```

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

   SECOND IN SERIES ON EFFECT OF FEDERAL TAX LAWS ON THE PRODUCTION, 
                   SUPPLY, AND CONSERVATION OF ENERGY

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 12, 2001

                               __________

                           Serial No. 107-27

                               __________

         Printed for the use of the Committee on Ways and Means

                   U.S. GOVERNMENT PRINTING OFFICE
74-228                     WASHINGTON : 2001

----------------------------------------------------------------------------
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa                     JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia                 WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania           XAVIER BECERRA, California
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                     Allison Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                Subcommittee on Select Revenue Measures

                    JIM McCRERY, Louisiana, Chairman

J.D. HAYWORTH, Arizona               MICHAEL R. McNULTY, New York
JERRY WELLER, Illinois               RICHARD E. NEAL, Massachusetts
RON LEWIS, Kentucky                  WILLIAM J. JEFFERSON, Louisiana
MARK FOLEY, Florida                  JOHN S. TANNER, Tennessee
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.
                                     

                            C O N T E N T S

                               __________
                                                                   Page
Advisory of June 5, 2001, announcing the hearing.................     2

                               WITNESSES

Camp, Hon. Dave, a Representative in Congress from the State of 
  Michigan.......................................................    10
Capito, Hon. Shelley Moore, a Representative in Congress from the 
  State of West Virginia.........................................    72
Collins, Hon. Mac, a Representative in Congress from the State of 
  Georgia........................................................    28
Cunningham, Hon. Randy ``Duke,'' a Representative in Congress 
  from the State of California...................................    18
Dunn, Hon. Jennifer, a Representative in Congress from the State 
  of Washington..................................................    24
Engel, Hon. Eliot L., a Representative in Congress from the State 
  of New York....................................................    67
Filner, Hon. Bob, a Representative in Congress from the State of 
  California.....................................................    49
Gephardt, Hon. Richard A., a Representative in Congress from the 
  State of Missouri, and House Democratic Leader.................    36
Inslee, Hon. Jay, a Representative in Congress from the State of 
  Washington.....................................................    60
Issa, Hon. Darrell E., a Representative in Congress from the 
  State of California............................................    76
Johnson, Hon. Nancy L. Johnson, a Representative in Congress from 
  the State of Connecticut.......................................     7
Lewis, Hon. Ron, a Representative in Congress from the State of 
  Kentucky.......................................................    33
Markey, Hon. Edward J., a Representative in Congress from the 
  State of Massachusetts.........................................    22
McDermott, Hon. Jim, a Representative in Congress from the State 
  of Washington..................................................    76
Moore, Hon. Dennis, a Representative in Congress from the State 
  of Kansas......................................................    64
Nussle, Hon. Jim, a Representative in Congress from the State of 
  Iowa...........................................................    13
Sandlin, Hon. Max, a Representative in Congress from the State of 
  Texas..........................................................    52
Stenholm, Hon. Charles W., a Representative in Congress from the 
  State of Texas.................................................    40
Terry, Hon. Lee, a Representative in Congress from the State of 
  Nebraska.......................................................    70
Weller, Hon. Jerry, a Representative in Congress from the State 
  of Illinois....................................................    31

                       SUBMISSIONS FOR THE RECORD

U.S. Department of the Treasury, Office of Tax Policy, statement 
  and attachments................................................    88

                                 ______

American Soybean Association, statement..........................   102
Davis, Hon. Susan A., a Representative in Congress from the State 
  of California, statement.......................................   103
Frost, Hon. Martin, a Representative in Congress from the State 
  of Texas, statement............................................   107
Herger, Hon. Wally, a Representative in Congress from the State 
  of California, statements......................................   108
Itron Inc., Spokane, WA, LeRoy Nosbaum, letter and atttachment...   112
Langevin, Hon. James R., a Representative in Congress from the 
  State of Rhode Island, statement...............................   120
McInnis, Hon. Scott, a Representative in Congress from the State 
  of Colorado, statement.........................................   121
Udall, Hon. Mark, a Representative in Congress from the State of 
  Colorado, statement............................................   122
Watkins, Hon. Wes, a Representative in Congress from the State of 
  Oklahoma, statement............................................   123
Whitfield, Hon. Ed, a Representative in Congress from the State 
  of Kentucky, statement.........................................   124

 
   SECOND IN SERIES ON EFFECT OF FEDERAL TAX LAWS ON THE PRODUCTION, 
                   SUPPLY, AND CONSERVATION OF ENERGY

                              ----------                              

                         TUESDAY, JUNE 12, 2001

                  House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:06 p.m., in 
room 1100 Longworth House Office Building, Hon. Jim McCrery, 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                Subcommittee on Select Revenue Measures

FOR IMMEDIATE RELEASE
                                                CONTACT: (202) 226-5911
June 5, 2001

No. SRM-2

   McCrery Announces Second in a Series of Hearings on the Effect of 
 Federal Tax Laws on the Production, Supply and Conservation of Energy

    Congressman Jim McCrery (R-LA), Chairman, Subcommittee on Select 
Revenue Measures of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a second hearing on the effect of 
Federal tax laws on the production, supply and conservation of energy. 
The hearing will take place on Tuesday, June 12, 2001, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 2:00 p.m.
      
    Oral testimony at this hearing will be from Members of Congress 
only. However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.

BACKGROUND:

    The Internal Revenue Code provides several incentives for the 
domestic production of oil and gas including: (1) expensing of certain 
exploration and development costs, (2) depletion rules, and (3) a tax 
credit for enhanced oil recovery costs. The tax code provides 
incentives for the production of electricity from certain renewable 
resources, including wind and closed-loop biomass facilities, and the 
acquisition of equipment that uses solar or geothermal energy. The tax 
code also encourages energy conservation by allowing taxpayers to 
exclude from income the value of certain energy conservation measures 
provided by a utility company to consumers and by providing a credit 
for qualified electric vehicles.
      
    In announcing the hearing, Chairman McCrery stated: ``With 
Americans facing rising energy costs, it is important for Congress to 
examine new ways to increase domestic energy production and to promote 
conservation. Over 30 energy related tax bills have been introduced in 
the 107th Congress, and I am pleased to offer this venue for 
Members of Congress to testify about their proposals.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on Member proposals to increase domestic 
production of traditional and renewable energy resources, to facilitate 
the distribution of energy resources, and to promote conservation 
measures.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
June 19, 2001 to Allison Giles, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Select Revenue Measures office, room 
1135 Longworth House Office Building, by close of business the day 
before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or 
MS Word format, typed in single space and may not exceed a total of 10 
pages including attachments. Witnesses are advised that the Committee 
will rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://waysandmeans.house.gov.''
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman McCrery. The hearing will come to order. Good 
afternoon, everyone. This hearing continues the Select Revenue 
Measures Subcommittee's inquiry into ways the Tax Code can 
promote a stable and secure supply of energy. Our first hearing 
last month examined proposals in the President's budget as well 
as expiring provisions in the Tax Code, such as section 29 tax 
credits for producing fuel from unconventional sources and the 
section 45, credit for renewable energy.
    Tomorrow our third hearing will involve testimony from 
interest groups and business groups on other proposals. Today's 
hearing will give the panel an opportunity to hear from nearly 
two dozen of our colleagues on the House of Representatives. 
The fact that so many of our colleagues from across the 
political spectrum have taken the time to be with us today 
demonstrates the importance of developing a comprehensive 
national energy policy. I am particularly pleased so many of 
our colleagues from the west, particularly California, will 
share their experiences and perspectives.
    While consumers across the country are fighting higher 
energy prices, especially at the gas pump, Californians 
continue to be at risk for rolling blackouts, and the situation 
may get worse as we head into the hot summer months and energy 
consumption spikes upward. Several of the witnesses will 
discuss policies included in the recommendations of the 
National Energy Policy Development Group, which was chaired by 
Vice President Cheney. I look forward to this testimony to 
better understand proposals relating to issues such as clean 
cars and landfill gases.
    It is impossible to overstate the complexities of energy 
production and distribution. The members testifying before us 
today will provide a wealth of ideas and experiences as to how 
the Tax Code can help us better meet our energy needs. As the 
Committee contemplates elements of an energy tax bill, their 
perspectives will be particularly helpful. As we review the 
testimony and consider which proposals represent good tax 
policy and should be included in any energy package considered 
by the Committee, I believe we must keep four principles in 
mind.
    First, an imbalanced approach will not help us secure a 
stable supply of energy. Recognizing patterns of human 
behavior, no known technology or inducements will allow us to 
conserve our way out of this problem. That is especially true 
of proposals which cap prices and therefore insulate consumers 
from the true costs of greater consumption. Likewise, despite 
the vast untapped oil and gas reserves, increased production 
alone won't insure supply keeps up with demand. Alternative and 
renewable fuels can help close the gap, but alone are not 
enough.
    Simply put, conservation, production and renewable and 
alternative fuels must all be part of our efforts to reduce our 
dependency on foreign oil. Second, we must address bottlenecks 
in the distribution chain. An adequate supply is only valuable 
if it can be efficiently distributed to where it is needed when 
it is needed.
    Third, the free market still works best. government 
intervention frequently misses the mark. For example, it seems 
clear that the Midwest is experiencing spikes in motor fuel 
prices because of the myriad of special blend fuels which must 
be refined. Regulation of the market should be the last resort, 
not our first option. And fourth, we must balance any enhanced 
production with environmental concerns. If we are to explore 
and produce in new areas, we should do so in a manner which is 
sensitive to the surroundings. Now, these principles are 
flexible, because I believe meeting our energy needs in the 
long term require ideology to yield to pragmatism. 
Nevertheless, I believe these four principles will serve us as 
useful guideposts as we examine the proposals offered by our 
colleagues today and by other interested parties in our hearing 
tomorrow.
    [The opening statement of Chairman McCrery follows:]

Opening Statement of the Hon. Jim McCrery, a Representative in Congress 
   from the State of Louisiana, and Chairman, Subcommittee on Select 
                            Revenue Measures

    The hearing will come to order. I ask our guests to please be 
seated.
    Good afternoon. This hearing continues the Select Revenue Measures 
Subcommittee's inquiry into ways the tax code can promote a stable and 
secure supply of energy.
    Our first hearing last month examined proposals in the President's 
budget as well as expiring provisions of the tax code, such as Section 
29 tax credits for producing fuel from unconventional sources and the 
Section 45 credit for renewable energy.
    Tomorrow, our third hearing will involve testimony from interest 
groups and businesses on other proposals.
    Today's hearing will give the panel an opportunity to hear from 
nearly two dozen of our colleagues in the House of Representatives.
    The fact so many of our colleagues from across the political 
spectrum have taken the time to be with us today demonstrates the 
importance of developing a comprehensive national energy policy.
    I am particularly pleased so many of our colleagues from the west, 
particularly California, will share their experiences and perspectives. 
While consumers across the country are fighting higher energy prices, 
especially at the gas pump, Californians continue to be at risk for 
rolling black-outs, and the situation is expected to worsen as we head 
into the hot summer months and energy consumption spikes upward.
    Several of the witnesses will discuss policies included in the 
recommendations of the National Energy Policy Development Group, which 
was Chaired by Vice President Cheney. I look forward to this testimony 
to better understand proposals relating to issues such as clean cars 
and landfill gases.
    It is impossible to overstate the complexities of energy production 
and distribution. The Members testifying before us today will provide a 
wealth of ideas and experiences as to how the tax code can help us 
better meet our energy needs. As the Committee contemplates elements of 
an energy tax bill, their perspectives will be particularly helpful.
    And as we review the testimony and consider which proposals 
represent good tax policy and should be included in any energy package 
considered by the Committee, I believe we must keep four principles in 
mind:
    First, an imbalanced approach will not help us secure a stable 
supply of energy. Recognizing patterns of human behavior, no known 
technology or inducements will allow us to conserve our way out of this 
problem. That is especially true of proposals which cap prices and 
therefore insulate consumers from the true costs of greater 
consumption. Likewise, despite the vast untapped oil and gas reserves, 
increased production alone won't ensure supply keeps up with demand. 
Alternative and renewable fuels can help close the gap, but are alone 
not enough. Simply put, conservation, production, and renewable and 
alternative fuels must all be part of our efforts to reduce our 
dependency on foreign oil.
    Second, we must address bottlenecks in the distribution chain. An 
adequate supply is only valuable if it can be efficiently distributed 
to where it is needed, when it is needed.
    Third, the free market still works best. Government intervention 
frequently misses the mark. For example, it seems clear that the 
Midwest is experiencing spikes in motor fuel prices because of the 
myriad of special blend fuels which must be refined. Regulation of the 
markets should be the last resort, not our first option.
    And fourth, we must balance any enhanced production with 
environmental concerns. If we are to explore and produce in new areas, 
we should do so in a manner which is sensitive to the surroundings.
    These principles are flexible, because I believe meeting our energy 
needs in the long-term require ideology to yield to pragmatism. 
Nevertheless, I believe these four principles will serve as useful 
guideposts as we examine the proposals offered by our colleagues today 
and by other interested parties in our hearing tomorrow.
    We have a long and distinguished list of Members, and I welcome 
them all. Before introducing our first witnesses, let me yield to my 
friend from New York for any opening statement he may have.

                                

    Chairman McCrery. We have a long and distinguished list of 
Members, and I welcome them all. Before introducing our first 
witnesses, let me yield to my friend from New York, for any 
opening statement he may have. Mr. McNulty.
    Mr. McNulty. Thank you, Mr. Chairman. I am pleased to join 
with you and the other Committee Members today and our programs 
to discuss tax incentives for the production, supply and 
conservation of energy in our country. Since the beginning of 
the 107th Congress, there have been over 30 energy-related tax 
bills introduced and referred to the Committee on Ways and 
Means. These bills would provide tax incentives for increased 
production of oil and gas, to encourage energy efficiency and 
conservation measures, to improve the electricity 
infrastructure, to facilitate the developmental of alternative 
fuel sources, to expand the use of solar, wind, biomass and 
fuel cell technology, and to prevent excess profits by 
electricity-generating facilities.
    As we proceed with the Subcommittee's hearings and markup 
of energy tax legislation later this month, it is important 
that consideration be given to how best to pay for additional 
tax relief. With the short-term surpluses already used up and 
the unclear budget situation in the longer term, it is critical 
that this Committee not take action which would invade the 
Social Security and Medicare trust funds. To the extent needed, 
I would suggest that we work together to develop revenue 
offsets to pay for energy tax reform bills adopted by the 
Committee in order to enact fiscally responsible reforms.
    The testimony we will receive today from our distinguished 
colleagues will be most valuable in analyzing pending energy 
tax legislation. I look forward to this testimony and welcome 
each of you. I am especially interested in the discussion of 
H.R. 1275, the bill I have joined Congresswoman Johnson in 
sponsoring to provide tax inventories for the use of fuel cells 
in creating electricity. Our legislation would encourage clean 
and chemical-free technology on the commercial market by 
providing a $1,000 per kilowatt tax credit to a purchaser of a 
stationary fuel cell system. A fuel cell provides electricity 
and heat to a non-combustion electrochemical process, thereby 
making it the cleanest of any electricity-generating device. 
The bill applies to residential and commercial consumers and 
allows for a variety of input, fuels applications and system 
sizes. The credit would be available for 5 years, at which 
point fuel cell manufacturers should be able to produce a 
product at market entry costs.
    This bipartisan bill would provide a great step forward 
from an energy policy standpoint and a low-cost, meaningful, 
short-term tax incentive for new space-age industry.
    Mr. Chairman, thank you for including H.R. 1275 within the 
scope of today's hearing. I look forward to further bipartisan 
discussions on how we might proceed in enacting energy tax 
legislation--legislative reforms. Thank you, Mr. Chairman.
    [The opening statement of Mr. McNulty follows:]

 Opening Statement of the Hon. Michael R. McNulty, a Representative in 
                  Congress from the State of New York

    Mr. Chairman, I am pleased to join with you today to discuss tax 
incentives for the production, supply and conservation of energy in our 
country.
    Since the beginning of the 107th Congress, there have been over 30 
energy-related tax bills introduced and referred to the Ways and Means 
Committee. These bills would provide tax incentives for the increased 
production of oil and gas, to encourage energy efficiency and 
conservation measures, to improve the electricity infrastructure, to 
facilitate the development of alternative fuel sources, to expand the 
use of solar, wind, biomass, and fuel-cell technology, and to prevent 
excess profits by electricity generating facilities.
    As we proceed with the Subcommittee's hearings and markup of 
energy-tax legislation later this month, it is important that 
consideration be given to how best to pay for additional tax relief. 
With the short-term surpluses already used up and the unclear budget 
situation in the longer term, it is critical that this Committee not 
take action which would invade the Social Security and Medicare Trust 
Funds. To the extent needed, I would suggest that we work together to 
develop revenue offsets to pay for energy-tax reform bills adopted by 
the Committee in order to enact fiscally-responsible reforms.
    The testimony we will receive today from our distinguished 
colleagues will be most valuable in analyzing pending energy tax 
legislation. I look forward to this testimony and welcome each of you.
    I am particularly interested in the discussion of H.R.1275, the 
bill I have joined Congresswoman Johnson in sponsoring, to provide tax 
incentives for the use of fuel cells in creating electricity. Our 
legislation would encourage clean and chemical-free technology on the 
commercial market by providing a $1,000 per kilowatt tax credit to a 
purchaser of a stationary fuel cell system. A fuel cell provides 
electricity and heat through a noncombustion, electrochemical process, 
thereby making it the cleanest of any electricity generation device. 
The bill applies to residential and commercial customers and allows for 
a variety of input fuels, applications and system sizes. The credit 
would be available for five years, at which point fuel cell 
manufacturers should be able to produce a product at market-entry 
costs. This bi-partisan bill would provide a great step forward from an 
energy-policy standpoint and a low-cost, meaningful short-term tax 
incentive for this new, ``space-age'' industry.
    Mr. Chairman, thank you for including H.R. 1275 within the scope of 
today's hearing. I look forward to further bipartisan discussions on 
how we might proceed in enacting energy tax legislative reforms.

                                

    Chairman McCrery. Thank you, Mr. McNulty. And now, our 
first panel is already seated. There is a fourth member of the 
panel who is not here yet, but if Mr. McDermott shows up, staff 
will put him at the stand. We will hear from him----
    Mr. McNulty. Mr. Chairman, I have been advised that Jim has 
been delayed, and he will be here around 4:00. So if I could 
ask permission if he would be included in one of the other 
panels, I would appreciate that.
    Chairman McCrery. Sure. That would be fine. So we will 
proceed with the first panel, and first, to address the 
Subcommittee is the chairwoman of the Health Subcommittee and a 
welcome guest before this Subcommittee. Mrs. Nancy Johnson from 
Connecticut, Mrs. Johnson.

  STATEMENT OF THE HON. NANCY L. JOHNSON, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CONNECTICUT

    Mrs. Johnson. Thank you very much, Mr. Chairman. It is 
indeed a pleasure to be before you and Mr. McNulty on this 
Subcommittee on such an extremely important matter. I think we 
are all conscious, those of us on the Ways and Means Committee, 
that the Tax Code presently is a significant component of what 
national energy policy we have, and so it is very important to 
review what it does and what it might do in the future. And I 
am pleased that you are undertaking that task, and I encourage 
you to look not only at how it can increase the supply of 
energy in our Nation, but how it can diversify that supply and 
also how it can encourage conservation as well. I am skipping 
through my testimony. So sorry I stumbled there. But it is just 
such a powerful factor in steering development, that we can 
ill-afford to not use it correctly at this particular time.
    So in an effort to promote clean and efficient alternative 
energy sources, I have joined with Mr. McNulty, as he 
mentioned, introducing legislation to promote the use of fuel 
cells, which remove the hydrogen from fossil fuels to create 
energy with virtually no pollutants. They function like a 
battery, fuse battery, except fuel cells do not require 
recharging and are far more efficient than a combustion engine 
or power plant. The President's national critical technology 
panel included fuel cells as one of the 22 technologies 
essential for the United States to develop and achieve economic 
progress and maintain national security.
    Our legislation, H.R. 1275, proposes a fuel cell tax credit 
for 5 years to create a market incentive for this revolutionary 
technology, which is reliable, will provide economic and 
environmental advantages to traditional fuel sources. The bill 
will accelerate commercialization of this technology by 
providing $1,000-per-kilowatt credit for efficient stationary 
fuel cell systems. Stationary fuel cell systems are capable of 
running 24 hours a day, 7 days a week for 5 years, with only 
routine maintenance. And they are currently in operation today. 
As a distributed generation technology, fuel cells address the 
immediate source for secure, efficient clean energy supplies, 
while reducing grid demand and increasing grid flexibility.
    First used by NASA in the space program--and I might say 
they were, early in their lives, developed through Federal 
grants for research, so they are a technology that has long 
been looked favorably on by the Federal Government, and Federal 
dollar had a real place in their development. They are now in 
hospitals, schools, military installations and manufacturing 
facilities and may be available for homeowners by the end of 
the year. Although these early products have proven energy 
efficient and environmentally advantageous, help at 
accelerating their volume production is essential in realizing 
low--the low prices they need to be able to be sold at for 
consumers to realize their full benefits.
    So this is really about marketizing a technology that is 
already well developed that needs to go into higher volume 
production so the individual units will cost more and also so 
that the resources will be there to apply this to ever smaller 
technologies. There are cars in the market now that get 50 
miles to the gallon, because they are a combination of fuel 
cells and electricity. The President has recommended tax 
incentives for that kind of automobile.
    There are also--as we speak, there is one producer who is 
working on a car that is just a fuel cell that will get 500 
miles to the gallon. So there has to be a way of driving this 
market more aggressively in order to allow the volume 
production that will bring prices down, make these stable 
producers and provide the revenue for further research.
    So I just urge you to take full cognizance of the promise 
of this technology as you move forward. I also want to mention 
that I am a strong supporter of H.R. 1863 introduced by my 
colleague, Dave Camp, but will not go through that portion of 
my testimony, since he will speak to this bill more eloquently 
than could I. But I believe what he is trying to do in that 
bill, to reuse resources that we are producing day in and day 
out at every landfill in New England--and of course, New 
England has very dense landfill problems--is something we need 
not only to do from the point of view of energy production, but 
the--from the point of view of conservation and developing a 
reuse mentality that in the long run will be very fruitful for 
America's economy, as well as for our way of life. Thank you.
    [The prepared statement of Mrs. Johnson follows:]

 Statement of the Hon. Nancy L. Johnson, a Representative in Congress 
                     from the State of Connecticut

    Mr. Chairman and Members of the Subcommittee, thank you for holding 
this important energy hearing. I firmly believe that a national energy 
policy must include promotion of alternatives to traditional energy 
sources. Doing so will reduce our reliance on imported oil, give 
consumers greater choice, stabilize energy prices, and benefit the 
environment at the same time.
    Last year, we saw fuel prices go through the roof. This winter we 
saw excessively high oil and natural gas prices and this summer's gas 
prices are near record highs. Plain and simple, the reason our 
constituents find themselves faced with out-of-control heating oil and 
fuel prices is because our nation has no long-term energy policy.
    In an effort to promote clean and efficient alternative energy 
sources, I have joined with Ranking Member McNulty in introducing 
legislation to promote the use of fuel cells which remove the hydrogen 
from fossil fuels to create energy with virtually no pollutants. They 
function much like a battery except fuel cells do not require 
recharging and are far more efficient than a combustion engine or power 
plant. The President's National Critical Technology Panel included fuel 
cells as one of the 22 technologies essential for the U.S. to develop 
to achieve economic progress and maintain national security.
    Our legislation, H.R. 1275, proposes a fuel cell tax credit for 
five years to create a market incentive for this revolutionary 
technology, which is reliable and will provide economic and 
environmental advantages to traditional fuel sources. The bill will 
accelerate commercialization of this technology by providing a $1,000 
per kilowatt credit for efficient, stationary fuel cell systems.
    Stationary fuel cells capable of running 24 hours a day, seven days 
a week for five years with only routine maintenance are currently in 
operation today. As a distributed generation technology, fuel cells 
address the immediate need for secure, efficient, clean energy 
supplies, while reducing grid demand and increasing grid flexibility.
    First used by NASA in the space program, they are now in hospitals, 
schools, military installations, and manufacturing facilities and may 
be available for homeowners by the end of this year. Although these 
early products have proven energy efficiency and environmental 
advantages, help in accelerating volume production is essential in 
realizing lower prices for consumers and the full benefits of fuel 
cells.
    I am also a strong supporter and cosponsor of H.R. 1863, introduced 
by our committee colleague Dave Camp to encourage the development of 
projects that capture landfill gas (LFG) and use it as an alternative 
energy source. LFG is produced as waste decomposes in landfills that 
serve our communities. LFG projects capture and use the gas to generate 
electricity or directly as an alternative fuel.
    Through Section 29 of the tax code, approximately 300 landfill gas-
to-energy projects nationwide were developed. Unfortunately, this 
``nonconventional fuel production'' credit became unavailable after 
June 30, 1998 and, since then, no new LFG projects have been planned or 
constructed.
    Mr. Camp's legislation would extend the Section 45 tax credit for 
wind energy, closed-loop biomass, and poultry waste to LFG projects. It 
is estimated that an additional 700 landfill gas-to-energy projects 
could be made economically feasible with such an incentive. Helping to 
bring these projects online would help the nation save more than 40 
million barrels of oil annually. With that kind of potential, we must 
ensure that we are tapping into LFG, which is available in nearly every 
community in America.
    I was pleased that the President's proposal calls for tax credits 
for fuel cell vehicles and hybrid vehicles which run on gas and 
electricity and a tax incentive for LFG projects. I urge the Members of 
the Subcommittee to also support a tax incentive for stationary fuel 
cells as you consider the use of the tax code to stimulate more rapid 
development of a comprehensive energy policy. It is technologies like 
fuel cells that will help us decrease our dependence on foreign oil, 
conserve existing oil supplies, and reduce air pollution.

                                

    Chairman McCrery. Thank you, Mrs. Johnson. And second, 
another member of the Ways and Means Committee, Dave Camp from 
Michigan. Mr. Camp.

 STATEMENT OF THE HON. DAVE CAMP, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF MICHIGAN

    Mr. Camp. Well, thank you, Mr. Chairman. I appreciate the 
opportunity to be here and to testify about two legislative 
proposals that I have introduced, one referred to by Chairman 
Johnson is H.R. 1863, and also H.R. 1864. Both are initiatives 
that have been highlighted in President Bush's energy 
recommendations. My first proposal would encourage the 
collection and utilization of landfill gas as an energy 
resource. Landfill gas is naturally produced as garbage 
decomposes and, importantly, is 50 percent methane, a valuable 
fuel.
    This legislation makes a tax credit under section 45 of the 
Tax Code available to new projects that use gas to generate 
electricity or to supplement local natural gas supplies. A 
typical medium-sized landfill can generate enough methane to 
produce 3 megawatts of electric power, which is enough to serve 
the electricity of 3,000 homes. The Nation's largest project of 
this kind is currently generating 50 megawatts of power. 
Typically these projects are located in urban areas, providing 
additional benefits as, quote, distributed power sources that 
help improve the reliability of a regional power supply. 
Methane gas could also be used directly as a supplement to 
natural gas for commercial and residential heating and as an 
industrial boiler fuel. There are currently 300 landfill gas 
energy projects nationwide which were made economically 
feasible by the non-conventional fuel production tax credit in 
section 29. As you know, Mr. Chairman, section 29 became 
unavailable after June 30th of 1998, and since that cutoff 
date, no new landfill gas projects have been planned or 
constructed in our country.
    However, the Environmental Protection Agency (EPA) and the 
landfill gas industry have identified an additional 700 
potential new sites where these projects could be constructed, 
and it is the crux of these potential new landfill projects 
that I hope this legislation will encourage.
    My second proposal is H.R. 1864, the CLEAR Act, which 
stands for Clean Efficient Automobiles Resulting from Advanced 
Car Technologies Act. This legislation would provide consumers 
a tax incentive for purchasing advanced technology and 
alternative fuel vehicles. These incentives are one of the most 
positive steps that can be taken today to promote the increase 
in the fuel economy of new vehicles. With growing concerns 
about our energy supplies and prices in the United States, we 
should move quickly to accelerate the introduction of these 
alternative fuels and advanced technologies into the 
marketplace. All the major auto makers that sell in the U.S. 
market have either introduced or have announced plans to 
introduce vehicles that promise to provide advantages of one 
type or the other compared to conventional technologies. These 
new products may have better emissions characteristics, use 
alternative fuels or may provide significant increases in miles 
per gallon. These new and emerging technologies at the present 
time are more expensive than conventional vehicles, and they 
must compete with them.
    As these technologies gain consumer acceptance and 
production increases, the cost differential between these 
vehicles, conventional vehicles, will be reduced or eliminated.
    Mr. Chairman, the CLEAR Act would provide tax incentives to 
help offset the higher cost of these vehicles so that consumers 
can--the cost to consumers can be held at a competitive level. 
This legislation provides incentives for a broad spectrum of 
vehicle and fuel technologies, and that is important, because 
the choice of the right vehicle and its attributes is best left 
to the consumer, not to the government decisions or 
limitations.
    This legislation would develop a wide range of advanced 
technology and alternative fuel, such as fuel cells, hybrids, 
dedicated alternative fuels and battery and electric--battery 
electric. The CLEAR Act provides a tax credit of 50 cents per 
gallon of gasoline, the equivalent for the purchase of 
alternative fuel at retail. It would also give customers better 
access to alternative fuel by giving--extending a deduction for 
the capital costs of installing alternative fueling stations.
    Finally, this bill provides tax credits to consumers to 
purchase alternative fuel in advanced technology vehicles, and 
to make certain that the tax benefit we provide translates into 
a corresponding benefit to the environment, we split the tax 
credit into one part provides a based tax credit for the 
purchase of vehicles dedicated to the use of alternative fuel 
or vehicles using advanced technologies. The other part offers 
a bonus credit based on the vehicle's efficiency and reduction 
in emissions. These tax credits would sunset within 6 years.
    There has been companion legislation introduced in the 
Senate by Senator Hatch, and I would urge my colleagues on the 
Subcommittee to take a close look at this proposal. I think it 
has merit, and, again, Mr. Chairman, I thank you for allowing 
me the opportunity to testify about these proposals before you. 
Thank you.
    [The prepared statement of Mr. Camp follows:]

Statement of the Hon. Dave Camp, a Representative in Congress from the 
                           State of Michigan

    Mr. Chairman, I appreciate the opportunity to be able to testify 
before this subcommittee today about two important legislative 
proposals that I have recently re-introduced. As you know, President 
Bush recently outlined a comprehensive energy strategy for our nation. 
The legislation that I have introduced H.R. 1863 and H.R. 1864, the 
CLEAR Act, are among the initiatives that are highlighted in his 
recommendations.
    My first proposal, HR 1863, would encourage collection and 
utilization of landfill gas as an energy resource. Landfill gas is 
naturally produced as garbage decomposes and, importantly, is 50% 
methane, a valuable fuel. This legislation would make the tax credit 
under Section 45 of the tax code available to new projects that use the 
gas to generate electricity or to supplement local natural gas 
supplies.
    A typical medium sized landfill can generate enough methane to 
produce 3.0 megawatts of electric power, enough to serve the annual 
electricity needs of 3,000 homes. The nation's largest project of this 
kind is currently generating 50 megawatts of power. Typically, these 
landfill gas-to-electricity projects are located in urban areas 
providing an additional benefit as ``distributed'' power sources that 
help improve the reliability of the regional power supply.
    The methane gas could also be used directly as a supplement to 
natural gas supplies for commercial and residential heating and as an 
industrial boiler fuel. More and more of these ``direct-use'' projects 
process the landfill gas so it can be used as a clean alternative 
vehicle fuel.
    There are currently, 300 landfill gas-to-energy projects nationwide 
which were made economically feasible by the ``nonconventional fuel 
production'' tax credit of Section 29. As you know, Mr. Chairman, the 
Section 29 tax credit became unavailable after June 30, 1998, to 
encourage construction of new projects. Since that cut-off date, no new 
landfill gas projects have been planned or constructed in our country. 
However, the EPA and the landfill gas industry have identified an 
additional 700 potential new sites where these projects could be 
constructed.
    It is the construction of these potential new landfill gas projects 
that I hope my legislation will encourage. I believe, our nation should 
harness the energy resource that are sitting in the backyards of most 
of our communities rather than allow it to be wasted. These projects 
can help bring our nation closer to energy self-sufficiency and I would 
urge the members of this subcommittee to support the provisions of HR 
1863.
    My second proposal is H.R. 1864, the CLEAR Act which stands for the 
``Clean Efficient Automobiles Resulting from Advanced Car Technologies 
Act''. This legislation would provide consumers tax incentives for 
purchasing advanced technology and alternative fuel vehicles. These 
incentives are one of the most positive steps that can be taken today 
to promote increases in the fuel economy of new vehicles. With growing 
concerns about our energy supplies and prices in the U.S., we should 
move quickly to accelerate the introduction of these alternative fuels 
and advanced technologies into the marketplace.
    All of the major automakers that sell in the U.S. market have 
either introduced or have announced plans to introduce vehicles that 
promise to provide advantages of one type or another compared to 
conventional, internal combustion engine technologies. Compared to 
conventional vehicles, these new products may have better emissions 
characteristics, use alternative fuels or may provide significant 
increases in the mileage achieved on a gallon of gasoline. Regardless, 
they utilize new and emerging technologies that--at the present time--
are much more expensive than conventional vehicles with which they must 
compete. As these vehicle technologies gain consumer acceptance and 
production volumes increase, the cost differential between these 
vehicles and conventional vehicles will be reduced or eliminated.
    So what do we need to do to put consumers in the drivers seat and 
provide them the ability to choose--and accelerate the demand for--
these new technologies? Well, Mr. Chairman, the CLEAR Act would provide 
tax incentives to help offset the higher costs of these vehicles, so 
that the cost to consumers can be held at a competitive level. This 
legislation provides incentives for a broad spectrum of vehicle and 
fuel technologies. This broad coverage is very important because the 
choice of the right vehicle and its attributes is best left to the 
consumer and the marketplace, not government decisions or limitations.
    Specifically, my legislation will develop market acceptance of a 
wide range of advanced technology and alternative fuel vehicles 
including: Fuel Cells, Hybrids, Dedicated Alternative Fuels and Battery 
Electric.
    The CLEAR Act provides a tax credit of 50 cents per gasoline-gallon 
equivalent for the purchase of alternative fuel at retail. To give 
customers better access to alternative fuel, we extend an existing 
deduction for the capital costs of installing alternative fueling 
stations. We also provide a 50 percent credit for the installation 
costs of retail and residential refueling stations.
    Finally, we provide tax credits to consumers to purchase 
alternative fuel and advanced technology vehicles. To make certain that 
the tax benefit we provide translates into a corresponding benefit to 
the environment, we split the vehicle tax credit in two. One part 
provides a base tax credit for the purchase of vehicles dedicated to 
the use of alternative fuel or vehicles using advanced technologies. 
The other part offers a bonus credit based on the vehicle's efficiency 
and reduction in emissions.
    Tax incentives will sunset within 6 years for all applications with 
the exception of fuel cell vehicles which are extended to 10 years. 
With minimum development cycles of 2-4 years for new vehicles, 
incentives are needed now to move existing designs to the market so 
they can accelerate the process for customer acceptance.
    President Bush's energy report includes recommendations in a number 
of areas to help address the U.S. energy concerns. Among the 
recommendations in the transportation sector is the provision of funds 
for consumer tax incentives for hybrid and fuel cell vehicles. It also 
highlights the benefits of alternative fuel and battery electric 
vehicles. I support these recommendations by the president. And my bill 
goes even further--to provide incentives for other types of new 
technology now available and under development that might otherwise not 
get an opportunity to effectively compete. So I urge that we include 
early in this process an appropriate provision to move such incentives 
along.
    The CLEAR Act was introduced in the Senate by Senator Orrin Hatch 
and enjoys broad support from automobile manufacturers, the 
environmental community and alternative fuel groups. I urge my 
colleagues on this subcommittee to look seriously at this proposal and 
initiate this important step toward greater vehicle and fleet fuel 
economy. America will be the winner for having provided this 
opportunity to pull these exciting new technologies into the 
marketplace more quickly than they might arrive on their own merit. 
These consumer based tax incentives will put American vehicle owners in 
the drivers seat by giving them the opportunity to purchase these new 
advanced technology products.
    Again, Mr. Chairman, thank you for allowing me the opportunity to 
testify today about these proposals. At this time, I would welcome any 
questions that members of this subcommittee may have.
    [The attachments are being retained in the committee 
files.]

                                

    Chairman McCrery. Thank you, Mr. Camp. And next we have 
another Member of the Ways and Means Committee, who we loaned 
to the Budget Committee to be chairman, and we are honored to 
have him with us today, Mr. Nussle from Iowa.

STATEMENT OF THE HON. JIM NUSSLE, A REPRESENTATIVE IN CONGRESS 
                     FROM THE STATE OF IOWA

    Mr. Nussle. Thank you, Mr. Chairman. First, my colleagues 
that are on the panel with me, I got some pretty good ideas 
just from listening to their testimony, and I appreciate your 
leadership in giving us all the opportunity to bring some of 
these ideas to your attention and to the attention of the rest 
of the panel. I think it is good to get ideas from a cross-
section of the Congress when it comes to solving an issue as 
important as long-term energy situation facing our country. I 
would like to amplify in two different areas that I think 
needamplification within the President's plan and with our concern 
overall. One is in the area of conservation. I think we can do more in 
that area. We could strive to do more in the area of conservation.
    The second is in the area of renewables. I have three 
bills--three ideas that I want to bring to your attention. The 
first one is one that gets the lonely Maytag repairmen that all 
of us are very familiar with from television commercials. He is 
pretty lonely. He wants to get into the business of helping us 
solve the long-term energy crisis that faces us, and I am going 
to try and help him do that by creating an incentive 
manufacturers to develop appliances that exceed the current 
U.S. Department of Energy (DOE) standards. We have introduced a 
bill which provides a modest, but I believe effective tax 
credit to appliance manufacturers who are able to produce high 
efficiency refrigerators and clothes washers that significantly 
exceed the current DOE standards. The purpose of this tax 
credit is to accelerate the production of market penetration of 
leading-edge appliance technologies.
    Also it provides that no company can earn more than $60 
million of these tax credits over the 5-year period of the 
bill. It is tied to the Energy Star Program that the President 
has already indicated he wants to strengthen. We believe this 
is a way to strengthen that program. It is also structured so 
that manufacturers of super-energy efficient clothes washers 
would be eligible for a $50 tax credit for each unit they 
produce that uses 35 percent less energy than this current DOE 
standard and $100 tax credit maximum for units that use 42 
percent less energy than the DOE standards. This is what we are 
trying to do.
    You know, the bill has the potential to provide enormous 
energy and water benefits to the Nation, as well as economic 
benefits to consumers over the life cycle of a super-efficient 
appliance. Let me give you an example of what this does. It is 
estimated that expanding the use of these appliances could save 
as much as 200 trillion BTUs, which would be the equivalent of 
taking 2.3 million cars off the road or shutting down six coal-
fired plants for just a year. This is not an insignificant 
amount of energy that we are talking about here.
    The amount of water necessary to meet the needs of 
households that could be saved here would be the equivalent of 
2 years for every household in Phoenix or every household for 
the State of Louisiana for 4 years. I pick that one out of a 
hat, Mr. Chairman.
    Some have advocated that this tax credit should go to 
consumers, and while that may, on its face, appear to be a good 
idea, let me give you three reasons why I think it is better to 
provide this for the manufacturer. One is that you limit the 
cost of the proposal. It is 2-1/2 times more expensive from a 
cost standpoint. Mr. McNulty was suggesting we have some 
concerns about the budget. I am concerned about that as well. 
This is a way to hold down the cost of a tax credit such as 
this.
    Second, the efficiency converts the incentive into the 
purchased product so that the incentive is to manufacture more 
of these, not just on the end that--on the purchase end. And 
finally, it does simplify the administration of the tax credit. 
It has bipartisan support in the House. It also has the support 
of the Alliance for Resource Efficient Appliances. Their 
Members include the Natural Resources Defense Council, Alliance 
to Save Energy, the American Council for Efficient Energy 
Economy, the California Energy Commission, Northwest Power 
Planning Council. There are many who have been part of the 
development of this piece of legislation, and I would--I would 
offer it to you for your--for your opportunity.
    The last two involve agricultural products. One goes hand 
in hand with what both my colleague just suggested, Renewable 
Energy From Agricultural Products Act. It creates incentives to 
produce energy from biodiesel, methane has been discussed, for 
manure waste product collection, allows for soy diesel and for 
switch grass use from CRP lands. So that is one I would suggest 
you should take a look at. It is good not only for the 
environment and for ag products, but it is good for energy.
    And then finally, it wouldn't be--my testimony wouldn't be 
complete if I also didn't provide you with some good ideas with 
regard to ethanol use. I have what is called the Ethanol Energy 
Promotion Act, which provides some assistance to small ethanol 
cooperatives, and, you know, it is not just an Iowa issue 
anymore.
    In fact, we did some research. We discovered that there are 
some plants that are looking into using and producing ethanol 
in California and in Louisiana, using rice as an example, and 
other by-products. So we have the opportunity to provide some 
incentives here to help encourage an industry that needs some 
encouragement right now if we are going to help not only deal 
with the long-term energy situation, but if we are going to do 
it in a way that doesn't sacrifice the quality of water and the 
quality of air in this country.
    So I offer those three ideas to you, and I really do 
commend you for having a hearing such as this to gather ideas 
from a cross section of the Congress.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Nussle follows:]
Statement of the Hon. Jim Nussle, a Representative in Congress from the 
                             State of Iowa
    Chairman McCrery, Ranking Member McNulty, and Members of the 
Subcommittee:
    I am pleased to be here today and appreciate the opportunity to 
testify before the subcommittee about the effects of federal tax laws 
on the production, supply and conservation of energy. This issue is 
extremely important in light of our current national energy situation. 
As you may know, I have drafted and supported several pieces of 
legislation that I believe will help America meet its long-term energy 
goals.
    Increasing energy efficiency is a key provision in the President's 
proposed National Energy Policy. Refrigerators and clothes washers, for 
example, both of which are manufactured in my state, account for 
approximately 15 percent of all household energy consumed in the United 
States, and consumers spend approximately $21 billion annually to 
operate these appliances. Consumers could save substantial amounts of 
energy and money each month, and our national economic security and 
environment would be enhanced, by simply replacing older inefficient 
appliances with newer high efficiency products.
    I would like to bring to your attention a bill that a member of the 
Subcommittee, Representative John Tanner, and I, along with others from 
both sides of the aisle, introduced on March 29. H.R. 1316, the 
Resource Efficient Appliance Incentives Act, would provide a modest but 
effective tax credit to appliance manufacturers who are able to produce 
high efficiency refrigerators and clothes washers that significantly 
exceed DOE standards. Currently we have 26 cosponsors including 
Representative Dave Camp, Representative John Lewis, and Representative 
Karen Thurman, all members of the full Committee. You may also be 
interested to know, Mr. Chairman, that a companion bi-partisan bill has 
been introduced in the Senate.
    The purpose of this tax credit is to accelerate the production and 
market penetration of leading-edge appliance technologies while 
creating significant environmental benefits. The more rapidly these 
high efficiency appliances appear in the market place, the quicker the 
energy savings will occur.
    H.R. 1316 has been drafted to be very defined and manageable. For 
example, no company can earn more than $60 million dollars in tax 
credits over the five-year period of this bill. Further, it is tied to 
the Energy Star program that the President indicated he wants to 
strengthen.
    H.R. 1316 is structured so that manufacturers of super energy 
efficient clothes washers would be eligible for a $50 tax credit for 
each unit they produce that uses 35% less energy than the current 
Department of Energy standard, and a $100 tax credit for units that use 
42% less energy than DOE's standard. Manufacturers of super energy 
efficient refrigerators would be eligible for a $50 tax credit for 
units that are 10% more efficient than the today's DOE standard, and 
$100 for units that are 15% more efficient than the DOE standard.
    I believe this bill has the potential to provide enormous energy 
and water benefits to the nation, as well as economic benefits to 
consumers over the life cycle of the super efficient appliance. In 
fact, it is estimated that expanding the use of these super energy-
efficient appliances would save over 200 trillion Btus. This would be 
equivalent to taking 2.3 million cars off of the road, or shutting down 
6 coal-fired power plants for a year. In addition, the super efficient 
clothes washers would reduce the amount of water necessary to wash 
clothes by 870 billion gallons of water. That is approximately the 
amount of water necessary to meet the needs of every household for two 
years in a city the size of Phoenix, Arizona or every household in the 
state of Louisiana for four years. The net benefits to consumers from 
operational savings would be approximately $1 billion.
    Some have advocated that such a tax credit ought to go directly to 
the consumer. I believe it is preferable to give the tax credit to 
manufacturers for several reasons. First, the ability to limit the cost 
of the proposal by capping the benefits is retained. It is estimated 
that if the credit were to be given to the consumer the cost would be 
at least $700 million, or 2\1/2\ times more than the cost of H.R. 1316.
    Second, is the flexibility to direct the capital to the area of the 
appliance manufacturers' business that can most effectively convert the 
incentive into a purchased product. Some manufacturers might need to 
spend the money on re-tooling or purchasing equipment for their 
facilities. Others will chose to increase their research and 
development programs that would help develop technology needed to 
spread efficiency throughout their entire product line. Some may choose 
to increase sales force, educational or incentive programs on energy 
efficiency or create a rebate for consumers.
    Lastly, it simplifies the administration of the tax credit and 
maximizes its benefit. A consumer tax credit could only be collected 
when a taxpayer files his tax return for the year in which the 
appliance was purchased. The passage of time between the actual 
purchase of the super efficient appliance and the filing of a tax 
return could be lengthy so there would be less incentive to purchase 
the high efficiency appliance. By letting the manufacturer receive the 
credit there is no question that the credit will be effectively 
leveraged.
    Not only does H.R. 1316 have bi-partisan support in the House, but 
the Alliance for Resource Efficient Appliances (AREA) also supports 
this bill. AREA members include energy and environmental groups like 
the Natural Resources Defense Council, Alliance to Save Energy, and the 
American Council for Energy Efficient Economy, as well as the 
California Energy Commission and the Northwest Power Planning Council. 
H.R. 1316 is the product of the combined efforts of industry, 
environment, and government interests and should serve as a model for 
future energy legislation.
    Mr. Chairman, I ask that the Subcommittee consider H.R. 1316 as you 
move forward in crafting an energy tax package. H.R. 1316 can play a 
significant role in our National Energy Policy by increasing the number 
and type of energy-efficient appliances in the market place, which in 
turn will create substantial savings for consumers and the environment. 
This bill will be the catalyst for a market transformation in which the 
long term cost savings of increased energy efficiency will lead to many 
new products in the market place and a significant change in the 
consumers purchasing decisions. Once manufacturers develop these new 
products, retailers and consumers will insist they stay available even 
after the credit program is over.
    In addition, I would like to share with the committee a couple 
other ideas I have concerning federal tax laws and energy production 
and supply which have been developed through meetings with Iowans to 
make sure renewable energy becomes an integral part of our nation's 
long-term energy policy. In response to President Bush's energy 
proposal, I have introduced two comprehensive pieces of legislation to 
advance renewable energy use and research.
    The Ethanol Energy Promotion Act of 2001 (H.R. 1999) takes a number 
of specific steps to increase the use of ethanol. First, the bill 
promotes the development of small ethanol cooperatives. A new tax 
credit will be of great benefit to the many farmer groups in Iowa 
currently developing plans to start their own cooperatives. The bill 
also protects the environment and strengthens the ethanol market by 
immediately banning the use of MTBE as a fuel additive. Finally, this 
legislation creates a huge ethanol consumer by requiring the federal 
government to use ethanol-blended gasoline in its vehicles.
    My second bill, the Renewable Energy from Agricultural Products 
(REAP) Act (H.R. 2000), creates incentives to produce energy from 
products once thought to have no use; methane, manure, and other forms 
of animal waste products. The REAP Act also increases demand for 
another farm product while promoting conservation by allowing 
switchgrass grown on land in the Conservation Reserve Program (CRP) to 
be used as an energy additive without affecting the program's payment 
schedule. Additionally, the REAP Act expands uses for soybeans by 
allowing diesel fuel blended with 2% soy-based biodiesel to receive a 3 
cent/gallon exemption from the diesel fuel excise tax.
    In my opinion, ethanol and biodiesel both have unlimited untapped 
potential. While providing a solution to our energy needs, they can 
also provide income to farm families. This Congress is all too aware of 
the prices our farmers have faced over the last few years, and I 
believe we could kill two birds with one stone by expanding our use of 
these two fuels.
    My colleagues on this panel know that I support alternative fuels, 
and they also know that I represent farm country. Every member of this 
Congress tries to promote industries that are vital to their districts, 
and rightly so. However, I would just like to point out to this panel 
that research has demonstrated that ethanol and biodiesel can be made 
from materials other than corn or soybeans. Though I would prefer that 
everyone buy Iowa corn and beans, ethanol and biodiesel could 
potentially be produced in your own districts from your own farm 
products. Companies are looking into producing ethanol in Gridley, 
California, using rice waste and in Lafayette, Louisiana, using organic 
waste.
    Mr. Chairman, I appreciate the President's leadership in crafting a 
national energy policy. I urge you to give consideration to his aims of 
promoting conservation and renewable fuels. Thank you for the 
opportunity to participate in this important hearing. I would be happy 
to answer any questions on the proposals I have outlined today.
    Chairman McCrery. Thank you, Mr. Chairman. And thank all of 
our first panel of witnesses for your excellent testimony. Does 
any Member of the Subcommittee have a question for any of the 
Members of the first panel? Mr. McNulty?
    Mr. McNulty. Mr. Chairman, I don't have a question. I just 
wanted to thank all of the Members for their testimony and say 
that it has been a pleasure working with Congresswoman Johnson 
on the fuel cell issue, and we both think that this is 
visionary and will, as her testimony pointed out, decrease our 
dependence on foreign oil, conserve existing oil supplies and 
reduce air pollution, and I think those are three goals that we 
all share. So I thank all of the Members for their testimony.
    Mrs. Johnson. I would just comment that I think--I would 
just like to comment that I think the Committee can't be too 
aggressive in this area. We are 60 percent dependent on foreign 
oil. It is truly a national security issue. Seventy percent of 
our oil is used in transportation. I mean, we can do better 
than this. So there are a lot of ways that we can use this 
crisis to create not only a national energy policy, but also to 
look at these distribution issues, because one of the things 
about fuel cells is it is going to be very helpful in remote 
areas, because the bigger packs are long-term, clean supply, 
and it does raise the fundamental issue of whether the public 
should be responsible for peak load or for normal load. And 
whether businesses shouldn't be responsible for peak loads, 
because they can use fuel cells to combine with current 
resources to manage peak loads.
    So it should involve a whole rethinking of not only grid 
issues, but what is the public responsibility in the energy 
arena, and so it is an exciting time to talk with you and I 
appreciate the seriousness of this Subcommittee and look 
forward to your product.
    Chairman McCrery. Thank you. Any other Member of the 
Subcommittee wish to inquire of this panel?
    In that case, thank you very much. Our next panel is 
composed of Jennifer Dunn, Mac Collins, Jerry Weller, Ron 
Lewis, and with the Subcommittee's indulgence, I will add Mr. 
Cunningham to the second panel since he has an engagement that 
he must get to quickly.
    So, Mr. Cunningham, if you will come up and join the 
esteemed Members of the Ways and Means Committee, we will let 
you be an interloper here. We will even allow you to go first, 
Mr. Cunningham, since you have got an important engagement that 
you need to get to off campus.
    I would remind all the Members that your written testimony 
that you submitted will be included in the record, and your 
oral testimony, of course, is also in the record, and it is 
just meant to summarize your written testimony. Mr. Cunningham?
    Mr. McNulty. Mr. Chairman, could I just ask one favor, 
also, because Mr. Markey has been working with Mr. Cunningham 
on some legislation, and he is also here at the present time. 
If he could join on the panel with Mr. Cunningham.
    Chairman McCrery. If he desires.
    Mr. McNulty. I thank the Chair.
    Chairman McCrery. Sure. Mr. Markey, do you and Mr. 
Cunningham have a tag team planned here for testimony?
    Mr. Markey. We don't have it planned. That is obvious.
    Chairman McCrery. You are testifying on the same subject 
matter?
    Mr. Markey. Same subject. I am just going to be ditto marks 
after his testimony.
    Chairman McCrery. Mr. Cunningham, please proceed.

      STATEMENT OF THE HON. RANDY ``DUKE'' CUNNINGHAM, A 
    REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Cunningham. Thank you, and I appreciate my colleagues 
letting me especially go first. I have got a meeting with Mr. 
Cheney in just a minute.
    Mr. Chairman, I would like to submit the full text. I would 
also like to submit common questions with answers that have 
been scientifically based and their rationale for those 
questions on this legislation.
    Chairman McCrery. Without objection.
    Mr. Cunningham. And I would as like to submit a list of all 
of the supporters, both business, environmental and community 
groups, that support this legislation.
    Chairman McCrery. Without objection.
    Mr. Cunningham. I would like to thank Mr. Markey, who is 
doing the lion's share on this particular bill, and I would 
like to commend Mrs. Johnson and Mr. Camp for their testimony. 
Mr. Nussle testified his bill is to let the panel know that it 
is a little competing. Ours is more consumer-based. His goes 
more to business, and I would tell you that if you have a tax 
incentive, if business builds it, there will be a ready supply 
if it is a good product. Build it and they will come, like the 
Field of Dreams. The difference is that we feel the consumers 
would benefit in a given incentive. Why does a man or woman go 
to Sears or Wards or something on the holidays? Because they 
have an incentive, and that is called the sale. If you offer 
incentives for these different things, the consumer will 
benefit, and that is the direction of our particular 
legislation.
    The other legislation that was talked about is primarily on 
developing means for energy. Ours is more on saving those 
energies that are produced in an efficient way.
    California has become the poster child for energy problems 
over the past few years. A combination of failed regulation, 
lack of interstate generation and rolling blackouts, and with 
this summer coming, you can imagine the problems that we are 
going to have. We must have a policy that looks at supply side, 
new avenues of production, as well as a demand side. But what 
this H.R. 778 goes into, it is actually on the savings of 
energy within buildings themselves. This building, construction 
buildings, business buildings, we feel that it could be up to 
80 percent more efficient and give revenue not only back to the 
individuals to the businesses, to the consumers, but provide 
more energy efficiency for this Nation across the board.
    It covers heat, cooling, water heating equipment, solar 
problems, and that is exactly why I think Mrs. Johnson's 
legislation and Mr. Camp's legislation fits right hand in hand 
with this. And it will reduce energy demand, bring quick relief 
to the power grid, but the legislation also has significant 
environmental benefits to the Nation. It will reduce America's 
greenhouse gas pollution emissions. I know there has been a lot 
of talk about that in the media--by at least 3 percent by 2010.
    And, again, to give you a few of those groups, the Sierra 
Club, National Wildlife Federation--this may be a negative, but 
Friends of the Earth--Global Green, and this whole page is 
environmental groups that do support this legislation. And I 
would yield, you know, the time to my colleague who, as I say, 
is doing the lion's share on this legislation, Mr. Markey.
    [The prepared statement of Mr. Cunningham follows:]
 Statement of the Hon. Randy ``Duke'' Cunningham, a Representative in 
                 Congress from the State of California
    Subcommittee Chairman McCrery, Ranking Member McNulty, and Members 
of the Subcommittee, I appreciate the Committee inviting me here today 
to speak in support of an important component of any National Energy 
Strategy, specifically the Energy Efficient Buildings Incentives Act 
(H.R. 778).
    Mr. Chairman, California, specifically San Diego County has become 
the poster child for energy problems in America. Over the last year, we 
were hit by a combination of a failed regulation proposal and lack of 
instate generation. This combination created shortages and extreme 
price fluctuations.
    This winter was tragic and included rolling blackouts. All of you 
are familiar with this ongoing problem. Many regions across the country 
face severe challenges to their electric grid, with California being 
the extreme example. In addition, this situation is likely to get worse 
before it gets better.
    New York may have serious disruptions in electricity distribution 
this summer and the Central U.S. may again experience similar problems 
to those of last year. More troubling, this summer California may have 
more than simply a price problem. We may actually be unable to get 
enough power at any price.
    The problem is the result of a serious instate imbalance between 
supply and demand, which has driven up the price of electricity 
several-fold compared to last year. This has resulted in drastically 
increased prices for consumers, and compromised the financial stability 
of utilities and businesses all across California.
    America is in desperate need of a comprehensive energy policy. We 
must have a policy that looks at the supply side, including new avenues 
of production and generation. But we must also address as well as the 
demand side, considering innovative conservation alternatives. These 
policies should consider the costs and risks to consumers and 
businesses. They should also provide incentives for economic growth and 
environmental protection.
    I have no illusions that developing a national consensus on a 
comprehensive energy policy will be easy. But, I am fairly confident 
that we can pass bi-partisan legislation which will meet our growing 
need for energy.
    I believe an important piece of a comprehensive energy policy will 
be an expanded effort to increase energy efficiency. Energy efficiency 
was an important part of President Bush's energy strategy of 1991 and 
has been the cornerstone of a number of state efforts.
    To this end, Mr. Markey of Massachusetts and I have introduced the 
Energy Efficient Buildings Incentives Act (H.R. 778). This is a 
companion to Sen. Bob Smith's S. 207 in the Senate. This legislation is 
designed to give new impetus to energy efficiency in buildings. This 
process shows tremendous short-term as well as long-term promise.
    Increasing energy efficiency is one of the few policy tools that 
can make an immediate difference. Within a matter of months after 
passage of this legislation, manufacturers and building designers will 
be able to provide significantly increased energy efficient technology 
to families and businesses.
    These new technologies will help in two ways: first, consumers who 
utilize them will immediately see lower energy bills. Second, as homes 
and businesses become more efficient, we will see reduced demand for 
fuels, and prices will come down.
    The sooner we can introduce energy efficiency into the marketplace, 
the sooner consumers and businesses will start to see solutions to 
their energy problems.
    Congress has passed several important pieces of bipartisan energy 
legislation over the past 15 years. These laws provide for more 
competitive and open energy markets; federal standards on the 
efficiency of appliances and equipment; assistance to states 
considering building efficiency standards; and tax incentives on the 
production side of the energy equation.
    Utilities have also learned over the past 20 years how to develop 
incentives that can encourage energy efficiency. Utilities have been 
very successful in promoting improvements in energy efficiency.
    However, there are two powerful difficulties when it comes to 
encouraging state-of-the-art improvements in energy efficiency, and 
that is why we need to work through the tax code.
    The first problem is that energy-consuming devices are produced for 
national markets, but utilities only serve a single region.
    Even if a utility offers attractive incentives for, say, an 
advanced new air conditioner, manufacturers will not be inclined to 
produce the product because their production has to be geared to 
national or even global demands, not those of a single region. National 
incentives will solve this problem.
    The second difficulty is timing. A major commercial building often 
takes over 2 years to construct. If the architect learns that the 
utility is offering an incentive for energy efficiency, the first 
question he or she will ask is: will the incentive still be available 
in 30 months when my building is finished?
    Most utilities will have to answer that they cannot ensure that 
this is the case. Therefore, the architect will refrain from making the 
commitment to energy efficiency.
    H.R. 778 addresses both of these problems and sets the stage for 
unleashing a wave of new technology that can provide major advances in 
energy efficiency in the easiest manner.
    H.R. 778 provides incentives for enhanced energy efficiency in 
buildings, because buildings account for over $300 billion a year in 
energy costs and account for over a third of pollution emissions in the 
United States.
    There are opportunities for new technology to save from 30% to 50%, 
and maybe even more of energy costs, while enhancing the productivity 
of workers in the buildings and increasing the comfort of families at 
home.
    H.R. 778 targets the entire set of building-related energy systems, 
for non-residential buildings, commercial buildings such as offices, 
stores, warehouses, greenhouses, etc., as well as public buildings such 
as schools, hospitals, and local government buildings.
    It also targets homes, including single-family, multi-family, and 
manufactured homes. It includes heating, cooling, and water heating 
equipment systems; and solar photovoltaic and water heating equipment. 
It provides incentives based on energy performance, not on cost.
    This structure is different from the energy efficiency tax 
incentives of the 1970's, which were based on cost and are perceived by 
many to have failed. These targets are ambitious but realistic.
    If they were less ambitious, there would be a risk of paying for 
energy efficiency investments that would have happened anyway. If they 
are too ambitious, no one would claim the tax incentive, which would 
fail to accomplish the purpose of the energy policy.
    The bill provides tax incentives for a fixed time period which are 
intended to be temporary through the end of taxable year 2007. Six 
years should be sufficient to provide financial reasons for 
manufacturers to invest in plants producing efficient equipment.
    This should be enough time for designers and contractors to get 
additional education and training in energy efficient design, 
construction practices, and to establish competitive markets for more 
efficient buildings and equipment.
    At the end of 6 years, I anticipate that the markets for energy 
efficiency will be strong enough that these tax incentives will no 
longer be needed. I believe that these incentives can transform the 
markets for energy efficient buildings over these 6 years, as several 
utility-sponsored programs have done in the past.
    This is because they rely on market forces, and establish a level 
playing field for competition between different industries and 
different companies.
    H.R. 778 will reduce energy demand and bring quick relief to the 
power grid, which will help alleviate electric supply problems. That is 
why H.R. 778 is so broadly endorsed by utilities, including all of 
California's major electric utilities and many national power 
generators as well.
    But the legislation also has significant environmental benefits to 
the nation. It will reduce America's greenhousegas pollution emissions, 
as well as air pollution emissions, by 3% by the year 2010.
    That is why this bill is endorsed by the nation's major 
environmental organizations. We have worked hard to deliver a bill that 
has both bipartisan support in the congress and support from the 
business and environmental community. I have attached a list of 
supporters along with my statement.
    Although the primary motivations for this bill are to help solve 
America's energy policy problems and reduce emissions, there are also 
large economic benefits of the bill.
    By reducing energy costs for businesses, which are tax-deductible, 
we believe it will actually increase revenues to the Treasury over a 5-
year period. Energy efficiency can be an excellent investment, with 
returns of 25% per year and better. By stimulating such investment, 
this bill will save businesses and families over $40 billion on net by 
2010.
    The benefits of this bill grow over time, as more and more energy-
efficient buildings are constructed and the technologies for efficiency 
get cheaper and better due to competition.
    I want to close by saying that the solution to California and 
America's energy problems is not found on the supply side alone. We 
must address demand, and our bill will do that.
    I want to thank you for the opportunity to come before the 
Committee today. With swift enactment, we can all enjoy lower energy 
bills and a better environment.

                    Supporters of S. 207 / H.R. 778

                  Smith-Feinstein / Cunningham-Markey

                     Energy Efficiency Legislation

The Real Estate Roundtable          New England Council
National Assoc of State Energy 
Officials                           California Building Industry Assoc.
Insulation Contractors Association 
of America                          Florida Solar Energy Center
Home Builders Association of 
Central Vermont, Inc.               National Association of Counties
California Association of Building 
Energy Consultants                  California Air Resources Board
National Council of the Housing 
Industry                            National Insulation Association
Florida Solar Energy Industries 
Association                         California Energy Commission
Building Owners and Managers 
Association                         Indiana Builders Association
ENRON                               American Public Power Association
Pacific Gas and Electric Company    Southern California Edison
Sacramento Municipal Utility 
District                            Montana Power
PacificCorp                         California ISO
Northern California Power Agency    Sempra Energy
CA Municipal Utilities Association  City of Los Angeles
Northeastern Public Power 
Association                         Los Angeles Water & Power
NorthEast Utilities                 National Grid USA
Narragansett Electric Company       Granite State Electric Company
Massachusetts Electric                
Natural Resources Defense Council   Sierra Club
League of Conservation Voters       National Wildlife Federation
Environmental Defense               Consumer's Choice Council
U.S. PIRG                           The Wilderness Society
World Wildlife Federation           National Environmental Trust
Defenders of Wildlife               Physicians for Social 
                                    Responsibility
American Oceans Campaign            Global Green USA
Environmental and Energy Study 
Institute                           Friends of the Earth
Legal Environmental Assistance 
Foundation, Inc                     Union of Concerned Scientists
Michigan Environmental Council      World Wildlife Fund
Minnesotans for an Energy Efficient 
Economy                             Consumer's Choice Council
American Rivers                     National Environmental Trust
Izaak Walton League of America      National Audubon Society
North American Insulation 
Manufacturers Association           Trane
Air Conditioning Contractors of 
America                             Siemens Solar Industries
Foamed Polystyrene Alliance         Climatic-Solar Corp
American Portland Cement Alliance   Energy Partners
Polyisocyanurate Insulation 
Manufacturers Association           Solar Systems of Florida
American Energy Technologies        AllSolar Service Company Inc.
American Solar Energy               Solar-Fit
Energy Conservation Services of 
North Florida                       Solar Source

05/08/01

    (THESE ARE SOME OF THE BUSINESSES WHICH THE TRADE ASSOCIATIONS 
       REPRESENT BUT HAVE NOT NECESSARILY SPECIFICALLY SIGNED ON)

Honeywell, Inc.                     Vulcan Materials
Evanite Fiber Corp                  Certain Teed Corp
Fibrex Insulations, Inc.            Isolatik International
Johns Manville Corp                 Knauf Fiber Glass
MFS, Inc.                           Owens Corning
OCHT                                Rock Wool Manufacturing Co.
Roxul, Inc.                         Sloss Industries Corp
Thermafiber LLC                     USG Interiors, Inc.
Western Fiberglass Group            Air Products & Chemicals, Inc.
Akzo Nobel                          Atlas Roofing Corp
BASF Corp                           Bayer
C.K. Witco Corp                     Carlisle Syntec, Inc.
Dow Chemical USA                    Elf Atochem North America, Inc.
Exxon Chemical Co.                  Firestone Building Products Co.
Goldschmidt Chemical Co.            Honeywell International
Hunter Panels                       Huntsman Corp
Huntsman Polyurethane               IKO Industries, Ltd
Johns Manville Corp                 KoSa
Laroche Industries, Inc.            OAF
Old American Products               Petrocel S.A.
Phillips 66 Co.                     Rmax, Inc.
Solvay Fluorides, Inc.              Stepan Co.

                                

  STATEMENT OF THE HON. EDWARD J. MARKEY, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF MASSACHUSETTS

    Mr. Markey. I thank the gentleman very much, and this is a 
true partnership, in fact. Duke and I on any ADA scale would 
definitely average 50. I would have 100 and Duke would not. So 
obviously what we are trying to do is define common sense 
solutions to the problem.
    The United States only has 3 percent of the world's oil 
reserves. The Organization of Petroleum Exporting Countries 
(OPEC) nations have 75 percent. Obviously we are never going to 
be able to fully win any race against OPEC in oil production. 
What is our advantage? Our advantage is technology. We are the 
technological giant in the world, and as my mother used to say, 
if you work smarter, not harder, you can get to the correct 
result much more quickly. So in summary, how does the taxpayer 
qualify for the tax incentive? Well, a homeowner would have to 
increase the overall efficiency of their home by 30 to 50 
percent. A business would have to increase by 50 percent, above 
already-existing minimal standards. They would have to go above 
that.
    How much incentives do taxpayers get? Well, a homeowner 
would get $2,000 if they could--a tax credit up to $2,000 if 
they could improve the efficiency by 30 to 50 percent. A 
businessperson would get $2.25 per square foot of commercial 
building space if they could increase their overall efficiency 
by 50 percent.
    How does it benefit the country? In sum, it reduces 
consumer energy cost, if this is fully implemented, by $10 
billion. It produces economic activity, because 440,000 new 
jobs would have to be created in order to implement this kind 
of a national tax credit-driven policy. It is the equivalent in 
air pollutants of taking 20 percent of all of the automobiles 
in the United States off the road.
    So, in other words, it is greenhouse-gas friendly, because 
it definitely deals with those issues. And it improves the 
electric reliability of our Nation by reducing the need for 
30,000 megawatts of electricity having to be produced in our 
country.
    So in other words, it is just looking at the existing 
homes, commercial residences, giving a tax incentive. Aslong as 
there is substantial improvement, they qualify. And Duke and I really 
do believe that this is a common sense, bipartisan, non-ideological way 
in which we can use the market in order to drive solutions. And I thank 
you for giving me the opportunity of testifying.
    Mr. Cunningham. If I may also say, this is also supported 
in the Senate by Mr. Smith and Ms. Feinstein, S. 207, which is 
a very strong bipartisan bill already moving forward. Thank 
you.
    [The prepared statement of Mr. Markey follows:]

 Statement of the Hon. Edward J. Markey, a Representative in Congress 
                    from the State of Massachusetts

    Mr. Chairman, thank you for allowing me the opportunity to testify 
before the Subcommittee this afternoon.
    I am pleased to join with the gentleman from California (Mr. 
Cunningham) and a bipartisan coalition of 43 other Democrats and 
Republicans in sponsoring the ``Energy Efficient Buildings Incentives 
Act.''
    Energy use in buildings in this country accounts for approximately 
35% of polluting air emissions nationwide about twice as much as the 
pollution from cars. It costs the average American $1500 to heat and 
cool their homes every year, which amounts to an annual cost of $150 
billion nationwide. Commercial buildings and schools incur $100 billion 
in annual utility bills. And yet, the tax code fails to provide 
sufficient incentives to reduce wasteful and unnecessary energy use. 
This is bad policy, and it must be changed. In these times of rolling 
blackouts in California and rising electricity prices throughout many 
regions of the country, we can and should be looking for ways to ensure 
that energy is never wasted. Instead, we should ensure that 
technologies that can enable us to become more efficient in our use of 
energy and deployed as widely as possible.
    That is why the Gentleman from California (Mr. Cunningham) and I 
have introduced the ``Energy Efficient Buildings Incentives Act.'' Our 
bill would spur use of energy efficient technologies, such as super-
efficient air conditioning units, which could result in a substantial 
drop in peak electricity demand of at least 20,000 megawatts--the 
equivalent of the output of 40 large power plants. At a time when many 
communities are currently facing electricity supply shortages, and the 
local political issues involved with siting and building new power 
plants are difficult and contentious, our bill provides a way to reduce 
pressures on the nation's electricity grid. Specifically, our bill 
provides tax incentives for:
    This bill provides tax incentives for:
         Efficient residential buildings, including 
        manufactured housing, that saves 30% or 50% of energy cost to 
        the homeowner compared to national model codes, with a higher 
        incentive for the higher savings;
         Efficient heating, cooling, and water heating 
        equipment that reduces consumer energy costs, and, for air 
        conditioners, reduces peak electric power demand, by about 20% 
        (lower incentives) and 30%-50% (higher incentives) compared to 
        national standards;
         New and existing commercial buildings, including 
        rental housing and schools, with 50% reductions in energy costs 
        to the owner or tenant; and,
         Solar hot water and photovoltaic systems.
    The incentives are based on performance, not costs, in order to 
foster competition between suppliers of different technologies that can 
meet the proposed targets. In the case of buildings and equipment, 
there are one or two tiers of energy cost reduction targets that 
qualify the taxpayer for a fixed incentive per appliance, per home, or 
per square foot of non-residential building. For solar systems, the 
incentives are based on energy production, on a sliding scale. The 
incentives are provided for a 6-year period, taxable years 2002 through 
2007, after which they sunset.
    The incentives are provided to the taxpayer with only one 
exception. For non-residential buildings, the incentives are in the 
form of a fixed dollar amount deduction to the business entity that 
pays for the construction. However, if the business entity is a 
municipality, such as a school district (which is tax-exempt), the 
deduction is assignable by the owner to the architect with primary 
responsibility for the design. This is designed to assure that there 
are incentives for incorporating energy efficiency into the design of 
schools and other public buildings.
    For residential buildings, the incentive is in the form of a tax 
credit that goes to the individual homeowner or the individual who 
purchases qualifying homes or equipment. In the case of condominiums or 
co-operatives, the owners get the credit on a pro-rated basis. In the 
case of rental housing, the incentive is a deduction to the building 
owner.
    If only 50% of new buildings reach the energy efficiency goals of 
this legislation, it has been estimated that air pollution emissions in 
this country could be reduced by over 3% in the next decade, and 
decrease even more dramatically over time. In that same ten-year 
period, this legislation could result in direct economic savings of $40 
billion to consumers and businesses. For example, a family that 
installs an energy efficient water heater can get $250 to $500 back 
from the tax code changes and an additional $50 to $200 every year in 
reduced utility bills. Or a family that purchases a new home that meets 
the standards in this bill can get as much as $2,000 returned to them 
by the tax incentives, in addition to the $300 or more in continuing 
energy savings.
    I urge the Subcommittee to include this proposal in any energy tax 
legislation it takes up. This bill is both good tax policy and good 
energy policy. It will help save American consumers money, improve the 
air we breathe and the water we drink, increase the competitiveness of 
American industries, and reduce the energy consumption of our 
commercial and residential buildings.
    Thanks again, for allowing me to testify. I look forward to working 
with you and other Members of the Subcommittee on this and other energy 
tax-related measures.

                                

    Chairman McCrery. Thank you, Mr. Markey. Thank you, Mr. 
Cunningham. Ms. Dunn?

   STATEMENT OF THE HON. JENNIFER DUNN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF WASHINGTON

    Ms. Dunn. Thank you very much, Mr. Chairman. We now face a 
problem that requires all of us in livings rooms, kitchens all 
over America to take note. As little children, we were tucked 
in by our parents and assured that the bogeyman did not come 
out from underneath the bed when the lights went out. We were 
told that there was no reason to be afraid of the dark. But 
today adults across the Pacific Northwest particularly have 
every reason to fear the darkness that could blanket our 
Region. Thankfully, for the first time in a decade, a President 
and Congress are seriously considering a national energy policy 
that is designed to help bring together business, government, 
local communities and citizens to promote dependable, 
affordable and environmentally friendly energy for the future.
    I am very happy that the administration's policy promotes 
energy conservation and efficiency. These elements are crucial, 
especially in my home State of Washington. Across the Pacific 
Northwest, energy demand is outpacing supply, because of a 
record low water supply year and a high-priced west coast power 
market. This deficit is driving up monthly electric bills and 
making it very difficult for families in my area to make ends 
meet.
    I believe that conservation is an important part of this 
solution in easing our energy problems, and I think it is up to 
us to provide the tools to empower families and businesses all 
over America so that they can better manage their energy use. 
We can encourage conservation with tools like smart meters, and 
that is what I would like to dedicate my next couple of minutes 
to telling you about. These are real-time metering devices that 
look just like the water meters that you have on the side of 
your house right now that tell consumers the cheapest and best 
time to flip on their hot tub switch and run their washer and 
drier. Currently utility bills give us no indication of when 
power is cheap and when it is expensive. For example, consumers 
who are washing laundry between 5:00 and 9:00 in the evening 
will pay up to 25 percent more in their electric bill. They 
don't know this. But if they waited until after 9:00, the costs 
would go way down.
    In a monthly energy bill when consumers peak costs are 
averaged with off-peak costs in that utility bill, the higher 
costs of peak electricity supplies is covered up and masked so 
that they don't know. As a result, consumers may not recognize 
the benefits of changing their energy habits. And this bill 
that I am proposing would do just that. It would give consumers 
the information so that they could change their behavior, 
thereby using less energy and paying less for it.
    It is our responsibility as public servants to propose 
thoughtful and sensible solutions to this energy quagmire. And 
that is why I have introduced the Energy Efficiency and 
Conservation Incentives Act of 2001, providing tax incentives 
designed to promote energy management conservation and 
efficiency through real-time metering.
    Thanks to innovative technology, we can now make better 
choices regarding our power usage. Electric and national gas 
meters can--and natural gas meters can be fitted with smart 
meters so that consumers can receive current pricing 
information and adjust their air-conditioners down during the 
peak usage periods, turn them back up later in the day when 
usage drops and prices also are lower.
    These new high-tech devices allow us to monitor our daily 
use of electricity and provide us information on how to save 
money and energy. With this device, consumers can easily 
conserve the electricity they use on a daily basis. 
Specifically, my legislation provides two tax incentives to 
encourage the use of smart meters. First, utilities will 
receive a $30 deduction per meter, just about the cost of the 
meter, not the cost of installation. They install with this new 
technology. Second, it would allow these devices to be 
depreciable over 3 years. Utility companies will be able to 
take the tax deduction from their corporate taxable income. The 
amount of the one-time deduction roughly equal to the cost of 
the device. Existing meters that are retrofitted would also be 
eligible for this same deduction.
    The benefits of information as it relates to conservation 
can't be overstated. In my home district, for example, if just 
half the customers did their laundry in off-peak hours rather 
than during on-peak hours, it would free up enough power to 
serve nearly a quarter of a million households. As we move 
forward and continue to grapple with our energy problems, we 
have got to embrace market-based solutions to conservation. My 
legislation is an innovative way to employ new technologies, to 
prompt changes in consumer behavior. Conservation doesn't have 
to be dictated. It can be learned, and with the right 
motivation and structure, it can work.
    This device and other reasonable conservation measures will 
help us squeeze out more efficiency from the existing system. I 
think it would be a shame for us to surrender to misleading and 
divisive rhetoric or quick-fix solutions like price caps when 
we have before us something that has not yet been tried.
    More importantly, let us not pass up this opportunity to 
propose thoughtful and responsible conservation solutions.
    Thank you very much, Mr. Chairman, for the opportunity to 
testify, and I would be happy to answer any questions.
    [The prepared statement of Ms. Dunn follows:]

Statement of the Hon. Jennifer Dunn, a Representative in Congress from 
                        the State of Washington

    We now face a problem that requires all of us in living rooms and 
kitchens across America to take note. As children, we were tucked in by 
our parents and assured the boogeyman did not come out of from 
underneath our bed the minute the lights went off. We were told there 
is no reason to be afraid of the dark. But today, adults across the 
Pacific Northwest have every reason to fear the darkness that could 
blanket our region.
    Thankfully, for the first time in a decade, a President and 
Congress are seriously considering a national energy policy designed to 
help bring together business, government, local communities, and 
citizens to promote dependable, affordable, and environmentally 
friendly energy for the future.
    I am pleased that the administration's policy promotes energy 
conservation and efficiency. These elements are crucial, especially in 
my home state of Washington. Across the Pacific Northwest, energy 
demand is outpacing supply because of a record low water year and a 
high priced West Coast power market. This deficit is driving up monthly 
electric bills, and making it difficult for families to make ends meet.
    Conservation is an important piece of the solution in easing our 
energy problems. We must provide the tools to empower families and 
businesses across America so they can better manage their energy use.
    We can encourage conservation with tools like ``smart meters,'' 
real-time metering devices that tell consumers the cheapest and best 
time to flip on the switch, and run the washer and dryer. Currently, 
utility bills give no indication of when power is cheap and when it is 
expensive. For example, consumers washing laundry between five and nine 
o'clock in the evening will pay up to 25% more in their electric bill 
than they will if they wait until after nine.
    When consumers' peak costs are averaged with off-peak costs in 
their utility bill, the higher cost of peak electricity supplies is 
masked. As a result, consumers may not recognize the benefits of 
changing their energy habits.
    Because it is our responsibility as public servants to propose 
thoughtful and sensible solutions to this energy quagmire, I have 
introduced the Energy Efficiency and Conservation Incentives Act of 
2001, providing tax incentives designed to promote energy management, 
conservation, and efficiency through real-time metering.
    Thanks to innovative technology, we can now make better choices 
regarding our power usage. Electric and natural gas meters can be 
fitted with smart meters so consumers can receive current pricing 
information and adjust their air conditioners down during peak usage 
periods and turn them back up later in the day, when usage drops and 
prices are lower.
    These new hi-tech devices allow us to monitor our daily use of 
electricity and provide us information on how to save money and energy. 
With this device, consumers can easily conserve the electricity they 
use on a daily basis.
    Specifically, my legislation provides two tax incentives to 
encourage the use of smart meters:
         First, utilities will receive a $30 deduction per 
        smart meter they install with this new technology.
         Second, it would allow these devices to be depreciable 
        over three years.
    Utility companies will be able to take the tax deduction from their 
corporate taxable income. The amount of the one-time deduction is 
roughly equal to the cost of the device. Existing meters that are 
retrofitted are also eligible for the deduction.
    The benefits of information as it relates to conservation cannot be 
overstated. In my home district, for example, if just half the 
customers did their laundry in off-peak hours rather than during on-
peak hours, it would free up enough power to serve nearly a quarter of 
a million households.
    As we move forward and continue to grapple with our national energy 
problems, we must embrace market-based solutions to conservation. My 
legislation is an innovative way to employ new technologies to prompt 
changes in consumer behavior. Conservation does not have to be dictated 
by the federal government. But rather it can be learned, and with the 
right motivation and structure, conservation can work.
    This device and other reasonable conservation measures will help us 
squeeze more efficiency out of our existing system. Let's not surrender 
to misleading and divisive rhetoric or to quick fix solutions like 
price caps. More importantly, let us not pass up this opportunity to 
propose thoughtful and responsible conservation solutions.
    In addition to conservation, a sound national energy policy should 
encourage a clean and diverse range of domestic energy supplies. Such 
diversity helps to ensure that future generations of Americans will 
have access to the energy they need. Renewable energy can help provide 
for our future needs by harnessing abundant, naturally occurring 
sources of energy.
    Hydropower is the nation's leading renewable resource. Overall, 
roughly 98,000 megawatts of clean and efficient power is produced from 
hydro facilities--enough electricity for 98 million homes. According to 
the Department of Energy, approximately 4,300 megawatts of additional 
power could be developed from existing hydroelectric facilities in the 
near term--none of this development would require new dam construction. 
Bringing new hydro generation on-line, however, is increasingly 
difficult and expensive.
    That is why I have introduced H.R. 1677, the Hydropower Capacity 
Improvement Act. My bill provides a tax credit for incremental 
hydropower for ten years. This tax credit will encourage hydro owners 
to modernize equipment and become more efficient in their energy 
production. As we face rising energy prices and increasing levels of 
pollution, it is clear that we must do as much as we can to promote 
clean, reliable and domestic resources like hydropower. Today more than 
ever, there is a need to provide incentives to encourage the 
development of incremental hydropower.
    In addition to hydropower, we must also address the current laws 
governing the use of biomass material. This committee has previously 
heard testimony from witnesses stating that the biomass provisions 
under Section 45 are not applicable to most taxpayers since they are 
defined as ``closed loop'' credits. Currently, only agricultural 
products grown exclusively for combustion in a power plant are eligible 
for the credit. We should amend Section 45 from ``closed loop'' to 
``open loop'' so that a broader cross section of taxpayers can take 
advantage of the credit.
    The forest products industry, for example, generates a substantial 
portion of its onsite electricity from renewable resources. Although 
the industry is 60% percent self-sufficient using biomass, they are 
forced to turn to other sources to meet the balance of their energy 
needs. High oil and gas prices--coupled with energy shortages--threaten 
the financial well being of the industry and its employees. Converting 
the biomass credit from ``closed'' to ``open loop'' will help alleviate 
the strain the industry faces.
    Thank you for the opportunity to testify and I would be happy to 
answer any questions.

                                

    Chairman McCrery. Thank you, Ms. Dunn. And now another 
Member of the Ways and Means Committee, Mr. Mac Collins from 
Georgia, Mr. Collins.

STATEMENT OF THE HON. MAC COLLINS, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF GEORGIA

    Mr. Collins. Thank you, Mr. Chairman. Thank you for the 
opportunity to testify before this Subcommittee this afternoon. 
I have three separate recommendations relevant to the 
Subcommittee's review of energy policy. The first issue is 
municipal utility natural gas supply for H.R. 1986, legislation 
that would permit municipal gas systems to continue to use 
their tax-exempt bond authority to purchase natural gas on a 
long-term basis. Twenty-two additional members of the House 
have also cosponsored this legislation, including seven members 
of the Ways and Means Committee, and there is a companion bill 
that has been introduced in the Senate by Senator Breaux.
    There are approximately 1,000 publicly owned gas 
distribution systems in the U.S., primarily located in small 
towns and rural communities. Deregulation of the natural gas 
industry in the early nineties made it more difficult for small 
municipal gas systems to locate gas suppliers, arrange 
transportation and maintain an assured supply of natural gas 
for their customers.
    In response, many formed joint action agencies to acquire 
and manage the delivery of gas. Sixty-four towns in my home 
State contract with the Municipal Gas Authority of Georgia for 
their natural gas supply. The Georgia Authority buys gas on the 
long-term basis to obtain the most reliable, reasonably priced 
product for their customers. Obtaining the best price is 
important, but another priority is ensuring a dependable 
supply, not only for residential customers, but also for 
industrial operations so that they will know that locating in a 
small rural community will not mean a greater threat of supply 
disruptions.
    Until August 1999, joint action agencies issued tax-exempt 
bonds to finance long-term, prepaid supply contracts with gas 
suppliers, usually for a 10-year period. However, in 1999, the 
IRS issued a request for public comment on whether funding 
these contracts with bonds proceeds violates the tax exempt 
bond arbitrage rules. Since that time, the IRS has failed to 
issue any regulation, revenue ruling or general guidance.
    With the simple comment request created uncertainty, 
essentially denying municipal gas systems the ability to most 
effectively fund the long-term purchase of gas. Today, natural 
gas prices have reached record levels. Shortages have 
developed, and the markets are experiencing disruption. The 
inability to use tax-exempt bond authority to finance long-term 
prepaid contracts further undermines access to an assured 
supply of reasonably priced natural gas.
    Current law is clear. Arbitrage rules do not permit tax 
exempt bonds to be used to raise proceeds that are then used to 
acquire, and I quote ``investment-type property,'' which has a 
higher yield in bonds. However, treasury regulations provide 
that a prepayment does not give rise to investment-type 
property if the prepayment, one, is made for a substantial 
business purpose other than investment return, and, two, the 
insurer has no commercially reasonable alternative to the 
prepayment.
    Municipal gas systems clearly have a substantial business 
purpose for entering into prepayment transactions and no 
commercially reasonable alternative. H.R. 1986 would clarify 
the law and remove the confusion created by the IRS. It would 
ensure that a long-term prepaid contract for natural gas used 
by public utilities do not violate the arbitrage rules. And it 
is my hope that we can address this problem as part of the 
comprehensive energy legislation.
    The second issue is tax incentives for electric vehicles. 
We introduced this legislation last year. It would provide a 
$4,000 tax credit for the--for those who purchase electric 
vehicles. Especially in areas like Atlanta where youhave a lot 
of commuters, it would be very helpful. That is part of a legislation 
that Representative Camp has introduced and also which I support.
    The third is the Generator Tariff Elimination Act. I 
introduced this in the last Congress, and while it is--and, 
again, this year. While this is actually a tariff issue rather 
than a tax concern, I believe it is relevant to today's 
discussion about energy costs imposed by the Federal 
Government. This measure would repeal the duty on the 
importation of replacement steam generators used in nuclear 
power plants. Steam generators are necessary for the operation 
of nuclear power facilities. Despite the fact that there is no 
domestic manufacturer of these generators, a tariff is imposed 
on their importation.
    Prior to the conclusion of last year's Congress, a 
reduction in this tariff was included in the Miscellaneous 
Tariff And Technical Corrections Act, H.R. 4868. However, the 
tariff should be fully repealed. This is an indirect tax on 
energy that is passed onto the ratepayers, directly and 
indirectly.
    Mr. Chairman, I appreciate the opportunity to bring these 
issues before you and the Subcommittee, and hopefully we can 
have assistance in seeing that they become reality. Thank you.
    [The prepared statement of Mr. Collins follows:]

 Statement of the Hon. Mac Collins, a Representative in Congress from 
                          the State of Georgia

THE MUNICIPAL UTILITY NATURAL GAS SUPPLY ACT (H.R. 1986)
    The first issue is the Municipal Utility Natural Gas Supply Act 
(H.R. 1986)--legislation I have introduced along with Representative 
John Lewis. This bill would permit municipal gas systems to continue to 
use their tax exempt bond authority to purchase natural gas, on a long 
term basis, for their customers. Twenty-one additional Members of the 
House have cosponsored this legislation, including seven Members of the 
Committee on Ways and Means. [A companion bill has been introduced in 
the Senate by John Breaux and six of his colleagues].
    There are approximately 1,000 publicly owned gas distribution 
systems in the United States--primarily located in small towns and 
rural communities. Deregulation of the natural gas industry in the 
early 1990s made it more difficult for small municipal gas systems to 
locate gas suppliers, arrange transportation and maintain an assured 
supply of natural gas for their residents and businesses. In response, 
many formed joint action agencies to acquire and manage the delivery of 
gas.
    Sixty four towns in my home state contract with the Municipal Gas 
Authority of Georgia for their natural gas supply. The Georgia 
authority buys gas on a long term basis to obtain the most reliable, 
reasonably priced product for their customers. Obtaining the best price 
is an important consideration. But even more important is ensuring a 
dependable supply, not only for residential customers, but also so 
industrial operations know that their location in a small, rural 
community will not mean a greater threat of supply disruptions.
    In today's energy markets, the most reliable means of obtaining 
natural gas is through long-term prepaid supply arrangements. Until 
August of 1999, joint action agencies issued tax-exempt bonds to 
finance prepayment supply contracts with gas suppliers to obtain a 
long-term supply of gas (usually ten years).
    However, in 1999, the IRS issued a request for public comment on 
whether the use of tax-exempt bonds to fund long term prepaid natural 
gas supply contracts violates the tax exempt bond arbitrage rules. 
Since that time, the IRS has failed to act on the request for comment. 
No regulation, revenue ruling or any other guidance has been issued. 
But the simple request for comment created uncertainty and killed the 
market, denying municipal gas systems the ability to most effectively 
fund long term purchases of gas.
    Today, natural gas prices have reached record levels, shortages 
have developed, and the markets are experiencing disruption. The 
inability to use tax-exempt bond authority to finance long term prepaid 
contracts further undermines access to an assured supply of reasonably 
priced natural gas for consumers.
    Current law is clear. Arbitrage rules do not permit tax-exempt 
bonds to be used to raise proceeds that are then used to acquire 
``investment-type property'' which has a higher yield than the bonds. 
However, Treasury regulations provide that a prepayment does not give 
rise to investment-type property if the prepayment is made for a 
substantial business purpose other than investment return and the 
issuer has no commercially reasonable alternative to the prepayment. 
The municipal gas systems clearly have a ``substantial business 
purpose'' for entering into prepayment transactions and ``no 
commercially reasonable alternative.''
    The legislation I have introduced simply clarifies the law to 
remove the confusion created by the IRS by providing that long term 
prepaid contracts for natural gas used by public utilities do not 
violate the tax-exempt bond arbitrage rules. It is my hope that we can 
address this problem as part of comprehensive energy legislation.
ELECTRIC VEHICLE TAX INCENTIVES
Purchase Incentives
    The second issue is tax incentives for electric vehicles. Through 
the Energy Policy Act, Congress enacted expiring tax incentives aimed 
at reducing the costs and expanding access to pollution-free electric 
vehicles. The technology is here. But the cost to consumers remains 
high.
    Legislation I have previously introduced would extend and modify 
the current-law provision which provides a tax credit of 10%, up to 
$4,000, toward the purchase cost of an electric vehicle. In large 
commuter cities such as Atlanta, electric vehicles are increasingly 
becoming a viable mode of pollution-free transportation. Companies such 
as Georgia Power are implementing creative electric vehicle incentive 
programs for employees that are being fully utilized--in fact demand 
for electric vehicles outpaces the supply. I support legislation which 
would extend the expiring tax credit through 2008 (which currently 
expires 2004) and convert the credit to a flat $4000 amount.
Infrastructure Incentives
    Additionally, the committee should consider other tax-based 
incentives which would offset the costs of electric vehicle 
infrastructure. Under current law, businesses are provided a $100,000 
deduction for the purchase of clean vehicle fueling property (batteries 
for electrics, hydrogen stations for fuel cells). This provision 
expires in 2004 and should also be extended. There are several other 
incentives which have been included in the Clean Efficient Automobiles 
Resulting From Advanced Car Technologies (CLEAR ACT) Act (H.R. 1864), 
introduced by Representative Dave Camp. Among those are additional 
infrastructure incentives including a $30,000 credit against the cost 
of the construction and installation of either public or private 
recharging stations.

GENERATOR TARIFF ELIMINATION ACT (H.R. 1141)
    Lastly, I have introduced the Generator Tariff Elimination Act 
(H.R. 1141). While this is actually a tariff issue, rather than a tax 
issue, I believe it is relevant to today's discussions about energy 
costs imposed by the Federal Government. This measure would repeal the 
duty on the importation of replacement steam generators used in nuclear 
power plants. Steam generators are necessary for the operation of 
nuclear power facilities. Despite the fact that there is neither a 
current nor any reasonable likelihood of future domestic manufacturing 
capability of these generators, a tariff is imposed on these imports. 
Prior to the conclusion of last year's Congress, a reduction in this 
tariff was included in the Miscellaneous Trade and Technical 
Corrections Act (H.R. 4868).
    However, this tariff should be fully repealed. While providing no 
benefit to any domestic manufacturer, this indirect ``tax'' on energy 
is passed on to the ratepayer directly and entirely through the state 
public utility commissions in ratemaking proceedings. This tariff 
repeal legislation enjoys bipartisan support in both the House of 
Representatives and the Senate. I hope it can be considered as a part 
of any energy-related bill that the committee reports.
    Thank you for the opportunity to testify on these issues.

                                

    Chairman McCrery. Thank you, Mr. Collins. And now another 
Member of the Committee, Jerry Weller from Illinois, Mr. 
Weller.

    STATEMENT OF THE HON. JERRY WELLER, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Weller. Thank you, Mr. Chairman, Mr. McNulty and my 
fellow Members of the Subcommittee. I appreciate very much the 
opportunity to appear before this Subcommittee, and with your 
permission, Mr. Chairman, I would prefer to summarize my 
testimony rather than read it in its entirety. But I do want to 
commend you for your leadership on conducting these hearings as 
we move forward to develop a bipartisan national energy policy. 
As President Bush noted, we are now paying the price of the 
failure for our country to have a national energy policy over 
the past decade.
    Of course, we have seen that with higher gasoline prices in 
Chicago last summer, higher gasoline prices in Chicago this 
summer, higher home heating costs in Chicago this past winter. 
And I would like to present to the Subcommittee today two 
initiatives which I would like to offer to help address our 
concerns with rising natural energy prices and our need to 
reduce our dependence on imported sources of energy.
    Two initiatives today I wish to discuss with the 
Subcommittee. One addressed the tax treatment and nuclear 
decommissioning funds as we look at electricity restructuring 
around the country, and also legislation which I will be 
introducing tomorrow, providing tax incentives to create an 
energy-efficient home, as well as improvements, as well as new 
construction.
    Nuclear power, of course, is a major part of electricity 
production in the United States. It has demonstrated the 
ability to be safe, and also when you are concerned about clean 
air, a way of providing safe energy without having an impact on 
air quality.
    I would note that across this country, we have seen more 
and more States that have moved forward in electricity 
restructuring. As a result of that, you are now seeing 
utilities that are decidedly in different portions of the 
business, but as a result of that, you are seeing nuclear power 
plants change hands, one company buying from another. As a 
result of that, we need to modernize the tax treatment. The 
nuclear decommissioning funds that these funds are in place 
when the time comes to decommission these plants. I believe as 
we develop tax provisions to address the need to reduce our 
energy dependence on overseas sources, as well as to find safe 
and environmentally safe uses of generating electricity, that 
we need to address this important issue involving the 
decommissioning of nuclear power plants by modernizing the tax 
treatment.
    I also believe, Mr. Chairman, that we need to find ways to 
encourage investments by consumers, as well as home builders, 
in development of energy efficient homes. Tomorrow, I will be 
introducing legislation along with a number of my colleagues, 
providing up to a 20 percent tax credit, up to $2,000 which can 
be used either by the consumer, by the homeowner or by the home 
builder for making at least a 30 percent improvement in 
theenergy efficiency of new and existing homes. And this would--this 
tax incentive would be available for installing new windows, 
installation, energy efficient air-conditioners, water heaters and home 
heating appliances.
    Mr. Chairman, we are looking for ways to reduce our 
dependence on imported sources of energy, and I believe by 
encouraging the development and improvements to homes, creating 
energy efficient homes, we can move toward that goal. By 
helping reduce the demand on the Nation's power grid and lower 
cost for consumers, it is estimated in 1998 that there was an 
estimated 74 million single family homes, 6 million multi-
family homes, and 6 million manufactured housing units in the 
United States, which accounted for 92 percent of total 
household energy consumption.
    In 1998, these homes accounted for nearly 20 percent, one-
fifth of all energy consumed in our country. By making changes 
in the energy efficiency of our homes, consumers can save real 
money. It is estimated that consumers can save 10 percent or 
more on energy bills by simply reducing the number of air leaks 
in their home. Double-pane windows with low emission coating 
can reduce heating bills by 34 percent in climates such as we 
have in my home area in Chicago.
    If all households upgraded their insulation to meet the 
International Energy Conservation Code Level, which is a 
private sector energy code used in the United States, this 
Nation would experience a permanent reduction of annual 
electricity consumption totaling 7 percent of current total 
electricity consumed. That is real savings, Mr. Chairman, and I 
believe by providing tax incentives, not only that I am 
suggesting, but others have suggested, that we can move toward 
this goal.
    Bottom line is, it will reduce our dependence on imported 
sources of energy, it will help the environment, and of course 
it will help our economy. So, Mr. Chairman, I thank you for the 
opportunity to be--sit before you today and present a couple of 
ideas that I have. I look forward to working with you, and I 
hope that we can work together to develop bipartisan energy 
policy for the good of our Nation. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Weller follows:]

 Statement of the Hon. Jerry Weller, a Representative in Congress from 
                         the State of Illinois

    Mr. Chairman, thank you for the opportunity to testify before the 
Subcommittee on two energy issues that are important to my constituents 
in Illinois, as well as consumers across the country. As you may be 
aware, the Chicago region is currently faced with some of the highest 
energy costs in the nation. This is costing real people real money.
    Did you know that the average household in America spends nearly 
$1,300 per year on home energy costs? This is an average of more than 
$100 per month. Again, this is real money for real people.
    I would like to address two issues today (1) the need to address 
the tax treatment of nuclear decommissioning funds, and (2) a bill I am 
introducing later today to allow for a tax credit for making energy 
efficient home improvements to a newly constructed or existing home.
    As you may know, I have more nuclear power plants in my district 
than any other Congressional district in the United States. This 
industry is important to my constituents because it provides electric 
power and jobs for thousands of people. For the past two years, I have 
been the lead sponsor of legislation to make ensure that, in a 
competitive electricity market, funds continue to be available to pay 
for safe and timely decommissioning of nuclear power plants. I believe 
that this is a public policy we want to encourage.
    The tax rules governing these funds are out of date because of 
electric utility restructuring. Adjustments to the tax code need to be 
made to ensure that policies are kept in place which ensure that 
nuclear power plants are decommissioned as they should be. To this end, 
during the 106th Congress and again this year, Congressman 
Cardin and I have introduced legislation to modernize the tax 
provisions related to decommissioning nuclear power plants. Last 
Congress, portions of this legislation were included in a large tax 
bill which passed the House and Senate and was sent to President 
Clinton and ultimately vetoed. I am pleased that this year, President 
Bush has included provisions related to decommissioning nuclear power 
plants into his budget. Our legislation adapts the tax code to reflect 
the competitive utility market that exists today. It helps facilitate 
the transfer and sale of nuclear power plants. I believe that ensuring 
that nuclear power plants are decommissioned safely is a policy we 
should all support. I encourage my colleagues to join me in doing so.
    While I strongly believe that enacting this legislation to 
encourage proper decommissioning of nuclear power plants is the right 
thing to do, I also believe that given the skyrocketing energy costs 
consumers are facing, we should also look for ways to conserve energy 
and slow the rising demand which is driving up costs. To this end, I 
will be introducing legislation later today which will provide a 20% 
tax credit, up to $2,000, to individuals and homebuilders for making at 
least 30% in improvements to the energy efficiency of new and existing 
homes. This includes installing new windows, insulation, energy 
efficient air conditioners, water heaters and home heating appliances.
    This tax credit will significantly reduce the demand on the 
nation's power grid and lower costs for consumers. In 1998, there were 
an estimated 74 million single family homes, 6 million multi-family 
homes and 6 million manufactured housing units in the United States 
which accounted for nearly 92% of total household energy consumption. 
Additionally, in 1998, homes accounted for nearly 20% of all of the 
energy consumed in the United States.
    By simply making changes in energy efficiency to their homes, 
consumers can save real money. Consumers can save 10% or more on energy 
bills by simply reducing the number of air leaks in their home. Double 
pane windows with low emissivity coating can reduce heating bills by 
34% in cold climates like Chicago.
    If all households upgraded their insulation to meet the 
International Energy Conservation Code level, which is a private sector 
energy code used in the United States, the nation would experience a 
permanent reduction of annual electric consumption totaling 7% of the 
total consumed. This is a real savings.
    This proposal doesn't only benefit individuals, but it benefits the 
environment and the entire economy. Reduced energy consumption reduces 
our reliance on imported oil. By increasing energy efficiency in homes, 
the emission of greenhouse gasses is significantly reduced. At the same 
time, construction and improvements made to homes will create new jobs.
    Mr. Chairman, I encourage my colleagues to join me in supporting 
this common-sense, long-term energy efficiency measure. I believe that 
it is in the best interests of our country to reduce our reliance on 
foreign energy sources by supporting and encouraging proper use and 
decommissioning of nuclear power plants, as well as conservation of 
energy by encouraging consumers to make energy efficient home 
improvements.
    I appreciate the opportunity to testify before the Subcommittee 
regarding these important issues and I would be pleased to answer any 
questions.

                                

    Chairman McCrery. Thank you, Mr. Weller. And now another 
Member of the Ways and Means Committee, the gentleman from 
Kentucky, Ron Lewis, Mr. Lewis.

 STATEMENT OF THE HON. RON LEWIS, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF KENTUCKY

    Mr. Lewis. Mr. Chairman, and Members of the Subcommittee, I 
thank you for the opportunity to testify today about my 
legislation to help increase the use of biofuels. Biofuels, 
such as ethanol and biodiesel, are renewable sources of fuel, 
that I believe can play a large role in our future energy 
security. Our vehicles and economy have become increasingly 
energy efficient and much friendlier to our environment. The 
demand for fuel will continue to increase. While biofuels are 
not able to replace gasoline or diesel fuel yet, additional tax 
incentives for fuel retailers, consumers and businesses can 
help promote their use.
    Our farmers currently produce a surplus of corn and 
soybeans and could meet the demands of higher biofuel use. 
Every gallon of these fuels used means fewer barrels of foreign 
oil we have to buy.
    Ethanol tax laws already on the books have made ethanol 
more price competitive, improved its quality as a fuel and 
encouraged its production. In 1999, the United States consumed 
1.4 billion gallons of ethanol, both blended and unblended. 
That may sound like a lot, but it makes up only 1.2 percent of 
the nearly 125 billion gallons of gasoline used this same year. 
When it comes to the more pure forms of ethanol used, just more 
than 3 million gallons were consumed in the past year.
    Biodiesel use has expanded to about 60 billion gallons per 
year. Manufacturers are making more flex-fuel vehicles for 
ethanol that cost basically the same as vehicles that run only 
on conventional gasoline. Biodiesel, a newer alternative, has 
the advantage of compatibility with conventional diesel 
engines, eliminating the cost of new vehicles or engines. These 
are just two factors that make biofuels attractive choices for 
renewable fuels.
    Tax incentives, rather than mandates on fuel content or 
vehicle use, are a better means of encouraging private-sector 
consumers to choose biofuels. We have invested in research and 
provided fuel tax exemptions for refiners and marketers and 
received support from interests in agriculture and the 
environment. Retailers and consumers, however, need to be a 
large part of that incentive package.
    Fueling infrastructure has not expanded rapidly because 
retailers don't feel there is enough demand. Consumers, on the 
other hand, are not demanding these fuels or vehicles that use 
them because of the lack of fueling infrastructure.
    My legislation will add and expand tax benefits for sale 
and use of biofuels for retailers and consumers. First, this 
bill will expand and improve tax credits available for the 
purchase and installation of infrastructure for the sale or 
personal use of pure forms of biofuels. It is expensive for 
retailers or businesses and farmers with their own refueling 
equipment to add new tanks or pumps for these fuels. Using tax 
credits for refueling property and adding a credit for 
installation costs help retailers, individuals and businesses 
offer these fuels.
    Second, I propose that retailers receive credit for the 
sale of pure forms of biofuels so that they have an additional 
reason to promote and sell these to consumers. Savings due to 
these income tax credits for retailers could also be passed on 
to consumers in the form of fuel cost reduction, encouraging 
their use of biofuels.
    My legislation also provides businesses with more tax 
incentives rather than Federal mandates to use ethanol or 
biodiesel in their vehicles, whether they operate a single 
delivery van or fleet of trucks.
    Finally, this legislation includes provisions to expand the 
small producers' tax credit for ethanol so that farm 
cooperatives can receive equitable tax treatment for their role 
in ethanol sales and production.
    I look forward to working with the Ways and Means Committee 
on these and other tax incentives we can offer to increase the 
sale and use of renewable biofuels. While they alone will not 
solve all of our energy problems, Istrongly support the 
promotion and use of biofuels in order to reduce our dependence on 
foreign oil, increased fuel supply, provide air quality benefits and 
improve the livelihood of our farmers.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Lewis follows:]

Statement of the Hon. Ron Lewis, a Representative in Congress from the 
                           State of Kentucky

    Chairman McCrery and members of the subcommittee, thank you for the 
opportunity to testify today. I believe our nation has an energy supply 
problem and faces even greater problems in the years to come if we 
continue to only rely on conventional fuel sources. Consumer demand for 
fuels continues to increase, even while our vehicles and economy have 
become increasingly energy efficient and much friendlier to our 
environment.
    One way we can meet increased fuel demand is to encourage use of 
more renewable fuels, particularly biofuels such as ethanol or 
biodiesel. Our farmers currently produce a surplus of corn and soybeans 
and could meet the demands of higher biofuel use. Every gallon of these 
fuels used, even when used as blends, displaces a gallon of 
conventional gasoline or diesel fuel. The excise tax exemption and 
research have made ethanol more price competitive and have encouraged 
its production.
    In 1999, the United States consumed 1.4 billion gallons of ethanol, 
mostly in the form of a 10 percent blend with gasoline. That may sound 
like a lot, but it makes up only 1.2 percent of the nearly 125 billion 
gallons of gasoline used in the same year. When it comes to the more 
pure forms of ethanol used in flexible fuel or alternative fuel 
vehicles, just more than 3 million gallons were consumed in the past 
year. Biodiesel use has expanded to about 60 million gallons per year.
    Manufacturers are making more flex-fuel vehicles that cost 
basically the same as vehicles that run only on conventional gasoline. 
Biodiesel, a newer alternative, has the advantage of compatibility with 
conventional diesel engines, eliminating the cost of different vehicles 
and other infrastructure. These are two factors that make biofuels 
attractive choices for renewable fuels.
    Tax incentives, rather than mandates on fuel content or vehicle 
use, are a more preferable means of encouraging use of biofuels in the 
private sector. With the research investments, tax treatment and 
support from a variety of interests, these fuels still have not reached 
the use level we all would hope for. Fueling infrastructure has not 
expanded rapidly because retailers and others do not see the consumer 
demand. Consumers, on the other hand, may not be drawn to these fuels 
because of the lack of fueling infrastructure.
    I am working on legislation to add and expand tax benefits for sale 
and use of biofuels. We need to expand and improve tax credits 
available for the purchase and installation of infrastructure for the 
sale and personal use of the more pure forms of biofuels. These credits 
would go to retailers, individuals or businesses. The addition of a 
sales tax credit for retailers would also provide incentive to promote 
and sell ethanol and biodiesel. Some of these savings would be passed 
on to consumers, encouraging their use of biofuels. I also believe we 
should provide businesses with more tax incentives, rather than federal 
mandates, to use biofuels in their vehicles, whether they operate a 
single delivery van or a fleet of trucks. Finally, I support expanding 
the small producers tax credit for ethanol so that farm cooperatives 
can receive equitable tax treatment for their role in ethanol sales and 
production.
    I look forward to working with the Ways and Means committee on 
these and other tax incentives we can offer to increase the sale and 
use of renewable biofuels. While they alone will not solve all of our 
energy problems, I strongly support the promotion and use of biofuels 
in order to reduce our dependence on foreign oil, increase fuel supply, 
provide environmental benefits and improve the livelihood of our 
farmers.

                                

    Chairman McCrery. Thank you, Mr. Lewis, and thank all the 
Members of the panel for your testimony. Does any Member of the 
Subcommittee wish to inquire of these panelists?
    Thank you very much, gentlemen and lady. We look forward to 
working with you to bring some of your suggestions to fruition. 
No questions, Mr. Collins. If you have questions of us, you are 
free to ask.
    [Laughter.]
    Our next panel would please come forward, Mr. Gephardt, Mr. 
Stenholm, Mr. Filner, Mr. Sandlin. Welcome, gentlemen, and to 
introduce our first witness on this panel, I defer to my 
colleague from New York, Mr. McNulty.
    Mr. McNulty. Thank you, Mr. Chairman.
    I am pleased to welcome before the Subcommittee someone who 
has served as a Member of the House of Representatives for a 
quarter of a century. He has been a leader on energy and tax 
issues, among others. He has risen through the ranks to become 
the Democratic leader in the House of Representatives, but Mr. 
Chairman, most important of all, he is a former Member of the 
Ways and Means Committee.
    So we all want to welcome back the distinguished gentleman 
from Missouri, Mr. Gephardt.
    Chairman McCrery. The gentleman from Missouri may proceed

STATEMENT OF THE HON. RICHARD A. GEPHARDT, A REPRESENTATIVE IN 
   CONGRESS FROM THE STATE OF MISSOURI, AND HOUSE DEMOCRATIC 
                             LEADER

    Mr. Gephardt. Thank you, Mr. Chairman.
    Members of the Committee, thank you to my friend from New 
York for that generous introduction. Clearly my service on this 
Committee in years past is the highlight of my career in the 
House, so I am always happy to come back here. And I commend 
all of you, because I know how important the work is that you 
do on a daily basis in so many different, important areas.
    I am really pleased to be part of this hearing today. I 
want to thank the Subcommittee for inviting us to testify on 
this important subject. To put it in a word, energy is a huge 
issue for all of us as Americans, and Missouri people, for two 
summers in a row, have watched gas prices spike up to $2 a 
gallon.
    I have been in California twice in the last 3 months. I 
have seen firsthand how the energy crisis is impacting people's 
lives. One survey of small business people in San Diego found 
that two out of three could go under if energy prices stay as 
high as they have been in the last year.
    People are paying astronomical electric rates at home. Some 
people have a residential bill of $1,250 a month. Consumers and 
small businesses can't afford these high prices at the pump or 
in the home. Families are canceling vacations. West Coasters 
cannot continue to live under the threat of rolling blackouts.
    A couple of weeks ago I was at an energy forum in Oakland. 
We heard how it is affecting the disabled senior citizens and 
others. And the fact is, in California thousands of people are 
on some kind of life support machinery; when blackouts strike, 
their lives are at risk.
    So this problem is huge and it is national. The current 
crisis I think should give all of us pause.
    We must move ahead with a policy that helps consumers now. 
That is why we have fought so hard for temporary price caps on 
wholesale energy prices, especially in the West.
    But we also have got to have a long-term policy. I believe 
we have to set idealogy aside and approach this issue in the 
pragmatic, common-sense way that I think most Americans do. 
This is no time for a one-sided or narrow approach. We need to 
find ways to increase production, bring new plants online, and 
we must make efficiency a major part of any strategy.
    There are many ways to get at this. I have always been for 
incentives rather than penalties. I think the positive is 
always better than the negative. We need to figure out how to 
give real incentives for efficient buildings, increased 
production in renewable energy and for the hybrid automobiles 
which can help solve our energy problems.
    One of my concerns about the tax bill the President, just 
signed, is that it does not leave enough room for action on 
energy. We should be promoting immediate relief for consumers 
and helping to develop new technologies to promote energy 
efficiencies in renewable sources. Unfortunately, with the 
surplus diminished, our options are limited.
    We have many of these new technologies in front of us right 
now. You can buy cars right now; for little more than $20,000 
you can buy a hybrid car. If we put a real tax incentive behind 
it, we might really get scale of production for the producers 
and begin to make a real difference in the emissions and 
efficiencies of cars.
    Fuel cells are right behind.
    If we invest wisely in research and tax incentives, the 
return would be terrific. In fact, I am told that there are now 
available kits that could convert internal combustion engines 
to run on hydrogen fuels right now. It seems to me we should 
look at incentives for those kinds of technologies.
    I saw a tag line on an ad for the biotech field the other 
day; it said, ``We will never know how far we can go''; the tag 
line should be, ``unless we try.'' We can do a lot on global 
warming. We can do a lot on energy and the environment, but we 
have got to try.
    A good energy policy, in my view, should do two things. 
First, it should produce reliable and affordable energy; 
second, it should sustain the environment. That is what the 
American people want, and that is what we deserve. It can be 
done with tax incentives and research playing a vital role in 
promoting innovation, inefficiency and production. We will 
never be able to pump more oil than OPEC, but we win every 
single time when we use technology and innovation to solve our 
problems.
    My colleagues and I on the Democratic side recently put 
forward our principles for sound energy policy. We hope this 
Committee will give consideration to the ideas in that report. 
We won broad support from conservative to progressive Members. 
We found agreement on production and efficiency incentives that 
are together the most cost-effective way to balance supply and 
demand.
    Many of the principles we supported are already represented 
in bipartisan bills before the House. For example, small 
independent energy companies produce 50 percent of the 
petroleum and 65 percent of the natural gas in the lower 48. We 
have proposed tax incentives to help keep marginal wells in 
production and to encourage increased production by these 
small, but crucial, energy companies.
    I think these ideas have support of both Republicans and 
Democrats. Ed Markey and Duke Cunningham have legislation that 
would dramatically increase energy savings in commercial 
buildings and new housing. It uses existing technology, but 
would stimulate the market for new ideas. Experts at the 
Department of Energy have predicted that energy efficiency 
measures like Markey-Cunningham can produce energy savings 
equal to 600 300-megawatt power plants over the next 20 years. 
That is over 40 percent of the number of new plants the 
President has suggested that we build. So I hope that we will 
look at that legislation.
    For anyone who still questions the importance of having a 
balanced energy policy, I want to point out one fact. From 1973 
to the present, Americans have saved between $150 and $200 
billion by improving energy efficiency.
    Another promising idea is hydrogen-run fuel cell cars and 
other hybrid engine technologies. The Democratic energy plans 
in both the Clinton and Bush administrations propose incentives 
for these and similar kinds of cars. If we structure sensible 
local and Federal tax credits, we can help make these cars a 
success. Also, hydrogen fuel cell technology holds great 
promise not just for powering cars, but also for electrifying 
buildings in a more efficient, environmentally sensitive 
manner.
    What we lack is leadership in public policy that will lead 
us in that direction.
    The same applies to renewable sources like solar and wind. 
For instance, presently wind power produces only 1.3 percent of 
yearly capacity in California. According to the American Wind 
Energy Association, the wind potential of California is 30 
percent of California's total energy demand. There are several 
bills with Republican and Democratic sponsors that give strong 
support to developing cost-effective renewable energy.
    Finally, one of our greatest failures is not sustaining a 
consistent, long-term energy policy. We put money in research 
and tax incentives for efficiency and renewables when the price 
of gasoline, oil and natural gas goes up; and when the price 
goes down, we cut out these same programs. We must adopt new 
thinking and new ideas so the American people have the 
opportunity to reach for their twin goals of plentiful energy 
and protecting our environment at the same time.
    The problems are real, the solutions are real. There are 
hybrid cars on the market today that get 70 miles per gallon 
that have much less emission than present cars. Who would have 
believed that that could be true 25 years ago, the last time we 
faced an energy crisis? We have to find ways to release the 
full creativity and ingenuity of the American people in 
resolving these problems.
    I am convinced if together, in a bipartisan way, we sustain 
a long-term energy policy in this country, we can solve these 
problems both in terms of energy and the environment and we can 
make a better America.
    Thank you very much.
    [The prepared statement of Mr. Gephardt follows:]

Statement of the Hon. Richard A. Gephardt, a Representative in Congress 
        from the State of Missouri, and House Democratic Leader

    ``Thank you Chairman McCrery and Ranking Member McNulty for 
inviting me to testify about one of the biggest issues of the day.
    ``Energy is a huge issue for all Americans. In Missouri, people for 
two summers in a row have watched gas prices spike up to $2 per gallon. 
I've been to California twice in the last three months. I've seen 
first-hand how the energy crisis is impacting people's lives. One 
survey of small businesses in San Diego found that two out of three 
could go under if energy prices stay as high as they've been in the 
past year. People are paying astronomical electricity rates, and I've 
even heard of one family paying as much as $1,250 each month in their 
home energy bills.
    ``Consumers and small businesses simply can't afford to pay such 
high prices at the pump or in the home. Families have been canceling 
vacations because they can't afford the price of gas. Meanwhile, 
Californians, Oregonians, Washingtonians can not continue to live under 
the threat of rolling blackouts which hit without notice, and with 
devastating impact. Just a couple of weeks ago, I was at an energy 
forum in Oakland. I sat with other members of Congress and listened to 
people testify about how this crisis is affecting their lives. I found 
one fact particularly striking. The fact was this: in California, 
thousands of people are on some kind of life support machine. When 
blackouts strike, their lives are at risk. For them, the energy issue 
is not just about economics, it's a matter of life and death.
    ``So this is a huge immediate problem, and it's a long-term 
national energy challenge. The current crisis should give all of us 
pause. We must move ahead with an energy policy that helps consumers in 
the here and now and creates a stable, sustainable energy supply over 
the long-term. And whatever we do, we must not roll back our hard-won 
progress on the environment. As difficult as this crisis is for many 
Americans, I also see it as a golden opportunity for the future of our 
country. Working together, we can address our short- and long-term 
national energy needs.
    ``To do this, I believe we must set ideology aside and approach the 
issue in a pragmatic way that makes sense for all Americans. This is no 
time for a one-sided or narrow policy. It's no time to let theories 
that are set in stone dictate or narrow our choices in energy policy. 
We need to find ways to increase production and bring new plants on 
line, and make efficiency a major part of any national energy strategy.
    ``There are many ways to get at this. I've always been for 
incentives rather than penalties. I think the positive is always better 
than the negative. We need to figure out how to give real incentives 
for efficient buildings, increased production and renewable energy, and 
for the hybrid automobiles which can help solve our energy problems. 
One of my concerns about the large tax cut which the President just 
signed is that it leaves little room for action on energy. We could be 
promoting immediate relief for consumers, and helping to develop new 
technologies to promote energy efficiencies and renewable sources. 
Unfortunately, with our surplus diminished, our options are also 
diminished.
    ``We've got many of these technologies in front of us right now; 
this is not pie in the sky stuff. You can go buy these cars right now; 
for a little more than $20,000 you can buy a hybrid car. If we put a 
real tax incentive behind it we might really get it out there--get 
scale of production for the producers and really begin making a 
difference in the emissions of cars. Fuel cells should be right behind 
it. If we invest wisely in research and tax incentives, the return 
would be terrific. I saw kind of a tag line on an ad the other day that 
said ``we'll never know how far we can go,'' and the tag to that should 
be, ``unless we try.'' We can do a lot on global warming, we can do a 
lot a lot on energy and the environment, but we must try. We must have 
a policy and we have to stick with it.
    ``A good energy policy should do two things. First, it should 
produce reliable and affordable energy. And second, it should improve 
the environment. That is what the American people want, and that is 
what they deserve. And it can be done, with tax incentives playing a 
vital role in promoting innovation in energy efficiency and energy 
production.
    ``We will never be able to pump more oil than OPEC, but Americans 
will win every single time when we use technology and innovation to 
solve our problems.
    ``My colleagues and I recently put forward Democratic principles 
for sound energy policy. I believe this Committee should give 
consideration to the ideas in our report. We won broad support from 
conservative to progressive members. When we found agreement on 
production and efficiency incentives that are together the most cost-
effective way to balance supply and demand.
    ``Many of the principles we supported are already represented by 
bi-partisan bills in the House. For example, small, independent energy 
companies produce 50% of the petroleum and 65% of the natural gas in 
the lower 48 states. We have proposed tax incentives to help keep 
marginal wells in production and to encourage increased production by 
these small, but crucial energy companies. These ideas have the support 
of Democrats and Republicans.
    ``Ed Markey and Duke Cunningham have legislation that would 
dramatically increase energy savings in commercial buildings and new 
housing. It uses existing technologies, but also helps to stimulate the 
market for new ideas in energy efficiency. Experts at the U.S. 
Department of Energy have predicted that energy efficiency measures, 
like Markey-Cunningham, can produce energy savings equal to 600 300 
mega-watt power plants over the next 20 years. That is over 40% of the 
number of new plants President Bush wants to build. Our approach means 
more power, lower energy bills, and billions saved from not having to 
build 600 power plants.
    ``For anyone who still questions the importance of having a 
balanced energy policy--one that includes both production and energy 
efficiency--I point out one fact. From 1973 to the present, Americans 
have saved between 150 and 200 billion dollars by improving energy 
efficiency.
    ``One very promising idea is hydrogen-run, fuel cell cars and, 
other hybrid engine technologies. The Democratic energy plan--and both 
the Clinton and Bush Administrations--proposed incentives for these and 
similar kinds of cars. If we structure sensible local and federal tax 
credits, we can help make these cars a success.
    ``Hydrogen-fuel cell technology holds great promise for powering 
autos and electrifying buildings in a much more efficient, 
environmentally sensitive manner. What we lack is the public leadership 
and public policy to lead us in that direction. The same applies to 
renewable sources of energy like solar and wind. For instance, 
presently wind power produces only 1.3% of yearly capacity in 
California. According to the American Wind Energy Association, the wind 
potential of California is 30% of California's total energy demand.
    ``There are several bills, with Republican and Democratic co-
sponsors, that give strong support to developing cost-effective 
renewable energy.
    ``One of our great failures is not sustaining a consistent, long 
term federal energy policy. First, we put money in research and tax 
incentives for efficiency and renewables and then later we cut these 
same programs. We must adopt new thinking and new ideas so the American 
people have the opportunity to reach for their twin goals of plentiful 
energy and protecting our environment at the same time.
    ``The problems are real. The solutions are real. There are hybrid 
cars on the market today that get 70 miles per gallon. Who would have 
believed that could be true 25 years ago, the last time we faced an 
energy crisis? We must find ways to release the full creativity and 
ingenuity of the American people in resolving this problem. We must 
move forward in a pragmatic way that taps into our capacity for 
innovation and new ideas, which Americans have in abundance, and which 
I believe is the key to meeting the challenges I've just outlined 
above.''

                                

    Chairman McCrery. Thank you, Mr. Gephardt. Mr. Stenholm.

STATEMENT OF THE HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Stenholm. Thank you, Mr. Chairman, Members of the 
Committee; thank you for your foresight in holding these 
hearings.
    As a Member who has been here for 22 years, I will say that 
at no time since the Carter administration has any 
administration provided leadership for a national energy 
policy, as I believe we are facing today and we are hearing 
today; and also I am very glad to see this Committee giving 
serious thought to a national energy policy as evident by the 
hearings you are holding today and the activities that you, as 
Members of this Committee, are in fact carrying on. And I thank 
you for the privilege of participating.
    I commend my colleague from Texas, Mr. Thornberry, for 
introducing H.R. 805, the Independent Energy Production Act, of 
which I am an original cosponsor. This bill 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.
    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, something that we failed 
to do 2 years ago when we had the opposite of pricing that we 
have today.
    Moreover, I would encourage the Committee to create a plow-
back incentive, a 10 percent tax credit that would apply to 
expenditures for domestic oil and gas exploration and 
production. I also would ask you to look at the bill introduced 
by Mr. Moore of Kansas to stimulate production of 
unconventional gas by extending the section 29 tax credit for 
unconventional gas production.
    Unfortunately, despite the wide-ranging bipartisan support 
for incentives to improve the domestic oil and gas industry, we 
have been unable to enact 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 with 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 exploration and development of 
reserves. The President's plan does not have any tax provisions 
for small independent producers.'' I submit their letter for 
the record with my testimony.
    We also have a growing demand for electricity and coal 
which 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 from existing coal-
fired power plants. The Blue Dog energy plan, which Mr. Sandlin 
will talk more about, proposes a 10 percent tax credit for 
qualified expenses toward the construction of new power plants 
using advanced clean-coal technology or the retrofitting and 
repowering of existing conventional power plants with new 
advanced clean-coal technology; and I would ask you to look at 
that as you continue your deliberations.
    Refining capacity, it is no secret that domestic refining 
has actually fallen over the last decade even as demand for 
refined petroleum has increased. As one who represents--at one 
time, represented two refineries in my District--one is no 
longer operating; it was closed because of its judgment that it 
could not meet the standards that were implied. Another has had 
terrific problems in dealing with the standards that we through 
Congress and congressional activity have placed upon them. I 
think we need to take a good, hard look at that.
    By reclassifying petroleum refineries as eligible for the 
7-year depreciation, the industry can retain capital for 
essential investments in infrastructure, and I would ask you to 
look at that.
    Likewise, construction should begin as soon as possible to 
bring North Slope natural gas to the United Statesmarkets. 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.
    Regarding electricity transmission, as we have seen over 
the course of the last 9 months, restructured electric markets 
recently have come under stress as increased demand creates 
supply bottlenecks, exposing the limitations of the delivery 
system and causing regional electricity disruptions. 
Transmission constraints in 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 electric cooperatives, 
modifying the Federal Tax Code to facilitate the transmission 
and distribution of electricity.
    Also, as you have heard, alternative and renewable energy 
sources need to be looked at in their entirety: wind, solar, 
hydroelectric, other renewable energy resources such as 
ethanol, biomass, biodiesel, as well as alternative sources 
such as nuclear energy. We need to look at all of them.
    I commend Mr. Foley, a Member of this Committee, for his 
bill, H.R. 876, providing for a 5-year extension of the 
production tax credit regarding wind energy and renewable 
energy, and I think that is headed in the right direction.
    Additionally, Congress should consider increasing the 
existing investment credit for renewable energy infrastructure 
to 20 percent for solar and geothermal, as well as increasing 
the current tax credit for producing electricity to 2 cents per 
kilowatt hour for electricity produced from wind and biomass 
and extend the credit to solar and to geothermal.
    I also come to you today as the Ranking Member of the House 
Agriculture Committee, and you will hear, as you heard from the 
previous witnesses, agriculture has got a role to play and vice 
versa. I have observed you cannot produce food and fiber 
without oil and gas. You cannot produce oil and gas without 
food and fiber. There is a natural partnership to be designed 
here, and it is this that I have been working on, since I 
represent the oil patch as well as the cotton patch.
    We have been working to see what we can do to work 
together. And there are many things that can be done, not the 
least of which is providing the research and development funds 
to answer those questions where there are legitimate concerns 
about the efficiency of those actions today, but also to 
continue to move forward in the development of alternative 
sources of energy.
    We must become more self-dependent upon our own energy, 
rather than dependent upon foreign sources. The only way I know 
to do that is to produce more energy, and all of these 
alternative sources offer tremendous potential that I believe 
can be developed at economically sound price levels if we will 
address those in a sound research and development process.
    Finally, on consumer needs, it is no secret today that 
consumers all over the United States are having terrific 
problems regarding their bills today, as they see them. And I 
think we must recognize, particularly, those who are unable to 
pay for their bills. We must look at ways in which we can be of 
help to those who, through no fault of their own, find 
themselves in an economic situation in which they cannot pay 
their electric bills.
    But I would hope that, in doing so, we would also look at 
long-term needs, we would look at making certain that we would 
have the energy available and the incentives to produce those 
efficient vehicles, efficient homes and other home improvements 
through the Tax Code.
    And here I will conclude my remarks to you in saying that I 
hope the Committee will be innovative and creative as you shape 
our country's next energy program. We no longer can rely on the 
same old policies. America needs a balanced, forward-looking 
energy policy which 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 fits within the context of a 
fiscally responsible budget framework.
    I was extremely disappointed that the tax incentives that I 
have mentioned today--and there were many--were not even 
considered within the context of the budget process that we 
have just gone through. The recently passed $1.35 trillion 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 into 
the Social Security and Medicare trust funds. 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 the trust fund. I know you share this 
desire.
    This Congress could have taken time to look at using the 
Tax Code to accomplish some of the much-needed improvements in 
our energy policy. Regrettably, we have made it virtually 
impossible to provide for the needed spending in the area of 
energy. I say ``virtually'' because I hope that in your wisdom, 
as you look at this, you will find ways that we can do so, and 
I look forward to working with you as you attempt to do just 
that.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Stenholm follows:]

Statement of the Hon. Charles W. Stenholm, a Representative in Congress 
                        from the State of Texas

    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 doubled 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 from 
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 from 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 apart 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 into 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.
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    Chairman McCrery. Thank you, Mr. Stenholm. Mr. Filner from 
California.

STATEMENT OF THE HON. BOB FILNER, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF CALIFORNIA

    Mr. Filner. Thank you, Mr. Chairman, and I thank the 
Committee for these hearings and for giving your colleagues not 
on the Committee a chance to share our experiences with you.
    I am going to speak as a Congressman from San Diego, where 
the electricity crisis really started, to speak solely on 
electricity although I think what I say has to do with other 
forms of energy, whether it is natural gas or gasoline. And I 
want to talk specifically about some short-term steps that need 
to be taken because we are in incredible crisis in California.
    The economy is teetering. The economy is being bled dry. 
The taxpayers of our State, because the utilities have gone 
bankrupt, are paying over $3 million an hour for electricity--
$70 million, sometimes $100 million a day, $3 billion a month. 
Our economy and, therefore, the Nation's economy cannot sustain 
this kind of bleeding, and we need your help.
    Obviously, the answers that you come up with for solutions, 
both long-range and short-range, depend upon your understanding 
of what caused the problem. San Diegans believe, and I think I 
speak for virtually everyone, Republican and Democrat, in San 
Diego believes that when our prices doubled and tripled within 
60 days of deregulation, it was a result of market 
manipulation. And I am talking about full deregulation, Mr. 
Chairman, deregulation of both wholesale and retail prices.
    We knew this was not a supply-and-demand problem or a cost-
of-production problem. The summer was no warmer than it was the 
summer before. Demand was almost the same, maybe even less. 
Cost of production had not increased. This was a result, and 
virtually everyone in San Diego will agree with me, of a 
manipulated market brought about by--a not-very-well-crafted 
deregulation plan for the State of California. The market was 
manipulated by outside energy wholesalers, and we are being 
bled dry by that.
    This is not fundamentally a problem of supply and demand. 
We have tight supplies. And the Governor of California is doing 
everything he can to increase those supplies. We have a dozen 
plants online that will be available for production within 2 to 
3 years, and he is doing everything he can to spur 
conservation. We reached a goal last month, we surpassed his 
goal of 10 percent with 11 percent conservation. We were 
already the second most conserving State per capita in this 
Nation.
    The problem is the price!
    Now, it would be simple for our Federal Energy Regulatory 
Commission (FERC) to impose cost-based rates for the Western 
grid in this Nation. In fact, when San Diego's prices went up 
two and three times, when small businesses by the scores went 
out of business, Mr. Chairman--and as the Democratic leader 
said, a recent report showed 65 percent of San Diego small 
business faced bankruptcy this year. When 65 percent of our 
small businesses almost going out of business, we have a 
problem.
    When the evidence of market manipulation was presented to 
the Federal Energy Regulatory Commission, they agreed in a 
November report of last year, Mr. Chairman, that, yes, the 
market was manipulated, these were unjust and unreasonable 
prices, they were illegal prices. Yet they did absolutely 
nothing. They had the power right then to say prices ought to 
be reduced. They did nothing, and they signaled the energy 
cartel that they could rob our State blind and rob the rest of 
the West blind; and that is exactly what they are doing.
    The FERC found these prices to be illegal. They could 
impose cost-based rates. Cost-based rates provided morethan a 
reasonable profit for decades and decades in this country. That is 
going back to the regulated rate, and in fact, they ought to refund the 
criminal overcharges that my constituents have been paying since last 
June.
    So if the problem is prices, then cost-based rates ought to 
be imposed. If they don't act, the Congress can act to do that. 
This Congress can also send signals to all cartels, whether it 
is natural gas or gasoline or electricity.
    I have a bill, H.R. 443, which is a windfall profits tax 
which imposes a 100 percent tax on windfall profits, which can 
be defined as a term of art. These companies are entitled to a 
reasonable profit; that is what the regulation said for 100 
years in this country. They are not entitled to gouge in a 
criminal way the consumers of California or Oregon or 
Washington or Montana or New Mexico or Wyoming or New York.
    So you have windfall profit tax bills for your 
consideration.
    I know Mr. Foley has put in tax incentives for wind power. 
I have a bill, H.R. 269, which I hope you will look at, Mr. 
Foley, also, because I worked it out with the top windmill 
manufacturer in the United States who is in San Diego. And they 
have thrived, and this country can thrive on wind power.
    As Mr. Gephardt suggested, a 30 percent goal for 
electricity is reasonable. I just got back from Denmark where 
their national goal is 20 percent, and they are going to 
achieve that, so we ought to be looking at these.
    But I will tell you in conclusion, in the short run, in 
electricity, this economy is being threatened by the prices in 
California and in the Western grid. This Congress, this Nation, 
this President have got to bring down those prices. We need a 
2-to-3-year breathing period before the new supply is online, 
before the conservation effects have taken full root. We need 
your help in doing that and I will tell you, the economy is 
threatened if we don't.
    I thank the Chairman.
    [The prepared statement of Mr. Filner follows:]

Statement of the Hon. Bob Filner, a Representative in Congress from the 
                          State of California

    Mr. Chairman, thank you for scheduling this hearing to examine the 
effects of federal tax laws on the production, supply and conservation 
of energy in the United States. It is critical that we act now to 
provide immediate relief for the American people from a growing energy 
crisis that threatens to disrupt the country. At the same time, we must 
also make greater strides in addressing the nation's long-term needs by 
implementing realistic and effective proposals.
    It's no secret that there is an energy crisis in California. San 
Diego was ground zero in this crisis. Our county became the first area 
in California where full electricity deregulation occurred in both 
retail and wholesale prices. My constituents were paying market-based 
electricity rates last summer which has resulted in triple-digit 
utility bills ever since.
    The impact does not stop with the individual consumer--our whole 
Nation bears the consequences. A surge in the price of energy can 
derail the economic expansion that we have worked so hard to achieve 
and maintain.
    California consumers have been gouged throughout the last year. 
Small businesses have been forced to close their doors. The utilities 
in our State have been brought to their knees. Yet quarterly reports 
show increased profits by nearly 1,000 percent for electricity 
wholesalers.
    To address this problem, I urge Congress to immediately pass my 
legislation, H.R. 443, the Public Oversight of Wholesale Electric Rates 
Act or POWER Act which would impose a windfall profit tax on wholesale 
power sold throughout the western U.S. Anything over a ``just and 
reasonable'' amount of profit would be taxed 100%.
    California is just part of a regional electricity grid. The obscene 
prices have spread to Oregon and Washington. Idaho and New Mexico are 
next, and the rest of the West will soon follow. It is time for 
Congress to act. We must hold this cartel accountable and provide the 
relief that Californians and all Americans so desperately need and 
deserve.
    We must also take lessons from the current crisis that we face and 
act to make certain that we do not have recurring and long-term 
problems. In an effort to help address this need, I have sponsored H.R. 
269, the WIND for Electricity Act.
    We have failed to support the development of alternative energy 
resources. In terms of domestic resource potential, wind energy is the 
most overlooked fuel source in this Nation. Wind is available just 
about anywhere, and can be utilized for electric generation more 
quickly than any other energy resource.
    Compared with the tax incentives for conventional nuclear energy, 
Federal tax support for renewable energy resources, such as wind, is 
relatively small. Aside from accelerated depreciation, which is shared 
by other fast-evolving technologies, wind facilities now qualify only 
for a temporary Federal production tax credit.
    This credit helps provide a price floor, but if the price of wind-
generated electricity rises above a certain benchmark, the tax credit 
phases out and this credit took effect in 1994. It was originally 
decided to sunset this credit in June of 1999. But several years after 
the credit was enacted, Congress considered repealing it when energy 
prices were at an all-time low.
    Fortunately, Congress retained the credit and later extended it 
until 2002. Despite wavering congressional policy, the credit has 
promoted use of domestic wind energy resources and has promoted 
technological development. An uncertain credit and a temporary 
extension, however, does not support long-term planning, development 
and construction of electric generation projects.
    To spur this effort, I ask for your support of the WIND for 
Electricity Act to specifically promote the development of wind energy 
resources in the U.S. I know that San Diego is looking to this Congress 
for short-term relief from the high prices of electricity and for long-
term alternative energy resources. I thank you for your support.

                                

    Chairman McCrery. Thank you, Mr. Filner. And next Mr. 
Sandlin from Texas.

STATEMENT OF THE HON. MAX SANDLIN, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. Sandlin. Thank you, Mr. Chairman. It is good to be 
here, and I too appreciate the work of the Committee today in 
calling attention to this important problem. We certainly 
appreciate your focus and look forward to working with the 
Committee and other Members of Congress in addressing this 
problem.
    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 in 
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 the 
energy markets and, thus, lower the cost of energy paid by 
consumers; and I will try to limit remarks to things that have 
not been talked about in detail by my colleagues.
    The exploration and production of energy resources is very 
capital-incentive, as you know. 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 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 an MCF, 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 important 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 in this country. Providing access to 
capital is linked to securing market stability, which benefits 
both the consumers and the energy producers.
    The domestic oil and gas industry, particularly the 
independent petroleum and gas producers are just now recovering 
from losses caused by the low prices in 1998 and 1999. The 
failure to recognize the need to respond to those low prices 
resulted in a 10-percent loss in domestic production, most of 
which has been made up by imports of gas and oil from Canada 
and OPEC.
    Easing this feast-or-famine swing 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 the Senate, with substantial cosponsorship, 
during the 106th Congress and now the 107th Congress. I am 
pleased to join as a cosponsor and speak in support of two of 
those bills today, H.R. 805 and H.R. 876, which, if enacted, 
will encourage the production and development of energy 
sources.
    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 that bill.
    The marginal well production tax credit: This credit will 
allow a $3 per barrel tax credit for the first three barrels of 
daily production from an existing marginal oil well and a 50 
cent per MCF tax credit for the first 18 MCF 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 barrels 
per day if fully employed during times of low prices like 1998 
and 1999.
    Geological and geophysical costs: Geological and 
geophysical costs, or G&G surveys, are used to locate 
andidentify 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 G&G expense is the use of 3-D technology, which 
utilizes 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; and as 
you know, it is now capitalized.
    H.R. 876, Mr. Foley's bill: I would like to shift gears for 
a moment and focus on that. The U.S. wind industry has 
successfully financed and built wind plants capable of 
generating 1,700 megawatts 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 its 
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 
unleashed.
    In closing, Mr. Chairman, I am hopeful that Congress will 
take up these progrowth tax reform proposals in the 107th 
Congress. We all recognize the importance of promoting a wide 
range of energy supplies. We must advance an energy plan that 
utilizes the Tax Code to encourage domestic energy production 
and development.
    Let me comment that the Blue Dog Democrats are currently 
working on an outline of 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 and the 
testimony of others here today, Congress should not be deterred 
from leading on energy by passing these good bills.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Sandlin follows:]

 Statement of the Hon. Max Sandlin, a Representative in Congress from 
                           the State of Texas

    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.

                                

    Chairman McCrery. Thank you, Mr. Sandlin. I thank all the 
Members of the panel for your testimony. Does any Member of the 
Subcommittee wish to inquire?
    Mr. Foley. Thank you, Mr. Chairman.
    Chairman McCrery. Mr. Foley.
    Mr. Foley. Thank you all very, very much and particularly 
for your comments on wind energy. They certainly are 
appreciated by this Member, and I would hope we can continue to 
work on those.
    Mr. Gephardt, the Democrats seem to have made quite an 
issue of President Bush and Mr. Cheney's discussions, at least 
in formation on drilling, and particularly in Arctic National 
Wildlife Refuge (ANWR), more recently in the Gulf of Mexico. 
The discussions pretty much have both focused on, that is not 
the sensible way to go, as well as kind of a political wedge 
they are creating between the Governor and his brother, the 
President.
    What is the Democratic Caucus's position on offshore 
drilling off of Florida? Do you have a formulated policy?
    Mr. Gephardt. As you know, Representative, we are a widely 
based party, and we have many differentviews on energy. I would 
never tell you that we have one view on drilling rights offshore or in 
ANWR.
    We have a lot of Members who feel that drilling in 
environmentally sensitive areas should be put to a later point 
in our energy policy, if at all, and we ought to be emphasizing 
the kinds of things that all of us have talked about here. 
Bringing more production out of marginal existing wells, 
natural gas pipelines from existing fields in Alaska, we think, 
is a very exciting and sensible idea.
    Developing more wind energy, solar energy and fuel cells 
and hydrogen fuel cells for both stationary electricity and for 
automobiles, I think you would get a strong consensus in the 
Democratic Caucus and, I will bet, in the Republican Conference 
for all of those ideas; and we believe that those should be 
pursued intensely and actively and over a long period before we 
go into drilling in environmentally sensitive areas.
    Mr. Foley. That is why I need your help as the most 
powerful Democrat here on Capitol Hill. Today's Associated 
Press reports, ``Democrat control of Senate may not help stop 
Florida drilling.'' It goes on to say, ``Democratic control of 
the U.S. Senate has turned out to be no windfall for Florida 
politicians trying to block oil and natural gas drilling off 
the State's shores. The change from Republican control made a 
drilling advocate, Senator Jeff Bingaman, chairman of the 
Senate Energy and Natural Resources Committee. Senator Bingaman 
is sponsoring a broad energy bill that would permit leasing 5.9 
million acres for drilling in the Gulf of Mexico, about 100 
miles south of Florida's panhandle.''
    Now, obviously that is a great concern to me, and I agree 
that what we are doing here today is very, very important. You 
cannot underestimate our Nation's lack of resolve in this 
particular arena. Democrats and Republicans have failed 
miserably at adopting an energy policy that meets the test of 
time. We have fallen asleep since Jimmy Carter's day, and we 
remain asleep today; and we seem to think the only way is to 
stick a pipe in the ground and drill for fossil fuels, and that 
is our answer.
    And that is why I am excited about the bipartisanship, but 
at the same time, I am troubled when the attacks go on when Mr. 
Bush and Cheney haven't even brought their report forward, and 
a Senator in your party is the prime sponsor of the effort to 
drill.
    We have to find some common ground here, and every Senator 
and every House Member has the privilege and honor in this 
process of being able to pursue their best thought strategy. I 
criticize no one other than if we are going to have a concerted 
effort on environmental policies, we must obviously try and 
speak at least in one voice and correct those who may be 
wayward in their own party at times.
    And I am certainly sending a message to Mr. Cheney and Mr. 
Bush on my desires not to have offshore drilling in Florida, 
but I would also encourage you to maybe have a conversation 
with Mr. Daschle, Mr. Bingaman, so that if those are the 
proposals that they are going to bring forward as the first 
offers as chairmen of those committees that we also focus on 
these much more important strategies.
    You all mentioned the tax cut, and I think, yes, we can 
disagree on that as well; but my hope is that when those $300 
and $600 checks go out that at least minimally they may help 
fill the SUVs of the soccer moms. They may allow businesses to 
at least get over that little bit of a hump that the energy 
prices have brought forward.
    And the one final question, if you will, Mr. Gephardt, you 
mentioned price controls, where were you speaking of those 
price controls? Were those at the pump? Were they at the 
producer levels because of California's problem? Where do those 
controls come into play?
    Mr. Gephardt. Well, first, the bill that I am interested in 
is the Waxman bill that would apply to wholesale electric 
prices on the West Coast. We see that as a temporary relief 
solution. We believe that California has four electric plants 
coming online this summer and 19 that have been permitted. We 
think there is a long-term solution here, but we think 
temporarily there is a crisis and this is the best way to deal 
with it.
    On the tax bill, I understand what you are saying. My 
concern there is twofold. One, I would have hoped we could have 
gotten some of these energy incentives we have been talking 
about today into that tax bill. Now that has gone past us. It 
is going to be harder in our view to get this done in the 
budget, but we are committed to work with you to find ways to 
get it into the budget.
    The other thing on the rebates is that about a fourth of 
the people in the country won't get a rebate because they don't 
pay that much income tax. But they do pay payroll tax, and they 
have cars, too, and we would have hoped we could have figured 
out a way to help them.
    Finally, let me agree with you that we need to work 
together in a bipartisan way to get this policy put together. 
It is the only way it is going to work.
    I think there is a bipartisan agreement in both Houses that 
would put drilling in places like off Florida and even in ANWR 
way back in the solution, if at all, and a bipartisan agreement 
to do the incentives for marginal wells, to do the wind, to do 
the solar, to do the fuel cells, to do the hybrid cars, to do a 
lot, to do the natural gas pipeline from Alaska, that would 
give us a lot of answers.
    Our biggest problem is the one you identified. The minute 
the price of oil and natural gas goes down, we forget all this 
stuff; we throw it out and we forget about it. It is kind of 
like after World War II we thought we didn't need much of a 
national defense infrastructure, then we figured out that here 
comes Korea, here comes Vietnam, here come all these 
skirmishes, and we need a good defense.
    We need a long-term energy policy that provides security 
for the American people--and only we can provide it--and stay 
with it in thick and thin and see it through to 50 years from 
now when it is really going to be needed.
    Mr. Foley. Would the chairman indulge one moment?
    Chairman McCrery. If the gentleman will restrict his 
further questions to the jurisdiction of this Subcommittee, I 
will indulge him.
    Mr. Foley. The only thing I was going to say is, these 
conversations are extremely cooperative, and I always enjoy 
them in this process; and I just hope, as we go back to our 
respective caucuses, the dialogue continues as positively as it 
has today, rather than, as we see, the attack modes from both 
sides. It is regrettable.
    But if we focus, as we have done today, I just see so many 
good things coming out of the process. I thank the chairman for 
giving me the opportunity.
    Chairman McCrery. Yes, sir. Mr. Brady.
    Mr. Brady. Yes, sir. I agree with my colleagues here today. 
It is refreshing we are discussing this issue.
    Even though President Bush inherited the problem, I am 
thrilled he is shooting straight with America about what it is 
going to take to produce reliable, affordable, environmentally 
clean energy. We do have responsibility, Republican and 
Democrat alike, to meet more of our energy needs. It will take 
a balanced game plan based on conservation, innovation and new 
supply, and we all agree on that; and we can't rely any more on 
obsolete networks to deliver energy when and where it is needed 
around the United States.
    The good news is that if we do work together, we can 
achieve energy independence; and I don't know about the 
panelists, but for me, this issue is more than just economics. 
It is a matter of national security. As long as America relies 
on foreign countries for more than half of our daily energy, we 
are vulnerable; and there is no reason why the most prosperous 
Nation in the world continues to allow itself to be held 
economically or politically hostage to any country, as we do.
    And as we talk about solving this problem, let's talk about 
what we don't want to export, especially from California. Let's 
not export California's irresponsibility. Let's not export its 
feel-good Band-Aids of price controls and windfall profit taxes 
that won't produce even one more watt of electricity for 
Californians who need it this summer.
    And let's especially not export their blame game. I think 
people are tired of politicians promising to fix this problem 
and then engaging in nothing but a blame game. People are tired 
of that. They want the long-term, high-tech, common-sense 
solutions we are capable of as a country.
    And I know, too, that as we address this problem, we will 
be asking questions of ourselves such as why is Dennis Rodman 
in California paying less for his electricity than Mr. 
Gephardt's mom in Missouri? You have got to ask why one of the 
richest areas in the region, California, doesn't have people 
flocking to sell them energy. You have to wonder why we have 
blackouts in the winter and the spring when there is no reason 
anywhere in America to be having these blackouts, especially in 
the mild, moderate climate of California.
    We have got some real key issues to deal with. We have got 
to avoid the blame game. We have got to avoid the Band-Aids. We 
have got to work together.
    Mr. Chairman, I yield the balance of my time.
    Chairman McCrery. Thank you, Mr. Brady. Mr. McNulty.
    Mr. McNulty. I don't have any questions, Mr. Chairman. I 
just want to thank all of the Members for their testimony, 
especially Leader Gephardt for his emphasis on the fuel cell 
technology which Congresswoman Johnson and I have been 
promoting. I thank all the Members.
    Chairman McCrery. I, too, would like to thank all the 
Members of this panel, especially the Minority Leader for 
spending so much time with us today, and also for his 
suggestion--at least as I heard it, correct me if I am wrong--
that this Committee put together items that have bipartisan 
support and package it in a tax bill that we can move within 
the budget constraints; and let's get it done and not worry 
about the things we can't agree on, whether it is ANWR or 
drilling off of Florida or price controls in California, stuff 
not within the jurisdiction of this Committee.
    I think that is a sensible suggestion. I think it can be 
done. We do have common ground that we can work with. So I am 
of a mind to do just that, and I appreciate the Minority 
Leader's suggestion that we pursue that course.
    I appreciate Mr. Stenholm's suggestion that we do it in the 
constraints of the budget, which I think is reasonable; and I 
am hopeful and I am optimistic that we can do that.
    So I appreciate very much your testimony and your 
constructive suggestions today for this Committee. Thank you.
    Mr. Gephardt. Thank you, Chairman
    Chairman McCrery. And now our last panel, Mr. Inslee, Mr. 
Moore, Mr. Engel, Mr. Terry, Ms. Capito, Ms. Davis, and Mr. 
Issa.
    Thank you all for coming this afternoon. Mr. Inslee, we 
will begin with your testimony. Your written testimony will be 
submitted for the record, and we would ask that you summarize 
your written testimony orally in a 5-minute time limit. Thank 
you.

STATEMENT OF THE HON. JAY INSLEE, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WASHINGTON

    Mr. Inslee. Mr. Chairman and Members, I really appreciate 
your holding this hearing.
    This is just the perfect moment for a hearing of this 
nature, because we are at the starting line of a two heat race. 
The first heat involves a national race to decide who is going 
to be the dominant player in the new technologies that are 
going to handle the next century of our energy needs that are 
not necessarily just carbon-based fuels. And I think there is, 
hopefully, bipartisan agreement that the world is going to need 
a new generation of industrial base to provide these new, clean 
technologies and conservation-based technologies. And there is 
a question right now on who is going to be the dominant player 
on that, whether it is Japan or France or Germany or the United 
States.
    And I am very happy you are holding this hearing because we 
ought to be fast out of the blocks. And, frankly, we are not 
quite there yet. There is no reason that the Danes and others 
in Europe should be leading in wind technology right now. There 
is no reason for us to be behind except perhaps a lack of 
vision. There is no reason that we shouldn't be first forever 
in fuel cells as perhaps we are at the moment.
    So we are in that race. That is the first heat.
    The second heat is the race that is driven by the global 
climate change challenge. As you know, the National Academy of 
Sciences just came back with a report that is rather conclusive 
to the effect that, in fact, we are increasing carbon dioxide 
and other climate-change gases, that the planet is warming up, 
and that human activity is a source of that phenomenon and that 
it will lead to unpredictable results.
    And it is my belief that while the President is over 
engaging some of our allies in a discussion internationally 
about this, there is no reason for us to have to wait for an 
international agreement for us to act with new clean sources 
that are nonclimate-changing sources of energy.
    We need not, we should not, and we cannot wait for other 
countries to act. We don't have to fail to act, and the reason 
is if you look at our leadership in the past, we didn't wait 
for international agreement to pass the Clean Air Act. We 
didn't wait for an international agreement to pass the Clean 
Water Act. We acted.
    And that is why I am so encouraged that this Committee is 
considering measures to deal with clean new technologies, and I 
will be promoting the Clean Energy Incentives Act, which is a 
comprehensive package of incentives for a large number of new 
technologies; and you have heard several of those addressed 
today, whether it be wind, fuel cell, solar, geothermal, 
increased hydropower efficiencies and the like.
    And what I have been working to do is to develop a package 
of those incentives that are not directed to any one single 
bullet, because I don't think there is a single bullet here of 
new technologies. There are a whole host of new candidates for 
those that--we ought to, in Congress, give an incentive and let 
the technology and the market decide who are going to be the 
winners.
    For that reason, I have been working for the last several 
months to put together a package with a whole variety of 
industries from the insulation manufacturers to the appliance 
makers, to the automobile makers, to the wind power folks, to 
the solar, to the geothermal, to the hydropower, all of those, 
to come up with a package of incentives that those industries 
also believe are, number one, effective for their industry and, 
number two, are fair relative to the other new technologies 
that are coming on line. And I think that is an important fact, 
while we move forward, to realize there is going to have to be 
some fairness, if you will, between these new technologies; and 
I will present to you a package in the next several weeks that 
I believe will do just that.
    Just briefly, it sort of has four provisions. One is to 
deal with the renewable and alternative energy electric 
production tax credits besides extension of wind, geothermal, 
solar and the like.
    Second is an alternative fuels vehicle package which is 
very similar to Senator Hatch's proposal in the Senate.
    Third is energy efficiency and conservation, which is a 
whole host--it is again a package of incentives for higher 
insulation in homes, better appliances and the like.
    And fourth, new incentives for demand management and 
distribution generation to essentially try to have more 
effective management of our electricity uses.
    Mr. Chairman, as you move for this, I will just ask you for 
this consideration. I hope in the next several weeks to present 
to you a comprehensive package in this regard, and I will look 
forward to working with you on a bipartisan basis. I have been 
working with Members across the aisle in this regard. This 
ought to be our shining moment, working together on this, and I 
think this package will help you along.
    Thank you very much.
    [The prepared statement of Mr. Inslee follows:]
Statement of the Hon. Jay Inslee, a Representative in Congress from the 
                          State of Washington
    First, I would like to thank the Chair and the Committee for 
holding this hearing. This is a perfect moment for the Congress to 
focus on how tax policy can be used to advance our national energy 
policy for two reasons. First, our current short-term energy crisis 
makes it obvious that we need conservation and efficient technology and 
new sources of generating capacity. Secondly, and just as importantly, 
the challenge of global climate change drives our need for conservation 
and new clean generating technologies just as powerfully as our raw 
shortage of kilowatts. This much is certain--we must develop new 
industrial bases for cleaner generating systems as well as achieving 
new efficiencies, or we run the risk of unintended and unpredictable 
climate change.
    President Bush is in Europe today discussing climate change and 
prospective international tactics to address it. We need not, we should 
not, and we cannot wait for other nations to act. We need to act now, 
with an American policy of American innovation. We did not have to wait 
for other nations when we passed the Clean Air Act, the Clean Water 
Act, or National Environmental Policy Act. We should not wait now.
    Fortunately, we are a nation uniquely talented when it comes to 
acquiring the need for new technology. It ought to be our national goal 
to lead the world in these new technologies, not just for environmental 
reasons but for economic ones as well.
    To that end, I have been working with Members of both parties, and 
a wide gamut of people leading in these new technologies, to develop a 
comprehensive package of tax policies that can spur innovation in this 
direction. The product we have produced represents a broad-based and 
well-balanced package of measures to encourage the use of new 
technologies. Rather than focusing on one technology, our bill 
addresses a number of new fronts so that Congress does not put itself 
in the position of ``picking a winner.''
    I can also say that this package is one with broad-based support 
throughout the world of new technologies. As such, it represents the 
culmination of a process of consensus in that community, rather than a 
request by just one player.
    The following is a summary of this legislation:

     TITLE I--RENEWABLE AND ALTERNATIVE ELECTRIC ENERGY PRODUCTION

    Tax incentives for the production of electricity by the use of 
renewable fuel sources.
Section 101 Expansion of Renewable Resource Credit to Include 
        Alternative Resources
         One and a half cents/kWh production tax credit for 
        solar, open loop biomass, hydropower efficiency, incremental 
        geothermal, and landfill gas.
         One cent/kWh for biomass portion of co-firing with 
        coal. Allows credit for co-production of electricity with heat, 
        mechanical power, or minerals.

Section 102 Additional Modifications of Renewable Resource Credit
         Allows transfer or offset of credit for public 
        utilities. Applies minimum tax provision to be reduced by the 
        credit allowed for renewable production.
         Extends existing wind, closed loop biomass, and 
        poultry litter production tax credits.

                  TITLE II--ALTERNATIVE FUEL VEHICLES

    Tax incentives to encourage the use of motor vehicles powered by 
fuel cells, hybrid technologies, battery electric technology, and 
alternative fuels. (Sections 201-204: Hatch--S. 760 with slight 
changes)

Section 201 Alternative Motor Vehicle Credit and Modification of Credit 
        for Qualified Electric Vehicles
         Provides tax credits to consumers to purchase 
        alternative fuel and advanced technology vehicles (fuel cell 
        vehicles, hybrid vehicles, dedicated alternative fuel vehicles 
        and battery electric vehicles). Divides the vehicle tax credit 
        in two parts--one part to provide a base tax credit for the 
        purchase of vehicles dedicated to the use of alternative fuel 
        or vehicles using advanced technologies, the other part to be 
        used as a bonus credit based on the vehicle's efficiency and 
        reduction in emissions.
         Performance criteria and emission backstops have been 
        established in order for a vehicle to receive the tax credits.
         There is a minimum level of tax credits for 
        introducing the technologies into the marketplace.
         Performance incentives are based on fuel economy 
        improvements over 2000 Model Year levels for ``like vehicle'' 
        categories.
         A sliding scale ranging from 125% to 300% over current 
        city mileage levels is included to reward fuel economy 
        improvements proportionately.
         Emission backstops are included to ensure that 
        incentives apply only to vehicles whose emissions meet or beat 
        the average applicable standards.
         Incentives are provided for the full range of 
        transportation categories including light, medium and heavy 
        duty applications.

Section 202 Credit for Retail Sale of Alternative Fuels as Motor 
        Vehicle Fuels
         Provides a tax credit of 50 cents per gasoline-gallon 
        equivalent for the purchase of alternative fuel at retail.

Section 203 Extension of Deduction of Certain Refueling Property
         Extends the existing deduction for the capital costs 
        of installing alternative fueling stations.

Section 204 Credit for Installation of Alternative Fueling Stations
         Provides a 50 percent credit for the installation 
        costs of retail and residential refueling stations.

Section 205 Credit for Investment in Property to Convert Waste to Fuel
         Fifteen percent investment tax credit for equipment 
        used to convert plastic waste and biomass into a usable fuel 
        source. $10,000 limitation.

             TITLE III--ENERGY EFFICIENCY AND CONSERVATION

    Tax incentives to promote energy efficient and conservation 
technologies for certain commercial and industrial property, new homes, 
existing homes, and appliances.

Section 301 Energy Efficient Commercial Building Property Deduction
         Investment tax credit of 20% for purchases of electric 
        heat pumps, hot water heaters, and natural gas heat pumps. 
        (Section 102 of Bingaman--S. 596)

Section 302 Credit for Construction of New Energy-Efficient Homes
    (Cunningham/Markey--H.R. 778 with increased credit amount, the 
credit going to the builder instead of the purchaser, and the 
Photovoltaic provision removed)
         Tax credit up to $1,500 for homes with annual heating 
        and cooling energy consumption 30% less than the national model 
        standard in accordance with the International Energy 
        Conservation Code of annual heating and cooling energy.
         Tax credit up to $2,500 for homes with annual heating 
        and cooling energy consumption 50% less than the standard 
        reference model. In general, credits equal the aggregate 
        adjusted bases of all energy-efficient property installed in a 
        qualified new energy-efficient home during construction.

Section 303 Credit for Energy Efficiency Improvements to Existing Homes
         Up to 20% tax credit for qualified energy efficiency 
        improvements to an existing home. In order to qualify, property 
        must meet or exceed standards set by the 2000 International 
        Energy Conservation Code or achieve at least a 30% reduction in 
        heating and cooling energy usage. $2000 limitation.

Section 304 Credit for Energy Efficient Appliances
    (Rep. Nussle--H.R. 1316)
         Production tax credit of $50 for clothes washers 
        manufactured with a 1.26 Modified Energy Factor (MEF) and 
        refrigerators that consume 10% less kWh per year than the 
        energy conservation standards promulgated by the DOE for 2001
         Production tax credit of $100 for clothes washers 
        manufactured with a 1.42 MEF and refrigerators that consume 15% 
        less kWh per year than such energy conservation standards.

Section 305 Credit for Adjustable Speed Drives
         10% investment tax credit for adjustable speed drives 
        of fifty horsepower or more that achieves at least 20% energy 
        savings. $10,000 limitation.

     TITLE IV--DEMAND MANAGEMENT AND DISTRIBUTIVE ENERGY GENERATION

    Tax incentives for utilities to purchase demand management 
technologies, and tax incentives to encourage investment in 
distributive energy generation powered by renewable fuels and fuel 
cells.

Section 401 Credit for Distributive Energy Generation and Demand 
        Management
Property Used in Business
    (Section 101 of Bingaman--S. 596 with changes)
    This section provides a tax credit to the purchaser of business 
property including certain solar, geothermal, energy efficiency 
building equipment, combined heat and power systems, anaerobic digester 
and low core distribution transformer property. The credit amount 
varies.

Section 402 Credit for Residential Solar and Fuel Cell Energy Property
    (Includes Johnson--H.R. 1275 and Hayworth--H.R. 2076)
         Tax credit of 15% investment tax credits for solar 
        thermal & solar electric systems.
         Tax Credit of $1000 per kilowatt for purchasers of all 
        types and sizes of permanently installed stationary fuel cell 
        systems. The credit does not specify input fuels, applications 
        or system sizes so a diverse group of customers can take short-
        term advantage of the credit to deploy a wide range of fuel 
        cell equipment.

Section 403 Credit for Qualified Energy Demand Management Devices
         Tax credit of 20% for utilities to purchase equipment 
        which will allow consumers to monitor their energy usage on a 
        real-time basis, and to adjust their consumption to respond to 
        price and usage signals, thereby enabling individuals and small 
        businesses to adjust their energy consumption to reduce their 
        electricity bills while helping to ``flatten'' the energy 
        demand curve.

Section 405 Incentive of Distributive Wind Generation
         Thirty percent tax credit for consumers purchasing 
        wind energy generation units of 75 kilowatts or less. $5,000 
        limitation.

Section 406 Credit for the Purchase of Flywheel Energy Storage Devices
         Ten percent consumer tax credit for the purchase of 
        flywheel energy storage device. $2,000 limitation.

                                

    Chairman McCrery. Thank you, Mr. Inslee. Mr. Moore.

    STATEMENT OF THE HON. DENNIS MOORE, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF KANSAS

    Mr. Moore. Thank you, Mr. Chairman. I appreciate the 
opportunity to be here as well.
    I want to talk to you very briefly today about the 
importance of extending the section 29 tax credit for the 
production of unconventional fuels. For those of you unfamiliar 
with the section 29 tax credit, Congress created this tax 
credit in 1980 to encourage domestic production of 
unconventional fuels from the processes that are difficult and 
expensive to produce. These fuels include such fuels as coalbed 
methane, tight gas sands, and gas produced from Devonian shale. 
They would make it very difficult and costly to recover these 
fuels without a tax credit, and I think that that would not be 
the exploration that we have seen without this tax credit.
    The section 29 fuel exists in all regions of the country, 
including Kentucky, northwestern Louisiana, and make up a 
significant portion of our Nation's natural gas resource base. 
Currently, the section 29 credit is scheduled to expire in 
December of 2002 for all qualifying fuels.
    I have introduced H.R. 794, the Energy Security for 
American Consumers Act, which would extend the section 29 
credit to 2016 with the value of the credit gradually declining 
between 2012 and 2016. This bipartisan legislation would 
encourage new drilling by applying the credit to wells drilled 
between the date of enactment and 2010.
    During the last Congress, Senator Murkowski introduced a 
companion bill in the Senate that was cosponsored by Members 
across the aisle, including Senator John Breaux. A section 29 
credit is also included in the Blue Dog proposal.
    According to the Congressional Research Service, the 
section 29 credit has significantly reduced the cost and 
stimulated the supply of unconventional gases in this country; 
and the Gas Technology Institute, GTI, and Energy and 
Environmental Analysis, Inc., EEA, basically--I have attached a 
copy of the summary of the EEA that talks about unconventional 
fuel, such as section 29. This study demonstrates that an 
extension of section 29 could have a significant impact on 
prices for the consumer by increasing the aggregate supply of 
natural gas.
    According to the study, natural gas currently provides 
approximately 23 percent of our Nation's energy needs. The 
study predicts that demand for natural gas in our country will 
grow to approximately 30 trillion cubic feet per year in the 
next 15 years. Electricity generation will account for a great 
deal of that demand for gas.
    According to the study, section 29 has been successful in 
boosting unconventional gas production in the past, and the 
section 29 tax credit extension will provide additional 
unconventional gas production to meet our Nation's growing 
demand for gas.
    As the study indicates, from 1986 to 1996, 70 percent of 
the increase in the lower 48 gas production came from 
unconventional sources. Currently, unconventional gas 
represents 30 percent of well production in the lower 48 
States.
    These next two things, I think, are extremely important. 
Extension of section 29 to wells drilled through 2010 could 
increase U.S. gas supply by approximately 2 trillion cubic feet 
per year. This would be additional gas production that likely 
would not occur without the section 29 credit.
    The study further predicts that increased supply of gas 
stimulated by production of section 29 fuels would translate 
into lower natural gas prices and estimated total savings to 
consumers of over $100 billion through 2015.
    Mr. Chairman I have heard from both producers and consumers 
in my district, and both stand to benefit greatly from 
extension of this section 29 credit. The section 29 credit can 
play a vital role in increasing and stabilizing the domestic 
supply of natural gas at a time when our Nation is looking for 
additional supplies.
    The study that I have mentioned, that is attached to my 
statement, suggests that while the extension of the credit may 
not solve--will not solve our Nation's energy problems by 
itself, the section 29 tax credit has the potential, I think, 
based upon past performance and future projections, to play an 
instrumental role in increasing our supply of energy.
    Mr. Moore. I think that is what we have to look at. This is 
one small piece of the overall comprehensivepolicy that we have 
talked about that we need to develop on a bipartisan basis in this 
Congress.
    This came to my attention last June. Very briefly--and I 
will finish here. When a friend of mine and a constituent back 
home contacted me last June, a year ago, he said at the time, 
Congressman, have you seen what has happened, the supply of--
the cost of natural gas in our country? I said, I really 
haven't paid attention. He said, well, it has doubled since the 
first of the year. I expect it to double again by the end of 
the year. He said, if you think consumers are upset now about 
the price of gasoline at the pumps, wait till they get their 
heating bills this last winter.
    And he was exactly right. It happened. I said, what can be 
done? He was in the business--he had formerly owned a medical 
lab, sold it and made some money. He went out and started 
drilling natural gas wells, and he found substantial natural 
gas wells, coalbed methane in Kansas. He said, what can be done 
is to extend this credit which will be expiring and encourage 
other people to increase the supply of natural gas and 
hopefully drive the cost down.
    I talked to several people in the industry and others 
around who know something about this, and they shared the same 
view, and that was the basis for my section 29 tax bill. I hope 
this Committee will take a look at it and recommend this be 
included in the bill; and I very much appreciate the 
opportunity to testify here, Mr. Chairman.
    [The prepared statement of Mr. Moore follows:]

 Statement of the Hon. Dennis Moore, a Representative in Congress from 
                          the State of Kansas

    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to appear before you today to talk about the importance of 
extending the section 29 tax credit for the production of 
unconventional fuels.
    For those of you who are unfamiliar with the section 29 credit, I 
would like to provide you with some brief background information. 
Congress created the section 29 credit in 1980 to encourage domestic 
production of unconventional fuels from deposits that are inordinately 
difficult and expensive to produce. These fuels, such as coalbed 
methane, tight gas sands, gas produced from Devonian shale and oil 
produced from shale or tar sands, would not be economically recoverable 
for producers in most areas of the nation without a federal tax 
incentive. Section 29 fuels exist in all regions of the country, 
including Kentucky and northwestern Louisiana, and make up a 
significant portion of our nation's natural gas resource base.
    Currently, the section 29 credit, which is equivalent to $.50 cents 
per thousand cubic feet (Mcf) for gaseous fuels and $3.00 per barrel of 
oil for liquid fuels, is scheduled to expire on December 31, 2002, for 
all qualifying fuels except biogas and synfuels. For biogas and 
synfuels, the credit will expire on December 31, 2007.
    I have introduced H.R. 794, the Energy Security for American 
Consumers Act, which would extend the section 29 credit to 2016, with 
the value of the credit gradually declining between 2012 and 2016. 
Additionally, this bipartisan legislation, which I originally 
introduced during the 106th Congress, would encourage new 
drilling by applying the credit to wells drilled between the date of 
enactment and 2010. During the last Congress, Senator Frank Murkowski 
introduced a companion bill in the Senate that was cosponsored by 
members from both sides of the aisle, including Senator John Breaux. 
Further, Senator Murkowski included section 29 extension in his 
comprehensive energy tax legislation that he introduced in February, S. 
389.
    According to the Congressional Research Service, the section 29 
credit ``has significantly reduced the cost and stimulated the supply 
of unconventional gases . . .'' This assertion is closely mirrored in a 
recent analysis of section 29 by the Gas Technology Institute (GTI), 
which has been analyzing unconventional fuels production for 20 years, 
and Energy and Environmental Analysis, Inc. (EEA), which, as many of 
you know, was the lead contractor in the landmark 1999 study of natural 
gas supply undertaken by the National Petroleum Council. The EEA's 1999 
study is the current industry standard reference for gas market 
projections and policy analysis. Please find a summary of the GTI/EEA 
study attached to my remarks.
    This study demonstrates that an extension of section 29 could have 
a significant impact on prices for the consumer by increasing the 
aggregate supply of natural gas.
         According to the GTI/EEA study [referred to hereafter 
        as ``the study''], natural gas currently provides approximately 
        23% of our nation's energy needs. The study predicts that 
        demand for natural gas in the United States will grow to 
        approximately 30 trillion cubic feet (Tcf) per year in the next 
        15 years. Electricity generation will account for much of this 
        increased demand for gas, as nearly all new generation 
        facilities are now powered by natural gas. In order to meet 
        this growing demand, we must focus on ways in which we can 
        increase our total supply of natural gas.
         According to the study, ``section 29 has been 
        successful in boosting unconventional gas production'' in the 
        past, and ``a section 29 tax credit extension will provide 
        additional unconventional gas production'' to meet our nation's 
        growing demand for gas. Total unconventional gas production 
        doubled during the 1990s from 2 trillion cubic feet in 1990 to 
        4.8 trillion cubic feet by 1999, and coalbed methane production 
        alone increased from zero production in 1990 to over 1.1 
        trillion cubic feet per year by the end of the last decade. As 
        the study demonstrates, ``from 1986 to 1996, 70% of the 
        increase in lower-48 gas production came from unconventional 
        sources.'' Currently, unconventional gas represents 30% of well 
        production in the lower 48 states.
         Extension of section 29 to wells drilled through 2010 
        could increase U.S. gas supply by approximately 2 trillion 
        cubic feet (Tcf) per year, adding a cumulative volume of over 
        15 trillion cubic feet of additional unconventional gas by 
        2015. I would like to reiterate that this would be additional 
        gas production that likely would not occur without the section 
        29 credit. Production from new wells would also likely extend 
        beyond 2015, and consumers will continue to benefit from both 
        expanded supply and new technological innovations even after 
        the term projected by the study.
         The study further predicts that increased supply of 
        gas stimulated by production of section 29 fuels would 
        translate into lower natural gas prices and estimated total 
        savings to consumers of over $100 billion through 2015. This 
        estimate is based upon analysis of similar model runs completed 
        for the 1999 National Petroleum Council study.
    Mr. Chairman, I have heard from both producers and consumers in my 
district, and both stand to benefit greatly from extension of this 
credit. Producers and investors need stability in order to make the 
long-term investments necessary to extract and produce gas from 
difficult sources. Additionally, section 29 can play a vital role in 
increasing and stabilizing the domestic supply of natural gas at a time 
when our nation is consuming more natural gas than ever before.
    The statistics contained in the GTI/EEA study suggest that, while 
extension of the section 29 credit may not solve our nation's energy 
problems by itself, section 29 has the potential, based on past 
performance and future projections, to play an instrumental role in 
increasing our supply of energy. It is my hope that extension of 
section 29 will exert downward pressure on the exorbitant prices 
consumers and businesses have recently been forced to pay for natural 
gas.
    I appreciate the opportunity to testify before the Subcommittee 
today, and I urge you to include extension of the section 29 tax credit 
in either a future tax extenders measure or comprehensive energy tax 
policy legislation.
    Attachment:
    Rationale for Section 29 Non-Conventional Gas Tax Credit Extension, 
prepared by the Gas Technology Institute and Energy & Environmental 
Analysis, Inc., March, 2001.
    [The attachment is being retained in the committee files.]

                                

    Chairman McCrery. Thank you, Mr. Moore. Mr. Engel.

   STATEMENT OF THE HON. ELIOT L. ENGEL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. Engel. Well, thank you, Mr. Chairman and Mr. Ranking 
Member, for holding this hearing today to allow Members to 
discuss proposals on tax credits for energy-saving measures.
    Let me say, on a personal note, it is nice to see people 
from the class of 1988 in such high places.
    As you know, New York City was initially expected to be hit 
by a California-type energy crisis this summer with an 
increased load and a lack of generation within the city, 
coupled with a lack of transmission lines into the city. There 
is a growing disparity between the supply and demand. Although 
I am told that there will be enough supply for this summer, it 
is still expected to be a tight crunch. The country is in the 
current energy situation because our economy and energy use 
have grown in tandem over the past 10 years, while energy 
infrastructure has not improved or expanded. As a result, we 
are stuck with generation and transmission bottlenecks and 
outdated, inefficient infrastructure which artificially drives 
up demand.
    My colleague on my left, although not politically, Mr. 
Terry and I have been working to develop bipartisan legislation 
that would address the conservation side of a national energy 
plan. We have been working on various ideas, including tax 
credits for replacing boilers, heating and cooling systems and 
windows with Energy Star ratings, which Mr. Terry will focus on 
his testimony.
    In addition, we are proposing legislation which will offer 
tax credits for homeowners and businesses to change their 
blacktop roofs to cool roofing material and to buy and use 
renewable sources of energy, including solar panels and wind 
turbines.
    Finally, the legislation includes a provision on net 
metering to allow owners of renewable sources of energy to 
remain connected to the grid and to get credit for putting any 
excess electricity they generate on the grid.
    I represent an urban district with a significant amount of 
residential and high-rise housing. Many of the apartment 
buildings were built before the energy crises of the seventies 
and therefore do not have many of the energy efficient 
equipment included in new homes. They have blacktop roofs that 
create heat traps on the top floor to the buildings and, like 
most communities across the country, do not have the incentive 
to invest in energy conservation, equipment and materials. 
Black surfaces in the sun can become up to 70 degrees 
Fahrenheit hotter than the most reflective white surfaces. On 
those dark surfaces or roofs, some of the heat collected by the 
roof is transferred inside. Staying comfortable under a dark 
shingle roof often means more air-conditioning and higher 
utility bills. These roofs also heat the air around them.
    Conversely, cool roofs can save energy. In a study founded 
by the U.S. EPA, the Heat Island Group carried out a detailed 
analysis of energy-saving potentials of light-colored roofs in 
11 U.S. metropolitan areas. About 10 residential and commercial 
building prototypes in each area were simulated. Considering 
both the savings in cooling and penalties in heating, they 
estimated saving potentials of about $175 million per year for 
the 11 cities. Extrapolated national energy savings were about 
$750 million per year.
    The legislation we are proposing offers a 30 percent tax 
credit to homeowners and businesses who want to change their 
blacktop roofs to cool roofing materials, defined as having a 
solar reflectance index of 65 percent or greater.
    Tax credits for renewables are not new. In fact, the Energy 
Tax Act 1978 created residential solar credits and residential 
and business credits for wind energy installations. 
Unfortunately, the legislation expired in 1985; and while the 
business credits were extended indefinitely by the Energy 
Policy Act of 1992, the residential credits were not.
    Our proposed legislation would offer 25 percent credit to 
residential users and expand the business tax credit to 25 
percent for buying and installing solar panels, wind turbines, 
geothermal pumps and other alternative energy generation 
equipment. The short-term costs of the renewables equipment is 
still high, but the savings are immeasurable and permanent. Not 
only are electricity bills reduced, but long-term positive 
benefits of turning to renewables and reducing emissions 
include cleaner air, cleaner water, and a reduction in the 
demand on the electricity grid.
    Incidences of childhood asthma are a serious problem in my 
district. The mercury poisoning in fish and the effects of 
global warming will all likely be reduced by investing in 
renewable sources of energy.
    Finally, the provision on net metering would allow 
homeowners and businesses who generate their own electricity 
with renewable sources of energy to put any excess power 
generated onto the grid. In turn, their electric meters would 
turn backward so that they would receive credits for producing 
excess energy. They would receive a credit against the next 
month's bill for any excess generation and a refund at retail 
price if they generate more than they use in a calendar year.
    I thank you for your consideration of our legislation, and 
we look forward to working with you in a bipartisan spirit as 
legislation on energy tax credits progresses.
    [The prepared statement of Mr. Engel follows:]
Statement of the Hon. Eliot L. Engel, a Representative in Congress from 
                         the State of New York
    Thank you Chairman McCrery and Ranking Member McNulty for holding 
this hearing today to allow Members to discuss proposals on tax credits 
for energy-saving measures.
    As you know, New York City was expected to be hit by a California-
like energy crisis this summer. With an increased load and a lack of 
generation within the City coupled with a lack of transmission lines 
into the City, there is a growing disparity between supply and demand. 
Although I am told that there will be enough supply for this summer, it 
is still expected to be a tight crunch. The country is in the current 
energy situation because our economy and energy use have grown in 
tandem over the past ten years while energy infrastructure has not 
improved or expanded. As a result, we are stuck with generation and 
transmission bottlenecks and an outdated, inefficient infrastructure 
which artificially drives up demand.
    My colleague, Mr. Terry, and I have been working to develop 
bipartisan legislation that would address the conservation side of a 
national energy plan. We have been working on various ideas, including 
tax credits for replacing boilers, heating and cooling systems, and 
windows with Energy Star-ratings, which Mr. Terry will focus on his 
testimony. In addition, we are proposing legislation which will offer 
tax credits for homeowners and businesses to change their black top 
roofs to cool roofing material and to buy and use renewable sources of 
energy, including solar panels and wind turbines. Finally, the 
legislation includes a provision on net-metering to allow owners of 
renewable sources of energy to remain connected to the grid and to get 
credit for putting any excess electricity they generate on the grid.
    I represent an urban district with a significant amount of 
residential and high-rise housing. Many of the apartment buildings were 
built before the energy crisis of the 1970s and therefore do not have 
many of the energy efficient equipment included in new homes. They have 
black top roofs that create ``heat traps'' on the top floors of the 
buildings, and like most communities across the country, do not have 
the incentive to invest in energy conservation equipment and materials. 
Black surfaces in the sun can become up to 70 deg.F (40 deg.C) hotter 
than the most reflective white surfaces. If those dark surfaces are 
roofs, some of the heat collected by the roof is transferred inside. 
Staying comfortable under a dark shingle roof often means more air 
conditioning and higher utility bills. These roofs also heat the air 
around them. Conversely, cool roofs can save energy. In a study funded 
by the U.S. EPA, the Heat Island Group carried out a detailed analysis 
of energy-saving potentials of light-colored roofs in 11 U.S. 
metropolitan areas. About ten residential and commercial building 
prototypes in each area were simulated. Considering both the savings in 
cooling and penalties in heating, they estimated saving potentials of 
about $175 million per year for the 11 cities. Extrapolated national 
energy savings were about $750 million per year. The legislation we are 
proposing offers a 30% tax credit to homeowners and businesses who want 
to change their black top roofs to cool roofing materials, defined as 
having a solar reflectance index (as determined by the Lawrence 
Berkeley National Laboratory) of 65 percent or greater.
    Tax credits for renewables are not new-in fact, the Energy Tax Act 
of 1978 created residential solar credits and residential and business 
credits for wind energy installations. Unfortunately, the legislation 
expired on December 31, 1985. While the businesses credits were 
extended indefinitely by the Energy Policy Act of 1992, the residential 
credits were not. Our proposed legislation would offer a 25% credit to 
residential users and expand the business tax credit to 25% for buying 
and installing solar panels, wind turbines, geothermal pumps, and other 
alternative energy generation equipment. The short-term cost of the 
renewables equipment is still high, but the savings are immeasurable 
and permanent. Not only are electricity bills reduced, the long-term 
positive benefits of turning to renewables and reducing emissions 
include cleaner air, cleaner water, and a reduction in the demand on 
the electricity grid. Incidences of childhood asthma, a serious problem 
in my district, mercury poisoning in fish, and the effects of global 
warming will all likely be reduced by investing in renewable sources of 
energy.
    Finally, the provision on net-metering would allow homeowners and 
businesses who generate their own electricity with renewable sources of 
energy to put any excess power generated onto the grid. In turn, their 
electric meters would turn backwards so that they receive credits for 
producing excess energy. They would receive a credit against the next 
months bill for any excess generation and a refund at retail price if 
they generate more than they use in a calendar year.
    Thank you for your consideration of our legislation. We look 
forward to working with you in a bipartisan spirit as legislation on 
energy tax credits progresses.

                                

    Chairman McCrery. Thank you, Mr. Engel. Mr. Terry.

 STATEMENT OF THE HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF NEBRASKA

    Mr. Terry. Mr. Chairman, thank you for holding this 
hearing, as we discuss a national energy policy and focus on 
the issue of supply and demand. Of course, when we talk about 
demand-side or lowering demand and creating efficiencies in 
energy, it is going to take incentives to accomplish those 
goals and, hence, tax credits.
    Well, I am here to ask for the same thing, a bill that I 
have worked on with Representative Engel, and it has been a 
pleasurable experience in trying to develop policies to make 
our country more energy efficient.
    One of those ways of accomplishing that goal is the Energy 
Star program, which was referenced also in the President's 
National Energy Policy. This program began in 1992 as a 
voluntary labeling program designed to identify and promote 
energy efficient products. The goal is to reduce carbon dioxide 
emissions. In 1996, the EPA partnered with the Department of 
Energy to promote this Energy Star label. Now, the Energy Star 
covers many categories of energy-saving products, such as 
windows, residential heating and cooling equipment, major 
appliances, lighting, consumer electronics and many others.
    Congressman Engel and I are here before you to talk about 
this bill that we will be introducing within a few days. It is 
the Energy Efficiency Investment Act of 2001. It is designed to 
encourage both homeowners and businessowners to replace their 
old energy inefficient windows, heating and cooling systems and 
boilers with Energy Star certified products of the same 
criteria. Our legislation will provide a 25 percent tax credit 
to either the homeowner or businessowner if they install the 
Energy Star products into an existing structure.
    To demonstrate how much of an impact this legislation can 
have, I want to mention some statistics from California and the 
kind of benefits this legislation could have to the citizens in 
that State. It could be translated to every other State as 
well. Currently, there is over 12 million homes in the Golden 
State that could benefit from the installation of new energy 
efficient windows. In these homes, over 40 percent of the 
annual energy budget is used on heating and cooling. By 
installing these energy efficient windows, the homeowners could 
reduce their energy bills by 15 percent.
    Another example I would like to mention also comes from the 
same State. According to the California Energy Commission, 
during the hot summer afternoons, air-conditioning can consume 
over 16,000 of the available 34,000 megawatts of electricity. A 
new central air conditioning system with a Federal Energy Star 
design could use half of the energy of a 20-year-old unit. 
Individuals who purchase a unit under this program can save 20 
to 40 percent on their overall energy bills to help reduce the 
need for electricity.
    As a personal note, we just had to replace our air 
conditioner. We looked for the energy efficient model. It ran 
over a third more than the basic unit that you would--a lot of 
families can't make that stretch. We, of course, did.
    The last example comes from my colleague's home State of 
New York, in the Bronx where there are more apartments and 
condominiums than freestanding homes. If the owner of these 
buildings were to take advantage of our legislation, the energy 
savings would be significant. In fact, we all know that the 
power supply in New York may be tight this summer. This could 
certainly help.
    The Energy Star program is something that needs to be 
included in this discussion. The Department of Energy estimates 
that if all households and businesses in the United States 
bought only Energy Star-labeled windows instead of standard 
products for the next 15 years, the reduction in carbon dioxide 
emissions would be equivalent to reducing gasoline consumption 
by 120 billion gallons.
    Mr. Chairman, this bill is not trying to reinvent the 
wheel. We are using something that is already put in place by 
both the EPA and the Department of Energy. Our bill simply 
takes the Energy Star program and encourages the homeowner and 
businessowner to invest in exchange for a 25 percent tax 
credit. We believe that this legislation needs to be part of 
the overall policy for energy efficiency and conservation 
discussion.
    Thank you.
    [The prepared statement of Mr. Terry follows:]

Statement of the Hon. Lee Terry, a Representative in Congress from the 
                           State of Nebraska

    Mr. Chairman, I want to thank you for holding this important 
hearing. It is important because we need to discuss the variety of 
energy saving legislation that has been and will be introduced this 
Congress, so we can decide what elements should be included in the 
energy policy that will soon be on the House floor. As the debate 
continues, we must make sure that the decisions we make are both 
balanced and are based on reducing our demand for energy.
    In May, the Energy Star program was referenced by the President in 
his National Energy Policy as something that needs to be promoted and 
expanded beyond its current level. This program began in 1992 as a 
voluntary labeling program designed to identify and promote energy-
efficient products. The goal was to reduce carbon dioxide emissions. In 
1996, the Environmental Protection Agency (EPA) partnered with the 
Department of Energy (DOE) to promote the Energy Star label. Now, 
Energy Star covers many categories of energy saving products, such as: 
windows, residential heating and cooling equipment, major appliances, 
lighting, consumer electronics and many others.
    Congressman Engel and I are here before you to talk about a bill 
that we will be introducing shortly. The Energy Efficiency Investment 
Act of 2001 is designed to encourage both homeowners and business 
owners to replace their old energy inefficient windows, heating and 
cooling systems, and boilers with Energy Star certified products of the 
same criteria. Our legislation will provide a 25% tax credit to either 
the homeowner or business owner, if they install the Energy Star 
products into an existing structure.
    To demonstrate how much of an impact this legislation can have, I 
want to mention some statistics from California and the kind of 
benefits this legislation could have to its citizens suffering one of 
the worst energy problems the state has ever seen. Currently, there are 
over 12 million homes in the Golden State that could benefit from the 
installation of new energy efficient windows. In these homes, over 40% 
of the annual budget is used on heating and cooling. By installing 
these energy efficient windows, these homeowners could reduce their 
energy bills by up to 15%.
    Another example I would like to mention also comes from California. 
According to the California Energy Commission, during a hot summer 
afternoon, air conditioning can consume over 16,000 of the available 
34,000 megawatts of precious electricity the state needs. A new central 
air conditioning system with a federal Energy Star designation could 
use half the energy of a 20-year old model. Individuals who purchase a 
unit under this program can save 20% to 40% on their overall energy 
bills, help to reduce California's need for precious electricity and 
qualify for our energy tax credit. In some cases, this credit is 
necessary, because a new central air system, which often requires a new 
heating system as well, is an investment that could cost thousands of 
dollars to replace.
    The last example comes from New York. My colleague represents an 
area of the Bronx where there are more apartments and condominiums than 
free standing homes. If the owners of these buildings were to take 
advantage of our legislation, the energy savings would not be 
insignificant. In fact, we all know that the power supply in the New 
York area will be tight this summer. Our bill will help to lessen this 
problem.
    The Energy Star program is something that needs to be included in 
this discussion, as well as be expanded. The Department of Energy 
estimates that if all households and businesses in the United States 
bought only Energy Star labeled windows instead of standard products 
for the next 15 years, the reduction in carbon dioxide emissions would 
be equivalent to reducing gasoline consumption by 120 billion gallons.
    Mr. Chairman, this bill is not trying to reinvent the wheel. We are 
using something already put in place by both the Environmental 
Protection Agency (EPA) and the Department of Energy (DOE). Our bill 
simply takes Energy Star program and encourages the homeowner and 
business owner to invest in exchange for a 25% tax credit. We believe 
that this legislation needs to be part of the energy efficiency and 
conservation discussion.
    Thank you.

                                

    Chairman McCrery. Thank you, Mr. Terry. Mrs. Capito.

STATEMENT OF THE HON. SHELLY MOORE CAPITO, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF WEST VIRGINIA

    Mrs. Capito. Yes. Thank you, Mr. Chairman. I thank you for 
letting me come here today to testify on the importance of tax 
credits for energy production and investment.
    I take pride in representing the coal-rich State of West 
Virginia. For generations, coal has played an integral part in 
the lives and livelihoods of West Virginians, and coal is an 
integral part of any solution to our country's energy 
predicament.
    Coal accounts for more than one half of the electricity 
generated in the country. It is our most abundant domestic 
energy resource, and one quarter of the entire world's known 
coal supplies are found within the United States.
    In terms of energy value, coal constitutes approximately 95 
percent of the United States fossil energy reserves. Our 
Nation's recoverable coal has the energy equivalent of about 1 
trillion barrels of crude oil--comparable in energy content to 
the entire world's known oil reserves. At present consumption 
rate, U.S. coal reserves are expected to last at least 275 
years.
    Using coal to generate electricity has been problematic in 
light of requirements of the Clean Air Act. In response, the 
Department of Energy has invested substantially in developing 
and testing clean coal technology, and the President's budget 
seeks to invest $2 billion in clean coal technology, including 
coal gasification over the next 10 years. According to the 
Department of Energy, coal gasification is one of the most 
promising clean coal technologies.
    Briefly, a coal gasification system turns coal into gas, 
which can be cleaned of its impurities, virtually to the same 
levels as natural gas. The gas is then burned in a turbine to 
generate one source of electricity. Exhaust from the gas 
turbine is hot enough to boil water, creating steam to drive a 
steam turbine, generating a second source of electricity. 
Initial gasification-based plants could boost power plant 
efficiencies by as much as 20 percent.
    The Department of Energy reports that gasification combined 
cycle technologies are among the cleanest way to generate 
electricity from coal. As much as 95 to 99 percent of the 
sulfur and nitrogen impurities in coal gas can be removed 
through the coal gasification process.
    In the early nineties, the Department of Energy recognized 
that investing in coal gasification technology will be the 
first step into the next millennium of clean, high efficiency 
electricity from coal. There are now three coal gasification 
combined cycle power plants in the United States. They are 
among the cleanest fossil fuel power plants in the world. Each 
previous coal gasification plant, however, has relied on 
substantial direct government subsidies and has been 
constructed by rate-regulated utilities with a pool of captive 
ratepayers to absorb cost overruns and the risk of failure.
    There has been no test, however, of a coal gasification 
plant in two ways: in the present energy environment, and one 
that does not rely on substantial direct infusions of Federal 
dollars--typically 50 percent of project costs. It is critical 
that Congress support the demonstration of the commercial 
viability of a coal gasification plant that would be funded by 
traditional sources of private debt and equity.
    Establishing that coal gasification plants can be built 
with private capital is not an attempt simply to save scarce 
Federal resources. It is an essential step in the transition 
that this country is taking in the deregulation of the 
generation and distribution of energy. The only plants that 
will survive are those that produce electricity at a 
competitive kilowatt-per-hour cost. Coal gasification 
technology is exciting and promising. However, until the 
modalities of making it commercially viable in a deregulated 
environment are determined, it cannot be used.
    Private equity and commercial financial institutions are 
going to need some encouragement. Senate bill 389, Senate bill 
60, and Senate bill 596 create a 10 percent tax credit for 
investments in advanced clean coal technology and a per-
kilowatt-hour production tax credit for each kilowatt hour 
produced at a facility which is implementing advanced clean 
coal technology. I am proposing that these same tax credits be 
granted for investments in coal gasification facilities and the 
production of energy at these facilities.
    Production and investment tax credits for coal gasification 
are similar to energy credits currently in the Internal Revenue 
Code.
    On the investment side, a 10 percent investment tax credit 
is currently available for energy property which includes solar 
energy and geothermal energy production. Clearly, energy tax 
credits have been historically used to encourage a broad range 
of energy investment.
    Investment and production tax credits for coal gasification 
are good for the country and consistent with current tax 
policy. At the very least, Mr. Chairman, investment and 
production tax credits for coal gasification should be 
available for a demonstration project to test the commercial 
viability of a coal gasification plant.
    Some say that tax credits distort the market by ``picking 
winners.'' This criticism is inapt in the case of coal. Mother 
Nature has picked coal to be America's principal fossil energy 
resource. Given this geological fact and given that reducing 
reliance on foreign energy sources is in the national interest 
and the increased sensitivity to the impact of energy 
production on the environment, coal gasification is a logical 
solution. As such, tax measures supporting clean coal 
technology like coal gasification are worthy of support.
    I look forward to the opportunity to work with you on these 
important matters. Thank you.
    [The prepared statement of Mrs. Capito follows:]

    Statement of the Hon. Shelley Moore Capito, a Representative in 
                Congress from the State of West Virginia

    Thank you, Mr. Chairman,
    I thank the members of the Committee for having me here today to 
testify on the importance of tax credits for energy production and 
investment. Specifically, I would like to discuss the importance of tax 
credits for cleancoal technology projects like coal gasification.
    I take pride in representing the coal rich State of West Virginia. 
For generations coal has played an integral part in the lives and 
livelihoods of West Virginians. Clean coal technology projects like 
coal gasification power plants offer West Virginia the opportunity to 
play a critical role in the delivery of the energy while preserving the 
environment.
    Coal is an integral part of any solution to our country's energy 
predicament. Coal accounts for more than half of the electricity 
generated in the country. It is our most abundant domestic energy 
resource. One quarter of the entire world's known coal supplies are 
found within the United States. In terms of energy value (Btus), coal 
constitutes approximately 95 percent of the United States fossil energy 
reserves. Our nation's recoverable coal has the energy equivalent of 
about one trillion barrels of crude oil--comparable in energy content 
to the entire world's known oil reserves. At present consumption rates, 
U.S. coal reserves are expected to last at least 275 years.
    At a recent House Commerce subcommittee hearing on energy policy, 
Chairman Barton (R-TX) appropriately called the United States ``[t]he 
Saudi Arabia of Coal.'' He also stated that ``[t]his strategic resource 
will not and should not be ignored or neglected.''
    If the United States is to reduce its dependence on foreign sources 
of energy, the enhanced use of coal is essential.
    Using coal to generate electricity has been problematic in light of 
the requirements of the Clean Air Act. In response, the Department of 
Energy has invested substantially in developing and testing clean coal 
technology, and the President's budget seeks to invest $2 billion in 
clean coal technologies, including coal gasification, over the next ten 
years. According to the Department of Energy, coal gasification is one 
of the most promising clean coal technologies.
    A coal gasification system turns coal into gas which can be cleaned 
of its impurities, virtually to the same levels as natural gas. The gas 
is then burned in a turbine to generate one source of electricity. 
Exhaust from the gas turbine is hot enough to boil water, creating 
steam to drive a steam turbine generating a second source of 
electricity. Initial gasification based plants could boost power plant 
efficiencies by as much as 20% over conventional coal burning power 
plants.
    The Department of Energy reports that gasification combined cycle 
technologies are among the cleanest ways to generate electricity from 
coal. As much as 95 to 99% of the sulfur and nitrogen impurities in 
coal gas can be removed through the coal gasification process. Vice 
President Cheney's National Energy Policy Development Group also 
reported in May of 2001 that ``[t]echnologies like . . . integrated 
gasification combined cycle have been developed that further reduce 
emissions.''
    In the early 1990s, the Department of Energy recognized that 
investing in coal gasification technology would be the first step into 
the next millennium of clean, high efficiency electricity from coal. 
There are now three coal gasification combined cycle power plants in 
the United States. They are among the cleanest fossil fuel power plants 
in the world.
    We now know that coal gasification technology works--coal can be 
processed into a gas and burned in this latter state in a manner that 
satisfies clean air standards. Each previous coal-gasification plant, 
however, has relied on substantial direct government subsidies and has 
been constructed by rate-regulated utilities with a pool of captive 
rate-payers to absorb cost overruns and the risk of failure.
    There has been no test, however, of a coal gasification plant: (1) 
in the newly deregulated energy environment, and (2) that does not rely 
on substantial direct infusions of federal dollars (typically 50% of 
project costs). It is critical that Congress support the demonstration 
of the commercial viability of a coal-gasification plant that would be 
funded by traditional sources of private debt and equity.
    Establishing that coal gasification plants can be built with 
private capital is not simply an attempt to save scarce federal 
resources; it is an essential step in the transition that this country 
is taking in the deregulation of the generation and distribution of 
energy. In the new deregulated environment, the only plants that will 
survive are those that produce electricity at a competitive kilowatt 
per hour cost. Coal-gasification technology is exciting and promising; 
the consumer will not benefit from it, however, until the modalities of 
making it commercially viable in a deregulated environment are 
determined.
    Private equity and commercial financial institutions are going to 
need some encouragement to realize that these projects are worthy of 
support. Senate bills S 389, S 60, and S 596 create both a 10% tax 
credit for investments in advanced clean coal technology and a per 
kilowatt hour production tax credit for each kilowatt hour produced at 
a facility which has implemented advanced clean coal technology. I am 
proposing that these same tax credits be granted for investments in 
coal gasification facilities and the production of energy at such clean 
coal facilities.
    Production and investment tax credits for coal gasification are 
similar to energy credits currently found in the Internal Revenue Code. 
For example, a production tax credit of 1.25 cents per kilowatt-hour 
for energy produced by a coal gasification plant would be similar to 
Internal Revenue Code Sec. 45 that currently provides a 1.50 credit per 
kilowatt hour for energy produced from certain renewable resources. In 
addition, coal gasification would qualify for the Nonconventional Fuels 
Production Credit under Internal Revenue Code Sec. 29 if the gas 
produced were sold instead of used in energy production.
    On the investment side, a 10% investment tax credit is currently 
available under Internal Revenue Code Sec. 48 for energy property which 
includes solar energy and geothermal energy production. Clearly, energy 
tax credits have been historically used to encourage a broad range of 
energy investment.
    I believe that investment and production tax credits for coal 
gasification are good for the country and consistent with current tax 
policy. At the very least, Mr. Chairman, investment and production tax 
credits for coal gasification should be available for a demonstration 
project to test the commercial viability of a coal gasification plant.
    Some say that tax credits distort the market by ``picking 
winners.'' This criticism is inapt in the case of coal: Mother Nature 
has picked coal to be America's principle fossil energy resource. Given 
this geological fact, and given that reducing reliance on foreign 
energy sources is in the national interest, and given the increased 
sensitivity to the impact of energy production on the environment, coal 
gasification is the logical solution. As such, tax measures supporting 
clean coal technology, like coal gasification, are worthy of support 
from all possible perspectives.
    I look forward to the opportunity to work with Members of the 
Committee on these important issues.
    Thank you.

                                

    Chairman McCrery. Thank you, Mrs. Capito. Mr. Issa.

  STATEMENT OF THE HON. DARRELL E. ISSA, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Issa. Thank you, Mr. Chairman. I would ask that my 
official statement be entered into the record.
    Chairman McCrery. Without objection.
    Mr. Issa. Thank you, Mr. Chairman.
    The last time that I was here was 1993 as a private citizen 
lobbying on behalf of North American Free Trade Agreement 
(NAFTA). At that time, my testimony centered on the benefit of 
a free and fair trade and that I felt that our relations 
between California, my home State, and Mexico were at stake if 
we didn't engage.
    Oddly enough, I am here today to a certain extent to talk 
about something that has a tax ramification, but for the same 
reason, that our--the best interest of my State, a State that 
right now has a terrible problem with getting electricity to 
where it is needed in a timely fashion and in a reliable 
fashion. As a result, I am here to talk about a bill that 
Heather Wilson is the author of and I cosponsored; and it is 
H.R. 1045.
    You know, many of us have all come the same way. We seem to 
be all talking about how tax credits will, in fact, do good 
things for our country.
    Distributed power does something that all the tax credits--
and they are all valuable and they all make a lot of sense--
can't do. It has--strategic interest is served by distributed 
power. There is no question that right now the problem in 
California can be linked to an absence of an ability to get 
sufficient competitors onto the grid, feeding into California. 
Cogeneration, or its many other--distributed power and many 
other names, does something more importantly. It puts the power 
into the grid under our bill, and it puts it in a way in which 
there is no critical path any longer.
    For too long we have been dependent upon just about four 
major ways of bringing power into California, but the entire 
country is set up that way. Our bill in distributing power, 
asking for a credit, has the benefit to America that if at some 
time in the future any part of the feed into the grid were to 
go down, if we don't in fact distribute much finer, we could 
find ourselves in any part of the country with an inability to 
deliver power when it is needed most.
    I am not saying that somebody is going to sabotage the grid 
today, but I was in a meeting--an international relations 
meeting, and it was oil producers, and every one of them was 
interested in our infrastructure and how vulnerable it was and 
what would happen if exactly that were to occur.
    I believe that distributed power benefits us, because in 
fact it forces the end to what we call in California NIMBYism. 
Nobody wants something in their backyard, but only if--the only 
reason they don't want it in their backyard is it is not in 
their backyard to their benefit. With cogeneration, what ends 
up happening is the benefit is in the same backyard, or in the 
case of photovoltaic, probably on your roof.
    This bill does not pick winners or losers as to how you do 
the generation, whether it is natural gas, flex fuel, or any 
other type of distributed power. What it does say is that if 
you are willing to produce this power in your own backyard, you 
should have access to the grid; and, in fact, the conversion to 
this type of power should enjoy a Federal preference, if you 
will.
    I believe that when we consider ending the single-point or 
few-point source of electricity and giving this Nation tens of 
thousands of new and reliable energy sources is weighed against 
the alternative of endlessly building up the grid to large 
nuclear or coal facilities located further and further away 
from metropolitan areas, you will see that this should in fact 
be a major component.
    I would urge you to look at this as an umbrella bill that 
benefits many of the other technologies talked about here 
today. Because without distributed power, doing photovoltaic or 
any other one technology doesn't get on the grid, especially in 
some of the States like California where the energy suppliers 
have chosen, unless mandated, to simply ignore the small 
producer, exactly the producer we wish we had more of today. So 
both for my home State and for strategic reasons of the United 
States, I would ask that you seriously consider endorsing the 
10 percent credit on bill H.R. 1045, and thank you for this 
opportunity.
    [The prepared statement of Mr. Issa follows:]
  Statement of the Hon. Darrell E. Issa, a Representative in Congress 
                      from the State of California
    Thank you, Mr. Chairman for holding this important hearing on 
energy policy--specifically, on revenue measures to create incentives 
to increase supply, reduce demand and encourage alternative 
technologies and energy efficiencies.
    I would like to take this opportunity to share with the 
Subcommittee an important provision in my bill, H.R. 1045, which would 
provide a 10% tax credit for the purchase of distributed generation 
units.
    Energy self-sufficiency is an integral part of the solution to the 
current energy problems in the West and should be the guiding principal 
of our national energy policy. By using distributed generation 
technology, we can empower individuals and companies to take control 
and meet their own power needs.
    Distributed generation, also known as on-site generation or micro-
generation or co-generation, is technology that has been used in 
various forms since Thomas Alva Edison's Pearl Street Station in New 
York City. Distributed generation allows individual sites, or in some 
cases whole sections of the grid, to remain in service during storms, 
high winds and other natural disasters. Distributed generation can also 
be used to provide backup service or peaking power during times of high 
demand. It is currently helping to solve transmission capacity problems 
in California.
    Distributed generation is an affordable, reliable, clean and stable 
power option than can help solve the problems energy customers are 
currently experiencing and will continue to experience across the 
country. These technologies include microturbine generators, fuel 
cells, solar energy, wind turbines, reciprocating engines and storage 
technology.
    H.R. 1045 has several vital components. It establishes the right to 
interconnect to the grid, establishes a uniform technology standard to 
interconnect to the grid, authorizes R&D programs for alternative 
technology at the Department of Energy, and finally, provides a 10% tax 
credit for the installation of distributed energy generation 
technologies.
    A tax credit will provide a valuable incentive to encourage self-
sufficiency for consumers and encourage the development of new clean 
technologies for consumer use by making individuals part of the 
solution to our energy problems.
    Again, thank you, Mr. Chairman, for giving me the opportunity to 
share with you and the other Subcommittee members the benefits of 
distributed generation and hope the Subcommittee will be able to 
support the provisions in H.R. 1045.

                                

    Chairman McCrery. Thank you, Mr. Issa. Finally, we have 
with us a Member of the Ways and Means Committee, Mr. 
McDermott.
    Thank you for joining us; and I would tell you, having 
looked over your testimony just briefly, Mr. Filner has already 
said it. So proceed as you wish.

   STATEMENT OF THE HON. JIM McDERMOTT, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF WASHINGTON

    Mr. McDermott. Thank you for that warm invitation for my 
testimony.
    I actually--as I sat down, I want to thank you, Mr. 
Chairman, for having this hearing and for making it last long, 
for some of us on the West Coast to make it in from the 
airport.
    As I sat down, Mr. Inslee whispered a secret in my ear. He 
said, everything has been said. Well, unfortunately, I am here 
to say mine.
    It feels a little like deja vu all over again, to quote 
that eminent philosopher Yogi Berra. We said in this Committee 
in 1993, 1994 when Danny Rostenkowski was the chairman and put 
together the Green amendments, which we adopted in that session 
of Congress--there has really been nothing since, and I really 
commend you for going through this exercise.
    I know that you have heard all about all the problems and 
who did what to whom. So I really want to focus on the things 
that I think ought to be considered, at least a couple of 
things that ought to be considered in the process of dealing 
with this crisis.
    It really is brought together by a combination not only of 
the energy crisis in the United States but the whole question 
of global warming. Those two issues are really what are 
bringing us to the table on these issues. And despite the fact 
that the Vice President has said that alternative fuels are way 
down the road, I think it is time to really look at the clean, 
renewable energy sources, including wind, solar, geothermal and 
so forth, that do not pollute our air and that are renewable.
    Renewable energy development continues to rise, while the 
costs continue to decline. The market for solar power alone is 
growing by 30 percent each year in the United States, while 
generating 17 percent of the world's power last year. 
Widespread use of solar and other renewable energy sources 
could bring costs down, and I think that that is really what we 
have to think about.
    It is with that in mind that I introduced a bill, H.R. 
1969. It is called the Residential Solar Energy Act of 2001. 
Under the provisions of that bill, electric utilities would be 
authorized to issue a new type of tax credit bonds. The tax 
credit bond provisions are modeled on the provisions currently 
in effect on a limited basis under the Qualified Zone Academy 
Bond Program, with certain technical changes that we have made. 
The utility would be required to use the proceeds of the tax 
credit bonds to make loans to residential customers to cover 
the cost of installing photovoltaic cells on the customers' 
homes.
    The loan would be without interest cost to the homeowner. 
The homeowner would be required to repay the loan in equal 
installments over a specified period of time.
    One might ask why you choose that as the first thing you 
put forward. One fact makes it real clear. Every day in 
California, seven times the energy that is used in California 
falls from the sky in the form of solar energy. We have not 
capitalized on that. We have not captivated it and turned it 
into energy, but it is possible. It is going on out there.
    Much of this information I have about solar energy came 
from my son who lives out there and watches what is going on. 
And there is clearly a movement in California--if you want to 
know what is going to happen in the world, always look to 
California first. Whatever is going on there is going to be 
going on everywhere in the word within 3 years, and I think 
that the solar energy issue is one to which we should be very 
attentive.
    Now, there is another problem that I--in looking at this 
whole issue I thought needed to be dealt with, and I have 
offered these amendments in the Committee before, but I will 
offer them again here, and I am sure they will be among your 
favorites to consider as we move toward a final bill.
    H.R. 2079 is a windfall profits tax on electric generating 
facilities having excess profits. Under this bill, wholesalers 
would have to pay one dollar in tax for every dollar in profit 
they reaped over a pretax rate of return that exceeds 15 
percent. A sense of Congress is expressed that this revenue 
should be used to moderate the impact of high prices on low-
income individuals and small businesses, as well as to 
encourage the development of alternative energy sources through 
tax credits that others have talked about.
    H.R. 2080 denies the benefits of accelerated depreciation 
for property. If you don't like the first way to go at it, 
there is another way to go at it. Just don't give them the 
depreciation for property used to generate electricity where 
there are excess profits, again defined by the 15 percent rate 
of return.
    Accelerated depreciation is a benefit designed by the 
Congress to provide incentives for investment in business 
assets. The bill is based on the premise that businesses do not 
need tax incentives when they are enjoying excess profits. Why 
should you continue to give them a tax credit when they are 
getting 400 percent profit? If a generating facility has excess 
profits for any year, the taxpayer is denied accelerated 
depreciation for that year.
    Fifteen percent for excess profits was chosen because it is 
close to the rates of return that have been used by many 
jurisdictions before electricity deregulation took hold. Both 
windfall profit bills do not apply to facilities that rely on 
renewable energy sources.
    Finally, and in conclusion, it is unfortunate, in my view--
and I hope that we will have more hearings on this--that my 
request to have the Consumer Federation testify at tomorrow's 
hearing was not granted. This organization believes that 
gasoline and electric shortages are the result of price 
manipulations and price gouging and that a windfall profits tax 
is a reasonable approach to dealing with this problem and 
protecting consumers. Accordingly, I would ask unanimous 
consent to include as a part of my statement the joint 
statement of the Consumer Federation and the Consumers Union.
    Chairman McCrery. Without objection.
    Mr. McDermott. Thank you.
    [The prepared statement of Mr. McDermott, and the Consumer 
Federation and Consumers Union statement follow:]
Statement of the Hon. Jim McDermott, a Representative in Congress from 
                        the State of Washington
    I am very concerned about the current energy crisis we are now 
facing.
    A tight energy market has created a situation, which is allowing a 
few number of energy marketers to over-charge for wholesale 
electricity. Wholesale electricity prices that cost $23 a megawatt last 
year now cost from $200 to $300 a megawatt and have been as high as 
$1,000. FERC has declared the rates, ``unjust and unreasonable,'' but 
the current Administration has failed to act.
    We must hold the wholesalers accountable. Why should we allow these 
big corporations in Texas to make huge rates of return? These 
corporations reportedly have seen revenues climb by 400 percent in the 
past two years while local utilities have spiraled into debt.
    Additionally, we need to generate policies that focus on the 
development of clean, efficient, and renewable energy sources. Despite 
our Vice President's assertion that alternative fuels are still ``years 
down the road,'' I say the wave of the future is here today.
    Clean, renewable energy sources--including wind, solar and 
geothermal power--do not pollute our air or our water and will never 
run out, unlike coal, natural gas and other fossil fuels. Renewable 
energy development continues to rise while its costs continue to 
decline. The market for solar power alone is growing by 30 percent each 
year in the U.S., while generating 17 percent of the world's power last 
year. Widespread use of solar and other renewable power sources will 
bring costs down, making clean energy even more attractive than fossil 
fuels.
    I have recently introduced three energy bills:
``Residential Solar Energy Act of 2001'' (HR 1969):
    Under the provisions of the bill, electric utilities would be 
authorized to issue a new type of tax credit bonds. The tax credit bond 
provisions are modeled on the provisions currently in effect on a 
limited basis under the Qualified Zone Academy Bond Program, with 
certain technical improvements.
    The utility would be required to use the proceeds of the tax credit 
bonds to make loans to residential customers to cover the cost of 
installing photovoltaic cells on the customers' homes.
    The loan would be without interest cost to the homeowner. The 
homeowner would be required to repay the loan in equal installments 
over a specified period of time.
Two Windfall Profits bills:
    HR 2079 is a windfall profits tax on electric generating facilities 
having excess profits. Under this bill, wholesalers would have to pay 
one dollar in tax for every one dollar in profit they reaped over a 
pre-tax rate-of-return that exceeds 15 percent. A sense of Congress is 
expressed that this revenue should be used to: moderate the impact of 
high prices on low-income individuals and small business, as well as to 
encourage the development of alternative energy sources through tax 
credits for research in renewable energy.
    HR 2080 denies the benefits of accelerated depreciation for 
property used to generate electricity when there are excess profits, 
(again defined by exceeding fifteen percent of the rate-of-return.) 
Accelerated depreciation is a benefit designed by the Congress to 
provide incentives for investment in business assets. The bill is based 
on the premise that businesses do not need tax incentives when they are 
enjoying excess profits. If a generating facility has excess profits 
for any year, the taxpayer is denied accelerated depreciation for that 
year.
    Fifteen percent for excess profits was chosen because it is close 
to the rates of return that had been used by many jurisdictions before 
electricity deregulation took hold. Both windfall profits bills do not 
apply to facilities that rely on renewable energy sources, such as 
wind, sun, or water.
    In conclusion, it is unfortunate that my request to have the 
Consumer Federation testify at tomorrow's hearing was denied. This 
organization, along with the Consumers Union, believes that gasoline 
and electricity shortages are the result of price manipulations and 
price gouging, and that a windfall profits tax is a reasonable approach 
to dealing with this problem and protecting consumers. Accordingly, the 
conclusions and analysis of the Consumer Federation and Consumer Union 
follow:

            Consumer Federation and Consumer Union Statement

    (An Analysis of Economic Justifications and Implications of Taxing 
Windfall Profits in the California Wholesale Electricity Market)
INTRODUCTION
    It has been two decades since this country has had a vigorous 
debate about windfall profits taxes on energy. The reason is clear, no 
series of events has called out for a careful consideration of a 
windfall profits tax than the complete breakdown of the wholesale 
electricity market and natural gas markets in California and throughout 
the Western United States. The magnitude of the economic shock created 
by the unprecedented increase in electricity prices in California 
exceeds the impact of the second oil price shock.
    In nominal dollars, the increase in the amount paid for electricity 
at wholesale in California between the end of October 2000 and April 
2001 was larger than the increase in the total national oil import bill 
in the entire year after the fall of the Shah of Iran, which is widely 
recognized as the largest energy price shock in the history of the 
nation. Expressed as a percentage of gross domestic product, the price 
increase suffered by California in electricity costs is about twice as 
large as the increase suffered by the nation in 1980 in its oil import 
bill. The impacts on electricity prices throughout the West would make 
these numbers even larger.
    The problem is certainly large. But, is it a federal problem that 
merits the imposition of a windfall profits tax? The following 
observations suggest that it is.
          1. Fundamental demand and supply conditions in the California 
        electricity market make it vulnerable to the abuse of market 
        power by energy producers.
          2. The remarkable run up in prices is attributable in 
        significant part to the premature and unjustified deregulation 
        by the Federal Energy Regulatory Commission (FERC) of the 
        wholesale electricity and natural gas markets in California and 
        FERC's subsequent failure to discipline pricing abuse in those 
        and other markets.
          3. Prices have been driven up by the strategic behavior of 
        merchant generators who have subsequently profited from those 
        increases.
          4. The profits are excessive by any reasonable measure.
          5. Taxing away windfalls such as this will not detract from 
        the incentive to build generating capacity to meet demand at a 
        reasonable profit. To the contrary, removing the fun and profit 
        from market manipulation will cause the supply-side of the 
        market to function more efficiently.
    In making these points, we do not mean to suggest that California 
policymakers and California utilities bear no responsibility for a 
dysfunctional market or none of the blame. They certainly do, but 
federal policymakers made a substantial contribution to the problem and 
they have yet to make up for their mistakes or play a substantial part 
in finding a solution. The need for Congress to consider this type of 
policy stems, in part, from the fact that the FERC has demonstrated its 
inability to ensure that energy markets function properly. If the FERC 
cannot be counted on to enforce laws that require just and reasonable 
rates, consumers be charged rates that are just and reasonable, then 
other federal actions must be taken to provide a back stop to policies 
to back stop to an agency that has been derelict in its duty are 
needed. A windfall profits tax would be one such policy.
FUNDAMENTAL DEMAND AND SUPPLY CONDITIONS MAKE ELECTRICITY A VULNERABLE 
        MARKET
    In the list of culprits identified above (FERC, merchant 
generators, California regulators and California utilities), we do not 
include California consumers. They are the victims in this drama, not 
the villains.
    California is among the most electricity efficient states in the 
nation. It consumes less than 50 percent as much electricity as the 
rest of the country per dollar of state output. On a heating and 
cooling degree day basis, it consumes considerably less electricity 
than the rest of the nation. California consumers now pay the highest 
prices in the country for electricity. If the rest of the country were 
as electricity efficient as California, we would only need the 
equivalent of 500 new power plants, instead of the 1300 that Vice 
President Cheney has discussed, talked about.
    Those who suggest that California consumers do not pay enough for 
electricity have not looked at the facts of the situation. Electricity 
is a necessity that has no substitute on the demand side in the short-
term. At the start of the twenty-first century, electricity is like 
oxygen--a basic necessity to daily life.
    Necessities like electricity have a low elasticity of demand. By 
this term, economists mean that as prices increase (or decrease) demand 
does not decrease (or increase) very much. The elasticity of demand is 
measured in terms of percentage changes. For example, if a ten percent 
increase in price results in a 20 percent decrease in demand, the 
elasticity of demand is said to equal 2 (20%/10%). When the elasticity 
is greater than 1, demand is said to be elastic. Alternatively, if a 10 
percent increase in price results in a 2 percent decrease in demand, 
the elasticity of demand is said to be .2, and this is considered 
inelastic. The empirical evidence demonstrates that this is the 
situation in electricity markets. The best evidence from California is 
that the short run elasticity of demand is considerably less than 1. In 
fact, the short term elasticity of demand is less than 1. Even in the 
long term, it is considerably less than 1.
    The empirical evidence in California is that supply is also very 
inelastic in the short term. The supply curve is very steep, (see 
Exhibit 1). The best evidence from California is that the short run 
supply elasticity is considerably less than 1. In fact the supply 
elasticity is probably less than .2 on the basis of 1999 prices. This 
is probably a higher price elasticity than observed in 2000-2001, which 
suggests a supply elasticity considerably less than 1 for the peak of 
2000 (demand of 35000 MW to 45000 MW) and in the range of .1 to .15 for 
shoulder periods (demand between 25000 MW and 35000 MW).
    When demand and supply elasticities are this low, the potential for 
the abuse of market power is substantial. Market power is the ability 
of suppliers to raise prices and earn excess profits. In simple terms, 
when we talk about market forces, we mean the ability of consumers to 
cut back or shift their demand and the ability of producers to increase 
their output in response to price increases--we mean supply and demand 
elasticities. If these elasticities are too small, market forces are 
weak and the exercise of market power will take place. Under these 
circumstances, firms with relatively small market shares can increase 
profits by withholding supplies. The evidence in California clearly 
suggests that they have been the victims of a monumental market 
failure.
FEDERAL REGULATORY RESPONSIBILITY FOR THE PROBLEM
    The Federal Energy Regulatory Commission bears a substantial part 
of the blame for the problem in California because it deregulated 
prices in a market which was vulnerable to abuse and failed to police 
that abuse once it began. FERC prematurely deregulated price over the 
objection of many in California. In fact, FERC fought California 
authorities to assert control over the Independent System Operator 
(ISO) and then deregulated the price of energy in the California 
wholesale market, even though its market analysis was fundamentally 
flawed. This enabled private interests to take advantage of the bad 
situation that they had helped to create.
    FERC failed to reasonably analyze the market before it deregulated. 
It treated the state as one big market, when it is evident that there 
are distinct and separate north-south markets because of a capacity 
constraint. It failed to identify load pockets that would be 
constrained at peak times. It deregulated ancillary services, even 
though it was told market power existed in these markets and accepted 
on faith that ``must run'' plants would mitigate market power, without 
any concrete plan to do so.
    FERC refuses to responsibly police the markets it has irresponsibly 
deregulated. It has defended the secrecy of spot market bidding, which 
appears to have the effect of allowing tight oligopolies of bidders to 
play their games behind closed doors. It refused to requisition and 
study bidding records for abusive patterns after the first price spikes 
in 1998, and the second price spikes in 1999, which emboldened 
strategic bidders for the really big killing of 2000. It failed to 
analyze the data once it was collected and has taken over a year to 
begin to address the problems in the natural gas market. After finding 
rates were unjust and unreasonable, it failed to adopt mitigation 
measures that could discipline the market.
    FERC approves rates without subjecting them to refund, so that 
market manipulators know they will never have to disgorge their ill-
gotten gains. It even rushed in to allow a hasty reorganization of one 
of the California utilities to shield its assets from its creditors. As 
the only dissenting Commissioner put it, if the FERC had exercised more 
responsibility earlier, ``capping spot market prices at variable 
operating costs plus a capacity adder * * * there is reason to believe 
that applicants would not be in such dire straits now.''
EXPLOITATION IN A DYSFUNCTIONAL MARKET
    Premature deregulation led to profit maximization that tightened 
electricity markets by reducing supplies, limiting reserves, 
eliminating back up requirements, undercutting conservation programs, 
and preventing facilities from being built. The small number of 
suppliers and the tendency for electricity product and geographic 
markets to be highly restricted in time and space make the exercise of 
market power and the implementation of gaming strategies that drive 
prices up easy to execute. Price spikes produce such huge windfalls 
that suppliers exhibit an OPEC-like (backward bending) supply curve, in 
which supplies are reduced, not increased, as prices rise.
    On any given day during the recent price spikes fossil fuel plants 
owned or controlled by merchants were producing between 2000 and 6000 
megawatts less than their historic average. The same independent 
generators also opposed long-term contracts, which would have kept 
utilities out of the volatile spot market. The disappearance of these 
assets is part of a pattern of resource denial that has the effect of 
driving up the price of electricity. Whether it is purely strategic, or 
illegally manipulative, or even collusive, remains to be seen, but 
there is no doubt that the pursuit of private interests has denied the 
electricity market in California substantial resources. This profit 
driven denial of resources equal to between 10 and 20 percent of peak 
demand had a substantial impact on price and performance.
    The CAL-ISO, the sole entity to produce a detailed analysis of 
bidding behavior, estimated that approximately half of the price 
increase through November 2000 is attributable to price gouging 
(offering prices far above costs) or capacity hoarding (physical 
withholding of supply). This detailed study of actual bidding behavior 
by every major player in the California market, charged that there had 
been either price gouging or physical withholding in virtually every 
hour between May and November (a total of 25,000 bid/hours). Daisy 
chains of transactions have been developed to avoid regulatory 
scrutiny. In the colorful language of a new game of consumer abuse we 
have hockey stick bidding and megawatt laundering, but they all mean 
the same thing, consumers are being ripped off.
    The inevitable result of greed, irresponsibility and mismanagement 
in a volatile market for a vulnerable commodity is a massive, 
inefficient and unjustified transfer of wealth from consumers to 
producers. Worse still this analysis does not even deal with the period 
after November 2000, when the excessive pricing became vastly more 
abusive.
    The CAL-ISO has asked for refunds of over $6 billion, but the CAL-
ISO analysis does not include the results of any investigation into 
natural gas prices in the California market and is based on a 
methodology distorted by a series of erroneous assumptions dictated by 
the FERC. A detailed and direct comparison of actual costs incurred and 
prices charged on a plant-by-plant basis, which is the methodology used 
to order the wholesale electricity market for six decades prior to the 
deregulation experiments of the 1990s, would inevitably reveal that the 
abuses are much larger than $6 billion.
EXCESS PROFITS
    For the purposes of empirically demonstrating excess profits (and 
the flaw in FERC's recent failed attempts to impose discipline on a 
dysfunctional market), we analyze evidence in the record for January 
2001 (See Exhibit 2). Assuming a least efficient generator using the 
most expensive inputs for January 2001, FERC's methodology establishes 
a ceiling price (or market clearing price) of $273/MWh. Since all 
generators are allowed to charge up to that level without scrutiny, it 
appears they fully exploited the artificially high benchmark in 
determining what to charge in California's dysfunctional market. The 
average wholesale price in January 2001 was $307.
    However, 99 percent of the generators did not incur costs at that 
level, since they are much more efficient than that. Consequently, and 
inevitably the prices they receive are far above their costs. At the 
average level of efficiency known to exist in California, the actual 
costs incurred, even assuming the high cost inputs, would have been 
half the ceiling level. In other words, not only are virtually all 
generators more efficient than FERC's benchmark, but also the average 
generator is twice as efficient. While the FERC methodology would allow 
them to charge $273/MWh without any scrutiny, the actual costs would be 
about $150/MWh. The difference, equal to about $120/MWh, constitutes a 
huge windfall and unreasonable level of profit.
    The CAL-ISO has estimated that a new generation unit being brought 
on line with heavy capital costs would be paid off in less than two 
years. The implicit return on equity would be approximately 85%. 
Similarly, the County of San Diego calculated a cost of $120/MWh for a 
new generation plant. At the FERC authorized ceiling prices, which are 
not subject to scrutiny, the plant would be paid off in one year. Such 
rates of return are historically unprecedented and patently 
unreasonable.
    The above analyses still assume that all producers pay the high, 
spot price for natural gas and air emission credits. In fact, there are 
many longer-term contracts for gas at much lower prices and the typical 
generator in California does not require emissions credits. This 
creates an even larger gap between actual costs and the FERC's ceiling 
price benchmark (as shown in Exhibit 2). Using an average cost of gas 
(assume $6.25 per MCF [thousand cubic feet]) and assuming the average 
generator does not pay emissions credits would increase the estimate of 
overcharges and windfalls by about one third.
    The patently unreasonable rates are not simply a one-month 
aberration. The CAL-ISO analysis shows that by February 2001, even 
assuming the spot market price of gas and NOX credits, the 
costs of a new plant brought on line when the restructured market 
commenced in May 1998 in California would have been fully recovered in 
just three years. The implicit return on equity would be in the range 
of 30 to 60 percent
    More to the point, perhaps, the total estimated revenues above 
costs, even using spot prices for gas and NONOX costs, for 
Non-Utility Distribution Company generators subject to FERC 
jurisdiction since the start of restructuring in May 1998, is 
approximately $3.1 billion. This is approximately equal to the total 
capital paid by merchant generators to acquire the fossil plants of the 
utilities. In other words, by abusing their market power, these 
entities have, at a minimum, recovered all of their capital in 
approximately three years. If actual input costs were used, the full 
cost recovery would have occurred even earlier. The return on equity 
based on actual costs would fall in the range of 40 to 80 percent.
    These direct estimates of price cost margins are confirmed by the 
bottom line profit figures of the power generators who are selling into 
California. Comparing the first quarter of 2001 to the first quarter of 
2000, just prior to the meltdown of the California market began; we 
observe a tripling of operating profits for the largest fossil fuel 
generators and marketers, as the first quarter financial results, 
focusing on wholesale or trading business segments and operating 
results, shows.

                     PROFITS IN MILLIONS OF DOLLARS
------------------------------------------------------------------------
                                                          1Q2001  1Q2000
------------------------------------------------------------------------
Enron: Wholesale Services (IBIT)........................    $755    $429
Duke: Energy Services (EBIT)............................     428     139
MIR: With California contingency (NI)...................     420      95
REI: Wholesale, (operating income)......................     216    (22)
Dynegy: Marketing & Trade (NI)..........................     100      50
Williams: Marketing and Trading (NI)....................     485      78
                                                         ---------------
TOTAL...................................................    2404     769
------------------------------------------------------------------------

    Sources: Quarterly reports and Wall Street briefings.
    Although the companies do not break their profits down by state, 
there is no doubt that California and the western United States are 
primarily where the profits accrued.

TAXING AWAY WINDFALL PROFITS AND MONOPOLY RENTS DOES NOT HARM ECONOMIC 
        EFFICIENCY
    California has paid a heavy price in economic rents--scarcity rents 
and monopoly rents. An economic rent is ``a payment to a factor in 
excess of what is necessary to keep it at its present occupation.'' 
More importantly, ``in perfect competition, no rents are made by any 
factor, because changes in supply bid prices of inputs and labor down 
to the level just necessary to keep them employed.''
    It is well established in the economic literature that scarcity 
rents can be taxed away without harming economic efficiency (see 
Exhibit 3). Since supply of a fixed asset does not respond to price 
changes, there is little or no dead weight loss. As Taylor, puts it,
          Economic rent is the price of anything that has a fixed 
        supply. Economic rent is also sometimes called pure rent. 
        Economic rent is a significant concept in economics precisely 
        because the quantity supplied does not depend on the price. 
        Thus, a tax on economic rents would not change the amount 
        supplied; it would not affect economic efficiency or cause a 
        deadweight loss.
    Monopoly rents should be eliminated to promote economic efficiency. 
In fact, producers do not even have an interest in delivering existing 
capacity. Indeed, when windfalls become as massive as they have been in 
California, they distort economic incentives. Producers make more by 
withholding supplies than by increasing output. Having learned how to 
manipulate the market, the primary interest of producers is to keep it 
tight. Exorbitant prices do not elicit efficient supply responses, they 
reward and create an incentive for more effective gaming. There is a 
formal theory of this in economics. It is called a backward bending 
supply curve. It has been extensively applied to labor markets and, not 
surprisingly, to the OPEC cartel.
    To state the concept in layman's terms, you make so much money by 
running the price up that you are much better off by cutting back 
production than by increasing output, which would lower the price. You 
can only get away with this when demand is inelastic (since that 
creates huge economic rents) and the supply beyond your control cannot 
be easily expanded in the short-term (since competition would dissipate 
the rents).
    Claims that the market needs electricity priced in the hundreds of 
dollars per MWh to elicit efficient supply-sided responses are absurd 
on their face. Neither empirical reality nor economic theory supports 
this claim. Hundreds of power plants were financed and placed under 
construction across the country and including California long before 
anyone dreamed that prices would rise so high. Payback periods of a 
couple of years for facilities with useful lives that are decades long 
are unprecedented and unnecessary in a workably competitive market to 
create adequate supply.
    Given the situation in the California electricity market, a 
windfall profits tax would play the useful role of taking the fun and 
profit out of market manipulation. It corrects part of the market 
failure (as described in Exhibit 3), although it does not fully 
accomplish the same outcome as cost-based rates.

                               EXHIBIT 1

                        SUMMER 2000 SUPPLY CURVE

[GRAPHIC] [TIFF OMITTED] T4228A.002

                               EXHIBIT 2

              ABUSIVE PRICING OF ELECTRICITY IN CALIFORNIA

          APPROVED BY THE FEDERAL ENERGY REGULATORY COMMISSION

                    (Based on January 2001 ``Caps'')
[GRAPHIC] [TIFF OMITTED] T4228A.003

    SOURCE: Request for Rehearing on Behalf of The County of San Diego, 
Comment of the California Independent System Operator Corporation on 
Staff's Recommendation on Perspective Market Monitoring and Mitigation 
for the California Wholesale Electric Power Market, San Diego Gas & 
Electric Company v. Seller of Energy and Ancillary Service Into Markets 
Operated by the California Independent System Operator and the 
California Power Exchange, Docket No. EL00-95-017, March 22, 2001.

                               EXHIBIT 3

        SCARCITY RENTS MONOPOLY PROFITS GENERATED BY WITHHOLDING

        AND WINDFALL PROFITS TAXES COMPARED TO COST BASED RATES
[GRAPHIC] [TIFF OMITTED] T4228A.004

    Scarcity rents and taxation of windfalls adapted from Rutherford, 
Donald, Dictionary of Economics (Routledge: London, 1992), p. 138 and 
Taylor, John, B., Economics (Houghton Mifflin, Boston, 1998), p. 350).

                                

    Chairman McCrery. Thank you, Mr. McDermott, and thank all 
the Members of the panel for your testimony.
    With respect to the gentleman's request for the Consumers 
Union to testify, the request did come rather late. Weplanned 
this hearing for some time, and we had our witness panels set, and had 
we had time to get somebody to respond specifically to those assertions 
by the Consumers Union, we would have gladly heard from them.
    We do have some panelists that will probably hit on some of 
the same themes, so I don't think the gentleman will be totally 
disappointed in the array of witnesses that we have. Plus the 
fact that some of the assertions that are made are not really 
within the jurisdiction of this Committee, although the one 
solution offered by the gentleman from Washington certainly 
would be, the windfall profits tax or the cancelation of the 
depreciation.
    And, as I said to the Minority Leader, who was here before 
you arrived, Mr. McDermott, we heard a lot of testimony today 
from Republicans and Democrats that gives me hope that there is 
much more common ground on the issue of energy policy in this 
country than there is disagreement. So I am hopeful that we 
will be able to come up with a tax bill that can include and 
will include those areas of common ground. I am not sure that 
the windfall profits tax rises to that status just yet, but the 
gentleman can certainly keep working on it with some members of 
the Committee. But I think there is a lot of common ground.
    I appreciate very much the testimony of all of you. You 
have brought up some very interesting approaches to energy 
policy, and we look forward to working with you to craft those 
in the form of legislation to help give this country a sensible 
energy policy. Mr. McNulty.
    Mr. McNulty. Thank you, Mr. Chairman. I thank you for 
holding these hearings, and I agree with your assessment of 
them.
    I think that the Democratic leader struck a very positive 
note today, and I think he was correct in pointing out all of 
the common ground that exists on many of these issues. Matter 
of fact, there is an old song that many people in this room are 
too young to remember, but it is ``accentuate the positive, 
eliminate the negative.'' There are a lot of things that we 
don't agree on, and I think we ought to put them in the 
background, as Mr. Gephardt suggested, and work on the things 
that we agree on. And there are many of those things that we 
agree on that can result in the development of a very positive 
energy policy for the future of this country, and I am 
committed to doing that. I know the chairman is.
    I thank all of the Members for their very positive input.
    Chairman McCrery. I thank my Ranking Member for 
participating in today's hearing and helping us put together 
the panel for tomorrow's hearing.
    Once again, thank all of you. We look forward to working 
with you to craft a sensible energy policy for the United 
States. Thank you.
    [Whereupon, at 4:32 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

 Statement of the U.S. Department of the Treasury, Office of Tax Policy

    Mr. Chairman, Mr. McNulty, and Members of the Subcommittee:
    It is the goal of this Administration to pursue an energy policy 
that protects America's economic, security, and environmental 
interests. As you know, in May the President's National Energy Policy 
Development (NEPD) Group released its report entitled ``Reliable, 
Affordable, and Environmentally Sound Energy for America's Future.'' 
The report sets forth three basic features of a National Energy Policy:
          The Policy is a long-term, comprehensive strategy. Our energy 
        crisis has been years in the making, and will take years to put 
        fully behind us.
          The Policy will advance new, environmentally friendly 
        technologies to increase energy supplies and encourage cleaner, 
        more efficient energy use.
          The Policy seeks to raise the living standards of the 
        American people, recognizing that to do so our country must 
        fully integrate its energy, environmental, and economic 
        policies.
    In that context, the Office of Tax Policy appreciates the 
opportunity to present testimony on tax incentives to promote energy 
conservation and increase domestic production of oil and gas.

            Energy Efficiency and Alternative Energy Sources

    Incentives for energy efficiency and alternative energy sources are 
essential elements of national energy policy. The continuing strength 
of our economy over the past two years, despite oil price rises, 
underscores the dramatic improvements in energy efficiency we have 
achieved over the past quarter century, as well as the changing 
economy. While past oil shortages have taken a significant toll on the 
U.S. economy, the recent increases in oil prices have not affected the 
economy much. Increased energy efficiency in cars, homes, and 
manufacturing has helped insulate the economy from these short-term 
market fluctuations. In 1974, we consumed 15 barrels of oil for every 
$10,000 of gross domestic product. Today we consume only 8 barrels of 
oil for the same amount (in constant dollars) of economic output.
Current law tax incentives for energy efficiency and alternative fuels
    Tax incentives currently provide an important element of support 
for energy-efficiency improvements and increased use of renewable and 
alternative fuels. Current incentives are estimated to total $1.2 
billion for fiscal years 2002 through 2006. They include a tax credit 
for electric vehicles and expensing for clean-fuel vehicles ($20 
million), a tax credit for the production of electricity from wind or 
biomass and a tax credit for certain solar energy property ($590 
million), and an exclusion from gross income for certain energy 
conservation subsidies provided by public utilities to their customers 
($580 million).\1\
---------------------------------------------------------------------------
    \1\ Analytical Perspectives, Budget of the United States 
Government, Fiscal Year 2002, U.S. Government Printing Office, 
Washington, DC, 2001, p. 63.
---------------------------------------------------------------------------
Electric and clean-fuel vehicles and clean-fuel vehicle refueling 
        property
    A 10-percent tax credit is provided for the cost of a qualified 
electric vehicle, up to a maximum credit of $4,000. A qualified 
electric vehicle is a motor vehicle that is powered primarily by an 
electric motor drawing current from rechargeable batteries, fuel cells, 
or other portable sources of electric current, the original use of 
which commences with the taxpayer, and that is acquired for use by the 
taxpayer and not for resale. The full amount of the credit is available 
for purchases prior to 2002. The credit begins to phase down in 2002 
and does not apply to vehicles placed in service after 2004.
    Certain costs of qualified clean-fuel vehicles and clean-fuel 
vehicle refueling property may be deducted when such property is placed 
in service. Qualified electric vehicles do not qualify for the clean-
fuel vehicle deduction. The deduction begins to phase down in 2002 and 
does not apply to property placed in service after 2004.

Energy from wind or biomass
    A 1.5-cent-per-kilowatt-hour tax credit is provided for electricity 
produced from wind, ``closed-loop'' biomass (organic material from a 
plant that is planted exclusively for purposes of being used at a 
qualified facility to produce electricity), and poultry waste. The 
electricity must be sold to an unrelated person and the credit is 
limited to the first 10 years of production. The credit applies only to 
facilities placed in service before January 1, 2002. The credit amount 
is indexed for inflation after 1992.

Solar energy
    A 10-percent investment tax credit is provided to businesses for 
qualifying equipment that uses solar energy to generate electricity, to 
heat or cool or provide hot water for use in a structure, or to provide 
solar process heat.

Ethanol and renewable source methanol
    An income tax credit and an excise tax exemption are provided for 
ethanol and renewable source methanol used as a fuel. In general, the 
income tax credit is 53 cents per gallon for ethanol and 60 cents per 
gallon for renewable source methanol. As an alternative to the income 
tax credit, gasohol blenders may claim an equivalent gasoline tax 
exemption for each ethanol and renewable source methanol that is 
blended into qualifying gasohol.
    The income tax credit expires on December 31, 2007, and the excise 
tax exemption expires on September 30, 2007. In addition, the ethanol 
credit and exemption are each reduced by 1 cent per gallon in 2003 and 
by an additional 1 cent per gallon in 2005. Neither the credit nor the 
exemption applies during any period in which motor fuel taxes dedicated 
to the Highway Trust Fund are limited to 4.3 cents per gallon. Under 
current law, the motor fuel tax dedicated to the Highway Trust Fund 
will be limited to 4.3 cents per gallon beginning on October 1, 2005.
Energy conservation subsidies
    Subsidies provided by public utilities to their customers for the 
purchase or installation of energy conservation measures are excluded 
from the customers' gross income. An energy conservation measure is any 
installation or modification primarily designed to reduce consumption 
of electricity or natural gas or to improve the management of energy 
demand with respect to a dwelling unit.

                    Administration budget proposals

    The Administration's budget proposals for fiscal year 2002 include 
tax incentives for renewable energy resources. The budget also proposes 
to modify the tax treatment of nuclear decommissioning funds. The 
Administration's proposals are described below.\2\
---------------------------------------------------------------------------
    \2\ For a more detailed description, see General Explanations of 
the Administration's Fiscal Year 2002 Tax Relief Proposals, Department 
of the Treasury, April 2001.
---------------------------------------------------------------------------

Electricity from wind and biomass
    The Administration proposes to extend the credit for electricity 
produced from wind and biomass for three years to facilities placed in 
service before January 1, 2005. In addition, eligible biomass sources 
would be expanded to include certain biomass from forest-related 
resources, agricultural sources, and other specified sources. Special 
rules would apply to biomass facilities placed in service before 
January 1, 2002. Electricity produced at such facilities from newly 
eligible sources would be eligible for the credit only from January 1, 
2002, through December 31, 2004. The credit for such electricity would 
be computed at a rate equal to 60 percent of the generally applicable 
rate. Electricity produced from newly eligible biomass co-fired in coal 
plants would also be eligible for the credit only from January 1, 2002, 
through December 31, 2004. The credit for such electricity would be 
computed at a rate equal to 30 percent of the generally applicable 
rate.

Residential solar energy systems
    The Administration proposes a new tax credit for individuals that 
purchase solar energy equipment used to generate electricity 
(photovoltaic equipment) or heat water (solar water heating equipment) 
for use in a dwelling unit that the individual uses as a residence. The 
credit would be available only for equipment used exclusively for 
purposes other than heating swimming pools. The proposed credit would 
be equal to 15 percent of the cost of the equipment and its 
installation. The credit would be nonrefundable and an individual would 
be allowed a lifetime maximum credit of $2,000 per residence for 
photovoltaic equipment and $2,000 per residence for solar water heating 
equipment. The credit would apply only to solar water heating equipment 
placed in service after December 31, 2001, and before January 1, 2006, 
and to photovoltaic systems placed in service after December 31, 2001, 
and before January 1, 2008.

Nuclear decommissioning funds
    The Administration proposes to repeal the current law provision 
that limits deductible contributions to a nuclear decommissioning fund 
to the amount included in the taxpayer's cost of service for ratemaking 
purposes. Thus, unregulated taxpayers would be allowed a deduction for 
amounts contributed to a qualified nuclear decommissioning fund. The 
Administration also proposes to permit funding of all decommissioning 
costs (including pre-1984 costs) through qualified nuclear 
decommissioning funds. Contributions to fund pre-1984 costs would be 
deductible except to the extent a deduction (other than under the 
qualified fund rules) or an exclusion from income has been previously 
allowed with respect to those costs. The Administration's proposal 
would clarify that any transfer of a qualified nuclear decommissioning 
fund in connection with the transfer of the power plant with which it 
is associated would be nontaxable and no gain or loss will be 
recognized by the transferor or transferee as a result of the transfer. 
In addition, the proposal would permit taxpayers to make deductible 
contributions to a qualified fund after the end of the nuclear power 
plant's estimated useful life and would provide that nuclear 
decommissioning costs are deductible when paid.

                          NEPD Group Proposals

    The Report of the NEPD Group also included tax incentives for 
renewable energy resources and for more efficient energy use. The NEPD 
Group proposals are described below.\3\
---------------------------------------------------------------------------
    \3\ For a more detailed description, see the attachments to this 
testimony.
---------------------------------------------------------------------------
Fuel from landfill methane
    The NEPD Group proposes to extend the section 29 credit for fuel 
produced from landfill methane produced at a facility (or portion of a 
facility) that is placed in service after December 31, 2001. Fuel 
produced at such facilities would be eligible for the credit through 
December 31, 2010. The proposal would also expand the credit by 
permitting the credit for fuel used by the taxpayer to produce 
electricity. The credit for fuel produced at landfills subject to EPA's 
1996 New Source Performance Standards/Emissions Guidelines would be 
limited to two-thirds of the otherwise applicable amount. In the case 
of landfills with facilities that currently qualify for the section 29 
credit, this limitation would not apply until after 2007.

Ethanol and renewable source methanol
    The NEPD Group proposes to extend the income tax credit and excise 
tax exemption for ethanol and renewable source methanol through 
December 31, 2010. The current law rule providing that neither the 
credit nor the exemption applies during any period in which motor fuel 
taxes dedicated to the Highway Trust Fund are limited to 4.3 cents per 
gallon would be retained. As under current law, the credit and the 
exemption would each be reduced by 1 cent per gallon in 2003 and by an 
additional 1 cent per gallon in 2005.

Hybrid and fuel cell vehicles
    The NEPD Group proposes to provide temporary tax credits for 
certain hybrid and fuel cell vehicles.
    A credit of $250 to $4,000 would be available for purchases of 
qualifying hybrid vehicles after December 31, 2001, and before January 
1, 2008. A hybrid vehicle is a vehicle that draws propulsion from both 
an on-board internal combustion or heat engine using combustible fuel 
and an on-board rechargeable energy storage system. To qualify for the 
minimum credit, a hybrid vehicle would be required to derive at least 5 
percent of its maximum available power from the rechargeable energy 
storage system. Larger credits would be available for vehicles that 
derive larger percentages of power from the rechargeable energy storage 
system and for vehicles that meet specified fuel economy standards.
    A credit of $1,000 to $8,000 would be available for the purchase of 
qualifying fuel cell vehicles after December 31, 2001, and before 
January 1, 2008. A fuel cell vehicle is a motor vehicle propelled by 
power derived from one or more cells that convert chemical energy 
directly into electricity by combining oxygen with on-board hydrogen 
(including hydrogen produced from on-board fuel that requires 
reformation before use). To qualify for the minimum credit, a fuel cell 
vehicle would be required to meet a minimum fuel economy standard for 
its weight class. Larger credits would be available for vehicles that 
achieve higher fuel economy standards.
Combined heat and power systems
    To encourage more efficient energy usage, the NEPD Group proposes 
to provide a 10-percent investment credit for qualifying combined heat 
and power (CHP) systems. CHP systems are used to produce electricity 
(and/or mechanical power) and usable heat from the same primary energy 
source. To qualify for the credit, a system would be required to 
produce at least 20 percent of its total useful energy in the form of 
thermal energy and at least 20 percent in the form of electrical and/or 
mechanical power and would also be required to satisfy an energy 
efficiency standard. The credit would apply to CHP equipment placed in 
service after December 31, 2001, and before January 1, 2007.

               Increasing Domestic Oil and Gas Production

    Before turning to a discussion of the present tax treatment of oil 
and gas activities, we would like to provide a brief overview of this 
sector.

Overview
    Oil is an internationally traded commodity with its domestic price 
set by world supply and demand. Domestic exploration and production 
activity is affected by the world price of crude oil. Historically, 
world oil prices have fluctuated substantially. From 1970 to the early 
1980s, there was a fivefold increase in real oil prices. World oil 
prices fell sharply in 1986 and were relatively more stable from 1986 
through 1997. During that period, average refiner acquisition costs 
ranged from $14.91 to $23.59 per barrel in real 1992 dollars. In 1998, 
however, oil costs to the refiner declined to $12.52 per barrel in 
nominal dollars ($11.14 per barrel in 1992 dollars), their lowest level 
in 25 years in real terms. Since 1998, the decline has reversed with 
refiner acquisition costs (in nominal dollars) rising to $17.51 per 
barrel in 1999 and $27.69 per barrel in 2000 (the price has since 
dropped to $23.89 per barrel in April 2001, the latest month for which 
composite figures are available). The equivalent prices in 1992 dollars 
are $15.31 per barrel in 1999, $24.28 per barrel in 2000, and $20.20 
per barrel in April 2001.
    Domestic oil production has been on the decline since the mid-
1980s. From 1978 to 1983 oil consumption in the United States also 
declined, but increasing consumption since 1983 has more than offset 
this decline. In 2000, domestic oil consumption was 28 percent higher 
than in 1970. The decline in oil production and increase in consumption 
have led to an increase in oil imports. Net petroleum (crude and 
product) imports have risen from approximately 38 percent of 
consumption in 1988 to 52 percent in 2000.
    A similar pattern of large recent price increases and increasing 
dependence on imports has occurred in the natural gas market. During 
the second half of the 1990s, spot prices for natural gas exceeded 
$4.00 per million Btu (MMBtu) in only one month (February 1996). The 
spot price again exceeded $4.00 per MMBtu in May 2000, rose above $5.00 
per MMBtu in September 2000, and exceeded $10.00 per MMBtu for several 
days last winter. Since last winter the price has fallen sharply. The 
current spot price is approximately $3.71 per MMBtu.\4\
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    \4\ All price references are to the spot price at the Henry Hub and 
are in nominal dollars.
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    The United States has large natural gas reserves and was 
essentially self-sufficient in natural gas until the late 1980s. Since 
1986, natural gas consumption has increased by more than 30 percent but 
natural gas production has increased by only 17 percent. Net imports as 
a share of consumption nearly quadrupled from 1986 to 2000, rising from 
4.2 percent to 15.6 percent. Natural gas from Canada makes up nearly 
all of the imports into the United States.
Current law tax incentives for oil and gas production
    Although the Administration's energy plan contains no new tax 
incentives for oil and gas production, the Internal Revenue Code 
includes a variety of measures to stimulate domestic exploration and 
production. They are generally justified on the ground that they reduce 
vulnerability to an oil supply disruption through increases in domestic 
production, reserves, exploration activity, and production capacity. 
The tax incentives contained in present law address the drop in 
domestic exploratory drilling that has occurred since the mid-1950s and 
the continuing loss of production from mature fields and marginal 
properties.
    Incentives for oil and gas production are estimated to total $9.8 
billion for fiscal years 2002 through 2006.\5\ They include the 
nonconventional fuels (i.e., oil produced from shale and tar sands, gas 
produced from geopressured brine, Devonian shale, coal seams, tight 
formations, or biomass, and synthetic fuel produced from coal) 
production credit ($2.4 billion), the enhanced oil recovery credit 
($4.4 billion), the allowance of percentage depletion for independent 
producers and royalty owners, including increased percentage depletion 
for stripper wells ($2.3 billion), the exception from the passive loss 
limitation for working interests in oil and gas properties ($100 
million), and the expensing of intangible drilling and development 
costs ($640 million). In addition to those tax expenditures, oil and 
gas activities have largely been eliminated from the alternative 
minimum tax. These provisions are described in detail below.
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    \5\ Analytical Perspectives, Budget of the United States 
Government, Fiscal Year 2002, U.S. Government Printing Office, 
Washington, DC, 2001, p. 6.
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Percentage depletion
    Certain costs incurred prior to drilling an oil--or gas-producing 
property are recovered through the depletion deduction. These include 
costs of acquiring the lease or other interest in the property, and 
geological and geophysical costs (in advance of actual drilling). Any 
taxpayer having an economic interest in a producing property may use 
the cost depletion method. Under this method, the basis recovery for a 
taxable year is proportional to the exhaustion of the property during 
the year. The cost depletion method does not permit cost recovery 
deductions that exceed the taxpayer's basis in the property or that are 
allowable on an accelerated basis. Thus, the deduction for cost 
depletion is not generally viewed as a tax incentive.
    Independent producers and royalty owners (as contrasted to 
integrated oil companies) \6\ may qualify for percentage depletion. A 
qualifying taxpayer determines the depletion deduction for each oil or 
gas property under both the percentage depletion method and the cost 
depletion method and deducts the larger of the two amounts. Under the 
percentage depletion method, generally 15 percent of the taxpayer's 
gross income from an oil--or gas-producing property is allowed as a 
deduction in each taxable year. The amount deducted may not exceed 100 
percent of the net income from that property in any year (the ``net-
income limitation'').\7\ Additionally, the percentage depletion 
deduction for all oil and gas properties may not exceed 65 percent of 
the taxpayer's overall taxable income (determined before such deduction 
and adjusted for certain loss carrybacks and trust distributions).\8\
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    \6\ An independent producer is any producer who is not a 
``retailer'' or ``refiner.'' A retailer is any person who directly, or 
through a related person, sells oil or natural gas or any product 
derived therefrom (1) through any retail outlet operated by the 
taxpayer or related person, or (2) to any person that is obligated to 
market or distribute such oil or natural gas (or product derived 
therefrom) under the name of the taxpayer or the related person, or 
that has the authority to occupy any retail outlet owned by the 
taxpayer or a related person. Bulk sales of crude oil and natural gas 
to commercial or industrial users, and bulk sales of aviation fuel to 
the Department of Defense, are not treated as retail sales for this 
purpose. Further, a person is not a retailer within the meaning of this 
provision if the combined gross receipts of that person and all related 
persons from the retail sale of oil, natural gas, or any product 
derived therefrom do not exceed $5 million for the taxable year. A 
refiner is any person who directly or through a related person engages 
in the refining of crude oil, but only if such person or related person 
has a refinery run in excess of 50,000 barrels per day on any day 
during the taxable year.
    \7\ By contrast, for any other mineral qualifying for the 
percentage depletion deduction, the deduction may not exceed 50 percent 
of the taxpayer's taxable income from the depletable property.
    \8\ Amounts disallowed as a result of this rule may be carried 
forward and deducted in subsequent taxable years, subject to the 65-
percent-of-taxable-income limitation for those years.
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    A taxpayer may claim percentage depletion with respect to up to 
1,000 barrels of average daily production of domestic crude oil or an 
equivalent amount of domestic natural gas. For producers of both oil 
and natural gas, this limitation applies on a combined basis. All 
production owned by businesses under common control and members of the 
same family must be aggregated; each group is then treated as one 
producer for application of the 1,000-barrel limitation.
    Special percentage depletion provisions apply to oil and gas 
production from marginal properties. The statutory percentage depletion 
rate is increased (from the general rate of 15 percent) by one 
percentage point for each whole dollar that the average price of crude 
oil (as determined under the provisions of the nonconventional fuels 
production credit of section 29) for the immediately preceding calendar 
year is less than $20 per barrel. In no event may the rate of 
percentage depletion under this provision exceed 25 percent for any 
taxable year. The increased rate applies for the taxpayer's taxable 
year which immediately follows a calendar year for which the average 
crude oil price falls below the $20 floor. To illustrate the 
application of this provision, the average price of a barrel of crude 
oil for calendar year 1999 was $15.56; thus, the percentage depletion 
rate for production from marginal wells was increased by four percent 
(to 19 percent) for taxable years beginning in 2000. The 100-percent-
of-net-income limitation has been suspended for marginal wells for 
taxable years beginning after December 31, 1997, and before January 1, 
2002. The Administration's budget for fiscal year 2002 proposes a one-
year extension of this provision. Under the Administration proposal, 
marginal wells would continue to be exempt from the limitation during 
taxable years beginning in 2002.
    Marginal production is defined for this purpose as domestic crude 
oil or domestic natural gas which is produced during any taxable year 
from a property which (1) is a stripper well property for the calendar 
year in which the taxable year begins, or (2) is a property 
substantially all of the production from which during such calendar 
year is heavy oil (i.e., oil that has a weighted average gravity of 20 
degrees API or less corrected to 60 degrees Fahrenheit). A stripper 
well property is any oil or gas property for which daily average 
production per producing oil or gas well is not more than 15 barrel 
equivalents in the calendar year during which the taxpayer's taxable 
year begins.\9\ A property qualifies as a stripper well property for a 
calendar year only if the wells on such property were producing during 
that period at their maximum efficient rate of flow.
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    \9\ Equivalent barrels is computed as the sum of (1) the number of 
barrels of crude oil produced, and (2) the number of cubic feet of 
natural gas produced divided by 6,000. If a well produced 10 barrels of 
crude oil and 12,000 cubic feet of natural gas, its equivalent barrels 
produced would equal 12 (i.e., 10 + (12,000/6,000)).
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    If a taxpayer's property consists of a partial interest in one or 
more oil--or gas-producing wells, the determination of whether the 
property is a stripper well property or a heavy oil property is made 
with respect to total production from such wells, including the portion 
of total production attributable to ownership interests other than the 
taxpayer's. If the property satisfies the requirements of a stripper 
well property, then each owner receives the benefits of this provision 
with respect to its allocable share of the production from the property 
for its taxable year that begins during the calendar year in which the 
property so qualifies.
    The allowance for percentage depletion on production from marginal 
oil and gas properties is subject to the 1,000-barrel-per-day 
limitation discussed above. Unless a taxpayer elects otherwise, 
marginal production is given priority over other production for 
purposes of utilization of that limitation.
    Because percentage depletion, unlike cost depletion, is computed 
without regard to the taxpayer's basis in the depletable property, 
cumulative depletion deductions may be far greater than the amount 
expended by the taxpayer to acquire or develop the property.

Intangible drilling and development costs
    In general, costs that benefit future periods must be capitalized 
and recovered over such periods for income tax purposes, rather than 
being expensed in the period the costs are incurred. In addition, the 
uniform capitalization rules require certain direct and indirect costs 
allocable to property to be included in inventory or capitalized as 
part of the basis of such property. In general, the uniform 
capitalization rules apply to real and tangible personal property 
produced by the taxpayer or acquired for resale.
    Special rules apply to intangible drilling and development costs 
(``IDCs'').\10\ Under these special rules, an operator (i.e., a person 
who holds a working or operating interest in any tract or parcel of 
land either as a fee owner or under a lease or any other form of 
contract granting working or operating rights) who pays or incurs IDCs 
in the development of an oil or gas property located in the United 
States may elect either to expense or capitalize those costs. The 
uniform capitalization rules do not apply to otherwise deductible IDCs.
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    \10\ IDCs include all expenditures made by an operator for wages, 
fuel, repairs, hauling, supplies, etc., incident to and necessary for 
the drilling of wells and the preparation of wells for the production 
of oil and gas. In addition, IDCs include the cost to operators of any 
drilling or development work (excluding amounts payable only out of 
production or gross or net proceeds from production, if the amounts are 
depletable income to the recipient, and amounts properly allocable to 
the cost of depreciable property) done by contractors under any form of 
contract (including a turnkey contract). Such work includes labor, 
fuel, repairs, hauling, and supplies which are used in the drilling, 
shooting, and cleaning of wells; in such clearing of ground, draining, 
road making, surveying, and geological works as are necessary in 
preparation for the drilling of wells; and in the construction of such 
derricks, tanks, pipelines, and other physical structures as are 
necessary for the drilling of wells and the preparation of wells for 
the production of oil and gas. Generally, IDCs do not include expenses 
for items which have a salvage value (such as pipes and casings) or 
items which are part of the acquisition price of an interest in the 
property.
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    If a taxpayer elects to expense IDCs, the amount of the IDCs is 
deductible as an expense in the taxable year the cost is paid or 
incurred. Generally, IDCs that a taxpayer elects to capitalize may be 
recovered through depletion or depreciation, as appropriate; or in the 
case of a nonproductive well (``dry hole''), the operator may elect to 
deduct the costs. In the case of an integrated oil company (i.e., a 
company that engages, either directly or through a related enterprise, 
in substantial retailing or refining activities) that has elected to 
expense IDCs, 30 percent of the IDCs on productive wells must be 
capitalized and amortized over a 60-month period.\11\
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    \11\ The IRS has ruled that if an integrated oil company ceases to 
be an integrated oil company, it may not immediately write off the 
unamortized portion of the IDCs capitalized under this rule, but 
instead must continue to amortize those ICDs over the 60-month 
amortization period.
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    A taxpayer that has elected to deduct IDCs may, nevertheless, elect 
to capitalize and amortize certain IDCs over a 60-month period 
beginning with the month the expenditure was paid or incurred. This 
rule applies on an expenditure-by-expenditure basis; that is, for any 
particular taxable year, a taxpayer may deduct some portion of its IDCs 
and capitalize the rest under this provision. This allows the taxpayer 
to reduce or eliminate IDC adjustments or preferences under the 
alternative minimum tax.
    The election to deduct IDCs applies only to those IDCs associated 
with domestic properties.\12\ For this purpose, the United States 
includes certain wells drilled offshore.\13\
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    \12\ In the case of IDCs paid or incurred with respect to an oil or 
gas well located outside of the United States, the costs, at the 
election of the taxpayer, are either (1) included in adjusted basis for 
purposes of computing the amount of any deduction allowable for cost 
depletion or (2) capitalized and amortized ratably over a 10-year 
period beginning with the taxable year such costs were paid or 
incurred.
    \13\ The term ``United States'' for this purpose includes the 
seabed and subsoil of those submerged lands that are adjacent to the 
territorial waters of the United States and over which the United 
States has exclusive rights, in accordance with international law, with 
respect to the exploration and exploitation of natural resources (i.e., 
the Continental Shelf area).
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    Intangible drilling costs are a major portion of the costs 
necessary to locate and develop oil and gas reserves. Because the 
benefits obtained from these expenditures are of value throughout the 
life of the project, these costs would be capitalized and recovered 
over the period of production under generally applicable accounting 
principles.

Nonconventional fuels production credit
    Taxpayers that produce certain qualifying fuels from 
nonconventional sources are eligible for a tax credit (``the section 29 
credit'') equal to $3 per barrel or barrel-of-oil equivalent.\14\ Fuels 
qualifying for the credit must be produced domestically from a well 
drilled, or a facility treated as placed in service before January 1, 
1993.\15\ The section 29 credit generally is available for qualified 
fuels sold to unrelated persons before January 1, 2003.\16\
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    \14\ A barrel-of-oil equivalent generally means that amount of the 
qualifying fuel which has a Btu (British thermal unit) content of 5.8 
million.
    \15\ A facility that produces gas from biomass or produces liquid, 
gaseous, or solid synthetic fuels from coal (including lignite) 
generally will be treated as being placed in service before January 1, 
1993, if it is placed in service by the taxpayer before July 1, 1998, 
pursuant to a written binding contract in effect before January 1, 
1997. In the case of a facility that produces coke or coke gas, 
however, this provision applies only if the original use of the 
facility commences with the taxpayer. Also, the IRS has ruled that 
production from certain post-1992 ``recompletions'' of wells that were 
originally drilled prior to the expiration date of the credit would 
qualify for the section 29 credit.
    \16\ If a facility that qualifies for the binding contract rule is 
originally placed in service after December 31, 1992, production from 
the facility may qualify for the credit if sold to an unrelated person 
before January 1, 2008.
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    For purposes of the credit, qualified fuels include: (1) oil 
produced from shale and tar sands; (2) gas produced from geopressured 
brine, Devonian shale, coal seams, a tight formation, or biomass (i.e., 
any organic material other than oil, natural gas, or coal (or any 
product thereof); and (3) liquid, gaseous, or solid synthetic fuels 
produced from coal (including lignite), including such fuels when used 
as feedstocks. The amount of the credit is determined without regard to 
any production attributable to a property from which gas from Devonian 
shale, coal seams, geopressured brine, or a tight formation was 
produced in marketable quantities before 1980.
    The amount of the section 29 credit generally is adjusted by an 
inflation adjustment factor for the calendar year in which the sale 
occurs.\17\ There is no adjustment for inflation in the case of the 
credit for sales of natural gas produced from a tight formation. The 
credit begins to phase out if the annual average unregulated wellhead 
price per barrel of domestic crude oil exceeds $23.50 multiplied by the 
inflation adjustment factor.\18\
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    \17\ The inflation adjustment factor for the 2000 taxable year was 
2.0454. Therefore, the inflation-adjusted amount of the credit for that 
year was $6.14 per barrel or barrel equivalent.
    \18\ For 2000, the inflation adjusted threshold for onset of the 
phaseout was $48.07 ($23.50 x 2.0454) and the average wellhead price 
for that year was $26.73.
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    The amount of the section 29 credit allowable with respect to a 
project is reduced by any unrecaptured business energy tax credit or 
enhanced oil recovery credit claimed with respect to such project.
    As with most other credits, the section 29 credit may not be used 
to offset alternative minimum tax liability. Any unused section 29 
credit generally may not be carried back or forward to another taxable 
year; however, a taxpayer receives a credit for prior year minimum tax 
liability to the extent that a section 29 credit is disallowed as a 
result of the operation of the alternative minimum tax. The credit is 
limited to what would have been the regular tax liability but for the 
alternative minimum tax.
    The provision provides a significant tax incentive (currently about 
$6 per barrel of oil equivalent or $1 per thousand cubic feet of 
natural gas). Coalbed methane and gas from tight formations currently 
account for most of the credit.
Enhanced oil recovery credit
    Taxpayers are permitted to claim a general business credit, which 
consists of several different components. One component of the general 
business credit is the enhanced oil recovery credit. The general 
business credit for a taxable year may not exceed the excess (if any) 
of the taxpayer's net income tax over the greater of (1) the tentative 
minimum tax, or (2) 25 percent of so much of the taxpayer's net regular 
tax liability as exceeds $25,000. Any unused general business credit 
generally may be carried back one taxable year and carried forward 20 
taxable years.
    The enhanced oil recovery credit for a taxable year is equal to 15 
percent of certain costs attributable to qualified enhanced oil 
recovery (``EOR'') projects undertaken by the taxpayer in the United 
States during the taxable year. To the extent that a credit is allowed 
for such costs, the taxpayer must reduce the amount otherwise 
deductible or required to be capitalized and recovered through 
depreciation, depletion, or amortization, as appropriate, with respect 
to the costs. A taxpayer may elect not to have the enhanced oil 
recovery credit apply for a taxable year.
    The amount of the enhanced oil recovery credit is reduced in a 
taxable year following a calendar year during which the annual average 
unregulated wellhead price per barrel of domestic crude oil exceeds $28 
(adjusted for inflation since 1990).\19\ In such a case, the credit 
would be reduced ratably over a $6 phaseout range.
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    \19\ The average per-barrel price of crude oil for this purpose is 
determined in the same manner as for purposes of the section 29 credit.
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    For purposes of the credit, qualified enhanced oil recovery costs 
include the following costs which are paid or incurred with respect to 
a qualified EOR project: (1) the cost of tangible property which is an 
integral part of the project and with respect to which depreciation or 
amortization is allowable; (2) IDCs that the taxpayer may elect to 
deduct;\20\ and (3) the cost of tertiary injectants with respect to 
which a deduction is allowable, whether or not chargeable to capital 
account.
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    \20\ In the case of an integrated oil company, the credit base 
includes those IDCs which the taxpayer is required to capitalize.
---------------------------------------------------------------------------
    A qualified EOR project means any project that is located within 
the United States and involves the application (in accordance with 
sound engineering principles) of one or more qualifying tertiary 
recovery methods which can reasonably be expected to result in more 
than an insignificant increase in the amount of crude oil which 
ultimately will be recovered. The qualifying tertiary recovery methods 
generally include the following nine methods: miscible fluid 
displacement, steam-drive injection, microemulsion flooding, in situ 
combustion, polymer-augmented water flooding, cyclic-steam injection, 
alkaline flooding, carbonated water flooding, and immiscible non-
hydrocarbon gas displacement, or any other method approved by the IRS. 
In addition, for purposes of the enhanced oil recovery credit, 
immiscible non-hydrocarbon gas displacement generally is considered a 
qualifying tertiary recovery method, even if the gas injected is not 
carbon dioxide.
    A project is not considered a qualified EOR project unless the 
project's operator submits to the IRS a certification from a petroleum 
engineer that the project meets the requirements set forth in the 
preceding paragraph.
    The enhanced oil recovery credit is effective for taxable years 
beginning after December 31, 1990, with respect to costs paid or 
incurred in EOR projects begun or significantly expanded after that 
date.
    Conventional oil recovery methods do not recover all of a well's 
oil. Some of the remaining oil can be extracted by unconventional 
methods, but these methods are generally more costly. At current world 
oil prices, a large part of the remaining oil in place is uneconomic to 
recover by unconventional methods. In this environment, the EOR credit 
can increase recoverable reserves. Although recovering oil using EOR 
methods is more expensive than recovering it using conventional 
methods, it may be less expensive than producing oil from new 
reservoirs. Although the credit could phase out at higher oil prices, 
it is fully effective at present world oil prices.

Alternative minimum tax
    A taxpayer is subject to an alternative minimum tax (``AMT'') to 
the extent that its tentative minimum tax exceeds its regular income 
tax liability. A corporate taxpayer's tentative minimum tax generally 
equals 20 percent of its alternative minimum taxable income in excess 
of an exemption amount. (The marginal AMT rate for a noncorporate 
taxpayer is 26 or 28 percent, depending on the amount of its 
alternative minimum taxable income above an exemption amount.) 
Alternative minimum taxable income (``AMTI'') is the taxpayer's taxable 
income increased by certain tax preferences and adjusted by determining 
the tax treatment of certain items in a manner which negates the 
deferral of income resulting from the regular tax treatment of those 
items.
    As a general rule, percentage depletion deductions claimed in 
excess of the basis of the depletable property constitute an item of 
tax preference in determining the AMT. In addition, the AMTI of a 
corporation is increased by an amount equal to 75 percent of the amount 
by which adjusted current earnings (``ACE'') of the corporation exceed 
AMTI (as determined before this adjustment). In general, ACE means AMTI 
with additional adjustments that generally follow the rules presently 
applicable to corporations in computing their earnings and profits. As 
a general rule a corporation must use the cost depletion method in 
computing its ACE adjustment. Thus, the difference between a 
corporation's percentage depletion deduction (if any) claimed for 
regular tax purposes and its allowable deduction determined under the 
cost depletion method is factored into its overall ACE adjustment.
    Excess percentage depletion deductions related to crude oil and 
natural gas production are not items of tax preference for AMT 
purposes. In addition, corporations that are independent oil and gas 
producers and royalty owners may determine depletion deductions using 
the percentage depletion method in computing their ACE adjustments.
    The difference between the amount of a taxpayer's IDC deductions 
and the amount which would have been currently deductible had IDC's 
been capitalized and recovered over a 10-year period may constitute an 
item of tax preference for the AMT to the extent that this amount 
exceeds 65 percent of the taxpayer's net income from oil and gas 
properties for the taxable year (the ``excess IDC preference''). In 
addition, for purposes of computing a corporation's ACE adjustment to 
the AMT, IDCs are capitalized and amortized over the 60-month period 
beginning with the month in which they are paid or incurred. The 
preference does not apply if the taxpayer elects to capitalize and 
amortize IDCs over a 60-month period for regular tax purposes.
    IDC's related to oil and gas wells are generally not taken into 
account in computing the excess IDC preference of taxpayers that are 
not integrated oil companies. This treatment does not apply, however, 
to the extent it would reduce the amount of the taxpayer's AMTI by more 
than 40 percent of the amount that the taxpayer's AMTI would have been 
if those IDCs had been taken into account.
    In addition, for corporations other than integrated oil companies, 
there is no ACE adjustment for IDCs with respect to oil and gas wells. 
That is, such a taxpayer is permitted to use its regular tax method of 
writing off those IDCs for purposes of computing its adjusted current 
earnings.
    Absent these rules, the incentive effect of the special provisions 
for oil and gas would be reduced for firms subject to the AMT. These 
rules, however, effectively eliminate AMT concerns for independent 
producers.

Passive activity loss and credit rules
    A taxpayer's deductions from passive trade or business activities, 
to the extent they exceed income from all such passive activities of 
the taxpayer (exclusive of portfolio income), generally may not be 
deducted against other income.\21\ Thus, for example, an individual 
taxpayer may not deduct losses from a passive activity against income 
from wages. Losses suspended under this ``passive activity loss'' 
limitation are carried forward and treated as deductions from passive 
activities in the following year, and thus may offset any income from 
passive activities generated in that later year. Losses from a passive 
activity may be deducted in full when the taxpayer disposes of its 
entire interest in that activity to an unrelated party in a transaction 
in which all realized gain or loss is recognized.
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    \21\ This provision applies to individuals, estates, trusts, 
personal service corporations, and closely held C corporations.
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    An activity generally is treated as passive if the taxpayer does 
not materially participate in it. A taxpayer is treated as materially 
participating in an activity only if the taxpayer is involved in the 
operations of the activity on a basis which is regular, continuous, and 
substantial.
    A working interest in an oil or gas property generally is not 
treated as a passive activity, whether or not the taxpayer materially 
participates in the activities related to that property. This exception 
from the passive activity rules does not apply if the taxpayer holds 
the working interest through an entity which limits the liability of 
the taxpayer with respect to the interest. In addition, if a taxpayer 
has any loss for any taxable year from a working interest in an oil or 
gas property which is treated pursuant to this working interest 
exception as a loss which is not from a passive activity, then any net 
income from such property (or any property the basis of which is 
determined in whole or in part by reference to the basis of such 
property) for any succeeding taxable year is treated as income of the 
taxpayer which is not from a passive activity.
    Similar limitations apply to the utilization of tax credits 
attributable to passive activities. Thus, for example, the passive 
activity rules (and, consequently, the oil and gas working interest 
exception to those rules) apply to the nonconventional fuels production 
credit and the enhanced oil recovery credit. However, if a taxpayer has 
net income from a working interest in an oil and gas property which is 
treated as not arising from a passive activity, then any tax credits 
attributable to the interest in that property would be treated as 
credits not from a passive activity (and, thus, not subject to the 
passive activity credit limitation) to the extent that the amount of 
the credits does not exceed the regular tax liability which is 
allocable to such net income.
    As a result of this exception from the passive loss limitations, 
owners of working interests in oil and gas properties may use losses 
from such interests to offset income from other sources.
Tertiary injectants
    Taxpayers are allowed to deduct the cost of qualified tertiary 
injectant expenses for the taxable year. Qualified tertiary injectant 
expenses are amounts paid or incurred for any tertiary injectant (other 
than recoverable hydrocarbon injectants) which is used as a part of a 
tertiary recovery method.
    The provision allowing the deduction for qualified tertiary 
injectant expenses resolves a disagreement between taxpayers (who 
considered such costs to be IDCs or operating expenses) and the IRS 
(which considered such costs to be subject to capitalization).
    This concludes our testimony. We would be pleased to answer any 
questions the Subcommittee may have.

                   ATTACHMENTS: NEPD GROUP PROPOSALS

    Extend and Modify Credit for Fuel Produced from Landfill Methane

Current Law
    Taxpayers that produce gas from biomass (including landfill 
methane) are eligible for a tax credit (``the section 29 credit'') 
equal to $3 per barrel-of-oil equivalent. For this purpose, a barrel-
of-oil equivalent is the amount of gas that has a Btu (British thermal 
unit) content of 5.8 million. To qualify for the credit, the gas must 
be produced domestically from a facility placed in service by the 
taxpayer before July 1, 1998, pursuant to a written binding contract in 
effect before January 1, 1997. In addition, the gas must be sold to an 
unrelated person before January 1, 2008.
    The amount of the section 29 credit generally is adjusted by an 
inflation adjustment factor for the calendar year in which the sale 
occurs. The inflation adjustment factor for the 2000 taxable year was 
2.0454, and the inflation-adjusted amount of the credit for that year 
was $6.14 per barrel or barrel equivalent. The credit begins to phase 
out if the annual average unregulated wellhead price per barrel of 
domestic crude oil exceeds $23.50 multiplied by the inflation 
adjustment factor. For 2000, the inflation adjusted threshold for onset 
of the phaseout was $48.07 ($23.50 x 2.0454) and the average wellhead 
price for that year was $26.73.
    The amount of the section 29 credit allowable with respect to a 
project is reduced by any unrecaptured business energy tax credit or 
enhanced oil recovery credit claimed with respect to such project.
    The section 29 credit may not be used to offset alternative minimum 
tax liability. Any unused section 29 credit generally may not be 
carried back or forward to another taxable year; however, a taxpayer 
receives a credit for prior year minimum tax liability to the extent 
that a section 29 credit is disallowed as a result of the operation of 
the alternative minimum tax. The credit is limited to what would have 
been the regular tax liability but for the alternative minimum tax.

Reasons for Change
    The tax credit helps make fuel produced from landfill methane 
competitive with other fuels. Extending the credit would continue the 
important contribution of this renewable energy source to the Nation's 
long-term energy supply.

Proposal
    The credit would be allowed for fuel produced from landfill methane 
if the fuel is produced from a facility (or portion of a facility) 
placed in service after December 31, 2001, and before January 1, 2011, 
and is sold (or used to produce electricity that is sold) before 
January 1, 2011. The credit for fuel produced at landfills subject to 
EPA's 1996 New Source Performance Standards/Emissions Guidelines would 
be limited to two-thirds of the otherwise applicable amount beginning 
on January 1, 2008, if any portion of the facility for producing fuel 
at the landfill was placed in service before July 1, 1998, and 
beginning on January 1, 2002, in all other cases. The proposal would 
clarify, for purposes of determining the extent to which a facility is 
placed in service after December 31, 2001, that the facility includes 
the wells, pipes, and related components used to collect landfill 
methane and that only production attributable to wells, pipes, and 
related components placed in service after December 31, 2001, is 
treated as produced from the portion of the facility placed in service 
after that date.

                Extension of Tax Incentives for Ethanol

Current Law
    Current law provides an income tax credit and an excise tax 
exemption for ethanol and renewable source methanol used as a fuel. In 
general, the income tax credit for ethanol is 53 cents per gallon, but 
small ethanolproducers (i.e., those producing less than 30 million 
gallons of ethanol per year) qualify for a credit of 63 cents per 
gallon on the first 15 million gallons of ethanol produced in a year. A 
credit of 60 cents per gallon is allowed for renewable source methanol.
    As an alternative to the income tax credit, gasohol blenders may 
claim a gasoline tax exemption of 53 cents for each gallon of ethanol 
and 60 cents for each gallon of renewable source methanol that is 
blended into qualifying gasohol.
    The income tax credit expires on December 31, 2007, and the excise 
tax exemption expires on September 30, 2007. In addition, the ethanol 
credit and exemption are each reduced by 1 cent per gallon in 2003 and 
by an additional 1 cent per gallon in 2005. Neither the credit nor the 
exemption applies during any period in which motor fuel taxes dedicated 
to the Highway Trust Fund are limited to 4.3 cents per gallon. Under 
current law, the motor fuel tax dedicated to the Highway Trust Fund 
will be limited to 4.3 cents per gallon beginning on October 1, 2005.

Reasons for Change
    The tax credit and excise tax exemption help make ethanol and 
renewable source methanol competitive with other fuels. Extending the 
credit and exemption would continue the important contribution of these 
renewable energy sources to the Nation's long-term energy supply.

Proposal
    The income tax credit and the excise tax exemption would be 
extended through December 31, 2010. The current law rule providing that 
neither the credit nor the exemption applies during any period in which 
motor fuel taxes dedicated to the Highway Trust Fund are limited to 4.3 
cents per gallon would be retained. As under current law, the credit 
and the exemption would each be reduced by 1 cent per gallon in 2003 
and by an additional 1 cent per gallon in 2005.

      Provide Tax Credit for Certain Hybrid and Fuel Cell Vehicles

Current Law
    No generally available income tax credit for purchases of hybrid 
vehicles is available currently. A 10-percent tax credit is provided 
for the cost of a qualified electric vehicle, up to a maximum credit of 
$4,000. A qualified electric vehicle is a motor vehicle that is powered 
primarily by an electric motor drawing current from rechargeable 
batteries, fuel cells, or other portable sources of electric current, 
the original use of which commences with the taxpayer, and that is 
acquired for use by the taxpayer and not for resale. The full amount of 
the credit is available for purchases prior to 2002. The credit begins 
to phase down in 2002 and does not apply to vehicles placed in service 
after 2004.
    Certain costs of qualified clean-fuel property, including clean-
fuel vehicles, may be deducted when such property is placed in service. 
Qualified electric vehicles do not qualify for the clean-fuel vehicle 
deduction. The deduction begins to phase down in 2002 and does not 
apply to property placed in service after 2004.

Reasons for Change
    The transportation sector now accounts for 67 percent of U.S. oil 
consumption. Cars, sport utility vehicles, light trucks, and minivans 
alone account for 40 percent of U.S. oil consumption, about 20 to 40 
percent of all urban smog-forming emissions and 20 percent of 
greenhouse gas emissions. Almost all of these vehicles use a single 
gasoline-fueled engine.
    Hybrid vehicles, which have more than one source of power on board 
the vehicle, and electric vehicles have the potential to reduce 
petroleum consumption, air pollution, and greenhouse gas emissions. The 
proposed credits will encourage the purchase of highly fuel efficient 
vehicles that incorporate advanced automotive technologies and will 
help to move hybrid and fuel cell vehicles from the laboratory to the 
highway. These vehicles can significantly reduce oil consumption, 
emissions of air pollutants, and emissions of carbon dioxide, the most 
prevalent greenhouse gas.

Proposal
    The proposal would provide temporary tax credits for certain hybrid 
and fuel cell vehicles:
          (1) Credit for qualified hybrid vehicles. A credit, of up to 
        $4,000, would be available for purchases of qualified hybrid 
        vehicles after December 31, 2001, and before January 1, 2008. 
        The credit would be:
          (a) $250 if the rechargeable energy storage system provides 
        at least 5 percent but less than 10 percent of the maximum 
        available power;
          (b) $500 if the rechargeable energy storage system provides 
        at least 10 percent and less than 20 percent of the maximum 
        available power;
          (c) $750 if the rechargeable energy storage system provides 
        at least 20 percent and less than 30 percent of the maximum 
        available power; and
          (d) $1,000 if the rechargeable energy storage system provides 
        30 percent or more of the maximum available power.
    If the vehicle's fuel economy exceeds the 2000 model year city fuel 
economy, the amount of credit shown in (a) through (d) above would be 
increased by the following amounts:
          (i) $500 if the vehicle achieves at least 125 percent but 
        less than 150 percent of the 2000 model year city fuel economy;
          (ii) $1,000 if the vehicle achieves at least 150 percent but 
        less than 175 percent of the 2000 model year city fuel economy;
          (iii) $1,500 if the vehicle achieves at least 175 percent but 
        less than 200 percent of the 2000 model year city fuel economy;
          (iv) $2,000 if the vehicle achieves at least 200 percent but 
        less than 225 percent of the 2000 model year city fuel economy;
          (v) $2,500 if the vehicle achieves at least 225 percent but 
        less than 250 percent of the 2000 model year city fuel economy; 
        and
          (vi) $3,000 if the vehicle achieves at least 250 percent of 
        the 2000 model year city fuel economy.
          (2) Credit for qualified fuel cell vehicles. A credit of up 
        to $8,000 would be available for the purchase of new qualified 
        fuel cell vehicles after December 31, 2001, and before January 
        1, 2008. The credit would be $4,000, but, if the vehicle's fuel 
        economy exceeds the 2000 model year city fuel economy, the 
        credit would increase by the following amounts:
          (i) $1,000 if the vehicle achieves at least 150 percent but 
        less than 175 percent of the 2000 model year city fuel economy;
          (ii) $1,500 if the vehicle achieves at least 175 percent but 
        less than 200 percent of the 2000 model year city fuel economy;
          (iii) $2,000 if the vehicle achieves at least 200 percent but 
        less than 225 percent of the 2000 model year city fuel economy;
          (iv) $2,500 if the vehicle achieves at least 225 percent but 
        less than 250 percent of the 2000 model year city fuel economy;
          (v) $3,000 if the vehicle achieves at least 250 percent but 
        less than 275 percent of the 2000 model year city fuel economy;
          (vi) $3,500 if the vehicle achieves at least 275 percent but 
        less than 300 percent of the 2000 model year city fuel economy; 
        and
          (vii) $4,000 if the vehicle achieves at least 300 percent of 
        the 2000 model year city fuel economy.
          The 2000 model year city fuel economy would be the following:

------------------------------------------------------------------------
                                                The 2000 model year city
                                                    fuel economy is:
                                               -------------------------
    If the vehicle inertia weight class is:        For a
                                                 passenger   For a light
                                                automobile:     truck:
------------------------------------------------------------------------
1,500 or 1,750 lbs............................     43.7 mpg     37.6 mpg
2,000 lbs.....................................     38.3 mpg     33.7 mpg
2,250 lbs.....................................     34.1 mpg     30.6 mpg
2,500 lbs.....................................     30.7 mpg     28.0 mpg
2,750 lbs.....................................     27.9 mpg     25.9 mpg
3,000 lbs.....................................     25.6 mpg     24.1 mpg
3,500 lbs.....................................     22.0 mpg     21.3 mpg
4,000 lbs.....................................     19.3 mpg     19.0 mpg
4,500 lbs.....................................     17.2 mpg     17.3 mpg
5,000 lbs.....................................     15.5 mpg     15.8 mpg
5,500 lbs.....................................     14.1 mpg     14.6 mpg
6,000 lbs.....................................     12.9 mpg     13.6 mpg
6,500 lbs.....................................     11.9 mpg     12.8 mpg
7,000 or 8,500 lbs............................     11.1 mpg     12.0 mpg
------------------------------------------------------------------------

    The ``vehicle inertia weight class'' is defined in regulations 
prescribed by the Environmental Protection Agency for purposes of title 
II of the Clean Air Act.
    A qualifying hybrid vehicle is a motor vehicle that draws 
propulsion energy from on-board sources of stored energy which are 
both: (1) an internal combustion engine or heat engine using 
combustible fuel, and (2) a rechargeable energy storage system. A 
qualifying fuel cell vehicle is a motor vehicle that is propelled by 
power derived from one or more cells which convert chemical energy 
directly into electricity by combining oxygen with hydrogen fuel which 
is stored on board the vehicle and may or may not require reformation 
prior to use. A qualifying vehicle must meet all applicable regulatory 
requirements.
    Maximum available power means the maximum value available from the 
battery or other energy storage device, during a standard power test, 
divided by the sum of the battery or other energy storage device and 
the SAE net power of the heat engine.
    These credits would be available for all qualifying light vehicles 
including cars, minivans, sport utility vehicles, and light trucks. 
Taxpayers would be able to claim only one of the credits per vehicle 
and taxpayers who claim either credit would not be able to claim the 
qualified electric vehicle credit or the deduction for clean-fuel 
vehicle property for the same vehicle. Business taxpayers claiming 
either credit would be subject to the limitations on the general 
business credit and would be required to reduce the basis of the 
vehicle by the amount of the credit.

      Investment Credit for Combined Heat and Power (CHP) Systems

Current law
    Combined heat and power (CHP) systems are used to produce 
electricity (and/or mechanical power) and usable thermal energy from a 
single primary energy source. Depreciation allowances for CHP property 
vary by asset use and capacity. Assets employed in the production of 
electricity used by the taxpayer in an industrial manufacturing process 
or plant activity (and not ordinarily available for sale to others) 
have a general cost recovery period of 15 years if rated with total 
capacity in excess of 500 kilowatts. Electricity production assets of 
lesser-rated capacity generally are classified with other manufacturing 
assets and have cost recovery periods of five to ten years. Assets used 
in the production of electricity for sale have either a 15-year or 20-
year recovery period. For assets that are structural components of 
buildings, however, the recovery period is either 39 years (if 
nonresidential) or 27.5 years (if residential), and the straight-line 
method for computing depreciation allowances must be used. For assets 
with recovery periods of 10 years or less, the 200 percent declining 
balance method may be used to compute depreciation allowances. The 150 
percent declining balance method may be used for assets with recovery 
periods of 15 or 20 years. No income tax credit is provided currently 
for investment in combined heat and power property.

Reasons for change
    Combined heat and power systems utilize thermal energy that is 
otherwise wasted in producing electricity by more conventional methods. 
CHP systems achieve a greater level of overall energy efficiency, and 
thereby lessen the consumption of primary fossil fuels, lower total 
energy costs, and reduce carbon emissions. An investment tax credit for 
CHP assets is expected to encourage increased energy efficiency by 
accelerating planned investments and inducing additional investments in 
such systems. The increased demand for CHP equipment should, in turn, 
reduce CHP production costs and spur additional technological 
innovation in improved CHP systems.

Proposal
    The proposal would establish a 10-percent investment credit for 
qualified CHP systems with an electrical capacity in excess of 50 
kilowatts or with a capacity to produce mechanical power in excess of 
67 horsepower (or an equivalent combination of electrical and 
mechanical energy capacities). CHP property would be defined as 
property comprising a system that uses the same energy source for the 
simultaneous or sequential generation of (1) electricity or mechanical 
shaft power (or both) and (2) steam or other forms of useful thermal 
energy (including heating and cooling applications). A qualified CHP 
system would be required to produce at least 20 percent of its total 
useful energy in the form of thermal energy and at least 20 percent of 
its total useful energy in the form of electrical or mechanical power 
(or a combination thereof) and would also be required to satisfy an 
energy-efficiency standard. For CHP systems with an electrical capacity 
in excess of 50 megawatts (or a mechanical energy capacity in excess of 
67,000 horsepower), the total energy efficiency of the system would 
have to exceed 70 percent. For smaller systems, the total energy 
efficiency would have to exceed 60 percent. For this purpose, total 
energy efficiency would be calculated as the sum of the useful 
electrical, thermal, and mechanical power produced by the system at 
normal operating rates, measured on a Btu basis, divided by the lower 
heating value of the primary fuel source for the system supplied. The 
credit would be allowed with respect to qualified CHP property only if 
its eligibility is verified under regulations prescribed by the 
Secretary of the Treasury.
    Investments in qualified CHP assets that are otherwise assigned 
cost recovery periods of less than 15 years would be eligible for the 
credit, provided that the taxpayer elected to treat such property as 
having a 22-year class life. Thus, regular tax depreciation allowances 
would be calculated using a 15-year recovery period and the 150 percent 
declining balance method.
    The credit would be treated as an energy credit under the 
investment credit component of the section 38 general business credit, 
and would be subject to the rules and limitations governing that 
credit. Taxpayers using the credit for CHP equipment would not be 
entitled to any other tax credit for the same equipment.
    The credit would apply to investments in CHP equipment placed in 
service after December 31, 2001, but before January 1, 2007.

                                

             Statement of the American Soybean Association

    The American Soybean Association (ASA) appreciates the opportunity 
to present written testimony to the House Ways and Means Subcommittee 
on Select Revenue Measures regarding our proposal to provide a partial 
exemption to the diesel fuel excise tax to diesel fuel suppliers who 
use blends of biodiesel. The amount of the exemption would be three 
cents for diesel fuel containing two percent biodiesel. We also propose 
to provide 20 cents for diesel fuel containing twenty percent or higher 
blends of biodiesel.
    This approach is similar to the partial tax exemption for ethanol, 
which provides a 5.4-cent exemption for gasoline that contains ten 
percent ethanol. Biodiesel and ethanol are complementary renewable 
fuels, since they are sold in separate fuel markets.
    One of the first concerns with excise tax exemptions is the lost 
revenue to the Highway Trust Fund. ASA isvery sensitive to the needs of 
highway users, and proposes to reimburse the Trust Fund with USDA's 
Commodity Credit Corporation (CCC). The cost to the CCC would be 
offset, at least initially, by savings realized in the cost of the 
soybean marketing loan program brought about by higher soybean prices 
from the increased use of soybean oil in biodiesel.
    For example, if 100 million gallons of biodiesel were used under 
this program, it would be blended at two percent per gallon into five 
billion gallons of diesel fuel. At a cost of three cents per gallon, 
the cost of the incentive would be $150 million.
    Soybean oil is a primary feedstock for biodiesel production. 
Assuming soyoil use in our example, reduced soybean oil surpluses will 
result in higher soybean prices, which will reduce CCC outlays under 
the soybean marketing loan program. Using a conservative 13 cents per 
bushel impact on price, the savings for this year's estimated 2.75 
billion bushel soybean crop would be $357 million. Our proposal will 
save more than two dollars for each dollar it costs.
    The Congressional Budget Office (CBO) baseline released in December 
2000 estimated that the CCC would incur the following costs (in 
billions) by fiscal year for the soybean marketing loan program:

------------------------------------------------------------------------
    FY02         FY03        FY04        FY05        FY06        FY07
------------------------------------------------------------------------
      $3.3         $3.3        $3.3        $3.0        $2.3        $0.9
------------------------------------------------------------------------

    These figures indicate that sufficient CCC funds will be available 
to offset the cost of our proposal to the Highway Trust Fund. It also 
is clear that stimulating demand for biodiesel through a tax incentive 
and thereby reducing farm program costs by more than two dollars for 
every dollar spent under the tax incentive is good fiscal policy. 
Additionally, development of the biodiesel industry and the further use 
of biodiesel in fuel will help address our nation's future energy 
needs.
    Mr. Chairman, the biodiesel industry believes that the timing is 
right for this proposal. For the last ten years U.S. soybean growers 
have invested in the research, development and commercialization of 
biodiesel. Biodiesel is a mono-alkyl ester-based oxygenated fuel. It 
contains no petroleum but can easily be blended with petroleum. 
Biodiesel is typically blended at the 20% level with diesel or at the 
2% or lower levels. It can be used in compression-ignition, diesel 
engines with no major modifications. Biodiesel in its neat or pure form 
is biodegradable and nontoxic, and is the first and only alternative 
fuel to meet EPA's Tier I and II health effects testing standards. 
Biodiesel is renewable and domestically produced from agricultural 
resources, including soybean oil.
    Biodiesel has many environmental and operational benefits. However, 
I would like to highlight the fuel's lubricity benefits. Even at very 
low blends, biodiesel contributes operational and maintenance benefits 
to diesel engines. This is even more significant when using ultra-low 
sulfur diesel.
    The Administration has decided to move forward with an EPA proposal 
to reduce the sulfur content of highway diesel fuel by over 95%, from 
its current level of 500 parts per million to 15 ppm. Biodiesel has no 
sulfur or aromatics, and tests have documented its ability to increase 
fuel lubricity significantly when blended with petroleum diesel fuel, 
even at less than one percent.
    Soybean growers began to invest in biodiesel because of the 
economics of the soybean industry. Soybeans are widely produced for the 
protein feed provided by in soybean meal. It is the plant protein of 
choice in the pork and poultry industries, leaving soybean oil as a 
valuable but abundant co-product. Because of large supplies of 
vegetable oils in the world market, we have a large surplus of soybean 
oil in the domestic market, which depresses the price of the whole 
soybean.
    Several years ago, ASA recognized that the traditional approach of 
riding out a depressed market by storing surplus soybean oil until 
better times was not going to work. The industry had to do more. It 
needed to be proactive and aggressive in developing new markets. 
Through our state and national check off programs soybean growers began 
investing in the development of new uses of soybean oil. Several of the 
products are widely accepted in the marketplace, such as soy ink, and 
others are just reaching acceptance, such as biodiesel, solvents, 
lubricants and other fluids.
    While biodiesel as a fuel is relatively new to our country, it is 
widely accepted and utilized in Europe, where motorists consume 250 
million gallons annually. Our biodiesel industry leaders have worked 
closely with the European industry by sharing research, performance 
data and consumer information. The European biodiesel industry is 
strongly supported by government and by agribusiness. In fact, several 
major U.S. oilseed processors are producing biodiesel in Europe.
    While biodiesel offers environmental, energy security, and economic 
development benefits, it is not yet cost-competitive in the U.S. Public 
support is needed to help the industry develop. ASA strongly believes 
that our nation needs an aggressive energy policy that includes 
renewable fuels and power generation as well as significant domestic 
production of oil and natural gas.

                                

Statement of the Hon. Susan A. Davis, a Representative in Congress from 
                        the State of California
    Mr. Chairman, Distinguished Members of the Subcommittee:
    Thank you for the opportunity to present my forthcoming bill, the 
Renewable Energy Act for Credit on Taxes.
    This is a tax credit to be given for investments in renewable 
energy systems based on solar, wind, or fuel cells providing up to 
$4.50 per Watt of electricity produced, capped at the lesser of 35% of 
the cost of the system or $6000 for residences and $50,000 for 
commercial enterprises. It would sunset in four years.
    I would like to answer six key questions about this proposal:
    1. Why renewable energy?
    2. Why now?
    3. Why residential and small commercial?
    4. Why solar, wind, and fuel cell?
    5. Why this method and these numbers?
    6. What else is needed to make this program effective?
    The recent ABC poll showed that 90% of the public support increased 
investment in renewable energy sources. In its National Energy Policy 
the administration has identified the need for investment in renewable 
sources. Clearly, a large number of members of Congress, including 
those from whom you have heard today, have given a great deal of 
thought to this issue and have constructed programs which they believe 
will meet this public policy goal.
    I do not need to reiterate the importance of weaning America from 
its dependence on fossil fuels or to make the argument about pollution 
of the atmosphere. There is a common belief that we will need more 
energy, more readily available at peak times throughout our country in 
the near future. However, development of long term fossil fuel sources 
is not a strategy to address the short or near-term needs for energy 
supplies.
    I offer an alternative focus, partly because I have been working on 
this issue steadily in California for the last year, and I believe it 
should be clear that responding to the shape of this supply-side need 
requires actions that will supply more energy at peak periods in the 
short run. Our experience in California has been that, without 
increasing the demand for energy during the peak periods of the year, 
we suddenly found ourselves with an inadequate supply of energy. The 
reasons that existing energy plants were not producing energy when 
needed is not the focus here. The issue is that one has to provide more 
peak load resources.
    One of the problems encountered last summer was that when the 
normal pattern failed, the ability to transfer power between states was 
inadequate. There were also transfer points within the state that 
prevented power available in Southern California to be shared with 
needs in Northern California. There has been a general call to build 
additional transmission lines. However, these are both costly and time-
consuming to site, and in the long run the need may be reduced and 
perhaps avoided. I understand that a number of companies are nearing 
commercial application of new transmission cabling technology that will 
increase the capacity of presently sited transmission lines.
    Not only are there transmission capacity and transfer problems, but 
it appears that the very complex system of grids nationally and the 
oversight, financing, and regulatory responsibility are in need of 
major review and improvement to meet near-term as well as long-term 
needs. This issue merits study and solution, but it also makes clear 
that in the short and near term we must increase that production of 
power where it will be used.
    I believe it is clear that America needs a multi-faceted approach 
to meeting our energy needs, targeted to different time frames and 
using different resources. New, full-sized plants must be built, but 
they take several years to come on line. Co-generation plants can be 
built much more quickly and are currently cost competitive. They must 
be encouraged for large sites, such as college campuses and large 
office buildings. Although they supply power on the site used and avoid 
transmission congestion, most plants rely on natural gas as a supply. 
This further exacerbates the existing supply/cost and pipeline capacity 
problem. In addition, energy efficient buildings must be promoted both 
in new construction and in retrofitting. In particular, schools and 
government buildings should lead in this effort. Finally, conservation 
of all sorts must be practiced. Not only are 90% of citizens supportive 
of conservation, but also in California the record of 11% reduction in 
demand in May shows that citizens will take action.
    All of these methods are helpful, but, in the near term, it is 
evident that we need to give additional incentives to power sources 
that can be put into operation relatively quickly, locally, produce 
power at peak times and use renewable energy sources. The 
administration's National Energy Policy states, ``Photovoltaic solar 
distributed energy is a particularly valuable energy generation source 
during times of peak use of power.'' [p. 6-10] I believe that this 
source meets all four policy goals; therefore, I have focused on 
increasing locally produced solar energy.
    Under-used locations for increased production of power are homes 
and businesses. Owners have not invested in personal energy systems in 
part because they did not have an energy pricing incentive to do so as 
the systems themselves may have been too costly to provide a reasonable 
return on the investment. I believe that this gap can be bridged by 
using tax incentives to motivate additional private investment in power 
based on renewable resources and provide energy where it will be used 
in order to reduce demand on the current transmission systems, 
particularly at peak load times. The key concepts are ``on-site'' 
production and ``environmentally sound sources.'' The benefit is a 
continuing stream of power without continued cost for purchase of fuel.
    One type, solar power for water heating, has been used extensively 
in the West over many years because it has been a good investment. 
Although solar water heating also removes energy load from the system, 
alone it has not made a large dent in over-all demand. Yet, it 
demonstrates the willingness of owners to make this investment in 
appropriate circumstances.
    Now, newer materials and more reliable systems have become 
available to make individual photovoltaic systems attractive as well. 
In April a solar demonstration home was built on the Washington Mall 
that not onlyincorporated many energy saving designs but also employed 
a solar energy system with back-up batteries. The system was designed 
to meet the household's energy needs (facilitated, to be sure, by the 
energy efficient design of the building and choice of Energy Star 
appliances and lighting which would decrease the demand.) The 
additional cost for the solar system for this large, three-bedroom, two 
story home was given as $30,000.
    As a newly built home, after being moved to another site, the cost 
would become part of the value of the house and could be included in 
the mortgage an owner would obtain. Clearly, it is possible for a great 
many new homes to be built in this way. The question is how to motivate 
a buyer to choose this house over a similar one without the solar 
energy but at a price $30,000 less. Although future energy savings will 
pay back the investment over enough years, additional incentives would 
be needed to make it a sound investment today. A refundable tax credit 
that would convey to the original purchaser of the house can fill that 
margin. An owner of an existing home or business could also be 
encouraged to invest in a renewable energy system, although the 
opportunity for funding through a second mortgage or line of credit may 
be somewhat more costly.
    Is a federal tax credit enough to encourage a homeowner to make 
this investment? Here is a possible financial scenario. Under my bill, 
the owner of an existing home comparable to the Mall home could invest 
in a similar system providing 4 kWh of electricity per year, with 
battery back-ups. Based on that amount of output, under my bill 
allowing for $4.50 per kWh, the system would qualify for $18,000 of the 
cost; however, the proposed cap in my bill would be the lesser of 35% 
of the cost or $6,000, leaving $24,000 of uncovered cost.
    Although there would be price savings over time, it might not be a 
prudent investment. However, some states and municipalities have 
additional rebates. California, for example, has a rebate program also 
measured at the $4.50 per kWh rate--but capped at 50% of the cost; it 
would rebate approximately $15,000 in this case. Thus, the California 
homeowner combining the two programs would be paying only $9,000 of 
that cost. Without the California rebate, however, a homeowner could 
buy a system of half the capacity at $15,000 and have approximately 
$9,750 net cost.
    Just how attractive this investment would be has many variables 
based on the current local cost of power, the cost of credit, and the 
individual's monthly energy use that affect the length of time required 
for the investment to pay for itself. In the California house 
comparable to the Mall demonstration house, depending on other energy 
efficiency attributes, that household might use more power than 
provided by a system that size. Nonetheless, the owner could 
potentially reduce current electricity costs by 50% to 100% and provide 
a full return of that investment in five to ten years, depending on the 
cost of power where it was located. In a state without a rebate 
program, the homeowner choosing a system half the size supplying half 
as much power would of course require twice the time for return on the 
investment.
    For businesses in non-rebate localities, the difference would be 
that with a cap of $50,000 the owner could purchase about 20 kWh of 
electricity for an additional $100,000. Again, the attractiveness 
depends on interest costs and local prices.
    The advantage of a solar solution in terms of public policy is that 
in many locations the solar energy is most available when it is most 
needed--in the summer in the middle of the day. Obviously, not every 
climate makes this investment worthwhile, nor does every home or 
business have the appropriate roof size facing the required direction 
for currently available applications.
    Because of regional variations in weather, I have also included 
wind systems. Presently, a new generation of larger, more efficient and 
cheaper commercial systems are available for wind farms. Assuming that 
the current program that expires December 31 is reauthorized, a rebate 
of 1.7 cents per kWh produced is given at the end of the year. At the 
present time, the net price is competitive with other types of power 
sold in the western market. Entrepreneurial businesses are putting 
together funding mechanisms and equipment to build additional wind 
farms. These will add to long-term needs, but applicable sites are 
limited and often require extensive time for permitting.
    For individuals, the production tax credit is not an attractive 
financial incentive since the owner is using the product not selling 
it. Thus, a tax credit on the system's cost is the appropriate 
mechanism. There are applications available suitable for residences and 
businesses, not all of which require a tower and wind turbine system. 
Wind machines that look like a typical roof top vent can also create 
wind power, although each one may supply only one kWh of power, and 
several would be required. Once again, this is not a system that can 
necessarily take over all of the needs of a household or business 
because in most locations wind power is not a constant. However, it is 
a potential addition to the nation's energy supply that has the two key 
attributes--on-site generation and a renewable, non-polluting energy 
source.
    Finally, I have included fuel cells for this funding. At the 
present time, these are marginally available for home application. 
However, again, the technology is in process, and fuel cells can 
provide a non-polluting source of on-site energy.
    Regarding the financing mechanisms in this bill, I have chosen a 
tax credit rather than a grant program as providing a less 
bureaucratically complicated funding mechanism that is readily 
understood by and accessible to a taxpayer. I have made it a refundable 
credit, as it is the policy to create incentives for an investment that 
decreases demand. The details of a particular individual's tax 
obligation is unrelated to meeting that policy goal. I have given a 
sunset to the bill in the belief, first, that our need is immediate and 
that the home or business owner should consider this as an option that 
requires current action. Second, any program should be reviewed after a 
reasonable time for its success and appropriate renewal.
    Basing the payment on a verified, standards-based kilowatt/hour 
output assures that the funds are buying a desired quantity of 
generation. The amount is chosen to be comparable to the rates for the 
California program and to bear a cost-based relation to commercial 
prices for these types of systems per kilowatt hour. The cap was 
selected from the perception that they would be sufficient to motivate 
an owner to make a decision that he was not otherwise financially able 
to choose purely out of a desire to add to the nation's renewable 
energy sources.
    To make these self-supplied energy sources viable, some additional 
mechanisms are required. I am aware that they are covered in other 
bills that have been submitted, and I have signed as a co-author. 
First, there must be a net metering system required for all 
jurisdictions. One of the greatest disincentives to providing 
individual renewable energy systems has been the unwillingness of 
commercial utilities to allow individuals to come onto their system and 
reduce their use of the utility's product. Charging high prices for the 
connection has been their practice. Reasonable charges for connection 
and for transmission must be a basis for fair pricing and must be both 
monitored and controlled by the appropriate agencies.
    The value, particularly of solar energy systems, is that a personal 
system not only supplies power to its household, but it may have an 
oversupply which is then given to the grid (net metering) in return for 
possible use from the grid when the solar system may not be fully 
operative and back-up batteries are insufficient--at night and in bad 
weather. Utilities may, but have not been required to, pay an 
individual where this net metering system results at the end of the 
month in a surplus added to the grid. From a policy standpoint, the 
producer even of this excess supply should be valued at some level.
    In sum, right now and as our population grows, more energy 
generation will be needed, particularly at peak-load times. For the 
next decade or so, energy providers may need to continue building low-
polluting generating plants using non-renewable sources, in part to 
decommission older, more polluting plants. During that time and with 
government investment in Research, Development, and Demonstration, we 
need to achieve economically viable technologies based on renewable 
sources. However, we will also benefit both now and in the future by 
giving financial incentives to individuals both in their residences and 
in their businesses to meet at least some of their energy needs in the 
short term through personal systems. We will benefit from having on-
site energy production that can be installed in a short time frame, 
produces energy at times of peak use, does not require transmission, 
and is based on non-polluting, renewable sources.
    Thank you for the opportunity to appear before you today to present 
this proposal. I appreciate your time and attention.

                                

 Statement of the Hon. Martin Frost, a Representative in Congress from 
                           the State of Texas
    Thank you Mr. Chairman for allowing me the opportunity to testify 
before you today. I appreciate the fact your Subcommittee is holding 
this hearing in order to explore the many tax proposals introduced by 
Members relating to the discovery, production, transportation, 
generation, and end-use of power. Given the current focus on these 
issues as a result of the West Coast electricity situation, and the 
President's own description of the national ``crisis'' we are facing, 
these hearings are indeed timely.
    As Chairman of the Democratic Caucus, I have over the last 18-
months chaired the Democratic Caucus Task Force on Energy. Our Task 
Force is composed of Members from all parts of the country representing 
a diverse spectrum of political views. While we all do not necessarily 
agree on all aspects of energy policy, there is a strong agreement in 
our Caucus that this Nation's energy needs can be met through a 
combination of increased production, use of alternative and renewal 
energy sources, and through energy efficiency and conservation. We 
believe national polls have shown that the American people agree with 
our focus on a balanced approach to solving our Nation's energy needs 
in the 21st Century.
    Last month our Caucus released a report prepared by the Caucus 
Energy Task Force that outlines our view of what energy policy should 
look like. While not everyone agrees with every part of the report, I 
believe, on balance it represents a good starting point for any 
discussion of how we should be addressing the energy problems we 
currently face. Please notice I have termed the current situation as a 
problem and not as a crisis, as has President Bush. While he and I both 
hail from Texas, a major energy producing state, I cannot agree with 
him that we are facing a crisis. And I do not believe most of my 
colleagues from Texas or other oil patch states would agree we are in a 
crisis mode. We do believe however, along with our colleagues from the 
North, the West, the Midwest, and the South, that the Congress, working 
with the Administration and the private sector, can find solutions to 
problems that might become crises if they are not addressed adequately 
and if they are not addressed in the short-term with long-term results 
in mind.
    Our report calls for very specific actions that will lead to 
increased energy supply as well as increases in conservation and energy 
efficiencies. We do not believe energy problems can be solved without 
concentrating on both supply and demand. We also reject the notion that 
the environment must be sacrificed in order to maximize production and 
generation. As stated in our report, ``Democrats strongly object to 
President Bush's assertions that the substantial improvements made in 
cleaning the air we breathe, cleaning the water we drink, or improving 
our public health must be sacrificed in order to ensure adequate energy 
will be available to fuel our industries, heat or cool our homes and 
businesses, and keep motorists on the road * * *. Democrats support a 
plan that recognizes the need for new energy production and generation, 
and will at the same time save consumers money, continue the important 
work to cut pollutants that affect the health of every American, create 
real jobs, and will reduce the percentage of imported foreign oil we 
need to keep our economy strong and to protect our national security.'' 
(Principles for Energy Prosperity: Helping Consumers, Promoting Growth 
& Protecting the Environment, House Democratic Caucus, May 15, 2001)
    Our report calls for several tax incentives that will promote both 
increased domestic energy production as well as enhanced conservation 
and energy efficiency in homes and businesses.
    First, we believe the independent domestic oil and gas industry 
needs greater market stability in order to maintain and increase 
domestic production of oil and gas resources. We endorse a number of 
tax incentives for the domestic industry embodied in H.R. 805, a bill 
sponsored by my Republican colleague from Texas, Mac Thornberry as well 
as my colleagues Ralph Hall, Charlie Stenholm, and Max Sandlin. These 
targeted tax incentives are designed to insure that the domestic 
production of oil and gas does not suffer long-term damage in times 
when the price of a barrel of oil drops so low it is impossible for 
small producers to continue to exploreand produce. When these producers 
are forced to cap wells, lay off their crews and cannibalize their 
equipment, it becomes extremely difficult for them to retool or reopen 
their wells once the price rises to more profitable levels. The 
President and the Vice President, both veterans of the oil industry, 
should understand the difficulties small producers experience in times 
of price swings, yet the President's energy plan contains no tax 
provisions that will help smaller domestic producers continue to 
produce oil and gas domestically. We believe this Committee should give 
the Thornberry bill every consideration when forming a legislative 
proposal.
    Secondly, we have called for the creation of a Best Energy Saving 
Tax Credit (BEST Credit) which would help consumers by providing a 
flexible tax credit of up to $4,000 for new homes meeting certain 
energy efficiency criteria, up to 20 percent of cost up to $4,000 for 
the retrofitting of existing homes or the replacement of existing 
heating and cooling systems, appliances, lighting, windows, doors, and 
insulation that meet or exceed federal guidelines; and a credit of up 
to $4,000 for the purchase of vehicles utilizing new technologies or 
alternative fuel engines.
    We also call for assisting American businesses reduce their energy 
costs and thus increase their profitability through the creation of a 
Structure and Vehicle Efficiency Tax Incentive (SAVE Incentives). Our 
plan would create an investment tax credit of up to 30 percent of the 
cost of the purchase of renewable energy generation, including wind 
turbines, co-generation, solar water heating and photovoltaic panels, 
fuel cells, geothermal technologies and other similar energy efficient 
technologies. We would create a business deduction of up to $2.25 a 
square foot for property improvements that reduce energy use by 50 
percent below defined standards. Finally, the SAVE Incentives would 
provide a 20 percent investment tax credit for the purchase of cars 
and/or light trucks/SUV's/minivans equipped with fuel-saving new 
technology or alternative fuel engines.
    Democrats understand that coal is currently the source for over 50 
percent of America's electricity generation, but at the same time we 
remain concerned about the emissions coming from coal-fired plants. 
While there have been encouraging strides made to reduce those 
emissions, we have called for the creation of an EXCEED Tax Credit 
which would provide a ten percent investment tax credit for the cost of 
clean air control technology for utilities that lead a power plant to 
exceed mandatory emissions reductions levels for pollutants regulated 
under Title I of the Clean Air Act, or for significant early compliance 
with clean air emissions reduction target dates. We would also extend 
this credit to those technologies that cap their CO2 emissions at 2000 
levels. And, important to rural America, we would permit public 
utilities and coops to trade these credits or use them as offsets 
against debt or obligations.
    Also very important to rural America and the farming industry, we 
support an investment tax credit of up to ten percent for modifications 
made to existing coal plants to allow the use of biomass and/or 
synthetic liquid or gaseous fuels form coal, in combination with coal 
to produce at least five and up to 15 percent of a plant's fuel 
requirements.
    Finally, our report calls for continued investments tax credits for 
renewable energy sources. We support increasing the existing investment 
credit for renewable energy infrastructure to 20 percent for solar and 
geothermal, and extending the credit to wind, biomass, and other energy 
produced form renewable resources. We also call for increasing the 
current tax credit for producing electricity to 2 cents per kilowatt 
hour for electricity produced from wind and biomass, and for extending 
the credit to solar and geothermal.
    Mr. Chairman, many of the proposals called for the Democratic 
Caucus energy plan are already embodied in legislation introduced by 
both Republican and Democratic Members of the House. Some of these 
proposals can be found in the President's energy plan. These are all 
good places to start any discussion of energy policy and I believe we 
can develop a meaningful energy policy that will benefit all Americans 
through a cooperative and deliberative legislative process. Certainly 
none of these proposals will solve the current problems consumers and 
businesses are experiencing in the West, but by working together it is 
possible to fashion an energy policy that will benefit all Americans, 
an energy policy that will create jobs for American workers, an energy 
policy that will protect the health of all Americans, and, most 
importantly, protect our national security in the years ahead.
    Again, thank you for the opportunity to appear before you today. On 
behalf of the Democratic Caucus, I look forward to working with you as 
you develop proposals to be incorporated into an overall energy policy 
for the 21st Century.

                                

Statements of the Hon. Wally Herger, a Representative in Congress from 
                        the State of California

    Mr. Chairman and Members of the Subcommittee.
    I would like to make a few comments to underline the importance of 
recognizing and providing strong support to the nation's solid-fuel 
biomass power industry. This unique asset provides both reliable 
electricity and an extraordinary range of public benefits including 
measurable reduction in the risk and severity of wildfires, waste 
management services to agriculture, improved air quality, and a solid 
base of rural employment across the nation.
    The biomass power industry converts more than 20 million tons of 
wood waste and other organic residuals into clean electricity every 
year. It makes productive use of materials that would otherwise be an 
environmental liability. Unfortunately, the industry has been 
destabilized by the volatility in our energy markets and rising costs. 
The productivity of our industry is diminishing and the public benefits 
provided are increasingly at risk.
    I have introduced legislation (HR 1657) to remedy this situation by 
providing a much-needed production tax credit to this important 
industry, and I am heartened by the growing list of bipartisan 
cosponsors who have joined me in this important effort.
    Independent research sponsored by the U.S. Department of Energy 
recently confirmed that the monetary value of the environmental and 
economic benefits of the biomass power industry--separate from the 
renewable electricity itself--is approximately 11.4 cents per kilowatt 
hour of electricity produced. I recommend that the committee recognize 
the singular importance of this finding which is quite significant and 
far in excess of the public benefits generated by any other energy 
technology. It tells us two things.
    First, we learn that the value of the industry's environmental and 
economic benefits are nearly double the cost of the electricity it 
produces. In other words, the public receives an environmental and 
economic reward when biomass power is generated. Second--and equally 
important--the value of the public benefits are more than six times 
greater than the 1.7 cent cost of the tax credit proposed in my 
legislation. From a public policy perspective, Congress would be well 
served by approving a tax credit that delivers such an extraordinary 
rate of return.
    I would like to emphasize the fact that the nation's biomass power 
industry is dependably producing clean electricity right now at a time 
when we are confronted with electricity shortages, in my state and 
elsewhere, that threaten our economy, our public health and our safety. 
While other renewable energy technologies may also make meaningful 
contributions to our electricity supply over time, few are as important 
in the present. We simply cannot afford to see a decline in biomass 
energy output and its inherent public benefits at a time when we have a 
clear responsibility to provide the American people with an 
uninterrupted supply of much needed electricity.

                                 * * *

    Mr. Chairman and Members of the Subcommittee:
    No discussion of the effect of the federal tax laws on production, 
supply and conservation of energy would be complete without 
acknowledging the significant role that capital cost recovery rules 
play in this regard. The electric power industry is one of the most 
capital-intensive industries in this country. The ability to recoup 
investment costs, including the depreciation and amortization of 
assets, is of critical importance to its viability and the nation's 
access to reliable power.
    The electric industry is rapidly changing to one in which 
generation is becoming fully competitive at a time when there is a 
growing need for new energy supply. However, the capital recovery rules 
that have applied in the past under a regulatory framework are now 
inadequate. Generating companies are no longer guaranteed a specified 
rate of return on their investment, and current tax law serves as a 
disincentive to upgrading and building more generation capacity at a 
time of increasing demand.
    To efficiently meet our nation's energy needs through adequate and 
reliable power, the electric supply industry requires the same ability 
that other industries have to more rapidly depreciate assets for 
Federal income tax purposes. I have introduced legislation, H.R. 1802, 
the ``National Energy Security Act of 2001,'' that would amend the 
Federal income tax laws to allow electric generation facilities to be 
depreciated over seven years. Identical provisions are included in 
comprehensive legislation (S. 389) introduced by Senator Frank 
Murkowski (R-AK) in the Senate.

The Nation's Inadequate Energy Supply Underscores the Need for New 
        Investment.
    The need for new investment to meet growing demand, to maintain the 
reliability of the electric system, and to ensure adequate energy 
supply across the nation has become clear. The energy crunch in 
California, preceded by spikes in the price for spot power in the 
Midwest, and power outages in cities such as New York and Chicago, has 
visibly underscored the need for new generation. Real events, supported 
by numerous studies, identify regions that will have dangerously narrow 
capacity margins within the next decade. The ability to obtain cost 
recovery must be provided to encourage the construction of new or 
improved electric generation facilities.

Other Capital-Intensive Industries Are Given Shorter Lives.
    In stark contrast to the 15- or 20-year depreciation lives for 
electric generation assets, facilities for other capital-intensive 
manufacturing processes, such as pulp and paper mills, steel mills, 
lumber mills, foundries, automobile plants, shipbuilding, and even 
cigarette manufacturing plants are depreciable for Federal income tax 
purposes over seven years. Chemical plants and facilities for the 
manufacture of electronic components and semiconductors can be 
depreciated over five years.
    There is no sound justification for these types of distinctions in 
today's competitive environment. For example, according to tax law, 
investment in pollution control equipment at other types of 
manufacturing facilities have shorter depreciable lives, but not at 
electric generation facilities. As the electricity industry evolves and 
becomes competitive, it is important for it to have the same types of 
tax incentives to encourage modernization and increase productivity as 
those available to other industries.

New Investments Are Required to Comply with Environmental Laws.
    New environmental requirements for electric generating facilities 
may impair the value and useful life of existing assets. For example, 
clean air compliance requirements, such as those relating to the Clean 
Air Act amendments, new source performance review, state implementation 
plans, National Ambient Air Quality Standards, and the Environmental 
Protection Agency's toxic release inventory, are requiring significant 
new investment in environmental mitigation technologies. In some cases, 
existing plants will have to be effectively abandoned and new 
generation plants constructed. This will require new capital 
investment, investment that the tax laws should encourage, not 
discourage as under current law.

Upgrades to Existing Generation Facilities Will Be Accelerated.
    The current fleet of generating facilities must run to their full 
advantage during this period of potential energyshortfalls. To optimize 
their capabilities, these plants must be maintained and in many cases, 
upgraded to become more efficient and cleaner. For example, an existing 
facility may be retrofitted with new turbine blades to increase 
conversion efficiencies and production output. And some facilities must 
be upgraded to comply with new environmental requirements. Revisions in 
the tax law will accelerate the necessary maintenance and enhancement 
of critical facilities.

Deregulation Is Fostering Innovation and Efficiency.
    Deregulation of electric generation is already fostering 
innovation. The preponderance of new generation facilities constructed 
a generation ago were nuclear or coal-fired facilities. Today, most new 
power plants are gas turbine facilities, often operated in combined-
cycle or as co-generation facilities that produce steam for sale as 
well as electricity. These new state-of-the-art combined cycle 
generators operate at energy conversion efficiency levels of 70% 
compared to 40%-50% a decade ago. However, tax laws discourage the 
construction of these more efficient units--while regular gas turbine 
facilities are depreciable over 15 years, combined cycle units are 
depreciable over 20 years.
    In addition, new developments, such as distributed generation, 
could render longer-lived generation assets functionally obsolete. 
Distributed generation is electricity produced on a customer's site 
using fuel cells, micro turbines, or other small scale generating 
equipment that can displace power generated by a central station 
generating unit. With these types of rapid changes in the electric 
industry, it is unlikely that electric generation facilities will have 
the same useful lives as they have had in the past.

Cost Recovery of Existing Plants Is Uncertain.
    Congress suggested in the legislative history to the Tax Reform Act 
of 1986 that one reason why electric assets are depreciated over longer 
periods is because of the certainty of cost recovery through rates. As 
the market for electric energy becomes competitive, this rationale 
becomes obsolete--there will be no more such certainty. Investors will 
demand a competitive return on their investments over much shorter 
periods of time. This new reality is inconsistent with the current tax 
rules that allow cost recovery only over 15-20 years.
    Just as the electric industry is rapidly changing, there is a need 
for a legislative solution to cost recovery for electric generation 
assets. A robust electric power industry must have the same ability as 
other competitive, market-based industries to rapidly depreciate assets 
for Federal income tax purposes. The Federal tax laws should be changed 
to allow electric generation facilities to be depreciated over 7 years.

                                 * * *

    Mr. Chairman and Members of the Subcommittee:
    As a representative of a state which has a good deal at stake in 
the ongoing energy debate, I am pleased to have the opportunity to 
discuss aspects of the tax code that hinder or help the production and 
distribution of energy resources. The provision that I am going to 
focus on in this testimony is one that many have overlooked with regard 
to its potential effect on our energy needs. In my opinion, however, 
this is an area where a small change in the tax law could reap 
substantial benefits by providing capital for the energy infrastructure 
necessary to gather, process, and store energy products such as crude 
oil, natural gas, natural gas liquids, refined petroleum products and 
propane, and to transport them from the areas where they are produced 
to the areas throughout the country where they are needed.
    Many of those in the energy business have long raised capital 
through partnerships, which allowed investors to have a direct stake in 
both the risks and the rewards of the business, including the tax 
benefits that have been placed in the Code to encourage energy 
production. Back in the early 1980s, searching for a way to reach a 
broader class of investors and make the partnership a more efficient 
form of raising capital, the Apache Oil Company created the first 
publicly traded partnership (PTP). Others soon followed suit, not only 
in the energy industry, but in real estate and other industries that 
used partnerships as well. PTPs, also referred to as master limited 
partnerships or MLPs, were a way not only to reach new investors but to 
finance business expansion without resorting to debt and to spin off 
undervalued assets and let them reach their full market value.
    PTPs, as their name suggests, are simply partnerships the interests 
in which, known as ``units,'' are traded on public stock exchanges. 
Traditional, nontraded partnerships required limited partners to invest 
a substantial amount of money, and it was very hard to dispose of a 
partnership interest. This meant that partnership investment was 
limited to affluent individuals who could afford to tie up a large 
amount of money for several years. The development of PTPs, with 
interests divided into liquid, affordable units, has opened partnership 
investment to the average, middle-class investor, thus broadening the 
base of individuals from whom partnerships could raise capital. For the 
individual investor, PTP units provide a steady stream of income 
through quarterly, tax deferred distributions, and, particularly in the 
energy partnerships, the potential for growth both in income and in 
value.
    There are currently about 50 PTPs on the market, operating 
primarily in natural resource and real estate related industries as 
well as a smattering of others. The most exciting story is to be found 
in the energy sector: although those PTPs are only about half the total 
number, they represent, according to their 10-Ks for 2000, close to 
two-thirds of PTP market capital, 71% of total assets owned by PTPs, 
and 90% of total revenue earned by PTPs. Several PTP equity offerings 
early in 2001 have probably raised these figures. Every new PTP to 
enter the market in the past few years has been in the energy business.
    These PTPs are helping to address the current energy situation. 
They are exploring and developing offshore oil and gas supplies. They 
are gathering, storing, transporting, and marketing crude oil, refined 
petroleum products, natural gas, and natural gas liquids. They are 
operating refineries, fractionation plants, and natural gas processing 
plants. They are building pipelines and transporting a range of 
petroleum products through them from energy-producing areas to 
virtually every state in the union. They are marketing, distributing, 
and selling propane and propane-related products and services at both 
the wholesale and the resale level.
    So what's the problem? It is this: PTPs could be doing far more of 
all these activities, developing more energy infrastructure and sending 
far more products through the system, but are prevented from doing so 
by a small provision of the tax code. In order to engage in all these 
activities to their maximum potential, PTPs need to raise equity 
capital, and under current tax law they are limited to raising it from 
the individual, or ``retail'' investors. While access to these 
investors has been part of the engine that drives PTPs, the individual 
segment of the market is not, in itself, large enough to provide the 
capital that these energy companies need.
    One of the sources that PTPs would like to tap is mutual funds, 
which are becoming an ever more important part of the capital markets. 
15 years ago, only about 6% of equity securities were held by mutual 
funds; now the figure is 20%. According to the Investment Company 
Institute, almost $7 trillion in capital is currently invested through 
mutual funds.
    Mutual funds, however, are very reluctant to invest in PTPs--not 
because they are not a good investment, but because of the tax code. In 
order to maintain its tax status under the Regulated Investment Company 
(RIC) rules, a mutual fund must receive 90% of its gross income from 
specific sources. Income from a partnership (whether it be the share of 
partnership income allocated for tax purposes or the cash 
distributions) is not on the qualifying list. This means that if a 
mutual fund receives more than 10% of its income from PTPs (along with 
other ``nonqualifying'' income), it will lose its RIC status. Faced 
with this possibility, as well as the burden entailed in keeping track 
of income percentages, most mutual funds turn away from PTPs.
    This, combined with the lack of institutional investment caused by 
the UBIT rules, forces PTPs to raise capital almost exclusively from 
individual investors. And while these investors are certainly a 
sizeable share of the market, they do not make the large share 
purchases that mutual funds and institutions do. Moreover, individual 
investors are increasingly making their investments through mutual 
funds. The result is that PTPs, compared other equity issuers, are 
extremely limited in the amount they can raise in any one offering and 
in the frequency with which they can go to the market.
    Recently I had the opportunity to speak with several executives of 
these partnerships. They talked about the frustration they feel in 
trying to raise the large amounts of capital needed to expand and build 
new energy infrastructure when they can raise only limited amounts of 
equity capital in any one offering and don't want to increase their 
debt burden. These companies have done a lot with the capital they have 
raised, but they all feel they could do much more if they were freed 
from this constraint.
    There is no policy reason for PTPs to be treated any differently 
than any publicly traded security when it comes to mutual fund 
eligibility. The reason that partnerships were left off the qualifying 
income list was that before PTPs emerged, partnerships were highly 
illiquid, often risky investments, not the sort that was appropriate 
for a mutual fund. It was also felt that a mutual fund might be too 
closely involved with a nontraded partnership's business. None of these 
concerns applies to PTPs--they are liquid, they are safe--fully 
regulated by the SEC, filing the same reports as corporations--and the 
mutual fund, as a PTP investor, would be one of tens of thousands of 
unitholders, not a manager of the business.
    For all these reasons, I am pleased to be the sponsor this year of 
legislation that was introduced by Chairman Thomas in the 105th and 
106th Congresses. The Publicly Traded Partnership Equity Act (H.R. 
1463) simply adds income derived from a PTP to the list of qualifying 
income sources under the RIC rules. This bill has cosponsors from both 
parties, including some members of this Subcommittee. During the 106th 
Congress it was approved by both the House and the Senate as part of 
the Taxpayer Refund and Relief Act of 1999, which was subsequently 
vetoed by the President.
    It is time that we freed these energy companies to do what they do 
best--build and operate the infrastructure that will deliver needed 
energy supplies to communities across the country. This is a simple, 
low-cost, and effective way to increase the capital flowing into the 
energy industry. It is an appropriate part of any energy bill that may 
come out of this Subcommittee and the Committee as a whole, and I urge 
that it be included.

                                

                                         Itron Inc.
                                          Spokane, Washington 99216
                                                      June 18, 2001
    To: The Honorable Jim McCrery
    Members of the Subcommittee on Select Revenue Measures of the 
Committee on Ways and Means
    From: LeRoy Nosbaum, President and CEO, Itron Inc.
    Subject: Testimony supporting advanced metering technology
    Thank you for the opportunity to submit this testimony to your 
committee. My company, Itron Inc., based in Spokane, Washington, is a 
technology provider and source of knowledge to the energy and water 
industry. We enable utilities to collect, analyze and apply critical 
data about the usage of electricity, gas and water though the use of 
radio and telephone based technology that automatically collects 
information from meters. Currently, over 18 million ``smart meters'' 
have been automated with Itron technology in the U.S. and Canada.
    The current energy situation and skyrocketing prices have brought 
energy policy to the forefront of our country's political agenda, and 
along with it, many innovative ideas to help deal with the problem have 
been put forward. The long-term solution, balancing supply with overall 
demand, is easier said than done. Despite efforts to increase supply 
through generation capacity, solutions are years out and are going to 
be expensive.
    This leads us to the demand side of the energy equation, where 
there are dramatic opportunities to impact theproblem in the near term. 
Others will undoubtedly speak to you about the need to improve our 
traditional conservation efforts, and those actions are important. 
There is also a need to manage demand in a more efficient manner. While 
there have been incremental advances in technologies to improve 
generation, transmission and distribution of energy over the years, our 
current energy delivery system and information structure does not 
operate much differently than it did when it was first established in 
1935.
    To manage demand more effectively and empower conservation efforts 
that will have a significant impact on the overall demand for 
electricity, utility distribution companies, energy providers and their 
customers need much more timely access to detailed energy usage data 
that empowers them to take charge of energy distribution and 
consumption.
    This is where advanced metering technology can be used. ``Smart 
meters'' are able to collect reliable, timely and detailed knowledge 
about how much energy people and businesses need, how much they use, 
when they use it, and most importantly, how much can be saved if given 
the incentives to do so. This works because it successfully exposes 
customers to the cost savings and efficiency benefits of reducing 
consumption or shifting electricity demand to off-peak hours. The 
economic upside to renewing our energy information infrastructure by 
putting the power of technology to work through advanced metering 
systems is tremendous.
    This technology is not new, nor is Itron Inc. the only provider of 
such technology. Puget Sound Energy, another Washington State-based 
corporation, recently earned The Edison Award, the electric industry's 
highest honor, for pioneering the use of real-time electricity pricing 
and metering. We congratulate our fellow Washingtonians on earning this 
prestigious award and appreciate that the industry recognized their 
innovation.
    This technology is proven, affordable and available on the market. 
But adoption of this technology by utilities and energy providers has 
been limited, due mainly to regulatory uncertainty and fear of stranded 
costs.
    Congresswoman Jennifer Dunn's HR 1797 attempts to address these 
fears with incentives, including the provision of tax credits for 
investments in ``smart meter'' technology. We encourage you to consider 
this bill as you help shape our country's energy policies.
    We believe the use of advanced metering technology will provide an 
immediate positive impact on the current energy situation. Thus, it's 
important that not only are smart meters in place, but that utilities, 
energy providers and customers have the ability in real time to use the 
information they are getting back from the meter.
    I've included a copy of our report, which was submitted to the U.S. 
Department of Energy, which fully describes advanced metering or 
``smart meter'' technology and its role in optimizing energy delivery 
and efficiency. Among the most important aspects this technology allows 
are the following:
         Real-time data to balance supply and demand
         Enhanced load management and control capacity
         Accurate demand forecasts for long-term power 
        purchases
         Proactive demand reduction to avoid rolling blackouts
         Data for businesses and consumers to manage energy use
         Empowerment of conservation measures
    Thank you again for allowing me to comment today. Itron Inc. is 
appreciative this committee is looking at new technologies to help deal 
with our current energy situation, and we look forward to working with 
others to be part of the solution. If you have any questions or require 
additional information, please contact me at 509-924-9900. You may also 
learn more by viewing our company website at www.itron.com.

The Critical Role of Advanced Metering Technology in Optimizing Energy 
                        Delivery and Efficiency

    A Report to the U.S. Department of Energy
Today's Real-Time Business Cycle
    Imagine the futility of trying to grow an investment portfolio 
using nothing more than month-old reports of the Dow Jones 30 
Industrials Average. Or think of what a recipe for disaster it would be 
for a manufacturing company to maintain only intermittent monthly 
contact with its supply chain and distribution network. What a step 
backward it would be if consumers had to manage their bank accounts 
today without the aid of automatic teller machines, the Internet or 
automated telephone banking services? Instead they must rely only on 
monthly bank statements that arrive in the mail and in-person visits to 
the branch office between 9 a.m. and 3 p.m. to balance their checkbooks 
or move money from one account to another.
    In this age of e-commerce, automated transactions and real-time 
information exchange, scenarios such as those listed above would 
represent the height of inefficiency and inconvenience, not to mention 
a clear impediment to economic growth. Yet as absurd as these examples 
might sound, they represent, by and large, exactly how our country's 
energy marketplace and infrastructure continue to operate at the 
beginning of the 21st century.
    In fact, though there have been incremental advances in the 
technologies to improve generation, transmission and distribution of 
energy over the years, our energy delivery system and information 
structure doesn't really operate much differently from the time the 
Public Utility Holding Company Act was passed in 1935, establishing the 
basic parameters of the vertically integrated, highly regulated utility 
industry that has defined energy delivery in the U.S. to this day. 
Specifically, the nation's current metering system--the cash register, 
data source and link to the customer--is unsuited to meet the dynamic 
needs of energy providers and energy consumers in the years to come.
    While proven and affordable advanced metering and automation 
technologies have been available on the market for nearly a decade, 
adoption of the technology by utilities and energy providers has been 
limited thus far. One of the primary reasons for this slow adoption is 
that many utilities have been hobbled by regulatory uncertainty and 
fear of stranded costs.
New Requirements
    The times, requirements and stakes are changing. Plans to 
deregulate and restructure the electricity market are approved or 
underway in some 34 states. Deregulation of the natural gas market, 
particularly at the wholesale level, and more recently at the retail 
level, is well underway and gaining momentum. Energy prices continue to 
spiral upward--hitting consumers and businesses hard in the pocketbook 
and undermining economic growth. And the continuing energy crisis in 
California provides a sobering harbinger of things to come if steps are 
not taken to re-align--much more precisely--energy supply with demand, 
and enable market forces to exert their proper influence in stabilizing 
energy prices.
    Despite these clear challenges and recent wake-up calls, neither 
California nor other areas of the country are well positioned to 
unleash the true benefits of competition in the energy marketplace. 
This is because, until now, utilities and energy providers have not had 
sufficient incentive or need to deploy the necessary data collection 
and management systems that will be required to ensure that the new 
energy marketplace functions in an efficient, reliable, safe and less 
volatile manner. Advanced metering systems and technology will provide 
the foundation for businesses and consumers to makes choices about 
their energy supplier and about their energy use on the basis of cost 
and pricing signals from the marketplace.
    Relative to other vital infrastructure systems that have evolved to 
meet new challenges and requirements in recent years--transportation, 
banking and finance, telecommunications, law enforcement and emergency 
services, even national defense--the nation's energy delivery system 
has not adopted and made use of advanced data collection, data 
management and communication technologies that will be required to meet 
the needs of the dynamic energy marketplace. And while no single 
analogy can adequately capture all the nuance and interdependencies of 
the nation's energy delivery system, we're driving in the dark with the 
lights off when it comes to collecting and capturing the full value of 
timely, accurate and detailed energy usage data. As the crisis in 
California is showing us, we do so at the imperilment of our economic 
well-being and consumer needs for safe, reliable and competitively 
priced energy.

The Metering Status Quo
    The vast majority of utility customers throughout the United States 
still receive a monthly visit from their utility's meter reader. This 
meter reader visually reads the electric and/or gas meter, records the 
amount of energy used for the past month, and forwards that information 
to the utility's billing office to generate a monthly consumption bill. 
If the meter reader is unable to access the meter because it's located 
in the basement and the consumer is not home, or because the backyard 
gate is locked and a dog is standing post right behind it, most 
utilities will proceed to estimate the gas or electricity consumption 
based on previous usage, recent weather patterns, and then use that 
estimate as the basis for the next bill.
    In fact, in an age of rapidly increasing energy prices, it's not at 
all uncommon for utilities--particularly those in higher-density urban 
areas--to estimate 10 percent, 20 percent, even 30 percent or more of 
the meter reads each month for billing purposes. This practice leads to 
inaccurate billing, increased customer complaints, and higher costs for 
utilities to investigate and resolve those complaints. How would 
consumers feel if their local gas station estimated how much gas they 
put in their tank when filling up, or if long distance carriers and 
credit card companies began estimating their customers' usage and 
bills?

Meter Tampering and Energy Theft
    Another area of growing concern for utilities, regulators and 
consumers (who end up footing the bill) related to metering and meter 
reading is energy theft. Nationwide, theft of energy services costs 
utilities, their shareholders and consumers billions of dollars each 
year. The consensus estimate among most industry groups and analysts is 
that energy theft in the U.S. stands between .5 percent and 3.5 percent 
of annual gross revenues. With U.S. electricity revenues at $280 
billion in the late 1990s, theft of electricity alone would equate to 
between $1 billion and $10 billion annually. A recent article in the 
Wall Street Journal estimated the nationwide electricity theft figure 
at $4 billion per year. That doesn't include natural gas. And with 
energy prices increasing sharply nationwide, theft of energy services 
is only likely to increase as consumers struggle to pay energy bills 
that have doubled or tripled over the past year.
    In addition to costing consumers, meter tampering and theft of 
electricity and natural gas service create significant public safety 
issues. A consumer tampering with a gas meter may cause that meter to 
leak, creating a risk of explosion or fire. An electric meter that is 
tampered with poses the risk of electrocution or other serious injury. 
Technology is currently available and in use that is capable of 
automatically detecting tampering with the meter, which would provide a 
crucial asset in efforts to improve public safety and deter energy 
theft.
    If the current crisis in California is any indication, the billing, 
customer service and theft problems perpetuated by traditional manual 
meter reading operations today will pale in comparison to the problems 
caused by a complete dearth of accurate, timely and reliable 
information about energy use and demand in the highly dynamic and 
interdependent energy markets of the 21st century. Without this 
automated metering technology, energy providers and consumers have no 
access to detailed and timely energy use data that would allow them to 
reduce energy consumption and reduce load when available power is in 
short supply, prices are high or distribution system conditions make it 
necessary to reduce load.

What is Advanced Metering Technology?
    While systems differ from vendor to vendor, most advanced metering 
solutions involve retrofitting an existing electric, gas or water meter 
with a data recording and communications device, called a meter module. 
The meter module is attached to the existing meter or is installed on a 
new meter. The meter module device automatically monitors and then 
transmits energy use data to nearby collection devices or 
communications networks, which in turn forward the information to a 
database at the utility or energy service provider. The average cost of 
a meter module, that is attached to an existing meter, is approximately 
$50 for a meter on a residential home and $500 for commercial or 
industrial facilities. More than 85% of meters in the U.S. can be 
retrofitted with these meter modules and not require the purchase and 
installation of a new meter.
    In addition to more frequent and accurate consumption information, 
many of these automated advanced metering systems are capable of 
collecting a variety of other data, such as power outage and 
restoration alerts, and meter tampering data to detect theft of 
services. These advanced metering systems also serve as the foundation 
to enable an array of new content value management applications that 
will support greater consumer choice and control capabilities with 
regard to their energy use both now and in the years to come.
    Many companies have developed different approaches for their 
advanced metering technology solutions. Despite the diversity of 
approaches, the vast majority of systems deployed thus far make use of 
either public and private wireless communications networks or some 
combination of the two. These data collection systems, which integrate 
hardware, software and communications systems, provide a wide range of 
functionality and sophistication.
    The array of systems comprise radio-equipped handheld computers, 
vehicle-based mobile collection systems and advanced ``fixed network'' 
systems that deliver real-time data and are deployed over geographic 
areas that can range in size from a small neighborhood or apartment 
complex to a large metropolitan area. Other advanced metering 
technologies make efficient use of existing telephone and cellular 
communication networks to communicate with the meter and send the data 
to the utility. Some systems are better suited for residential 
metering, while others feature more advanced functionality ideally 
suited to meeting the more complex needs of larger commercial and 
industrial energy customers.
    Depending on the type of solution deployed, advanced metering 
technology efficiently and cost-effectively delivers a wealth of 
critical data to the utility, its energy customers and other players in 
the deregulated energy market. In addition to automatically delivering 
basic energy usage data for customer billing, advanced metering systems 
are capable of gathering and delivering real-time and near real-time 
energy use data from all types of energy customers in all types of 
service environments.

The Value of Advanced Metering Data
    The automated collection of advanced or ``interval'' energy use 
data is necessary to enable energy market participants to more closely 
match energy supply with demand. Balancing energy supply and demand 
will become increasingly important to making the new competitive energy 
marketplace work in a cost effective and reliable manner.
    To manage the demand-side of the equation, advanced metering and 
energy data allows energy market participants to more accurately 
forecast the required energy load, negotiate long-term power purchase 
contracts, perform proactive energy load management and control, 
establish demand-side management programs and incentives to reduce 
energy use, develop more dynamic rate structures to shave peak loads, 
and put into place knowledge-driven conservation programs and content 
value management innovations that empower consumers to take charge of 
and reduce their energy use. By collecting more advanced metering data, 
a utility can build a body of knowledge to develop an entirely new 
portfolio of dynamic rate structures and incentive programs, real-time 
pricing packages and interruptible rates that can be targeted to 
specific customers to significantly improve load management 
capabilities and reduce peak demand when distribution system conditions 
become critical.
    These energy management and load control capabilities would help 
prevent extreme crisis management measures such as the costly rolling 
blackouts initiated by the California Independent System Operator (ISO) 
earlier this year. These blackouts are hugely disruptive and costly to 
consumers and businesses; they also pose a serious threat to public 
safety. These data-driven capabilities can also insulate utilities and 
their customers from the volatile whims of today's wholesale energy 
market by providing the means to forecast future demand more precisely. 
The utility or energy service provider can then use this knowledge to 
negotiate longer-term power purchasing contracts at much more 
competitive prices. Without detailed, real-time energy usage delivered 
by advanced metering systems, this type of precise planning, management 
and control is unachievable.
    By combining advanced metering technology with the Internet and new 
load management and demand side management technologies, businesses and 
consumers can take charge of their energy consumption to reduce their 
costs. Businesses can monitor their energy consumption much more 
closely, and alter production schedules or equipment start-up sequences 
to take advantage of off-peak hours. Consumers can adjust their 
thermostats while they're away from home, or use the data in concert 
with new technologies from the home automation and control sector to 
monitor energy consumption by appliance to create a new model for home 
energy efficiency in the 21st century. For small businesses owners, 
large increases in energy costs can put their business in jeopardy, 
while the ability of American companies to compete in the global 
economy is undermined. Ultimately, increased energy costs are passed on 
to consumers and with the current metering infrastructure, they have 
little or no means and little or no knowledge to do anything about it.
    Furthermore, by using automated metering systems to collect 
advanced energy usage data from strategic numbers and segments of 
energy customers on a daily, hourly or 15-minute interval basis, 
utilities and energy service providers gain knowledge necessary to 
optimize their own load forecasting accuracy, which reduces the risk of 
hugely expensive spot-market energy purchases that have led at least 
two large California utilities to the brink of bankruptcy.
    On the supply-side of the equation, accurate energy use forecasting 
supports the precise planning of supply or generation requirements, 
which reduces frantic and costly searches for available power supply 
when energy reserves are near emergency levels.

Safety and Reliability
    In addition to delivering real-time consumption data, many advanced 
metering systems provide other types of information that improve energy 
delivery while also improving consumer safety and distribution system 
reliability. Even today, customer phone calls continue to be the 
utility's primary source of information about power outages. Many 
advanced metering systems provide immediate outage detection and 
restoration notification capability to remove the guesswork and 
inference from the outage management equation. The systems provide 
precise, immediate and reliable data--all the way down to individual 
customers' homes and businesses--that enable utilities to reduce the 
duration of power outages and improve the reliability of their 
distribution system. Furthermore, automatic outage detection, improved 
outage response and restoration times, and improved system reliability 
have significant economic ramifications. As we saw during the recent 
rolling blackouts in California, outages cost businesses large amounts 
of money in ruined product and lost productivity. According to the 
Department of Energy's own figures, power outages and fluctuations cost 
U.S. businesses and consumers $30 billion each year. Yet that estimate 
may be very conservative in today's information--and technology-driven 
economy. As this year's energy crisis in California revealed, power 
outages at large, high-tech manufacturing companies with energy-
sensitive production methods can cost just a single company millions of 
dollars per hour.
    When outages and system reliability issues do arise, advanced 
metering systems enable a utility to quickly identify and isolate the 
problem, efficiently dispatch maintenance resources with pinpoint 
precision, and they can provide customers with much more reliable and 
timely information concerning restoration of service. More frequent 
data collection of advanced metering combined with outage information 
also enables utilities to identify trouble spots in their distribution 
system, replace or resize equipment, improve outage response and 
restoration times and overall distribution system reliability and 
safety. These safety benefits are not limited to electricity delivery. 
By recording and reporting abnormal gas consumption patterns, the 
technology also helps to identify potential gas leaks before they turn 
into safety hazards that threaten property and consumer safety.

Adoption of Technology Has Been Slow
    While proven and affordable advanced metering and automation 
technologies have been available on the market for nearly a decade, 
adoption of the technology by energy providers has been limited thus 
far. According to recent statistics compiled by Chartwell, a leading 
energy industry research group and publisher, more than half of 
utilities nationwide are installing or piloting advanced metering 
technology. However, the majority of those are doing so only on a 
limited basis to this point. Overall penetration of advanced metering 
and automation technology currently stands at about 8 percent of 
electric, gas and water meters in the U.S., according to the most 
recent industry statistics available. More than nine out of every 10 
electric, gas and water meters nationwide are still read manually once 
each month by a meter reader who must physically access the customer's 
house and property.
    One of the primary reasons for the slow adoption of advanced 
metering technology is that many utilities have been hobbled by 
regulatory uncertainty and fear of stranded costs. Stranded costs and 
investments refer to assets that were purchased to serve customers 
under the traditional regulated model and their costs were recovered in 
the utility's ratebase. Those assets may become ``stranded'' if 
regulatory decisions ``unbundle'' those assets from utility ownership 
before their cost is recovered, or if asset cost exceeds its market-
driven value in a deregulated market. With one foot forward in a new 
business model of a competitive marketplace, and one foot stuck 
fulfilling the obligations of the traditional business model, 
investments in advanced metering and automation technology and other 
infrastructure improvements still seem risky to many utilities. As a 
result, some utilities have postponed, delayed, downsized or altogether 
shelved their plans for investment in advanced metering technologies 
until this cloud of uncertainty clears.
    In the end, those delays cost everyone: utilities, their 
shareholders, businesses, consumers, and they delay further our 
nation's ability to move toward an efficient energy delivery model that 
is characterized by consumer choice among energy providers, 
competitively priced energy and energy services, and a highly efficient 
and reliable energy delivery system that enhances consumer safety and 
provides a strong foundation economic growth.

Lack of Enterprise-Wide Perspective
    To this point, virtually all utilities have appraised advanced 
meter reading technology in relative isolation. In the view of most 
utilities thus far, the technology delivers value merely by automating 
meter reading and reducing or eliminating many of the operations costs 
associated with a manual meter reading operation. Advanced metering 
technology delivers some further value to utilities by eliminating 
meter access problems, estimated reads and improving meter reading 
accuracy, which results in improved billing accuracy, fewer customer 
complaints, reduced call center traffic and improved customer service. 
Because they eliminate the need for large utility vehicle fleets 
associated with traditional meter reading operations, automated 
metering systems also reduce gas consumption, and vehicle emissions.
    As mentioned earlier, many systems on the market today also feature 
automatic meter tampering detection to detect and deter theft of 
services and improve revenue assurance. That's about as far as many 
utility project teams will take their business case. And this limited 
view has made it very challenging, many industry experts say, to 
develop a compelling business case to justify the technology's 
widespread deployment.
    However, when comparing the operational costs associated with meter 
reading and revenue cycle services to the overall cost of delivering 
energy, there's a persuasive case to be made that meter data collection 
technology, by virtue of the information it delivers, provides an even 
stronger return on investment to the utility's distribution system 
operations and business development initiatives. Yet many utilities, 
for many different reasons, have difficulty seeing the value of 
advanced metering technology beyond automation of the meter reading 
function.

Performance-based Drivers
    Some electric and natural gas utilities are working with regulators 
to implement an innovative new regime of Performance-Based Regulation 
(PBR) aimed at providing utilities with strong financial incentives to 
ensure that consumer needs for reliable and competitively priced energy 
services are maintained.
    As energy markets ``regionalize'' and become increasingly 
interdependent, the efficacy of a federal mechanism establishing basic 
performance-based regulation increases significantly. This innovative 
and proven regulatory approach would provide utilities and energy 
service providers with clear financial incentives to ensure that 
consumer needs for safe, reliable and competitively priced energy 
services are maintained.
    This approach strikes a desirable balance between the benefits of 
competition and the vital interests of consumers, and is gaining 
significant momentum in the energy industry as it transitions from a 
highly regulated,monopolized model to a competitive one. With these 
incentives in place, energy providers would have a strong opportunity 
to mitigate risk and achieve a higher return on investment in advanced 
metering technology while meeting the vital needs of businesses and 
consumers.
    These important objectives can be achieved with minimal government 
intrusion and regulation by instituting a new regime of performance-
based incentive programs at the federal level that will provide 
utilities nationwide with the impetus to invest in new technology to 
optimize energy delivery. These performance-based incentives should 
focus on critical distribution and customer service functions such as 
system reliability; outage response and restoration times; meter 
reading, estimated reads and billing accuracy; as well as call center 
operations and customer complaint resolution. These incentives could 
also focus on conservation and demand-side management programs to trim 
overall demand for energy. With reliability, energy costs and customer 
service high on the minds of regulators nationwide, uniform 
performance-based regulation has opened a window of opportunity to 
address critical energy distribution issues and consumer needs through 
automation technology in a manner that minimizes costs and strengthens 
shareholder value.

The California Crisis
    When it comes to issues facing the energy and utility industry, the 
California energy crisis rightly deserves top-of-mind billing for both 
state and federal policymakers. The California energy crisis is a 
multidimensional problem that doesn't lend itself to easy answers. 
Blaming ``deregulation'' is overly simplistic. While there are 
important lessons to be learned from California's early deregulation 
initiative, the fundamental premise that competition in the energy 
industry will ultimately benefit consumers is hardly disproved. 
Deregulation of electricity markets in other states is proceeding 
without the price volatility and supply problems seen in California. 
Instead, it is a mosaic of circumstances that have put the power supply 
in California so wildly out of step with rapidly increasing demand. 
Many in the industry have dubbed California's energy crisis ``the 
perfect storm,'' and they're right.
    Most industry experts predict that the state will be unable to 
muster the necessary mega wattage to make it through the summer without 
persistent service interruptions and widespread rolling blackouts. Some 
predict a deficit of 4,000 to 8,000 megawatts during peak summer load, 
or enough energy to power approximately 800,000 homes. The stakes are 
huge. California represents the sixth largest economy in the world and 
is home to many of the high-tech companies that are driving the new 
economy. When the power goes out, it can cost large companies with 
energy-sensitive operations and production methods millions of dollars 
an hour in lost productivity, not to mention the impact rising energy 
prices have on the overall cost of doing business. Many of these 
companies have already made it clear to the state's politicians that 
they have no intention of expanding their presence in the state without 
being assured of a reliable supply of competitively priced power. Add 
in the costs, difficulties and uncertainties for the state's 
agriculture, manufacturing and tourism sectors, and the adverse 
economic effects of a protracted power crisis will likely ripple far 
beyond the California border.
    Yet this seemingly dark period in the evolution of the competitive 
energy marketplace will likely be looked back upon on as a trial-and-
error period, a time in which utilities, regulators, politicians and 
other market participants corrected the course and trimmed the sails. 
At the same time consumers, despite current regulatory rate caps that 
insulate them from the law of supply and demand in California, are 
slowly coming to grips with the fact that electricity is not an 
inexhaustible resource.
    The ultimate solution to the problems plaguing California is to 
balance--much more precisely--the supply of electricity with overall 
demand. This, of course, can be achieved in two ways: increase supply 
or decrease demand. Ultimately, as new power plants are constructed, 
more portable or ``distributed generation'' technology proliferates 
(such as back-up generators and fuel cells), and existing power plants 
that are currently idle return to service, supply shortages will ease. 
Despite expedited efforts to speed up power plant siting, approval and 
start-up, it will take three to five years before appreciable 
generations assets to serve the California market will go on line, and 
it could be nearly a decade before generation capacity catches up with 
California's again-booming economy, which has brought with it a 25 
percent increase in energy demand over the past five years that no one 
seemed to anticipate. Cleary, addressing this problem on the supply 
side of this unbalanced equation represents a longer-term and very 
expensive strategy.

An Opportunity in Disguise
    That leads us to the demand side of the equation, where, through 
the application of advanced metering systems and technology, we find 
dramatic opportunities to put a big dent in this problem in the near 
term. To manage demand more effectively and empower a new regime of 
conservation and demand management efforts, utility distribution 
companies and their customers need access to much more timely and 
detailed energy usage data that empowers them to manage energy 
distribution and consumption much more effectively. What's required to 
solve today's energy problems in California and meet tomorrow's 
requirements is an infrastructure that empowers businesses and people 
to take control of their energy use and costs. What a golden 
opportunity California has to establish a new model of effective load 
management, energy efficiency and conservation for the 21st century.
    But to meet this challenge, energy providers require better data, 
which they can turn into valuable knowledge for themselves and their 
customers. As previously discussed, the automated collection of 
advanced metering data would enable utilities and energy service 
providers in California to more closely match energy supply with demand 
through precision load forecasting, effective load management and 
control, demand-side management programs and incentives, development of 
more dynamic rate structures, and knowledge-driven conservation 
programs. For example, if the large utilities in California were to 
move aggressively to deploy advanced meter data collection capability 
for their commercial and industrial customers, they could conceivably 
have the data collection and management infrastructure in place to 
proactively manage as much as 60 percent of their load in relatively 
short order. Whether it could happen in time to provide some relief 
from the looming summer crisis would depend on a number of variables. 
But the technology is there and ready to go.

Policy Solutions
    One of the most cost-effective, potent and yet measured public 
policy solutions to these problems in the near term would be for 
regulators and legislators, at both the state and federal levels, to 
enact tax incentives and/or asset recovery mechanisms to encourage all 
forms of investment in this country's energy infrastructure as part of 
a comprehensive national energy policy.
    This public policy effort should not only include new generation 
facilities and energy exploration to increase energy supply and reduce 
our dependence on foreign energy sources, but should also include 
advanced metering systems and data management technology to increase 
distribution system efficiency and reliability while empowering 
businesses and consumers to take control of their energy consumption in 
response to market forces and price signals. It's time to remove 
uncertainty. Remove obstacles. Remove risk. But this calls for nothing 
less than a revolutionary retooling of the energy infrastructure at a 
level and sense of purpose comparable to what the Interstate Highway 
System did for transportation and commerce in the 1950s and the 1960s.

Conclusion
    In the long-term, the solution to the problem posed by volatile 
energy markets requires a carefully balanced prescription of increased 
energy supply and reduced demand. If we focus only on increasing supply 
through expanded generation capacity, the solution to our problems will 
be much more expensive than it needs to be. We will achieve our energy 
management objectives most cost-effectively if we also deploy the 
technology to collect reliable, timely and detailed knowledge about how 
much energy people need, how much they use, when they use it, and most 
importantly, how much can be saved if people are given incentives and 
the means to do so. The economic upside to renewing our energy 
information infrastructure by putting the power of technology to work 
through advanced metering systems is tremendous; the downside is very 
steep.
    In that light, the crisis before us in California is really an 
opportunity. It is an opportunity to invest in new technology that will 
enable us to put the power of information to work in our energy 
delivery infrastructure. The result will be improved public safety, 
improved reliability and greater price stability. An affordable, 
reliable energy supply is critical to economic growth in our knowledge-
driven economy of the 21st century. Increasing energy supply is part of 
the answer to the nation's energy needs. Stimulating investment in 
technology and information that empower utilities, businesses and 
consumers to more effectively manage the demand side of the equation is 
an equally important component to any long-term energy policy. In the 
end, advanced metering technology is vital to keeping the lights on and 
keeping energy prices affordable. Incentives to implement this 
technology and make full use of the data it delivers offer the fastest, 
most cost-effective way to restore balance between energy supply and 
demand. Ultimately that capability will enable the nation's energy 
providers to deliver safer, more reliable and competitively priced 
supply of energy to businesses and consumers today, and well into the 
future.

                                

 Statement of the Hon. James R. Langevin, a Representative in Congress 
                     from the State of Rhode Island

    Chairman McCrery, Ranking Member McNulty, and esteemed members of 
the Committee, I appreciate the opportunity to join you today in 
addressing the need for a national energy strategy, and I thank you for 
convening this hearing.
    The rolling blackouts in California and the high price of gasoline 
have focused national attention on the need for a comprehensive energy 
policy for the United States. We must ensure that a national strategy 
addresses short-term energy problems such as rising costs, while 
encouraging the development of clean and diverse energy supplies to 
meet our growing need for power. Through a variety of tax incentives, 
we can foster conservation efforts and encourage the production of 
clean, renewable energy.
    Most importantly, we must dispel the myth that the energy situation 
in the Western United States is not a national problem. I am concerned 
by repeated statements from the Administration that energy shortfalls 
are attributable to faulty state laws and should therefore be left to 
the California legislature for resolution. As the fifth largest economy 
in the world, California is inextricably tied to the rest of the 
nation, and any state economic downturn will certainly spill beyond her 
borders and have disastrous effects across our nation and among our 
neighbors. Even Rhode Island residents are keeping a watchful eye on 
other energy markets. While New England is expected to have a 
sufficient supply of electricity from diverse sources this summer, any 
shortfalls in New York may have adverse effects on our residents 
through increased prices. Congress has a unique opportunity to address 
our existing energy concerns while laying the groundwork for a national 
strategy that meets our future needs.
    One of the simplest methods to prevent skyrocketing energy 
consumption in the United States is to promote conservation efforts 
among residential and business customers. Congress should pursue tax 
credits to encourage both the construction of new energy-efficient 
homes and buildings as well as the purchase of efficient appliances, 
heating and cooling equipment, lighting, windows and doors, and other 
devices. Additionally, Congress should support conservation efforts by 
providing tax credits for the purchase of fuel-efficient vehicles. The 
automobile industry has the technology to bring high-efficiency and 
alternative fuel vehicles to market, and we should provide incentives 
to increase the use of such vehicles in the U.S. Ideally, vehicle tax 
credits should be coupled with an increase in corporate average fuel 
efficiency (CAFE) standards, so that our nation's vehicle fleet will 
help reduce, not exacerbate, our consumption of fossil fuels.
    However, I recognize that conservation will not meet all of our 
nation's energy needs, and I support tax credits to encourage the 
production of clean and renewable energy sources. Most importantly, we 
must extend the existing investment credit for wind and biomass energy, 
and expand the credit for solar and geothermal energy. By encouraging 
further development and production of these sources, we can make them 
competitive with fossil fuels, and will ultimately diversify our 
nation's energy supply. Additionally, Congress must promote responsible 
fossil fuel production, and develop existing oil and gas fields before 
even considering exploration in new areas.
    When major nationwide concerns about energy first arose, I saw that 
the situation in California presented an opportunity for Congress and 
the Administration to develop a forward-looking, comprehensive energy 
policyfor the United States. Now, however, I question the future of 
these efforts in light of the $1.35 trillion tax cut that was recently 
signed into law. Whereas three months ago, Congress had the resources 
to initiate fundamental changes to our energy policy through tax 
incentives, the meager sums remaining in our coffers make any new 
energy investments more daunting. I sincerely hope that those 
benefiting most from the tax cut recognize the importance of 
conservation, renewable and alternative fuels, and energy 
infrastructure and invest their rewards accordingly.
    It is incumbent on Congress to work actively on this issue and to 
find the resources needed to implement a national energy strategy. We 
should target our immediate efforts to working- and middle-class 
families to help them address rising energy costs through conservation 
and efficiency efforts. Programs such as the Low Income Home Energy 
Assistance Program (LIHEAP) and the Weatherization Assistance Program 
(WAP) have been effective tools in mitigating the high cost of energy 
for low-income households and seniors, and Congress must continue its 
strong commitment to these initiatives.
    I know that the people of Rhode Island are looking to the federal 
government for leadership on this issue, and I am eager to work with 
you to develop legislation that meets our current and future energy 
needs in an environmentally and fiscally responsible manner.
    Thank you.

                                

Statement of the Hon. Scott McInnis, a Representative in Congress from 
                         the State of Colorado

    I appreciate the opportunity to share my thoughts with the Members 
of the Subcommittee on Select Revenue Measures on this very important 
issue, and would like to thank Chairman McCrery for giving Members the 
opportunity to discuss this issue. Between 1992 and 2000, America's 
dependence upon foreign oil rose 56%. Each year, billions of tax 
dollars are spent to maintain an already strained transportation 
infrastructure. Congestion on the nation's highways is at an all time 
high and our ever-increasing consumption of energy is taking a toll on 
the environment. These hearings are not only timely, but they are 
desperately needed. In addition, Mr. Chairman, I wholeheartedly agree 
with the statement you made during the first hearing of this 
Subcommittee that in order to avoid the mistakes of the past, it is 
important that we examine all angles of America's energy policy.
    There is no single solution to our energy challenges. Our national 
energy policy should address the production, efficient use, as well as 
the conservation of energy. Today I will focus on the conservation of 
energy, and I will also propose legislation that will take steps toward 
not only reducing energy consumption, but that will also improve the 
environment and address other key policy initiatives.
    At the first hearing of this Subcommittee, Mary Hutzler of the U.S. 
Department of Energy provided some sobering statistics on our nation's 
projected consumption and supply of energy as well as the impact that 
that consumption will have on our environment. Per Ms. Hutzler's 
testimony, even with projected efficiency gains, the consumption of 
petroleum for transportation uses is expected to far exceed domestic 
production and supplies by 2020, resulting in net imports of petroleum 
to increase from 51 percent to 64 percent of domestic petroleum demand. 
In other words, absent any unexpected breakthroughs in domestic 
petroleum production, developments in alternative energy sources, or 
significant strides in conservation efforts, America's dependence upon 
foreign oil will continue to grow.
    I believe that our federal tax laws should continue to promote 
domestic exploration and production of oil, gas, and other energy 
sources. The Department of Treasury provided this Subcommittee with an 
excellent overview of existing tax incentives and their role in our 
national energy policy. But I also believe that our tax laws should be 
more proactive in promoting energy conservation measures. Specifically, 
I urge this Subcommittee to consider tax incentives to promote 
widespread participation in teleworking, also referred to as 
telecommuting. In short, teleworking is an arrangement whereby advanced 
communications technology is used to replicate or completely eliminate 
the ``traditional'' workplace--thereby eliminating the commute to and 
from that workplace, reducing overall energy consumption, and improving 
the environment. Consider the following:
           It is estimated that staying at home to work 
        requires 3 times less energy consumption than commuting to 
        work;
           According to a George Mason study, for each 1% of 
        the regional workforce that teleworks, there is a 3% reduction 
        in traffic congestion;
           It was recently reported that if 10 to 20 percent of 
        commuters switched to teleworking:
                 1,800,000 tons of regulated pollutants would 
                be eliminated,
                 3,500,000,000 gallons of gas would be saved,
                 3,100,000,000 hours of personal time would be 
                freed up, and
                 maintenance and infrastructure costs would 
                decrease by $500,000,000 annually because of reduced 
                congestion and reduced vehicle miles traveled.
    Teleworking is also a superior choice as a conservation measure 
since it does not infringe upon an individual's recreational travel 
time. Instead, it seeks to eliminate or substantially reduce the daily 
commute to and from work--a drudgery that all of us would rather avoid.
    The benefits of teleworking do not end with energy conservation, 
reduced congestion and transportation infrastructure costs, and a 
cleaner environment. Studies have shown that teleworking can provide 
significant benefits to both employers and employees. For employers, 
teleworking results in a more satisfied and efficient workforce 
resulting in greater productivity, reductions in real estate costs and 
employee turnover and related costs, and serves as an important tool to 
attract and retain employees. For employees, teleworking results in 
better work and family balance, greater productivity, a better attitude 
toward the employer, greater career satisfaction, and more personal 
time due to a reduced commute.
    Despite all of these positive attributes, broad employer and 
employee participation in teleworking will not occur unless individuals 
have remote access to broadband communication technologies. To that 
end, I suggest that the Subcommittee consider The Broadband Deployment 
and Telework Incentive Act of 2001, a bill that I will be introducing 
with Congressman John Tanner. This legislation represents a fresh and 
comprehensive approach to addressing several important policy 
objectives: conserving energy, improving the environment, and closing 
the nation's growing digital divide. By offering modest tax incentives 
to both providers and potential users of broadband services, this bill 
will stimulate investment in the broadband technologies that will in 
turn stimulate greater telework participation.
    As I mentioned earlier, there is no single solution to our energy 
challenges. We should always promote exploration of new and alternative 
energy sources and development of more efficient ways to use energy 
sources. We should also promote intelligent conservation of those 
sources. While the positive impacts of alternative sources and 
efficient uses of energy can take years to become reality, conservation 
measures--such as teleworking--offer an effective and timely solution 
to our energy challenges and should be an integral part of our national 
energy policy. Also, by promoting good conservation habits now, we will 
maximize the future effectiveness of all other energy policy 
initiatives.
    Thank you once again for this opportunity.

                                

Statement of the Hon. Mark Udall, a Representative in Congress from the 
                           State of Colorado

    I want to join Rep. Jay Inslee to speak in support of the Clean 
Energy Incentives Act, a bill he will soon introduce with my support 
and with the support of a number of other Members who are interested in 
seeing a broad range of incentives provided for the development of 
clean energy technologies.
    Increasing the contributions of clean energy technologies to our 
energy mix requires a combination of policy tools. For best effect, we 
should implement a number of tools simultaneously. At the most basic 
level, we should increase funding for the Department of Energy's 
research and development programs for renewable energy and energy 
efficiency technologies. To increase the integration of these 
technologies into the marketplace, we should require that a certain 
percentage of power generation come from new renewable technologies 
such as wind, solar thermal, photovoltaic, geothermal, or biomass. To 
encourage their broad adoption among the public, we should hold up the 
federal government as a role model and require that it purchase an 
ever-growing portion of its energy needs from renewables. To ensure the 
development of these technologies isn't blocked by transmission 
obstacles, we should push the Federal Energy Regulatory Commission to 
integrate alternative energy sources into the electric utility grid.
    Finally, perhaps the most important policy tool to help accelerate 
commercialization of clean energy technologies is the tax credit. By 
creating incentives for the development and purchase of these 
technologies, we can generate environmental benefits, provide reliable 
sources of power for business as well as homeowners, reduce our 
nation's dependence on foreign oil supplies, help commercialize clean 
technology, enhance U.S. technology leadership, and create economic 
benefits for the nation.
    I joined Rep. Inslee and a number of other Members in working to 
craft a bipartisan and comprehensive clean energy tax package. We've 
finally done that in the Clean Energy Incentives Act. The legislation 
covers all the bases, from renewables to efficiency technologies. The 
bill would expand the renewable resource tax credit to include more 
alternative energy sources; encourage the use of alternative fuel 
vehicles and alternative fuels and related infrastructure; promote 
energy efficient technologies for certain commercial and industrial 
property, new and existing homes, and appliances; and encourage the use 
of demand management technologies and investment in distributed energy 
generation powered by renewable energy and fuel cells.
    In drafting the legislation, we consulted closely with clean energy 
advocates representing a spectrum of technologies. After months of 
meetings, we are confident we have compiled a package of incentives 
that best addresses the needs of the various clean energy sectors and 
the needs of this country to move toward a new energy future. We feel 
that our approach is comprehensive and that it should serve as the 
basis for any energy tax package that this Committee considers.

                                

 Statement of the Hon. Wes Watkins, a Representative in Congress from 
                         the State of Oklahoma

    Mr. Chairman, I thank you for the opportunity to submit testimony 
today. I also applaud your efforts on holding this series of hearings 
on the effects of federal tax laws on the production, supply and 
conservation of energy.
    As you know, I have always stressed the need for a national energy 
policy. The world is operating with a small supply of petroleum and the 
U.S. is facing tight natural gas supplies. We now depend on foreign 
nations for nearly 60 percent of the oil we use--and that figure is 
growing rapidly. From 1986 to 1997 (before the latest price crisis) 
domestic oil production dropped by 2 million barrels per day--roughly 
25 percent of 1986 capacity.
    The fact is that the United States is now dependent on foreign 
countries--some who have unfriendly dictators--for the very life-blood 
(oil) of our Nation.
    Now is the time to clearly address a national energy policy and 
build a program that is needed to meet future demand. I believe a clear 
national energy policy will stabilize the roller coaster energy prices 
and make the U.S. more energy self-sufficient.
    It is very important to recognize that the domestic oil and natural 
gas industry has changed significantly overthe last fifteen years. 
Independent producers of both oil and natural gas have grown in their 
importance. They account for 85 percent of the wells drilled in the 
U.S., produce 40 percent of the oil--60 percent in the lower 48 states 
onshore--and produce 65 percent of the natural gas.
    Tax incentives are critical to help the energy economy survive the 
peaks and valleys of energy prices. Because oil and natural gas 
exploration and production are capital intensive and high-risk 
operations that must compete for capital against more lucrative 
investment choices, much of its capital comes from cash flow. The 
federal tax code is a key factor in defining how much capital will be 
retained.
    Therefore, I believe we must enact provisions designed to encourage 
new production, maintain existing production, and put a safety net 
under the most vulnerable domestic production--marginal wells.
    I have authored and cosponsored legislation in the past that is 
designed to preserve production of independent oil and gas producers' 
marginal wells, and to protect this high-risk sector of the economy 
from volatile world price fluctuations.
    Two fundamental tax incentives are the suspension or elimination of 
the net income limitation on percentage depletion and the marginal well 
tax credit.
    The net income limitation severely restricts the ability of 
independent producers to use percentage depletion, particularly with 
respect to marginal wells. Percentage depletion is already subject to 
many limitations. First, its allowance may only be taken by independent 
producers and royalty owners and not by integrated oil companies. 
Second, depletion may only be claimed up to specific daily production 
levels of 1,000 barrels of oil or 6,000 Mcf of natural gas. Third, 
depletion is limited to the net income from the property. Fourth, the 
deduction is limited to 65% of net taxable income. The net income 
limitation requires percentage depletion to be calculated on a 
property-by-property basis. It prohibits percentage depletion to the 
extent it exceeds the net income from a particular property.
    This provision is extremely important for marginal oil wells. These 
wells account for approximately 20 percent of domestic oil production. 
The U.S. is the only country with significant production from marginal 
wells. Once wells are plugged, it becomes nearly impossible to reclaim 
the remaining oil or gas. Eliminating the net income limitation on 
percentage depletion would encourage producers to keep marginal wells 
in production and enhance optimum oil and natural gas resource 
recovery.
    As you know, I worked to include a two-year suspension of the net 
income limitation on percentage depletion in the Taxpayer Relief Act of 
1997. The suspension has been extended through 2001. We must act to 
extend or eliminate the suspension before it expires at the end of this 
year.
    To help preserve our domestic production and energy security, we 
must create a counter-cyclical marginal well tax credit. Essentially 
establish a sliding scale tax credit that kicks in for marginal well 
producers when prices are low, as they were in 1998 and 1999. A 
marginal well is defined as an oil well producing less than 15 barrels 
a day or a gas well producing less than 90 cubic feet per day. The tax 
credit would be phased in and out in equal increments as prices for oil 
and natural gas fall and rise. The tax credit will protect during down 
turns and helps marginal wells to keep producing during low price 
cycles.
    In addition, two other tax incentives allow taxpayers to expense 
(a) delay rentals and (b) geological and geophysical expenses. Delay 
rental payments are contractual payments made by an oil and gas 
producer to the mineral owner in the event mineral production is 
delayed. Geological and geophysical (``G&G'') expenses are costs 
incurred by an oil and gas producer for the purpose of obtaining and 
accumulating data that will serve as a basis for the acquisition and 
retention of oil or gas properties. In both cases, these are out-of-
pocket expenses incurred by taxpayers in the oil and gas drilling 
business.
    Again, I thank you for this opportunity to testify before your 
subcommittee. I look forward to working with you and the Committee to 
structure the Federal tax code so it encourages increased domestic 
energy production; therefore, as a Nation, we can declare our 
independence from foreign oil and gas.

                                

 Statement of the Hon. Ed Whitfield, a Representative in Congress from 
                         the State of Kentucky

    Mr. Chairman and Members of the Committee, I am pleased to offer my 
testimony on the effects of federal tax laws on the production, supply 
and conservation of energy.
    The National Academy of Engineering recently identified 
``Electrification--the vast networks that power the developed world'' 
as the single most important achievement of the 20th century. The 
economy of the 21st century will require increased amounts of reliable, 
clean and affordable electricity. Coal, the nation's most abundant 
energy resource, can help meet these requirements if new technologies 
are developed and deployed to convert this resource to electricity more 
efficiently and cleanly. I hope to soon introduce the National 
Electricity and Environmental Technology Act, which would make such a 
venture possible.
    By the year 2020, U.S. electricity consumption is projected to grow 
35% and worldwide electricity is projected to grow by 70%. Today, more 
than half of that U.S. electricity is generated from abundant, low-cost 
domestic coal. In fact, coal constitutes more than 85% of U.S. fossil 
fuel resources, enough to last more than 250 years at current rates of 
consumption.
    Not only does an ample supply of coal exist, but the electricity it 
produces is significantly cheaper than other sources of power. For 
example, on average the cost of electricity from coal is less than one-
half the cost of electricity generated from natural gas or oil, and it 
also costs less than nuclear power. Additionally, even though 
electricity produced from coal has tripled since 1970, overall 
emissions from U.S. coal-based generating plants have been reduced by 
one-third.
    Despite the benefits of using coal to produce electricity, 
uncertainty about new environmental requirements and electricity 
deregulation, as well as optimistic projections about natural gas 
prices, has led generators to rely heavily on natural gas for new 
electric generating capacity. Consumption of natural gas for 
electricity is projected to triple by 2020.
    Such widespread use of an expensive resource could prove 
detrimental to many Americans. Average wellhead prices for natural gas 
in 2000 exceeded $9.00/mcf, well above the $3.66/mcf price DOE 
forecasted for 2020. Large-scale conversion to natural gas generation 
could double retail electric prices--creating a significant hardship 
for low and fixed income consumers. It would also eliminate an 
advantage the U.S. enjoys in the world marketplace.
    Currently, only expensive retrofit technologies can achieve the 
more stringent emissions limits being considered for existing coal-
based generating facilities. Advanced technologies for converting coal 
into electricity could effectively eliminate health-based pollutants 
and substantially improve efficiency in new power generating 
facilities. Unfortunately, initial commercial deployment of new coal 
generating technologies entails significant risk which generators are 
unwilling to accept in a newly competitive electricity market.
    The National Electricity and Environmental Technology Act provides 
a measure of burden-sharing to cushion the cost of improving the 
environmental performance of existing coal-based generating facilities. 
It also stimulates deployment of advanced technologies to further 
reduce emissions and improve efficiency in new generating facilities, 
allowing our most abundant domestic energy resource to help meet the 
nation's growing need for clean, reliable and affordable electricity.
    Title I of the bill provides for an accelerated technology research 
and development program for new and existing coal-based generation 
facilities. The Secretary of Energy, in consultation with the private 
sector, is authorized to establish R&D cost and performance goals that 
can be achieved by 2007, 2015 and 2020 by existing and new coal-based 
generating facilities. The bill authorizes the Secretary to study the 
technologies capable of achieving the performance goals and make 
recommendations for the programs required to develop those 
technologies. It also authorizes the appropriations necessary to carry 
out the R&D program to advance the technologies identified in the study 
as being capable of achieving the cost and performance goals. The 
Secretary will be authorized to carry out a power plant improvement 
initiative that will demonstrate commercial applications to new and 
existing plants of coal-based technologies that will advance the 
efficiency, environmental performance and cost competitiveness beyond 
that of facilities in service or demonstrated to date. The bill allows 
for 50% of the private sector cost-sharing along with the use of 
uncommitted Clean Coal Technology program funds to provide the federal 
share of the demonstration projects.
    Title II makes the provisions for tax credits for emission 
reductions and efficiency improvements in existing coal-based 
generating facilities. It establishes a 10% investment tax credit for 
investments in systems of continuous emissions controls retrofitted to 
existing coal-based electricity generating units. Additionally, it 
creates a production tax credit (0.34 cents/kWH) for the first 10 years 
of electricity output from existing coal-based generation units that 
are repowered with qualifying clean coal technologies.
    Title III makes the provisions for tax credits for early commercial 
applications of advanced coal-based generating technologies. It 
establishes a 10% investment tax credit for investment in qualifying 
advanced coal-based generating technologies for use in new or repowered 
units. It establishes an efficiency-based production tax credit for 
electricity generated during the first 10 years of operation of a new 
or repowered unit using qualified advanced coal-based generation 
technologies. In subsequent years, eligible technologies must achieve 
increasingly higher levels of efficiency to qualify for the credits. 
Finally, it establishes a risk pool amounting to 5% of the cost of the 
new technologies to help defray the cost of any modifications necessary 
to achieve design performance levels.
    Title IV provides credits for certain exempt organizations and 
government units. Additionally, it establishes an offset against 
payments required as an annual return on appropriations by the 
Tennessee Valley Authority.

                                
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