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[Senate Report 107-140]
[From the U.S. Government Publishing Office]

                                                       Calendar No. 320
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-140

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

 
                   ENERGY TAX INCENTIVES ACT OF 2002

                                _______
                                

                 March 1, 2002.--Ordered to be printed

                                _______
                                

   Mr. Baucus, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 1979]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance reported an original bill (S. 
1979) to provide energy tax incentives, having considered the 
same, reports favorably thereon and recommends that the bill do 
pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................3
II. Explanation of the Bill...........................................3
    Title I. Renewable Energy.........................................3
          A. Extension and Modification of the Section 45 
              Electricity Production Credit (secs. 101-104 of the 
              bill and sec. 45 of the Code)......................     3
    Title II. Alternative Vehicles and Fuel Incentives................6
          A. Modifications and Extensions of Provisions Relating 
              to Electric Vehicles, Clean-Fuel Vehicles, and 
              Clean-Fuel Vehicle Refueling Property (secs. 201-20 
              of the bill and sec. 30 and 179A of the Code and 
              new Code secs. 30B, 30C, and 40A)..................     6
          B. Modifications to Small Producer Ethanol Credit (sec. 
              206 of the bill and secs. 38, 40, 87 and 469 of the 
              Code)..............................................    11
          C. Transfer Full Amount of Excise Tax Imposed on 
              Gasohol to the Highway Trust Fund (sec. 207 of the 
              bill and sec. 9503 of the Code)....................    12
          D. Modify Income Tax and Excise Tax Rules Governing 
              Treatment of ETBE (sec. 208 of the bill and secs. 
              40 and 4081 of the Code)...........................    13
          E. Income Tax Credit and Excise Tax Rate Reduction for 
              Biodiesel Fuel Mixtures (sec. 209 of the bill and 
              new sec. 40B of the Code)..........................    14
    Title III. Conservation and Energy Efficiency Provisions.........15
          A. Business Credit for Construction of New Energy-
              Efficient Homes (sec. 301 of the bill and new sec. 
              45G of the Code)...................................    15
          B. Tax Credit for Energy-Efficient Appliances (sec. 302 
              of the bill and new sec. 45H of the Code)..........    17
          C. Credit for Residential Energy Efficient Property 
              (sec. 303 of the bill and new sec. 25C of the Code)    18
          D. Business Tax Incentives for Fuel Cells (sec. 304 of 
              the bill and sec. 48 of the Code)..................    20
          E. Allowance of Deduction for Energy-Efficient 
              Commercial Building Property (sec. 305 of the bill 
              and new sec. 179B of the Code).....................    21
          F. Allowance of Deduction for Qualified Energy 
              Management Devices and Retrofitted Qualified Meters 
              (sec. 306 of the bill and new sec. 179C of the 
              Code)..............................................    22
          G. Three-Year Applicable Recovery Period for 
              Depreciation of Qualified Energy Management Devices 
              (sec. 307 of the bill and sec. 168 of the Code)....    23
          H. Energy Credit for Combined Heat and Power System 
              Property (sec. 308 of the bill and sec. 48 of the 
              Code)..............................................    24
          I. Credit for Energy Efficiency Improvements to 
              Existing Homes (sec. 309 of the bill and new sec. 
              25D of the Code)...................................    25
    Title IV. Clean Coal Incentives..................................27
          A. Investment and Production Credits for Clean Coal 
              Technology (secs. 401, 411-412, and 421 of the bill 
              and new Code secs. 45I, 45J, and 48A)..............    27
    Title V. Oil and Gas Provisions..................................31
          A. Tax Credit for Oil and Gas Production from Marginal 
              Wells (sec. 501 of the bill and new sec. 45K of the 
              Code)..............................................    31
          B. Natural Gas Gathering Lines Treated as Seven-Year 
              Property (sec. 502 of the bill and sec. 168 of the 
              Code)..............................................    32
          C. Repeal of Requirement of Certain Approved Terminals 
              to Offer Dyed Diesel or Kerosene for Nontaxable 
              Purposes (sec. 503 of the bill and sec. 4101 of the 
              Code)..............................................    33
          D. Expensing of Capital Costs Incurred and Credit for 
              Production in Complying with Environmental 
              Protection Agency Sulfur Regulations (secs. 504 and 
              505 of the bill and new secs. 45L and 179D of the 
              Code)..............................................    34
          E. Determination of Small Refiner Exception to Oil 
              Depletion Deduction (sec. 506 of the bill and sec. 
              613A of the Code)..................................    35
          F. Extension of Suspension of Taxable Income Limit With 
              Respect to Marginal Production (sec. 507 of the 
              bill and sec. 613A of the Code)....................    36
          G. Amortization of Geological and Geophysical 
              Expenditures (sec. 508 of the bill and new sec. 199 
              of the Code).......................................    38
          H. Amortization of Delay Rental Payments (sec. 509 of 
              the bill and new sec. 199A of the Code)............    41
          I. Extension and Modification of Credit for Producing 
              Fuel From a Non-Conventional Source (secs. 510 and 
              511 of the bill and sec. 29 of the Code)...........    41
          J. Natural Gas Distribution Lines Treated as Fifteen-
              Year Property (sec. 512 of the bill and sec. 168 of 
              the Code)..........................................    44
    Title VI. Provisions Relating to Electric Industry Restructuring.45
          A. Ongoing Study and Reports With Regard to Tax Issues 
              Resulting from Future Restructuring Decisions (sec. 
              601 of the bill)...................................    46
          B. Modification to Special Rules for Nuclear 
              Decommissioning Costs (sec. 602 of the bill and 
              sec. 468A of the Code).............................    46
          C. Treatment of Certain Income of Electric Cooperatives 
              (sec. 603 of the bill and sec. 501 of the Code)....    49
    Title VII. Additional Provisions.................................53
          A. Extension of Accelerated Depreciation and Wage 
              Credit Benefits on Indian Reservations (sec. 701 of 
              the bill and secs. 45A and 168(j) of the Code).....    53
          B. GAO Study (sec. 702 of the bill)....................    55
III.Budget Effects of the Bill.......................................56

          A. Committee Estimates.................................    56
          B. Budget Authority and Tax Expenditures...............    60
          C. Consultation with Congressional Budget Office.......    60
IV. Votes of the Committee...........................................63
 V. Regulatory Impact and Other Matters..............................63
          A. Regulatory Impact...................................    63
          B. Unfunded Mandates Statement.........................    64
          C. Tax Complexity Analysis.............................    64
VI. Changes in Existing Law Made by the Bill, as Reported............64

                       I. LEGISLATIVE BACKGROUND

    The Senate Committee on Finance marked up an original bill, 
S. 1979 (the ``Energy Tax Incentives Act of 2002''), on 
February 13, 2002, and, with a quorum present, ordered the bill 
favorably reported by a unanimous voice vote on that date.
    The Committee held a series of hearings in 2001 to consider 
the role of tax incentives in energy policy. The first hearing, 
on July 10, 2001, addressed alternative vehicles and fuels and 
tax incentives to encourage their development. The second 
hearing, on July 11, 2001, considered incentives for domestic 
production of conventional fuels and development of alternative 
and renewable energy sources. The third hearing, in Billings, 
Montana, on August 24, 2001, addressed rural energy needs and 
how energy tax incentives might address those needs.\1\ A 
fourth hearing on electric utility restructuring was scheduled 
for September 12, 2001, but was cancelled after the September 
11, 2001 terrorist attacks.
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    \1\ See S. Hrg. 107-267 and S. Hrg. 107-192.
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                      II. EXPLANATION OF THE BILL

                       TITLE I. RENEWABLE ENERGY

A. Extension and Modification of the Section 45 Electricity Production 
                                 Credit

(Secs. 101-104 of the bill and sec. 45 of the Code)

                              Present Law

    An income tax credit is allowed for the production of 
electricity from either qualified wind energy, qualified 
``closed-loop'' biomass, or qualified poultry waste facilities 
(sec. 45). The amount of the credit is 1.5 cents per kilowatt 
hour (indexed for inflation) of electricity produced. The 
amount of the credit was 1.7 cents per kilowatt hour for 2001. 
The credit is reduced for grants, tax-exempt bonds, subsidized 
energy financing, and other credits.
    The credit applies to electricity produced by a wind energy 
facility placed in service after December 31, 1993, and before 
January 1, 2002, to electricity produced by a closed-loop 
biomass facility placed in service after December 31, 1992, and 
before January 1, 2002, and to a poultry waste facility placed 
in service after December 31, 1999, and before January 1, 2002. 
The credit is allowable for production during the 10-year 
period after a facility is originally placed in service. In 
order to claim the credit, a taxpayer must own the facility and 
sell the electricity produced by the facility to an unrelated 
party. In the case of a poultry waste facility, the taxpayer 
may claim the credit as a lessee/operator of a facility owned 
by a governmental unit.
    Closed-loop biomass is plant matter, where the plants are 
grown for the sole purpose of being used to generate 
electricity. It does not include waste materials (including, 
but not limited to, scrap wood, manure, and municipal or 
agricultural waste). The credit also is not available to 
taxpayers who use standing timber to produce electricity. 
Poultry waste means poultry manure and litter, including wood 
shavings, straw, rice hulls, and other bedding material for the 
disposition of manure.
    The credit for electricity produced from wind, closed-loop 
biomass, or poultry waste is a component of the general 
business credit (sec. 38(b)(8)). The credit, when combined with 
all other components of the general business credit, generally 
may not exceed for any taxable year the excess of the 
taxpayer's net income tax over the greater of (1) 25 percent of 
net regular tax liability above $25,000, or (2) the tentative 
minimum tax. For credits arising in taxable years beginning 
after December 31, 1997, an unused general business credit 
generally may be carried back one year and carried forward 20 
years (sec. 39). To coordinate the carryback with the period of 
application for this credit, the credit for electricity 
produced from closed-loop biomass facilities may not be carried 
back to a tax year ending before 1993 and the credit for 
electricity produced from wind energy may not be carried back 
to a tax year ending before 1994 (sec. 39).

                           Reasons for Change

    The Committee recognizes that the section 45 production 
credit has fostered additional electricity generation capacity 
in the form of non-polluting wind power. The Committee believes 
it is important to continue this tax credit by extending the 
placed in service date for such facilities to bring more wind 
energy to the United States electric grid. The Committee 
alsobelieves it is important to extend the placed in service date for 
closed-loop biomass facilities and poultry waste facilities to give 
those potential fuel sources an opportunity in the market place. The 
Committee also believes it is appropriate to include in qualifying 
facilities those facilities that co-fire closed-loop biomass fuels with 
coal.
    Based on the success of the section 45 credit in the 
development of wind power as an alternative source of 
electricity generation, the committee further believes the 
country will benefit from the expansion of the production 
credit to certain other ``environmentally friendly'' sources of 
electricity generation such as swine and bovine waste 
nutrients, geothermal power, solar power, and open-loop 
biomass. While open-loop biomass facilities are not pollution 
free, they do address environmental concerns related to waste 
disposal. In addition, these potential power sources further 
diversify the nation's energy supply.
    Because tax-exempt persons such as public power systems and 
cooperatives provide a significant percentage of electricity in 
the United States, the Committee believes it is important to 
provide the incentive for production from renewable resources 
to these persons in addition to taxable persons.
    Lastly, the Committee believes that certain pre-existing 
facilities should qualify for the section 45 production credit, 
albeit at a reduced rate. These facilities previously received 
explicit subsidies, or implicit subsidies provided through rate 
regulation. In a deregulated electricity market, these 
facilities, and the environmental benefits they yield, may be 
uneconomic without additional economic incentive. The Committee 
believes the benefits provided by such existing facilities 
warrant their inclusion in the section 45 production credit.

                        Explanation of Provision

    The provision extends the placed in service date for wind 
facilities, closed-loop biomass facilities, and poultry waste 
facilities to facilities placed in service after December 31, 
1993 (December 31, 1992 in the case of closed-loop biomass 
facilities and December 31, 1999 in the case of poultry waste 
facilities) and before January 1, 2007.
    The provision also defines four new qualifying energy 
resources: open-loop biomass, swine and bovine waste nutrients, 
geothermal energy, and solar energy. Open-loop biomass is 
defined as any solid, nonhazardous, cellulosic waste material 
which is segregated from other waste materials and which is 
derived from any of forest-related resources, solid wood waste 
materials, or agricultural sources. Eligible forest-related 
resources are mill residues, precommercial thinnings, slash, 
and brush, but not including old-growth timber (other than old 
growth timber that has been permitted or contracted for removal 
by appropriate Federal authority under the National 
Environmental Policy Act or appropriate State law authority). 
Solid wood waste materials include waste pallets, crates, 
dunnage, manufacturing and construction wood wastes (other than 
pressure-treated, chemically-treated, or painted wood wastes), 
and landscape or right-of-way tree trimmings. Agricultural 
sources include orchard tree crops, vineyard, grain, legumes, 
sugar, and other crop by-products or residues. However, 
qualifying open-loop biomass does not include municipal solid 
waste (garbage), gas derived from biodegradation of solid 
waste, or paper that is commonly recycled. Swine and bovine 
waste nutrients are defined as swine and bovine manure and 
litter, including bedding material for the disposition of 
manure. Geothermal energy is energy derived from a geothermal 
deposit which is a geothermal reservoir consisting of natural 
heat which is stored in rocks or in an aqueous liquid or vapor 
(whether or not under pressure).
    Qualifying open-loop biomass facilities are facilities 
using open-loop biomass to produce electricity that are placed 
in service prior to January 1, 2005. Qualifying swine and 
bovine waste nutrient facilities are facilities using swine and 
bovine waste nutrients to produce electricity that are placed 
in service after the date of enactment and before January 1, 
2007. Qualifying geothermal energy facilities are facilities 
using geothermal deposits to produce electricity that are 
placed in service after the date of enactment and before 
January 1, 2007. Qualifying solar energy facilities are 
facilities using solar energy to generate electricity that are 
placed in service after the date of enactment and before 
January 1, 2007.
    In the case of qualifying open-loop biomass facilities, 
taxpayers may claim the otherwise allowable credit for a three-
year period. For a facility placed in service after the date of 
enactment, the three-year period commences when the facility is 
placed in service. In the case of open-loop biomass facility 
originally placed in service before the date of enactment, the 
three-year period commences after December 31, 2002 and the 
otherwise allowable 1.5 cent-per-kilowatt-hour credit (adjusted 
for inflation) is reduced to 1.0 cent-per-kilowatt-hour credit 
(adjusted for inflation). In the case of qualifying geothermal 
energy and solar energy facilities, taxpayers may claim the 
otherwise allowable credit for the five-year period commencing 
when the facility is placed in service.
    The provision modifies present law to provide that 
qualifying closed-loop biomass facilities include any facility 
originally placed in service before December 31, 1992 and 
modified to use closed-loop biomass to co-fire with coal before 
January 1, 2007. The taxpayer may claim credit for all 
electricity produced at such qualifying facilities with no 
reduction for the thermal value of the coal.
    In the case of qualifying open-loop biomass facilities and 
qualifying closed-loop biomass facilities modified to use 
closed-loop biomass to co-fire with coal, the provision permits 
a lessee operator to claim the credit in lieu of the owner of 
the facilities.
    The provision provides that certain persons (public 
utilities, electric cooperatives, rural electric cooperatives, 
and Indian tribes) may sell, trade, or assign to any taxpayer 
any credits that would otherwise be allowable to that person, 
if that person were a taxpayer, for production of electricity 
from a qualified facility owned by such person. However, any 
credit sold, traded, or assigned may only be sold, traded, or 
assigned once. Subsequent trades are not permitted. In 
addition, any credits that would otherwise be allowable to such 
person, to the extent provided by the Administrator of the 
Rural Electrification Administration, may be applied as a 
prepayment to certain loans or obligations undertaken by such 
person under the Rural Electrification Act of 1936.
    Lastly, the provision repeals the present-law reduction in 
allowable credit for facilities financed with tax-exempt bonds 
or with certain loans received under the Rural Electrification 
Act of 1936.

                             Effective Date

    The provision generally is effective for electricity sold 
from qualifying facilities after the date of enactment. For 
electricity produced from qualifying open-loop biomass 
facilities originally placed in service prior to the date of 
enactment, the provision is effective January 1, 2003.

           TITLE II. ALTERNATIVE VEHICLES AND FUEL INCENTIVES

  A. Modifications and Extensions of Provisions Relating to Electric 
    Vehicles, Clean-Fuel Vehicles, and Clean-Fuel Vehicle Refueling 
                                Property

(Secs. 201-205 of the bill and sec. 30 and 179A of the Code and new 
        Code secs. 30B, 30C, and 40A)

                              Present Law

    A 10-percent tax credit is provided for the cost of a 
qualified electric vehicle, up to a maximum credit of $4,000 
(sec. 30). 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 electrical current, the original use of which commences with 
the taxpayer, and that is acquired for the use by the taxpayer 
and not for resale. The full amount of the credit is available 
for purchases prior to 2002. The credit phases down in the 
years 2002 through 2004, and is unavailable for purchases after 
December 31, 2004. There is no carry forward or carryback of 
the credit for electric vehicles.
    Certain costs of qualified clean-fuel vehicle property and 
clean-fuel vehicle refueling property may be expensed and 
deducted when such property is placed in service (sec. 179A). 
Qualified clean-fuel vehicle property includes motor vehicles 
that use certain clean-burning fuels (natural gas, liquefied 
natural gas, liquefied petroleum gas, hydrogen, electricity and 
any other fuel at least 85 percent of which is methanol, 
ethanol, or any other alcohol or ether). The maximum amount of 
the deduction is $50,000 for a truck or van with a gross 
vehicle weight over 26,000 pounds or a bus with seating 
capacities of at least 20 adults; $5,000 in the case of a truck 
or van with a gross vehicle weight between 10,000 and 26,000 
pounds; and $2,000 in the case of any other motor vehicle. 
Qualified electric vehicles do not qualify for the clean-fuel 
vehicle deduction.
    Clean-fuel vehicle refueling property comprises property 
for the storage or dispensing of a clean-burning fuel, if the 
storage or dispensing is the point at which the fuel is 
delivered into the fuel tank of a motor vehicle. Clean-fuel 
vehicle refueling property also includes property for the 
recharging of electric vehicles, but only if the property is 
located at a point where the electric vehicle is recharged. Up 
to $100,000 of such property at each location owned by the 
taxpayer may be expensed with respect to that location.
    The deduction phases down in the years 2002 through 2004, 
and is unavailable for purchases after December 31, 2004.

                           Reasons for Change

    The Committee believes that further investments in 
alternative fuel and advanced technology vehicles are necessary 
to transform automotive transportation in the United States to 
be cleaner, more fuel efficient, and less reliant on petroleum 
fuels.
    Tax benefits provided directly to the consumer to lower the 
cost of new technology and alternative-fueled vehicles can help 
lower consumer resistance to these technologies by making the 
vehicles more price competitive with purely petroleum-based 
fuel vehicles and creating increased demand for manufacturers 
to produce the technologies. The eventual goal is mass 
production and mass market acceptance of new technology 
vehicles. No one technology has established that it alone 
provides the solution. Therefore, it is appropriate to provide 
tax benefits tailored to specific vehicle technologies, as long 
as the vehicle's engine technology directly replaces gasoline 
and diesel fuel with an alternative energy source.
    The Committee expects that hybrid motor vehicles and 
dedicated alternative fuel vehicles are the near-term 
technological advancement that will replace gasoline- and 
diesel-burning engines with alternative-powered engines, and 
electrical and fuel cell vehicles will be the long-term 
technological advancement.
    Applying these technologies to medium and heavy-duty trucks 
and buses is also important for transforming the transportation 
sector to a cleaner, more fuel efficient sector less reliant on 
petroleum-based fuels. Therefore, it is appropriate to use tax 
incentives to encourage the introduction of advanced vehicle 
technologies in large trucks and buses.
    In addition, because new vehicle technologies require new 
fuels and infrastructure to deliver those fuels, investments in 
new technology automobiles alone are not sufficient to 
transform the market to accept these vehicles. Therefore, 
substantial investments in new refueling stations and new fuels 
are also necessary to make alternative vehicle technologies 
feasible.

                        Explanation of Provision

Alternative motor vehicle credits

    The provision provides a credit to the taxpayer for the 
purchase of a new qualified fuel cell motor vehicle, a new 
qualified alternative fuel motor vehicle, and a new qualified 
hybrid motor vehicle. In general, the credit amount is 
determined by calculation of a base credit for attainment of a 
particular technology and an additional credit if the vehicle 
attains certain improvements in fuel economy or complies with 
an emissions standard in advance of the date the standard goes 
into effect. The credit allowable in the taxable year cannot 
exceed the difference between the taxpayer's regular tax 
(reduced by certain other credits) and the taxpayer's tentative 
minimum tax. The taxpayer may carry forward unused credits for 
20 years or carry unused credits back for three years (but not 
carried back to taxable years beginning before October 1, 
2002). In the case of property purchased by tax-exempt persons, 
the seller may claim the credit. In addition to the 
specifications described below, a qualifying vehicle must meet 
certain emissions standards.
            Fuel cell motor vehicles
    The base credit for the purchase of new qualified fuel cell 
motor vehicles ranges between $4,000 and $40,000 depending upon 
the weight class of the vehicle. For automobiles and light 
trucks, the otherwise allowable credit amount ($4,000) is 
increased by an amount from $1,000 to$4,000 if the vehicle 
meets certain fuel economy increases compared to a stated standard.\2\ 
Credit may not be claimed for qualified fuel cell motor vehicles 
purchased after December 31, 2011. The taxpayer's basis in the property 
is reduced by the amount of credit claimed.
---------------------------------------------------------------------------
    \2\ The fuel efficiency comparison of fuel cell vehicles is to be 
made on the basis of Btu equivalent measures of the fuel utilized in 
the fuel cell to one gallon of gasoline.
---------------------------------------------------------------------------
            Hybrid motor vehicles
    The base credit for the purchase of a new qualified hybrid 
motor vehicle ranges from $250 to $10,000 depending upon the 
weight of the vehicle and the maximum power available from the 
vehicle's rechargeable energy storage system.\3\ For 
automobiles and light trucks, the otherwise allowable credit 
amount ($250 to $1,000) is increased by an amount from $500 to 
$3,000 if the vehicle meets certain fuel economy increases. For 
heavy duty hybrid motor vehicles, the otherwise allowable 
credit ($1,000 to $10,000) is increased depending upon the 
vehicle's weight and provided the vehicle meets certain 2007 
(and beyond) emissions standards. The amount of credit is 
increased by between $3,500 and $14,000 for vehicles placed in 
service in 2002; is increased by between $3,000 and $12,000 for 
vehicles placed in service in 2003, is increased by between 
$2,500 and $10,000 for vehicles placed in service in 2004, is 
increased by between $2,000 and $8,000 for vehicles placed in 
service in 2005, and is increased by between $1,500 and $6,000 
for vehicles placed in service in 2006. Credit may not be 
claimed for qualified hybrid motor vehicles purchased after 
December 31, 2006. The taxpayer's basis in the property is 
reduced by the amount of credit claimed.
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    \3\ In the case of an electric rechargeable energy storage system 
consisting of a battery pack, the percentage of maximum available power 
is the electrical power verified by the 10 second discharge test 
divided by the sum of the electric power plus the SAE net engine power 
for the conventional engine. In order to determine this percentage for 
any vehicle, the manufacturer shall need to document both SAE net 
engine power and verification of the net electric power of the battery 
pack over a 10-second discharge. The constant power discharge applied 
for this verification is the same experienced by the battery during 
nominal operating conditions in the vehicle as specified by the 
manufacturer (i.e., the battery capability as limited by the electric 
motor, power electronics and/or control logic on the vehicle as 
applicable).
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            Alternative fuel motor vehicles
    The base credit for the purchase of a new alternative fuel 
motor vehicle equals 40 percent of the incremental cost of such 
vehicle. The otherwise allowable credit for 40 percent of the 
incremental cost is increased by an additional 30 percent of 
the incremental cost of the vehicle if the vehicle meets 
certain emissions standards. For computation of the credit, the 
incremental cost of the vehicle may not exceed between $5,000 
and $40,000 (resulting in a maximum total credit of between 
$3,500 and $28,000) depending upon the weight of the vehicle. 
For this purpose, incremental cost generally is defined as the 
amount of the increase of the manufacturer's suggested retail 
price of such a vehicle compared to the manufacturer's 
suggested retail price of a comparable gasoline or diesel 
model. Qualifying alternative fuel motor vehicles are vehicles 
that operate only on qualifying alternative fuels and are 
incapable of operating on gasoline or diesel (except in the 
extent gasoline or diesel fuel is part of a qualified mixed 
fuel). Qualifying alternative fuels are compressed natural gas, 
liquefied natural gas, liquefied petroleum gas, hydrogen, and 
any liquid mixture consisting of at least 85 percent methanol.
    Taxpayers purchasing certain mixed-fuel vehicles also may 
claim the alternative fuel motor vehicle credit, at a reduced 
rate. A mixed-fuel vehicle is a vehicle with gross weight of 
seven tons or more and is certified by the manufacturer as 
being able to operate on a combination of alternative fuel and 
a petroleum-based fuel. A qualifying mixed-fuel vehicle must 
use at least 75 percent alternative fuel (a ``75/25 mixed-fuel 
vehicle'') or 90 percent alternative fuel (a ``90/10 mixed-fuel 
vehicle'') and be incapable of operating on a mixture 
containing less than 75 percent alternative fuel in the case of 
a 75/25 vehicle (less than 90 percent alternative fuel in the 
case of a 90/10 vehicle). A taxpayer purchasing a 75/25 mixed-
fuel vehicle may claim 70 percent of the otherwise allowable 
credit. A taxpayer purchasing a 90/10 mixed-fuel vehicle may 
claim 90 percent of the otherwise allowable credit.
    Credit may not be claimed for qualified alternative fuel 
motor vehicles purchased after December 31, 2006. The 
taxpayer's basis in the property is reduced by the amount of 
credit claimed.

Modification of credit for qualified electric vehicles

    The provision modifies the present-law credit for electric 
vehicles to provide that the credit for qualifying vehicles 
generally ranges between $3,500 and $40,000 depending upon the 
weight of the vehicle and, for certain vehicles, the driving 
range of the vehicle. In the case of property purchased by tax-
exempt persons, the seller may claim the credit. The taxpayer 
would be ineligible for the deduction allowable under present-
law section 179A for a qualified battery electric vehicle on 
which a credit is allowable. The provision also extends the 
expiration date of the credit from December 31, 2004 to 
December 31, 2006 and would repeal the phaseout schedule of 
present law. The taxpayer would be able to carry forward unused 
credits for 20 years or carry unused credits back for three 
years (but not carried back to taxable years beginning before 
October 1, 2002).

Extension of present-law section 179A

    The provision extends the deduction for costs of qualified 
clean-fuel vehicle property and clean-fuel vehicle refueling 
property through December 31, 2006. The phase-down of present 
law for clean fuel vehicles would be modified such that the 
taxpayer may claim 75 percent of the otherwise allowable 
deduction in 2003 and 2004, 50 percent of the otherwise 
allowable deduction in 2005, and 25 percent of the otherwise 
allowable deduction in 2006.

Credit for installation of alternative fueling stations

    The provision permits taxpayers to claim a 50-percent 
credit for the cost of installing clean-fuel vehicle refueling 
property to be used in a trade or business of the taxpayer or 
installed at the principal residence of the taxpayer. In the 
case of retail clean-fuel vehicle refueling property the 
allowable credit may not exceed $30,000. In the case of 
residential clean-fuel vehicle refueling property the allowable 
credit may not exceed $1,000. The taxpayer's basis in the 
property is reduced by the amount of the credit and the 
taxpayer may not claim deductionsunder section 179A with 
respect to property for which the credit is claimed. In the case of 
refueling property installed on property owned or used by a tax-exempt 
person, the taxpayer that installs the property may claim the credit. 
To be eligible for the credit, the property must be placed in service 
before January 1, 2007. The credit allowable in the taxable year cannot 
exceed the difference between the taxpayer's regular tax (reduced by 
certain other credits) and the taxpayer's tentative minimum tax. The 
taxpayer may carry forward unused credits for 20 years.

Credit for retail sale of alternative fuels

    The provision permits taxpayers to claim a credit equal to 
the gasoline gallon equivalent of 30 cents per gallon of 
alternative fuel sold in 2002 and 2003, 40 cents per gallon in 
2004, and 50 cents per gallon thereafter. Qualifying 
alternative fuels are compressed natural gas, liquefied natural 
gas, liquefied petroleum gas, hydrogen, any liquid mixture 
consisting of at least 85 percent methanol, and any liquid 
mixture consisting of at least 85 percent ethanol. The gasoline 
gallon equivalency of any alternative fuel is determined by 
reference to the British thermal unit content of the 
alternative fuel compared to a gallon of gasoline. The credit 
may be claimed for sales prior to January 1, 2007. Under the 
provision, the credit is part of the general business credit.

                             Effective Date

    The provisions relating to the credit for new fuel cell 
motor vehicles, hybrid motor vehicles, and alternative fuel 
motor vehicles, the credit for battery electric vehicles, the 
credit for alternative fuel vehicle refueling property, and 
deductions for clean fuel vehicles and clean fuel refueling 
property are effective for property placed in service after 
September 30, 2002, in taxable years ending after September 30, 
2002. The credit for retail sales of alternative fuels is 
effective for sales of fuels after September 30, 2002, in 
taxable years ending after September 30, 2002.

           B. Modifications to Small Producer Ethanol Credit

(Sec. 206 of the bill and secs. 38, 40, 87 and 469 of the Code)

                              Present Law

Small producer credit

    Present law provides several tax benefits for ethanol and 
methanol produced from renewable sources (e.g., biomass) that 
are used as a motor fuel or that are blended with other fuels 
(e.g., gasoline) for such a use. In the case of ethanol, a 
separate 10-cents-per-gallon credit for small producers, 
defined generally as persons whose production does not exceed 
15 million gallons per year and whose production capacity does 
not exceed 30 million gallons per year. The alcohol fuels tax 
credits are includible in income. This credit, like tax credits 
generally, may not be used to offset alternative minimum tax 
liability. The credit is treated as a general business credit, 
subject to the ordering rules and carryforward/carryback rules 
that apply to business credits generally. The alcohol fuels tax 
credit is scheduled to expire after December 31, 2007.

Taxation of cooperatives and their patrons

    Under present law, cooperatives in essence are treated as 
pass-through entities in that the cooperative is not subject to 
corporate income tax to the extent the cooperative timely pays 
patronage dividends. Under present law, the only excess credits 
that may be flowed-through to cooperative patrons are the 
rehabilitation credit (sec. 47), the energy property credit 
(sec. 48(a)), and the reforestation credit (sec. 48(b)).

                           Reasons for Change

    The Committee believes provisions allowing greater 
flexibility in utilizing the benefits of the small ethanol 
producer credit are consistent with the objective of the bill 
to increase availability of alternative fuels.

                        Explanation of Provision

    The provision makes several modifications to the rules 
governing the small producer ethanol credit. First, the 
provision liberalizes the definition of an eligible small 
producer to include persons whose production capacity does not 
exceed 60 million gallons. Second, the provision allows 
cooperatives to elect to pass-through the small ethanol 
producer credits to its patrons. The credit allowed to a 
particular patron is that proportion of the credit that the 
cooperative elects to pass-through for that year as the amount 
of patronage of that patron for that year bears to total 
patronage of all patrons for that year.
    Third, the provision repeals the rule that includes the 
small producer credit in income of taxpayers claiming it and 
liberalizes the ordering and carryforward/carryback rules for 
the small producer ethanol credit. Fourth, the provision allows 
the small producer credit to be claimed against the alternative 
minimum tax. Finally, the provision provides that the small 
producer ethanol credit is not treated as derived from a 
passive activity under the Code rules restricting credits and 
deductions attributable to such activities.

                             Effective Date

    The provision is effective for taxable years beginning 
after date of enactment.

C. Transfer Full Amount of Excise Tax Imposed on Gasohol to the Highway 
                               Trust Fund

(Sec. 207 of the bill and sec. 9503 of the Code)

                              present law

    An 18.4 cents-per-gallon excise tax is imposed on gasoline. 
The tax is imposed when the fuel is removed from a refinery 
unless the removal is to a bulk transportation facility (e.g., 
removal by pipeline or barge to a registered terminal). In the 
case gasoline removed in bulk by registered parties, tax is 
imposed when the gasoline is removed from the terminal 
facility, typically by truck (i.e., ``breaks bulk''). If 
gasoline is sold to an unregistered party before it is removed 
from a terminal, tax is imposed on that sale. When the gasoline 
subsequently breaks bulk, a second tax is imposed. The payor of 
the second tax may file a refund claim if it can prove payment 
of the first tax. The party liable for payment of the gasoline 
excise tax is called a ``position holder,'' defined as the 
owner of record inside the refinery or terminal facility.
    A 53-cents-per-gallon income tax credit is allowed for 
ethanol used as a motor fuel (the ``alcohol fuels credit''). 
The benefit of the alcohol fuels tax credit may be claimed as a 
reduction in excise tax payments when the ethanol is blended 
with gasoline (``gasohol''). The reduction is based on the 
amount of ethanol contained in the gasohol. The excise tax 
benefits apply to gasohol blends of 90 percent gasoline/10 
percent ethanol, 92.3 percent gasoline/7.7 percent ethanol, or 
94.3 percent gasoline/5.7 percent ethanol. The income tax 
credit is based on the amount of alcohol contained in the 
blended fuel.
    In general, 18.3 cents per gallon of the gasoline excise 
tax is deposited in the Highway Trust Fund and 0.1 cent per 
gallon is deposited in the Leaking Underground Storage Tank 
Trust Fund (the ``LUST'' rate). In the case of gasohol with 
respect to which a reduced excise tax is paid, 2.5 cents per 
gallon of the reduced tax is retained in the General Fund. The 
balance of the reduced rate (less the LUST rate) is deposited 
in the Highway Trust Fund.

                           reasons for change

    The Committee believes that it is appropriate that the 
entire amount of alcohol fuel taxes be devoted to the Highway 
Trust Fund.

                        explanation of provision

    The provision transfers the 2.5 cents per gallon of excise 
tax on gasohol that currently is retained in the General Fund 
to the Highway Trust Fund.

                             effective date

    The proposal would be effective on taxes imposed after 
September 31, 2003.

 D. Modify Income Tax and Excise Tax Rules Governing Treatment of ETBE

(Sec. 208 of the bill and secs. 40 and 4081 of the Code)

                              present law

    An 18.4 cents-per-gallon excise tax is imposed on gasoline. 
The tax is imposed when the fuel is removed from a refinery 
unless the removal is to a bulk transportation facility (e.g., 
removal by pipeline or barge to a registered terminal). In the 
case gasoline removed in bulk by registered parties, tax is 
imposed when the gasoline is removed from the terminal 
facility, typically by truck (i.e., ``breaks bulk''). If 
gasoline is sold to an unregistered party before it is removed 
from a terminal, tax is imposed on that sale. When the gasoline 
subsequently breaks bulk, a second tax is imposed. The payor of 
the second tax may file a refund claim if it can prove payment 
of the first tax. The party liable for payment of the gasoline 
excise tax is called a ``position holder,'' defined as the 
owner of record inside the refinery or terminal facility.
    A 53-cents-per-gallon income tax credit is allowed for 
ethanol used as a motor fuel (the ``alcohol fuels credit''). 
The benefit of the alcohol fuels tax credit may be claimed as a 
reduction in excise tax payments when the ethanol is blended 
with gasoline (``gasohol''). The reduction is based on the 
amount of ethanol contained in the gasohol. The excise tax 
benefits apply to gasohol blends of 90 percent gasoline/10 
percent ethanol, 92.3 percent gasoline/7.7 percent ethanol, or 
94.3 percent gasoline/5.7 percent ethanol. The income tax 
credit is based on the amount of alcohol contained in the 
blended fuel.
    ETBE is an ether that is manufactured using ethanol. Unlike 
ethanol, ETBE can be blended with gasoline before the gasoline 
enters a pipeline because ETBE does not result in contamination 
of fuel with water while in transport. Treasury Department 
regulations provide that gasohol blenders may claim the income 
tax credit and excise tax rate reductions for ethanol used in 
the production of ETBE. The regulations also provide a special 
election allowing refiners to claim the benefit of the excise 
tax rate reduction even though the fuel being removed from 
terminals does not contain the requisite percentages of ethanol 
for claiming the excise tax rate reduction.

                           reasons for change

    The Committee believes the tax benefits currently available 
to ethanol used in the production of ETBE should be clarified. 
The provision will simplify significantly the current 
regulatory rules under which the alcohol fuels credit may be 
claimed for alcohol used in the production of ETBE.

                        explanation of provision

    The provision replaces the present-law regulatory 
procedures enabling refiners to claim excise tax benefits on 
ETBE-blended gasohol with a new excise tax credit alternative 
to the alcohol fuels income tax credit. Under the provision in 
lieu of excise tax rate reductions for specified gasohol 
blends, a refiner blending ETBE and gasoline will accrue an 
excise tax credit equal to the amount of the alcohol fuels 
credit or excise tax rate reduction otherwise available for the 
ETBE blended fuel. The refiner may use this credit to offset 
its excise tax liability for highway motor fuels under Code 
section 4081. Alternatively, the credit may be transferred to a 
registered position holder that is a member of the same 
controlled group of corporations as the refiner, and the 
position holder may use the excise tax credit to offset its 
liability for excise taxes under Code section 4081.

                             effective date

    The provision is effective for fuels blended after date of 
enactment.

 E. Income Tax Credit and Excise Tax Rate Reduction for Biodiesel Fuel 
                                Mixtures

(Sec. 209 of the bill and new sec. 40B of the Code)

                              present law

    No income tax credit or excise tax rate reduction is 
provided for biodiesel fuels under present law.
    However, a 53-cents-per-gallon income tax credit (the 
``alcohol fuels credit'') is allowed for ethanol and methanol 
(derived from renewable sources) when the alcohol is used as a 
highway motor fuel. The 53-cents-per-gallon rate is scheduled 
to decline to 51 cents per gallon in two steps, beginning in 
calendar years 2003 and 2005. The benefit of this income tax 
credit may be claimed through reductions in excise taxes paid 
on alcohol fuels. In the case of alcohol blended with other 
fuels (e.g., gasoline), the excise tax rate reductions are 
allowable only for blends of 90 percent gasoline/10 percent 
alcohol, 92.3 percent gasoline/7.7 percent alcohol, or 94.3 
percent gasoline/5.7 percent alcohol. These present law 
provisions are scheduled to expire in 2007.

                           reasons for change

    The Committee believes that providing a new income tax 
credit for biodiesel fuel will promote energy self-sufficiency 
and also is consistent with the environmental objectives of the 
bill.

                        explanation of provision

    A new income tax credit is provided for biodiesel fuel 
mixtures. The structure of the new credit is similar to 
structure of the present-law alcohol fuels credit. Biodiesel is 
defined as virgin vegetable oils derived from corn, soybeans, 
sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 
safflowers, flaxseeds, rice bran, or mustard seeds and meeting 
the requirements of the Environmental Protection Agency under 
section 211 of the Clean Air Act (42 U.S.C. 7545) and the 
American Society of Testing and Materials D6751. The per gallon 
biodiesel credit rate equals one cent for each percentage point 
of biodiesel in the fuels mixture, subject to a maximum credit 
of 20 cents per blended gallon of fuel.
    As with the present-law alcohol fuels credit, the biodiesel 
fuel mixture credit can be claimed as a reduction in excise tax 
paid on these mixtures. Also, like the present-law alcohol 
fuels credit, the amount of the biodiesel fuel mixture credit 
is includible in income.
    The provision further provides for transfers to the Highway 
Trust Fund from the funds of the Commodity Credit Corporation 
of amounts equivalent to the reduction in receipts to the Trust 
Fund resulting from the excise tax rate reduction allowed under 
the provision.

                             effective date

    The biodiesel fuel mixture credit (and excise tax rate 
reductions) is effective for biodiesel fuel blended after 
December 31, 2002, and before January 1, 2006.

        TITLE III. CONSERVATION AND ENERGY EFFICIENCY PROVISIONS

   A. Business Credit for Construction of New Energy-Efficient Homes

(Sec. 301 of the bill and new sec. 45G of the Code)

                              present law

    A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
    The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means 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 (sec. 136).
    There is no present-law credit for the construction of new 
energy-efficient homes.

                           reasons for change

    The Committee recognizes that residential energy use for 
heating and cooling represents a large share of national energy 
consumption, and accordingly believes that measures to reduce 
heating and cooling energy requirements have the potential to 
substantially reduce national energy consumption. The Committee 
further recognizes that the most cost-effective time to 
properly insulate a home is when it is under construction and 
that the most effective mechanism to encourage the utilization 
of energy-efficient components in the construction of new homes 
is through an incentive to the builder. Accordingly, the 
Committee believes that a tax credit for the use of energy-
efficiency components in a home's envelope (exterior windows 
(including skylights) and doors and insulation) or heating and 
cooling appliances will encourage contractors to produce highly 
energy-efficient homes, which in turn will reduce national 
energy consumption. Reduced energy consumption will in turn 
reduce reliance on foreign suppliers of oil and will reduce 
pollution in general.

                        Explanation of Provision

    The proposal provides a credit to an eligible contractor of 
an amount equal to the aggregate adjusted bases of all energy-
efficient property installed in a qualified new energy-
efficient home during construction. The credit cannot exceed 
$1,250 ($2,000) in the case of a new home which has a projected 
level of annual heating and cooling costs that is 30 percent 
(50 percent) less than a comparable dwelling constructed in 
accordance with Chapter 4 of the 2000 International Energy 
Conservation Code.
    The eligible contractor is the person who constructed the 
home, or in the case of a manufactured home, the producer of 
such home. Energy efficiency property is any energy-efficient 
building envelope component (insulation materials or system 
designed to reduce heat loss or gain, and exterior windows, 
including skylights, and doors) and any energy-efficient 
heating or cooling appliance that can, individually or in 
combination with other components, meet the standards for the 
home.
    To qualify as an energy-efficient new home, the home must 
be: (1) a dwelling located in the United States; (2) the 
principal residence of the person who acquires the dwelling 
from the eligible contractor; and (3) certified to have a 
projected level of annual heating and cooling energy 
consumption that meets the standards for either the 30-percent 
or 50-percent credit. The home may be certified according to a 
component-based method or an energy performance based method.
    The component-based method of certification shall be based 
on applicable energy-efficiency specifications or ratings, 
including current product labeling requirements. The Secretary 
shall develop component-based packages that are equivalent in 
energy performance to properties that qualify for the credit.
    The performance-based method of certification shall be 
based on an evaluation of the home in reference to a home which 
uses the same energy source and system heating type, and is 
constructed in accordance with the Chapter 4 of the 2000 
International Energy Conservation Code. The certification shall 
be provided by an individual recognized by the Secretary for 
such purposes.
    The certification process requires that energy savings to 
the consumer be measured in terms of energy costs. To ensure 
consistent and reasonable energy cost analyses, the Department 
of Energy shall include in its rulemaking related to this bill 
specific reference data to be used for qualification for the 
credit.
    The credit will be part of the general business credit. No 
credits attributable to energy efficient homes may be carried 
back to any taxable year ending on or before the effective date 
of the credit.

                             Effective Date

    The credit applies to homes whose construction is 
substantially completed after the date of enactment and which 
are purchased during the period beginning on the date of 
enactment and ending on December 31, 2007.

             B. Tax Credit for Energy-Efficient Appliances

(Sec. 302 of the bill and new sec. 45H of the Code)

                              Present Law

    A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment: (1) 
that uses solar energy to generate electricity, to heat or cool 
a structure, or to provide solar process heat; or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
    The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of: (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means 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 (sec. 136).
    There is no present-law credit for the manufacture of 
energy-efficient appliances.

                           Reasons for Change

    The Committee believes that providing a tax credit for the 
production of energy-efficient clothes washers and 
refrigerators will encourage manufacturers to produce such 
products currently and to invest in technologies to achieve 
higher energy-efficiency standards for the future. In addition, 
the Committee intends to encourage those manufacturers already 
producing energy-efficient clothes washers and refrigerators to 
accelerate production.

                        Explanation of Provision

    The bill provides a credit for the production of certain 
energy-efficient clothes washers and refrigerators. The credit 
would equal $50 per appliance for energy-efficient clothes 
washers produced with a modified energy factor (``MEF'') of 
1.26 or greater and for refrigerators produced that consume 10 
percent less kilowatt-hours per year than the energy 
conservation standards promulgated by the Department of Energy 
that took effect on July 1, 2001. The credit equals $100 for 
energy-efficient clothes washers produced with a MEF of 1.42 or 
greater (1.5 or greater for washers produced after 2004) and 
for refrigerators produced that consume 15 percent less 
kilowatt-hours per year than the energy conservation standards 
promulgated by the Department of Energy that took effect on 
July 1, 2001. A refrigerator must be an automatic defrost 
refrigerator-freezer with an internal volume of at least 16.5 
cubic feet to qualify for the credit. A clothes washer is any 
residential clothes washer, including a residential style coin 
operated washer, that satisfies the relevant efficiency 
standard.
    For each category of appliances (i.e., washers that meet 
the lower MEF standard, washers that meet the higher MEF 
standard, refrigerators that meet the 10 percent standard, 
refrigerators that meet the 15 percent standard), only 
production in excess of average production for each such 
category during calendar years 1999-2001 would be eligible for 
the credit. The taxpayer may not claim credits in excess of $30 
million for all taxable years for appliances that qualify for 
the $50 credit, and may not claim credits in excess of $30 
million for all taxable years for appliances that qualify for 
the $100 credit. Additionally, the credit allowed for all 
appliances may not exceed two percent of the average annual 
gross receipts of the taxpayer for the three taxable years 
preceding the taxable year in which the credit is determined.
    The credit will be part of the general business credit. No 
credits attributable to energy-efficient appliances may be 
carried back to taxable years ending before January 1, 2003.

                             Effective Date

    The credit applies to appliances produced after December 
31, 2002 and prior to (1) January 1, 2005 in the case of 
refrigerators that only meet the 10 percent credit standard, or 
(2) January 1, 2007 in the case of all other qualified energy-
efficient appliances.

          C. Credit for Residential Energy Efficient Property

(Sec. 303 of the bill and new sec. 25C of the Code)

                              Present Law

    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means 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 (sec. 136).
    There is no present-law personal tax credit for energy 
efficient residential property.

                           Reasons for Change

    The Committee believes that allowing a credit for the 
purchase of certain energy efficient appliances and systems 
that generate electricity through renewable and pollution-free 
alternative energy sources will encourage the purchase of these 
products. The Committee believes that the use of these products 
will help reduce reliance on conventional energy sources and 
reduce atmospheric pollutants. The Committee believes that the 
on-site generation of electricity and solar hot water will 
reduce reliance on the United States' electricity grid and on 
natural gas pipelines. Furthermore, the Committee believes that 
the use of highly efficient residential equipment will lead to 
decreased energy consumption in households, resulting in 
significant energy savings.

                        Explanation of Provision

    The bill provides a personal tax credit for the purchase of 
qualified wind energy property, qualified photovoltaic 
property, and qualified solar water heating property that is 
used exclusively for purposes other than heating swimming pools 
and hot tubs. The credit is equal to 15 percent for solar water 
heating property and photovoltaic property, and 30 percent for 
wind energy property. The maximum credit for each of these 
systems of property is $2,000. The proposal also provides a 30 
percent credit for the purchase of qualified fuel cell power 
plants. The credit for any fuel cell may not exceed $1,000 for 
each kilowatt of capacity.
    Qualifying solar water heating property means an 
expenditure for property to heat water for use in a dwelling 
unit located in the United States and used as a residence if at 
least half of the energy used by such property for such purpose 
is derived from the sun. Qualified photovoltaic property is 
property that uses solar energy to generate electricity for use 
in a dwelling unit. Solar panels are treated as qualified 
photovoltaic property. Qualified wind energy property is 
property that uses wind energy to generate electricity for use 
in a dwelling unit. A qualified fuel cell power plant is an 
integrated system comprised of a fuel cell stack assembly and 
associated balance of plant components that converts a fuel 
into electricity using electrochemical means, and which has an 
electricity-only generation efficiency of greater than 30 
percent and that generates at least 1 kilowatt of electricity. 
The qualified fuel cell power plant must be installed on or in 
connection with a dwelling unit located in the United States 
and used by the taxpayer as a principal residence.
    The proposal also provides a credit for the purchase of 
other qualified energy efficient property, as described below:
    Electric heat pump hot water heaters with an Energy Factor 
of at least 1.7. The maximum credit is $75 per unit.
    Electric heat pumps with a heating efficiency of at least 9 
HSPF (Heating Seasonal Performance Factor) and a cooling 
efficiency of at least 15 SEER (Seasonal Energy Efficiency 
Rating) and an energy efficiency ratio (EER) of 12.5 or 
greater. The maximum credit is $250 per unit.
    Natural gas heat pumps with a coefficient of performance 
for heating of at least 1.25 and for cooling of at least 0.70. 
The maximum credit is $500 per unit.
    Central air conditioners with an efficiency of at least 15 
SEER and an EER of 12.5 or greater. The maximum credit is $250 
per unit.
    Natural gas water heaters with an Energy Factor of at least 
0.8. The maximum credit is $75 per unit.
    Geothermal heat pumps which have an EER of at least 21. The 
maximum credit is $250 per unit.
    The credit is nonrefundable, and the depreciable basis of 
the property is reduced by the amount of the credit. 
Expenditures for labor costs allocable to onsite preparation, 
assembly, or original installation of property eligible for the 
credit are eligible expenditures. The credit is allowed against 
the regular and alternative minimum tax.
    Certain equipment safety requirements need to be met to 
qualify for the credit. Special proration rules apply in the 
case of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations.

                             Effective Date

    The credit applies to purchases after December 31, 2002 and 
before January 1, 2008.

               D. Business Tax Incentives for Fuel Cells

(Sec. 304 of the bill and sec. 48 of the Code)

                              Present Law

    A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
    The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. An unused 
general business credit generally may be carried back one year 
and carried forward 20 years (sec. 39).
    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means 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 (sec. 136).
    There is no present-law credit for fuel cell power plant 
property.

                           Reasons for Change

    The Committee believes that investments in qualified fuel 
cell power plants represent a promising means to produce 
electricity through non-polluting means and from 
nonconventional energy sources. Furthermore, the on-site 
generation of electricity provided by fuel cell power plants 
will reduce reliance on the United States' electricity grid. 
The Committee believes that providing a tax credit for 
investment in qualified fuel cell power plants will encourage 
investments in such systems.

                        Explanation of Provision

    The bill provides a 30 percent business energy credit for 
the purchase of qualified stationary or portable fuel cell 
power plants for businesses. A qualified stationary fuel cell 
power plant is an integrated system comprised of a fuel cell 
stack assembly and associated balance of plant components that 
converts a fuel into electricity using electrochemical means, 
and which has an electricity-only generation efficiency of 
greater than 30 percent. A qualified portable fuel cell is a 
portable fuel cell that generates at least 1 kilowatt of 
electricity using an electrochemical process. The credit for 
any fuel cell may not exceed $1,000 for each kilowatt of 
capacity. The credit is nonrefundable. The taxpayer's basis in 
the property is reduced by the amount of the credit claimed.

                             Effective Date

    The credit for businesses applies to property placed in 
service after December 31, 2002 and before January 1, 2007, 
under rules similar to rules of section 48(m) of the Internal 
Revenue Code of 1986 (as in effect on the day before the date 
of enactment of the Revenue Reconciliation Act of 1990).

  E. Allowance of Deduction for Energy-Efficient Commercial Building 
                                Property

(Sec. 305 of the bill and new sec. 179B of the Code)

                              Present Law

    No special deduction is currently provided for expenses 
incurred for energy-efficient commercial building property.

                           Reasons for Change

    The Committee recognizes that commercial buildings consume 
a significant amount of energy resources and that reductions in 
commercial energy use have the potential to significantly 
reduce national energy consumption. Accordingly, the Committee 
believes that a special deduction for commercial building 
property (lighting, heating, cooling, ventilation, and hot 
water supply systems) that meets a high energy-efficiency 
standard will encourage construction of buildings that are 
significantly more energy efficient than the norm. The 
Committee further believes that the special deduction will 
encourage innovation to reduce the costs of meeting the energy-
efficiency standard.

                        Explanation of Provision

    The bill provides a deduction equal to energy-efficient 
commercial building property expenditures made by the taxpayer. 
Energy-efficient commercial building property expenditures are 
defined as amounts paid or incurred for energy-efficient 
commercial building property installed in connection with the 
new construction or reconstruction of property: (1) which are 
otherwise be depreciable property; (2) which is located in the 
United States, and (3) the construction or erection of which is 
completed by the taxpayer. The deduction is limited to an 
amount equal to the product of $2.25 and the square footage of 
the property for which such expenditures were made. The 
deduction is allowed in the year in which the property is 
placed in service.
    Energy-efficient commercial building property mean any 
property that reduces total annual energy and power costs with 
respect to the lighting, heating, cooling, ventilation, and hot 
water supply systems of the building by 50 percent or more in 
comparison to a reference building which meets the requirements 
of a Standard 90.1-1999 of the American Society of Heating, 
Refrigerating, and Air Conditioning Engineers and the 
Illuminating Engineering Society of North America. Certain 
certification requirements must be met in order to qualify for 
the deduction. The Secretary shall promulgate procedures for 
the inspection and testing of compliance for buildings. 
Individuals qualified to determine compliance shall only be 
those recognized by one or more organizations certified by the 
Secretary for such purposes.
    For public property, such as schools, the Secretary will 
issue regulations to allow the deduction to be allocated to the 
person primarily responsible for designing the property in lieu 
of the public entity owner. Other rules will apply.

                             Effective Date

    The provision is effective for taxable years beginning 
after October 1, 2002 for plans certified prior to December 31, 
2007, whose construction is completed on or before December 31, 
2009.

 F. Allowance of Deduction for Qualified Energy Management Devices and 
                      Retrofitted Qualified Meters

(Sec. 306 of the bill and new sec. 179C of the Code)

                              Present Law

    No special deduction is currently provided for expenses 
incurred for qualified energy management devices.

                           Reasons for Change

    The Committee believes that consumers could better manage 
their electricity and natural gas use if they had better 
information concerning its price. In the case of electricity, 
if time-of-day pricing is used, energy management devices that 
provide information to consumers regarding their peak 
electrical use and the time-of-day price variation could 
encourage consumers to defer certain electrical use, such as 
use of a clothes washer and dryer, to periods of the day when 
electricity prices are lower. In addition to reducing 
consumers' electricity bill, spreading the demand for 
electricity throughout the day will reduce the need for utility 
investments in generation capacity to satisfy peak demand 
periods.
    The Committee believes that a deduction for qualified 
energy management devices, in conjunction with a 3-year 
recovery period for qualified energy management devices 
provided in the bill, will provide sufficient incentive to 
encourage their adoption as a means for consumers to control 
electricity and natural gas usage.

                        Explanation of Provision

    The bill provides a $30 deduction for each qualified new or 
retrofitted energy management device placed in service by any 
taxpayer who is a supplier of electric energy or natural gas or 
is a provider of electric energy or natural gas services. A 
qualified energy management device is any tangible property 
eligible for accelerated depreciation under section 168 and 
which is acquired and used by the taxpayer to enable consumers 
or others to manage their purchase, sale, or use of electricity 
in response to energy price and usage signals and which permits 
reading of energy price and usage signals on at least a daily 
basis.
    The deduction is not allowed to property used outside of 
the United States. The taxpayer would have basis reduction for 
such property equal to the deduction. Other rules apply.

                             Effective Date

    The proposal is effective for any qualified energy 
management device placed in service after the date of enactment 
of the Act.

G. Three-Year Applicable Recovery Period for Depreciation of Qualified 
                       Energy Management Devices

(Sec. 307 of the bill and sec. 168 of the Code)

                              Present Law

    No special recovery period is currently provided for 
depreciation of qualified energy management devices.

                           Reasons for Change

    The Committee believes that consumers could better manage 
their electricity and natural gas costs if they had better 
information concerning the price of electricity and natural gas 
use. In the case of electricity, if time-of-day pricing is 
used, energy management devices that provide information to 
consumers regarding their peak electrical use and the time-of-
day price variation could encourage consumers to defer certain 
electrical use, such as use of a clothes washer and dryer, to 
periods of the day when electricity prices are lower. In 
addition to reducing consumers' electricity bill, spreading the 
demand for electricity throughout the day will reduce the need 
for utility investments in generation capacity to satisfy peak 
demand periods.
    The Committee believes that a 3-year recovery period for 
qualified energy management devices, in conjunction with the 
special deduction for qualified energy management devices 
provided in the bill, will provide sufficient incentive to 
encourage their adoption as a means for consumers to control 
electricity and natural gas usage.

                        Explanation of Provision

    The bill provides a three-year recovery period for 
qualified new or retrofitted energy management devices placed 
in service by any taxpayer who is a supplier of electric energy 
or natural gas or is a provider of electric energy or natural 
gas services. A qualified energy management device is any 
tangible property eligible for accelerated depreciation under 
code section 168 and which is acquired and used by the taxpayer 
to enable consumers or others to manage their purchase, sale, 
or use of electricity in response to energy price and usage 
signals and which permits reading of energy price and usage 
signals on at least a daily basis.

                             Effective Date

    The provision is effective for any qualified energy 
management device placed in service after the date of enactment 
of the Act.

      H. Energy Credit for Combined Heat and Power System Property

(Sec. 308 of the bill and sec. 48 of the Code)

                              Present Law

    A nonrefundable, 10-percent business energy credit is 
allowed for the cost of new property that is equipment (1) that 
uses solar energy to generate electricity, to heat or cool a 
structure, or to provide solar process heat, or (2) used to 
produce, distribute, or use energy derived from a geothermal 
deposit, but only, in the case of electricity generated by 
geothermal power, up to the electric transmission stage.
    The business energy tax credits are components of the 
general business credit (sec. 38(b)(1)). The business energy 
tax credits, when combined with all other components of the 
general business credit, generally may not exceed for any 
taxable year the excess of the taxpayer's net income tax over 
the greater of (1) 25 percent of net regular tax liability 
above $25,000 or (2) the tentative minimum tax. For credits 
arising in taxable years beginning after December 31, 1997, an 
unused general business credit generally may be carried back 
one year and carried forward 20 years (sec. 39).
    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means 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 (sec. 136).
    There is no present-law credit for combined heat and power 
(``CHP'') property.

                           Reasons for Change

    The Committee believes that investments in combined heat 
and power systems represent a promising means to achieve 
greater national energy efficiency by encouraging the dual use 
of the energy from the burning of fossil fuels. Furthermore, 
the on-site generation of electricity provided by CHP systems 
will reduce reliance on the United States' electricity grid. 
The Committee believes that providing a tax credit for 
investment in combined heat and power property will encourage 
investments in such systems.

                        Explanation of Provision

    The bill provides a 10 percent credit for the purchase of 
combined heat and power property. (``CHP property'').
    CHP property is defined as property: (1) which uses the 
same energy source for the simultaneous or sequential 
generation of electrical power, mechanical shaft power, or 
both, in combination with the generation of steam or other 
forms of useful thermal energy (including heating and cooling 
applications); (2) which has an electrical capacity of more 
than 50 kilowatts or a mechanical energy capacity of more than 
67 horsepower or an equivalent combination of electrical and 
mechanical energy capacities; (3) which produces 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 or 
mechanical power (or a combination thereof); and (4) the energy 
efficiency percentage of which exceeds 60 percent (70 percent 
in the case of a system with an electrical capacity in excess 
of 50 megawatts or a mechanical energy capacity in excess of 
67,000 horsepower, or an equivalent combination of electrical 
and mechanical capacities.)
    CHP property does include property used to transport the 
energy source to the generating facility or to distribute 
energy produced by the facility.
    If a taxpayer is allowed a credit for CHP property, and the 
property would ordinarily have a depreciation class life of 15 
years or less, the depreciation period for the property is 
treated as having a 22-year class life. The present-law carry 
back rules of the general business credit generally would apply 
except that no credits attributable to combined heat and power 
property may be carried back before the effective date of this 
provision.

                             Effective Date

    The credit applies to property placed in service after 
December 31, 2002 and before January 1, 2007.

     I. Credit for Energy Efficiency Improvements to Existing Homes

(Sec. 309 of the bill and new sec. 25D of the Code)

                              Present Law

    A taxpayer may exclude from income the value of any subsidy 
provided by a public utility for the purchase or installation 
of an energy conservation measure. An energy conservation 
measure means 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 (sec. 136).
    There is no present law credit for energy efficiency 
improvements to existing homes.

                           Reasons for Change

    Since residential energy consumption represents a large 
fraction of national energy use, the Committee believes that 
energy savings in this sector of the economy have the potential 
to significantly impact national energy consumption, which will 
reduce reliance on foreign suppliers of oil and reduce 
pollution in general. The Committee further recognizes that 
many existing homes are inadequately insulated. Accordingly, 
the Committee believes that a tax credit for certain energy-
efficiency improvements related to a home's envelope (exterior 
windows (including skylights) and doors, insulation, and 
certain roofing systems) will encourage homeowners to improve 
the insulation of their homes, which in turn will reduce 
national energy consumption.

                        Explanation of Provision

    The proposal would provide a 10-percent nonrefundable 
credit for the purchase of qualified energy efficiency 
improvements. The maximum credit for a taxpayer with respect to 
the same dwelling for all taxable years is $300. A qualified 
energy efficiency improvement would be any energy efficiency 
building envelope component that is certified to meet or exceed 
the prescriptive criteria for such a component established by 
the 2000 International Energy Conservation Code, or any 
combination of energy efficiency measures that is certified to 
achieve at least a 30 percent reduction in heating and cooling 
energy usage for the dwelling and (1) that is installed in or 
on a dwelling located in the United States; (2) owned and used 
by the taxpayer as the taxpayer's principal residence; (3) the 
original use of which commences with the taxpayer; and (4) such 
component can reasonably be expected to remain in use for at 
least five years.
    Building envelope components would be: (1) insulation 
materials or systems which are specifically and primarily 
designed to reduce the heat loss or gain for a dwelling; and 
(2) exterior windows (including skylights) and doors.
    Homes shall be certified according to a component-based 
method or a performance-based method. The component-based 
method shall be based on applicable energy-efficiency ratings, 
including current product labeling requirements. The 
performance-based method shall be based on a comparison of the 
projected energy consumption of the dwelling in its original 
condition and after the completion of energy efficiency 
measures. The performance-based method of certification shall 
be conducted by an individual or organization recognized by the 
Secretary for such purposes.
    The certification process requires that energy savings to 
the consumer be measured in terms of energy costs. To ensure 
consistent and reasonable energy cost analyses, the Department 
of Energy shall include in its rulemaking related to this bill 
specific reference data to be used for qualification for the 
credit.
    The taxpayer's basis in the property would be reduced by 
the amount of the credit. Special rules would apply in the case 
of condominiums and tenant-stockholders in cooperative housing 
corporations.
    The credit is allowed against the regular and alternative 
minimum tax.

                             Effective Date

    The credit is effective for qualified energy efficiency 
improvements installed on or after the date of enactment and 
before January 1, 2006.

                    TITLE IV. CLEAN COAL INCENTIVES

     A. Investment and Production Credits for Clean Coal Technology

(Secs. 401, 411-412, and 421 of the bill and new Code secs. 45I, 45J, 
        and 48A)

                              Present Law

    Present law does not provide an investment credit for 
electricity generating units that use coal as a fuel. Nor does 
present law provide a production credit for electricity 
generated at units that use coal as a fuel. However, a 
nonrefundable, 10-percent investment tax credit (``business 
energy credit'') is allowed for the cost of new property that 
is equipment (1) that uses solar energy to generate 
electricity, to heat or cool a structure, or to provide solar 
process heat, or (2) that is used to produce, distribute, or 
use energy derived from a geothermal deposit, but only, in the 
case of electricity generated by geothermal power, up to the 
electric transmission stage (sec. 48). Also, an income tax 
credit is allowed for the production of electricity from either 
qualified wind energy, qualified ``closed-loop'' biomass, or 
qualified poultry waste units placed in service prior to 
January 1, 2002 (sec. 45). The credit allowed equals 1.5 cents 
per kilowatt-hour of electricity sold. The 1.5 cent figure is 
indexed for inflation and equals 1.7 cents for 2001. The credit 
is allowable for production during the 10-year period after a 
unit is originally placed in service. The business energy tax 
credits and the production tax credit are components of the 
general business credit (sec. 38(b)(1)).

                           Reasons for Change

    The Committee recognizes that coal is the nation's most 
abundant fuel source. The Committee is also sensitive to the 
environmental impact of burning coal for the production of 
electricity. For coal to continue to be a viable fuel source, 
the Committee seeks to encourage ways to burn coal in a more 
efficient and environmentally friendly manner. Therefore, the 
Committee supports the development and deployment of the most 
advanced technologies for generating electricity from coal by 
providing investment and production credits to a limited number 
of experimental production-scale electricity generating units 
to reduce the cost of building and operating units that 
represent the frontier of thermal efficiency and pollution 
control.
    Tax-exempt organizations make up a significant percentage 
of the electricity industry in the United States. The Committee 
believes it is important to provide the incentives for 
investment in, and production from, clean coal technologies to 
all producers.

                        Description of Provision

In general

    The provision creates three new credits: a production 
credit for electricity produced from qualifying clean coal 
technology units; a production credit for electricity produced 
from qualifying advanced clean coal technology units; and a 
credit for investments in qualifying advanced clean coal 
technology units. Certain persons (public utilities, electric 
cooperatives, Indian tribes, and the Tennessee Valley 
Authority) will be eligible to obtain certifications from the 
Secretary of the Treasury (as described below) for each of 
these credits and sell, trade, or assign the credit to any 
taxpayer. However, any credit sold, traded, or assigned may 
only be sold, traded, or assigned once. Subsequent trades are 
not permitted.

Credit for investments in qualifying advanced clean coal technology 
        units

    The provision provides a 10-percent investment tax credit 
for qualified investments in advanced clean coal technology 
units.\4\ Qualifying advanced clean coal technology units must 
utilize advanced pulverized coal or atmospheric fluidized bed 
combustion technology, pressurized fluidized bed combustion 
technology, integrated gasification combined cycle technology, 
or some other technology certified by the Secretary of Energy. 
Any qualifying advanced clean coal technology unit must meet 
certain capacity standards, thermal efficiency standards, and 
emissions standards for SO2, nitrous oxides, 
particulate emissions, and source emissions standards as 
provided in the Clean Air Act. In addition, a qualifying 
advanced clean coal technology unit must meet certain carbon 
emissions requirements.
---------------------------------------------------------------------------
    \4\ A qualifying advanced clean coal unit does not include any unit 
that uses ``refined coal'' (as defined elsewhere in the bill). Nor, can 
the unit be a qualified clean coal technology unit as defined below.
---------------------------------------------------------------------------
    If the advanced clean coal technology unit is an advanced 
pulverized coal or atmospheric fluidized bed combustion 
technology unit, a pressurized fluidized bed combustion 
technology unit, or an integrated gasification combined cycle 
technology unit and if the unit uses a design coal with a heat 
content of not more than 9,000 Btu per pound, the unit must 
have a carbon emission rate less than 0.60 pound of carbon per 
kilowatt hour of electricity produced. If the advanced clean 
coal technology unit is an advanced pulverized coal or 
atmospheric fluidized bed combustion technology unit, a 
pressurized fluidized bed combustion technology unit, or an 
integrated gasification combined cycle technology unit and if 
the unit uses a design coal with a heat content greater than 
9,000 Btu per pound, the unit must have a carbon emission rate 
less than 0.54 pound of carbon per kilowatt hour of electricity 
produced. In the case of an advanced clean coal technology unit 
that uses another eligible technology and if the unit uses a 
design coal with a heat content of not more than 9,000 Btu per 
pound, the unit must have a carbon emission rate less than 0.51 
pound of carbon per kilowatt hour of electricity produced. In 
the case of an advanced clean coal technology unit that uses 
another eligible technology and if the unit uses a design coal 
with a heat content greater than 9,000 Btu per pound, the unit 
must have a carbon emission rate less than 0.459 pound of 
carbon per kilowatt hour of electricity produced.
    To be a qualified investment in advanced clean coal 
technology, the taxpayer must receive a certificate from the 
Secretary of the Treasury. The Secretary may grant certificates 
to investments only to the point that 4,000 megawatts of 
electricity production capacity qualifies for the credit.\5\ 
From the potential pool of 4,000 megawatts of capacity, not 
more than 1,000 megawatts in total and not more than 500 
megawatts in years prior to 2009 shall be allocated to units 
using advanced pulverized coal or atmospheric fluidized bed 
combustion technology. From the potential pool of 4,000 
megawatts of capacity, not more than 500 megawatts in total and 
not more than 250 megawatts in years prior to 2009 shall be 
allocated to units using pressurized fluidized bed combustion 
technology. From the potential pool of 4,000 megawatts of 
capacity, not more than 2,000 megawatts in total and not more 
than 1,000 megawatts in years prior to 2009 and not more than 
1,500 megawatts in year prior to 2013 shall be allocated to 
units using integrated gasification combined cycle technology, 
with or without fuel or chemical co-production. From the 
potential pool of 4,000 megawatts of capacity, not more than 
500 in total and not more than 250 megawatts in years prior to 
2009 shall be allocated to any other technology certified by 
the Secretary of Energy.
---------------------------------------------------------------------------
    \5\ If the Secretary grants a certificate for a megawattage 
allocation that is less than the rated megawatt capacity of the unit, 
the taxpayer may claim credit for expenses related to the percentage of 
the unit equal to the percentage of the Secretary's allocation compared 
to the unit's capacity.
---------------------------------------------------------------------------

Production credit for electricity produced from qualifying clean coal 
        technology units

    The provision provides a production credit for electricity 
produced from certain units that have been retrofitted, 
repowered, or replaced with a clean coal technology within ten 
years of the date of enactment. The value of the credit is 0.34 
cents per kilowatt-hour of electricity produced and is indexed 
for inflation occurring after 2002 with the first potential 
adjustment in 2004. The taxpayer may claim the credit 
throughout the ten-year period commencing from the date on 
which the qualifying unit is placed in service.
    A qualifying clean coal technology unit is a clean coal 
technology unit that meets certain capacity standards, thermal 
efficiency standards, and emissions standards for 
SO2, nitrous oxides, particulate emissions, and 
source emissions standards as provided in the Clean Air Act. In 
addition, a qualifying clean coal technology unit cannot be a 
unit that is receiving or is scheduled to receive funding under 
the Clean Coal Technology Program, the Power Plant Improvement 
Initiative, or the Clean Coal Power Initiative administered by 
the Secretary of the Department of Energy. Lastly, to be a 
qualified clean coal technology unit, the taxpayer must receive 
a certificate from the Secretary of the Treasury. The Secretary 
may grant certificates to units only to the point that 4,000 
megawatts of electricity production capacity qualifies for the 
credit. However, no qualifying unit would be eligible if the 
unit's capacity exceeded 300 megawatts.

Production credit for electricity produced from qualifying advanced 
        clean coal technology

    The provision also provides a production credit for 
electricity produced from any qualified advanced clean coal 
technology electricity generation unit that qualifies for the 
investment credit for qualifying clean coal technology units, 
as described above.\6\ The taxpayer may claim a production 
credit on the sum of each kilowatt-hour of electricity produced 
and the heat value of other fuels or chemicals produced by the 
taxpayer at the unit.\7\ The taxpayer may claim the production 
credit for the 10-year period commencing with the date the 
qualifying unit is placed in service (or the date on which a 
conventional unit was retrofitted or repowered). The value of 
the credit varies depending upon the year the unit is placed in 
service, whether the unit produces solely electricity or 
electricity and fuels or chemicals, and the rated thermal 
efficiency of the unit. In addition, the value of the credit is 
reduced for the second five years of eligible production. The 
value of the credit is indexed for inflation occurring after 
2002 with the first potential adjustment in 2004. The tables 
below specify the value of the credit (before indexing is 
applied).
---------------------------------------------------------------------------
    \6\ In the case of a taxpayer who received a megawatt allocation 
for a qualifying advanced clean coal technology unit that is less than 
the rated capacity of such unit, the taxpayer may claim credit on a 
percentage of the electricity produced from the unit. The percentage is 
the percentage that the taxpayer's megawatt allocation represents as a 
percentage of the rated capacity of the unit.
    \7\ Each 3,413 Btu of heat content of the fuel or chemical is 
treated as equivalent to one kilowatt-hour of electricity.
---------------------------------------------------------------------------

Advanced clean coal technology units producing solely electricity

            Units placed in service before 2009

------------------------------------------------------------------------
                                         Credit amount per kilowatt-hour
    The unit net heat rate, Btu/kWh    ---------------------------------
 adjusted for the heat content for the   For the first    For the second
       design coal is equal to:            five years       five years
------------------------------------------------------------------------
Not more than 8,400...................           $.0060           $.0038
More than 8,400 but not more than                 .0025            .0010
 8,550................................
More than 8,550 but less than 8,750...            .0010            .0010
------------------------------------------------------------------------

            Units placed in service after 2008 and before 2013

------------------------------------------------------------------------
                                         Credit amount per kilowatt-hour
    The unit net heat rate, Btu/kWh    ---------------------------------
 adjusted for the heat content for the   For the first    For the second
       design coal is equal to:            five years       five years
------------------------------------------------------------------------
Not more than 7,770...................           $.0105           $.0090
More than 7,770 but not more than                 .0085            .0068
 8,125................................
More than 8,125 but less than 8,350...            .0075            .0055
------------------------------------------------------------------------

            Units placed in service after 2012 and before 2017

------------------------------------------------------------------------
                                         Credit amount per kilowatt-hour
    The unit net heat rate, Btu/kWh    ---------------------------------
 adjusted for the heat content for the   For the first    For the second
       design coal is equal to:            five years       five years
------------------------------------------------------------------------
Not more than 7,380...................           $.0140           $.0115
More than 7,380 but not more than                 .0120            .0090
 7,720................................
------------------------------------------------------------------------

Advanced clean coal technology units producing electricity and a fuel 
        or chemical

            Units placed in service before 2009

------------------------------------------------------------------------
                                         Credit amount per kilowatt-hour
The unit design net thermal efficiency ---------------------------------
             is equal to:                For the first    For the second
                                           five years       five years
------------------------------------------------------------------------
Not less than 40.6%...................           $.0060           $.0038
Less than 40.6% but not less than 40%.            .0025            .0010
Less than 40% but not less than 39%...            .0010            .0010
------------------------------------------------------------------------

            Units placed in service after 2008 and before 2013

------------------------------------------------------------------------
                                         Credit amount per kilowatt-hour
The unit design net thermal efficiency ---------------------------------
             is equal to:                For the first    For the second
                                           five years       five years
------------------------------------------------------------------------
Not less than 43.6%...................           $.0105           $.0090
Less than 43.6% but not less than 42%.            .0085            .0068
Less than 42% but not less than 40.9%.            .0075            .0055
------------------------------------------------------------------------

            Units placed in service after 2012 and before 2017

------------------------------------------------------------------------
                                         Credit amount per kilowatt-hour
The unit design net thermal efficiency ---------------------------------
             is equal to:                For the first    For the second
                                           five years       five years
------------------------------------------------------------------------
Not less than 44.2%...................           $.0140           $.0115
Less than 44.2% but not less than                 .0120            .0090
 43.9%................................
------------------------------------------------------------------------

    The credits are part of the general business credit. No 
credit may be carried back to taxable years ending on or before 
the date of enactment.

                             Effective Date

    The provision relating to investment credits for advanced 
clean coal technology units is effective after the date of 
enactment. The provisions relating to production credits are 
effective after the date of enactment.

                    TITLE V. OIL AND GAS PROVISIONS

      A. Tax Credit for Oil and Gas Production From Marginal Wells

(Sec. 501 of the bill and new sec. 45K of the Code)

                              present law

    There is no credit for the production of oil and gas from 
marginal wells. The costs of such production may be recovered 
under the Code's depreciation and depletion rules and in other 
cases as a deduction for ordinary and necessary business 
expenses.

                           reasons for change

    The highly volatile price of oil and gas can result in lost 
production during periods when prices are low. The Committee 
determined that a price support program administered through a 
tax credit will help ensure that supply is not lost as a result 
of low market prices.

                        explanation of provision

    The provision would create a new, $3 per barrel credit for 
the production of crude oil and a $0.50 credit per 1,000 cubic 
feet of qualified natural gas production. The maximum amount of 
production on which credit could be claimed is 1,095 barrels or 
barrel equivalents. In both cases, the credit is available only 
for production from a ``qualified marginal well.'' The credit 
is not available to production occurring if the reference price 
of oil exceeded $18 ($2.00 for natural gas). The credit is 
reduced proportionately as for reference prices between $15 and 
$18 ($1.67 and $2.00 for natural gas). Reference prices are 
determined on a one-year look-back basis.
    A qualified marginal well is defined as (1) a well 
production from which was marginal production for purposes of 
the Code percentage depletion rules or (2) a well that during 
the taxable year had (a) average daily production of not more 
than 25 barrel equivalents and (b) produced water at a rate of 
not less than 95 percent of total well effluent.
    The credit is treated as part of the general business 
credit.

                             effective date

    The provision is effective for production in taxable years 
beginning after the date of enactment.

     B. Natural Gas Gathering Lines Treated as Seven-Year Property

(Sec. 502 of the bill and sec. 168 of the Code)

                              present law

    The applicable recovery period for assets placed in service 
under the Modified Accelerated Cost Recovery System is based on 
the ``class life of the property.'' The class lives of assets 
placed in service after 1986 are generally set forth in Revenue 
Procedure 87-56.\8\ Revenue Procedure 87-56 includes two asset 
classes that could describe natural gas gathering lines owned 
by nonproducers of natural gas. Asset class 46.0, describing 
pipeline transportation, provides a class life of 22 years and 
a recovery period of 15 years. Asset class 13.2, describing 
assets used in the exploration for and production of petroleum 
and natural gas deposits, provides a class life of 14 years and 
a depreciation recovery period of seven years. The uncertainty 
regarding the appropriate recovery period of natural gas 
gathering lines has resulted in litigation between taxpayers 
and the IRS. The 10th Circuit Court of Appeals held that 
natural gas gathering lines owned by nonproducers falls within 
the scope of Asset class 13.2 (i.e., 7-year recovery 
period).\9\ More recently, the U.S. District Court for the 
Eastern District of Michigan, Southern Division, held that 
natural gas gathering lines owned by nonproducers falls within 
the scope of Asset class 46.0 (i.e., 15-year recovery 
period).\10\
---------------------------------------------------------------------------
    \8\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 
1988-1 C.B. 785).
    \9\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999), 
rev'g 109 T.C. 416 (1997). See also True v. United States, 97-2 U.S. 
Tax Cas. (CCH) par. 50,946 (D. Wyo. 1997).
    \10\ Saginaw Bay Pipeline Co. v. United States, 124 F. Supp. 2d 465 
(E.D. Mich. 2001).
---------------------------------------------------------------------------

                           reasons for change

    The Committee believes the appropriate recovery period for 
natural gas gathering lines is seven years.

                        explanation of provision

    The provision establishes a statutory 7-year recovery 
period and a class life of 10 years for natural gas gathering 
lines. A natural gas gathering line is defined to include any 
pipe, equipment, and appurtenance that is (1) determined to be 
a gathering line by the Federal Energy Regulatory Commission, 
or (2) used to deliver natural gas from the wellhead or a 
common point to the point at which such gas first reaches (a) a 
gas processing plant, (b) an interconnection with an interstate 
transmission line, (c) an interconnection with an intrastate 
transmission line, or (d) a direct interconnection with a local 
distribution company, a gas storage facility, or an industrial 
consumer.

                             effective date

    The provision is effective for property placed in service 
after the date of enactment. No inference is intended as to the 
proper treatment of natural gas gathering lines placed in 
service before the date of enactment.

 C. Repeal of Requirement of Certain Approved Terminals To Offer Dyed 
               Diesel or Kerosene for Nontaxable Purposes

(Sec. 503 of the bill and sec. 4101 of the Code)

                         present and prior law

    Excise taxes are imposed on highway motor fuels, including 
gasoline, diesel fuel, and kerosene, to finance the Highway 
Trust Fund programs. Subject to limited exceptions, these taxes 
are imposed on all such fuels when they are removed from 
registered pipeline or barge terminal facilities, with any tax-
exemptions being accomplished by means of refunds to consumers 
of the fuel. One such exception allows removal of diesel fuel 
and kerosene without payment of tax if the fuel is destined for 
a nontaxable use (e.g., use as heating oil) and is indelibly 
dyed.
    Terminal facilities are not permitted to receive and store 
non-tax-paid motor fuels unless they are registered with the 
Internal Revenue Service. Under present law, a prerequisite to 
registration is that if the terminal offers for sale diesel 
fuel, it must offer both dyed and undyed diesel fuel. 
Similarly, if the terminal offers for sale kerosene, it must 
offer both dyed and undyed kerosene. This ``dyed-fuel mandate'' 
was enacted in 1997, to be effective on July 1, 1998. 
Subsequently, the effective date was delayed until July 1, 2000 
and delayed again through December 31, 2001.

                           reasons for change

    When the rules governing taxation of kerosene used as a 
highway motor fuel were enacted in 1997, there was a concern 
that dyed kerosene (destined for nontaxable use) might not be 
available in markets where that fuel was commonly used (e.g., 
as heating oil). To ensure availability of untaxed kerosene for 
these uses, a requirement that terminals offer both dyed and 
undyed kerosene and diesel fuel (if they offered the fuels for 
sale at all) as a condition of receiving untaxed fuels was 
included. Since that time, markets have provided dyed kerosene 
and diesel fuel for nontaxable uses in markets where there is a 
demand for such fuel even in the absence of a statutory mandate 
for such fuels. The Committee believes that a statutory mandate 
is not necessary and should be repealed.

                        explanation of provision

    The provision repeals the diesel fuel and kerosene-dyeing 
mandate.

                             effective date

    The provision is effective on January 1, 2002.

  D. Expensing of Capital Costs Incurred and Credit for Production in 
   Complying With Environmental Protection Agency Sulfur Regulations

(Secs. 504 and 505 of the bill and new secs. 45L and 179D of the Code)

                              present law

    Taxpayers generally may recover the costs of investments in 
refinery property through annual depreciation deductions. 
Present law does not provide a credit for the production of 
low-sulfur diesel fuel.

                           reasons for change

    The Committee believes it is important for all refiners to 
meet applicable pollution control standards. However, the 
Committee is concerned that the cost of complying with the 
Highway Diesel Fuel Sulfur Control Requirement of the 
Environmental Protection Agency may force some small refiners 
out of business. To maintain this refining capacity and to 
foster compliance with pollution control standards the 
committee believes it is appropriate to modify cost recovery 
provisions for small refiners to reduce their capital costs of 
complying with the Highway Diesel Fuel Sulfur Control 
Requirement of the Environmental Protection Agency.

                        description of provision

    The bill generally permits small business refiners to claim 
an immediate deduction (i.e., expensing) for up to 75 percent 
of the qualified capital costs paid or incurred for the purpose 
of complying with the Highway Diesel Fuel Sulfur Control 
Requirements of the Environmental Protection Agency. Qualified 
capital costs are those costs paid or incurred and otherwise 
chargeable to the taxpayer's capital account that are necessary 
for the refinery to come into compliance with the EPA diesel 
fuel requirements.
    In addition, the bill provides that a small business 
refiner may claim a credit equal to five cents per gallon for 
each gallon of low sulfur diesel fuel produced at a facility of 
a small business refiner. The total production credit claimed 
by the taxpayer generally is limited to 25 percent of the 
qualified capital costs incurred with respect to expenditures 
at the refinery during the period beginning one year after the 
date of enactment and ending with the date that is one year 
after the date on which the taxpayer must comply with 
applicable EPA regulations. No deduction is allowed to the 
taxpayer for expenses otherwise allowable as a deduction in an 
amount equal to the amount of production credit claimed during 
the taxable year.
    For these purposes a small business refiner is a taxpayer 
who within the business of refining petroleum products employs 
not more than 1,500 employees directly in refining on business 
days during a taxable year in which the deduction or production 
credit is claimed and had an average daily refinery run not 
exceeding 205,000 barrels per day for the year prior to 
enactment.
    For taxpayers with an average daily refinery run in the 
year prior to enactment in excess of 155,000 and not greater 
than 205,000 barrels per day, the provision limits otherwise 
qualifying small business refiners to an immediate deduction 
for a percentage of qualifying capital costs equal to 75 
percent less the percentage points determined by the excess of 
the average daily refinery runs over 155,000 barrels per day 
divided by 50,000 barrels per day. In addition, for these 
taxpayers, the limitation on the total production credit that 
may be claimed also is reduced proportionately.
    In the case of a qualifying small business refiner that is 
owned by a cooperative, the cooperative is allowed to elect to 
pass any production credits to patrons of the organization.

                             effective date

    The provision is effective for expenses paid or incurred 
after the date of enactment.

 E. Determination of Small Refiner Exception to Oil Depletion Deduction

(Sec. 506 of the bill and sec. 613A of the Code)

                              present law

    Present law classifies oil and gas producers as independent 
producers or integrated companies. The Code provides numerous 
special tax rules for operations by independent producers. One 
such rule allows independent producers to claim percentage 
depletion deductions rather than deducting the costs of their 
asset, a producing well, based on actual production from the 
well (i.e., cost depletion).
    A producer is an independent producer only if its refining 
and retail operations are relatively small. For example, an 
independent producer may not have refining operations the runs 
from which exceed 50,000 barrels on any day in the taxable year 
during which independent producer status is claimed.

                           reasons for change

    The Committee believes that the goal of present law, to 
identify producers without significant refining capacity, can 
be achieved while permitting more flexibility to refinery 
operations.

                        explanation of provision

    The provision increases the current 50,000-barrel-per-day 
limitation to 60,000. In addition, the provision changes the 
refinery limitation on claiming independent producer status 
from a limit based on actual daily production to a limit based 
on average daily production for the taxable year. Accordingly, 
the average daily refinery run for the taxable year cannot 
exceed 60,000 barrels. For this purpose, the taxpayer would 
calculate average daily refinery run by dividing total 
production for the taxable year by the total number of days in 
the taxable year.

                             effective date

    The provision is effective for taxable years beginning 
after December 31, 2002.

  F. Extension of Suspension of Taxable Income Limit With Respect to 
                          Marginal Production

(Sec. 507 of the bill and sec. 613A of the Code)

                              present law

In general

    Depletion, like depreciation, is a form of capital cost 
recovery. In both cases, the taxpayer is allowed a deduction in 
recognition of the fact that an asset--in the case of depletion 
for oil or gas interests, the mineral reserve itself--is being 
expended in order to produce income. Certain costs incurred 
prior to drilling an oil or gas 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).
    Depletion is available to any person having an economic 
interest in a producing property. An economic interest is 
possessed in every case in which the taxpayer has acquired by 
investment any interest in minerals in place, and secures, by 
any form of legal relationship, income derived from the 
extraction of the mineral, to which it must look for a return 
of its capital.\11\ Thus, for example, both working interests 
and royalty interests in an oil- or gas-producing property 
constitute economic interests, thereby qualifying the interest 
holders for depletion deductions with respect to the property. 
A taxpayer who has no capital investment in the mineral deposit 
does not possess an economic interest merely because it 
possesses an economic or pecuniary advantage derived from 
production through a contractual relation.
---------------------------------------------------------------------------
    \11\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
            Cost depletion
    Two methods of depletion are currently allowable under the 
Internal Revenue Code (the ``Code''): (1) the cost depletion 
method, and (2) the percentage depletion method (secs. 611-
613). Under the cost depletion method, the taxpayer deducts 
that portion of the adjusted basis of the depletable property 
which is equal to the ratio of units sold from that property 
during the taxable year to the number of units remaining as of 
the end of taxable year plus the number of units sold during 
the taxable year. Thus, the amount recovered under cost 
depletion may never exceed the taxpayer's basis in the 
property.
            Percentage depletion and related income limitations
    The Code generally limits the percentage depletion method 
for oil and gas properties to independent producers and royalty 
owners.\12\ Generally, under the percentage depletion method 15 
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable 
year (sec. 613A(c)). The amount deducted generally may not 
exceed 100 percent of the net income from that property in any 
year (the ``net-income limitation'') 613(a)). By contrast, for 
any other mineral qualifying for the percentage depletion 
deduction, such deduction may not exceed 50 percent of the 
taxpayer's taxable income from the depletable property. A 
similar 50-percent net-income limitation applied to oil and gas 
properties for taxable years beginning before 1991. Section 
11522(a) of the Omnibus Budget Reconciliation Act of 1990 
prospectively changed the net-income limitation threshold to 
100 percent only for oil and gas properties, effective for 
taxable years beginning after 1990. The 100-percent net-income 
limitation for marginal wells has been suspended for taxable 
years beginning after December 31, 1997, and before January 1, 
2002.
---------------------------------------------------------------------------
    \12\ Sec. 613A.
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    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) (sec. 613A(d)(1)).\13\ Because percentage 
depletion, unlike cost depletion, is computed without regard to 
the taxpayer's basis in the depletable property, cumulative 
depletion deductions may be greater than the amount expended by 
the taxpayer to acquire or develop the property.
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    \13\ Amounts disallowed as a result of this rule may be carried 
forward and deducted in subsequent taxable years, subject to the 65-
percent taxable income limitation for those years.
---------------------------------------------------------------------------
    A taxpayer is required to determine the depletion deduction 
for each oil or gas property under both the percentage 
depletion method (if the taxpayer is entitled to use this 
method) and the cost depletion method. If the cost depletion 
deduction is larger, the taxpayer must utilize that method for 
the taxable year in question (sec. 613(a)).

Limitation of oil and gas percentage depletion to independent producers 
        and royalty owners

    Generally, only independent producers and royalty owners 
(as contrasted to integrated oil companies) are allowed to 
claim percentage depletion. Percentage depletion for eligible 
taxpayers is allowed only with respect to up to 1,000 barrels 
of average daily production of domestic crude oil or an 
equivalent amount of domestic natural gas (sec. 613A(c)). For 
producers of both oil and natural gas, this limitation applies 
on a combined basis.
    In addition to the independent producer and royalty owner 
exception, certain sales of natural gas under a fixed contract 
in effect on February 1, 1975, and certain natural gas from 
geopressured brine,\14\ are eligible for percentage depletion, 
at rates of 22 percent and 10 percent, respectively. These 
exceptions apply without regard to the 1,000-barrel-per-day 
limitation and regardless of whether the producer is an 
independent producer or an integrated oil company.
---------------------------------------------------------------------------
    \14\ This exception is limited to wells, the drilling of which 
began between September 30, 1978, and January 1, 1984.
---------------------------------------------------------------------------

                           reasons for change

    The Committee is concerned that, while current oil and gas 
operations may be profitable, the highly volatile nature of oil 
and gas prices could quickly create economic hardships in the 
industry. Thus, to help minimize the adverse effects of future 
price fluctuations, the Committee believes it is appropriate to 
extend the suspension of the 100-percent net-income limitation 
for marginal wells.

                        explanation of provision

    The suspension of the 100-percent net-income limitation for 
marginal wells is extended an additional five years, through 
taxable years beginning before January 1, 2007.

                             effective date

    The provision is effective on date of enactment for taxable 
years after December 31, 2001.

       G. Amortization of Geological and Geophysical Expenditures

(Sec. 508 of the bill and new sec. 199 of the Code)

                              present law

In general

    Geological and geophysical expenditures are costs incurred 
by a taxpayer for the purpose of obtaining and accumulating 
data that will serve as the basis for the acquisition and 
retention of mineral properties by taxpayers exploring for 
minerals. A key issue with respect to the tax treatment of such 
expenditures is whether or not they are capital in nature. 
Capital expenditures are not currently deductible as ordinary 
and necessary business expenses, but are allocated to the cost 
of the property.\15\
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    \15\ Under section 263, capital expenditures are defined generally 
as any amount paid for new buildings or for permanent improvements or 
betterments made to increase the value of any property or estate. 
Treasury regulations define capital expenditures to include amounts 
paid or incurred (1) to add to the value, or substantially prolong the 
useful life, of property owned by the taxpayer or (2) to adapt property 
to a new or different use. Treas. Reg. sec. 1.263(a)-1(b).
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    Courts have held that geological and geophysical costs are 
capital, and therefore are allocable to the cost of the 
property \16\ acquired or retained.\17\ The costs attributable 
to such exploration are allocable to the cost of the property 
acquired or retained. As described further below, IRS 
administrative rulings have provided further guidance regarding 
the definition and proper tax treatment of geological and 
geophysical costs.
---------------------------------------------------------------------------
    \16\ ``Property'' means an interest in a property as defined in 
section 614 of the Code, and includes an economic interest in a tract 
or parcel of land notwithstanding that a mineral deposit has not been 
established or proved at the time the costs are incurred.
    \17\ See, e.g., Schermerhorn Oil Corporation v. Commissioner, 46 
B.T.A. 151 (1942). By contrast, section 617 of the Code permits a 
taxpayer to elect to deduct certain expenditures incurred for the 
purpose of ascertaining the existence, location, extent, or quality of 
any deposit of ore or other mineral (but not oil and gas). These 
deductions are subject to recapture if the mine with respect to which 
the expenditures were incurred reaches the producing stage.
---------------------------------------------------------------------------

Revenue Ruling 77-188

    In Revenue Ruling 77-188 \18\ (hereinafter referred to as 
the ``1977 ruling''), the IRS provided guidance regarding the 
proper tax treatment of geological and geophysical costs. The 
ruling describes a typical geological and geophysical 
exploration program as containing the following elements:
---------------------------------------------------------------------------
    \18\ 1977-1 C.B. 76.
---------------------------------------------------------------------------
     It is customary in the search for mineral 
producing properties for a taxpayer to conduct an exploration 
program in one or more identifiable project areas. Each project 
area encompasses a territory that the taxpayer determines can 
be explored advantageously in a single integrated operation. 
This determination is made after analyzing certain variables 
such as (1) the size and topography of the project area to be 
explored, (2) the existing information available with respect 
to the project area and nearby areas, and (3) the quantity of 
equipment, the number of personnel, and the amount of money 
available to conduct a reasonable exploration program over the 
project area.
     The taxpayer selects a specific project area from 
which geological and geophysical data are desired and conducts 
a reconnaissance-type survey utilizing various geological and 
geophysical exploration techniques. These techniques are 
designed to yield data that will afford a basis for identifying 
specific geological features with sufficient mineral potential 
to merit further exploration.
     Each separable, noncontiguous portion of the 
original project area in which such a specific geological 
feature is identified is a separate ``area of interest.'' The 
original project area is subdivided into as many small projects 
as there are areas of interest located and identified within 
the original project area. If the circumstances permit a 
detailed exploratory survey to be conducted without an initial 
reconnaissance-type survey, the project area and the area of 
interest will be coextensive.
     The taxpayer seeks to further define the 
geological features identified by the prior reconnaissance-type 
surveys by additional, more detailed, exploratory surveys 
conducted with respect to each area of interest. For this 
purpose, the taxpayer engages in more intensive geological and 
geophysical exploration employing methods that are designed to 
yield sufficiently accurate sub-surface data to afford a basis 
for a decision to acquire or retain properties within or 
adjacent to a particular area of interest or to abandon the 
entire area of interest as unworthy of development by mine or 
well.
    The 1977 ruling provides that if, on the basis of data 
obtained from the preliminary geological and geophysical 
exploration operations, only one area of interest is located 
and identified within the original project area, then the 
entire expenditure for those exploratory operations is to be 
allocated to that one area of interest and thus capitalized 
into the depletable basis of that area of interest. On the 
other hand, if two or more areas of interest are located and 
identified within the original project area, the entire 
expenditure for the exploratory operations is to be allocated 
equally among the various areas of interest.
    If no areas of interest are located and identified by the 
taxpayer within the original project area, then the 1977 ruling 
states that the entire amount of the geological and geophysical 
costs related to the exploration is deductible as a loss under 
section 165. The loss is claimed in the taxable year in which 
that particular project area is abandoned as a potential source 
of mineral production.
    A taxpayer may acquire or retain a property within or 
adjacent to an area of interest, based on data obtained from a 
detailed survey that does not relate exclusively to any 
discrete property within a particular area of interest. 
Generally, under the 1977 ruling, the taxpayer allocates the 
entire amount of geological and geophysical costs to the 
acquired or retained property as a capital cost under section 
263(a). If more than one property is acquired, it is proper to 
determine the amount of the geological and geophysical costs 
allocable to each such property by allocating the entire amount 
of the costs among the properties on the basis of comparative 
acreage.
    If, however, no property is acquired or retained within or 
adjacent to that area of interest, the entire amount of the 
geological and geophysical costs allocable to the area of 
interest is deductible as a loss under section 165 for the 
taxable year in which such area of interest is abandoned as a 
potential source of mineral production.
    In 1983, the IRS issued Revenue Ruling 83-105,\19\ which 
elaborates on the positions set forth in the 1977 ruling by 
setting forth seven factual situations and applying the 
principles of the 1977 ruling to those situations. In addition, 
Revenue Ruling 83-105 explains what constitutes ``abandonment 
as a potential source of mineral production.''
---------------------------------------------------------------------------
    \19\ 1983-2 C.B. 51.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that substantial simplification for 
taxpayers and significant gains in taxpayer compliance and 
reductions in administrative cost can be obtained by 
establishing that geological and geophysical costs can be 
amortized over two years, regardless of the taxpayer's 
determination of the suitability of the site or sites examined 
for future production.

                        Explanation of Provision

    The provision allows geological and geophysical costs 
incurred in connection with oil and gas exploration in the 
United States to be amortized over two years.

                             Effective Date

    The provision is effective for geological and geophysical 
costs paid or incurred in taxable years beginning after 
December 31, 2002. No inference is intended from the 
prospective effective date of this proposal as to the proper 
treatment of pre-effective date geological and geophysical 
costs.

                H. Amortization of Delay Rental Payments

(Sec. 509 of the bill and new sec. 199A of the Code)

                              Present Law

    Present law generally requires costs associated with 
inventory and property held for resale to be capitalized rather 
than currently deducted as they are incurred. (sec. 263). Oil 
and gas producers typically contract for mineral production in 
exchange for royalty payments. If mineral production is 
delayed, these contracts provide for ``delay rental payments'' 
as a condition of their extension. In proposed regulations 
issued in 2000, the Treasury Department took the position that 
the uniform capitalization rules of section 263A require delay 
rental payments to be capitalized.\20\
---------------------------------------------------------------------------
    \20\ 65 Fed. Reg. 6090 (2000).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee believes that, in essence, a delay rental 
payment is a substitute, both in the eyes of the payor and the 
payee, for a royalty payment that would have been made had the 
property been brought into production. The Committee believes 
it appropriate to allow delay rental payments to be amortized 
over a two year period.

                        Explanation of Provision

    The provision allows delay rental payments incurred in 
connection with the development of oil or gas within the United 
States to be amortized over two years.

                             Effective Date

    The provision applies to delay rental payments paid or 
incurred in taxable years beginning after December 31, 2002. No 
inference is intended from the prospective effective date of 
this proposal as to the proper treatment of pre-effective date 
delay rental payments.

 I. Extension and Modification of Credit for Producing Fuel From a Non-
                          Conventional Source

(Secs. 510 and 511 of the bill and sec. 29 of the Code)

                              Present Law

    Certain fuels produced from ``non-conventional sources'' 
and sold to unrelated parties are eligible for an income tax 
credit equal to $3 (generally adjusted for inflation) per 
barrel or BTU oil barrel equivalent (sec. 29). Qualified fuels 
must be produced within the United States.
    Qualified fuels include:
          (1) oil produced from shale and tar sands;
          (2) gas produced from geopressured brine, Devonian 
        shale, coal seams, tight formations (``tight sands''), 
        or biomass; and
          (3) liquid, gaseous, or solid synthetic fuels 
        produced from coal (including lignite).
    In general, the credit is available only with respect to 
fuels produced from wells drilled or facilities placed in 
service after December 31, 1979, and before January 1, 1993. An 
exception extends the January 1, 1993 expiration date for 
facilities producing gas from biomass and synthetic fuel from 
coal if the facility producing the fuel is placed in service 
before July 1, 1998, pursuant to a binding contract entered 
into before January 1, 1997.
    The credit may be claimed for qualified fuels produced and 
sold before January 1, 2003 (in the case of non-conventional 
sources subject to the January 1, 1993 expiration date) or 
January 1, 2008 (in the case of biomass gas and synthetic fuel 
facilities eligible for the extension period).\21\
---------------------------------------------------------------------------
    \21\ The provision does not apply to liquid, gaseous, or solid 
synthetic fuels produced from coal as described under present law 
section 29(c)(1)(C), but does provide credit for a new category, 
refined coal, described below.
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee concludes that the section 29 credit on the 
margins has increased production of oil and natural gas from 
domestic sources and that in the absence of these non-
conventional sources the demand for imported fuels may have 
increased. To increase domestic sources of supply, the 
Committee believes it is appropriate to extend the section 29 
credit to help foster new domestic fuel sources. The Committee 
is also concerned that, because of the higher extraction costs 
of certain ``viscous oil,'' without the implicit subsidy of the 
production credit, entrepreneurs will not exploit this domestic 
energy source. Therefore, the Committee believes it is 
appropriate to extend the credit for certain fuels produced 
from new wells or facilities.
    The Committee also recognizes that the credit for 
production of synthetic fuels from coal has been interpreted to 
include fuels that are merely chemical changes to coal that do 
not necessarily enhance the value or environmental performance 
of the feedstock coal. Therefore, the Committee believes it is 
appropriate to extend the section 29 credit only to fuels 
produced from coal that achieve significant environmental and 
value-added improvements.
    Methane in coal mines is a serious safety hazard. In many 
coal mining operations, the cost of collection exceeds the 
value of the recovered methane so the methane is vented 
directly into the atmosphere. Methane is an extremely potent 
and long-lived greenhouse gas. Therefore, the Committee seeks 
to encourage capture of methane from coal mines in particular.
    The Committee recognizes that the world price of oil as the 
nation enters the 21st century has not risen to levels forecast 
in 1978. Therefore, the Committee believes it is appropriate to 
restart the section 29 credit at a level lower than that 
currently available to existing production.
    Lastly, the Committee believes it is important to study the 
efficacy of the section 29 credit in the case of methane 
recovered from coal seams or so-called ``coal beds.''

                        Explanation of Provision

Extension for certain non-conventional fuels

    The provision permits taxpayers to claim the section 29 
credit for production of certain non-conventional fuels 
produced at wells placed in service after the date of enactment 
and before January 1, 2005. Under the provision, qualifying 
fuels are oil from shale or tar sands, and gas from 
geopressured brine, Devonian shale, coal seams, a tight 
formation, or biomass. The value of the credit is re-based to 
$3.00 and the amount is not indexed for inflation. Taxpayers 
may claim the credit for production from the well for each of 
the first three years of production from the qualifying well.

Expansion for ``viscous oil''

    The provision expands section 29 to permit taxpayers to 
claim the section 29 credit for production of certain viscous 
oil produced at wells placed in service after the date of 
enactment and before January 1, 2005. The provision defines 
``viscous oil'' as domestic crude oil produced from any 
property if the crude oil has a weighted average gravity of 22 
degrees API or less (corrected to 60 degrees Fahrenheit). The 
value of the credit for viscous oil also is $3.00 per barrel. 
Taxpayers may claim the credit for production from the well for 
each of the first three years of production from the time the 
well is placed in service. The provision provides that 
qualifying sales to related parties for consumption not in the 
immediate vicinity of the wellhead qualify for the credit.

Extension and modification for ``refined coal''

    The provision also expands section 29 to include certain 
``refined coal'' as a qualified non-conventional fuel. 
``Refined coal'' is a qualifying liquid, gaseous, or solid 
synthetic fuel produced from coal (including lignite) from 
placed in service after date of enactment and before January 1, 
2007. Refined coal also would include a qualifying fuel derived 
from high-carbon fly ash produced from facilities placed in 
service after the date of enactment and before January 1, 2007. 
A qualifying fuel is a fuel that when burned emits 20 percent 
less SO2and nitrogen oxides than the burning of 
feedstock coal or comparable coal predominantly available in the 
marketplace as of January 1, 2002, and if the fuel sells at prices at 
least 50 percent greater than the prices of the feedstock coal or 
comparable coal. However, no fuel produced at a qualifying advanced 
clean coal facility (as defined elsewhere in the committee bill) would 
be a qualifying fuel. The amount of credit for refined coal also is 
$3.00 per barrel equivalent. Taxpayers may claim the credit for fuel 
produced during the five-year period beginning on the date the facility 
is placed in service.

Credit for coalmine methane gas

    In addition, the provision permits taxpayers to claim 
credit for coalmine methane gas captured by the taxpayer and 
utilized as a fuel source or sold by or on behalf of the 
taxpayer to an unrelated person. The term ``coalmine methane 
gas'' means any methane gas which is being liberated during 
qualified coal mining operations or as a result of past 
qualified coal mining operations, or which is captured in 
advance of qualified coal mining operations as part of specific 
plan to mine a coal deposit. In the case of coalmine methane 
gas that is captured in advance of qualified coal mining 
operations, the credit is allowed only after the date the coal 
extraction occurs in the immediate area where the coalmine 
methane gas was removed. The value of the credit for coalmine 
methane also is $3.00 per Btu oil barrel equivalent (51.7 cents 
per million Btu of heat value in the gas) for gas captured and 
utilized or sold. Taxpayers may claim the credit for gas 
captured and utilized or sold after the date of enactment and 
before January 1, 2005.

Study of coal bed methane gas

    Lastly, the committee bill directs the Secretary of the 
Treasury to undertake a study of effect section 29 has had on 
the production of coal bed methane. The Secretary's study is to 
be made in conjunction with the study to be undertaken by the 
Secretary of the Interior on the effects of coal bed methane 
production on surface and water resources, as provided in 
section 608 of the Energy Policy Act of 2002 (should that study 
be required by law). The study should estimate the total amount 
of credit claimed annually and in aggregate related to the 
production of coal bed methane since the enactment of section 
29. The study should report the annual value of the credit 
allowable for coal bed methane compared to the average annual 
wellhead price of natural gas (per thousand cubic feet of 
natural gas). The study should estimate the incremental 
increase in production of coal bed methane that has resulted 
from the enactment of section 29. The study should estimate the 
cost to the Federal government, in terms of the net tax 
benefits claimed, per thousand cubic feet of incremental coal 
bed methane produced annually and in aggregate since the 
enactment of section 29.

                             Effective Date

    The provisions apply to fuels sold from qualifying wells 
and facilities after the date of enactment.

   J. Natural Gas Distribution Lines Treated as Fifteen-Year Property

(Sec. 512 of the bill and sec. 168 of the Code)

                              Present Law

    The applicable recovery period for assets placed in service 
under the Modified Accelerated Cost Recovery System is based on 
the ``class life of the property.'' The class lives of assets 
placed in service after 1986 are generally set forth in Revenue 
Procedure 87-56.\22\ Natural gas distribution pipelines are 
assigned a 20-year recovery period and a class life of 35 
years.
---------------------------------------------------------------------------
    \22\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee recognizes the importance of modernizing our 
aging energy infrastructure to meet the demands of the twenty-
first century, and the Committee also recognizes that both 
short-term and long-term solutions are required to meet this 
challenge. The Committee understands that investment in our 
energy infrastructure has not kept pace with the nation's 
needs. In light of this, the Committee believes it is 
appropriate to reduce the recovery period for investment in 
certain energy infrastructure property to encourage investment 
in such property. In particular, more rapid depreciation of 
natural gas distribution lines will help rural utilities 
overcome the higher cost of service in rural areas, where there 
are fewer customers per mile of pipeline.

                        Explanation of Provision

    The provision establishes a statutory 15-year recovery 
period and a class life of 20 years for natural gas 
distribution lines.

                             Effective Date

    The provision is effective for property placed in service 
after the date of enactment.

    TITLE VI. PROVISIONS RELATING TO ELECTRIC INDUSTRY RESTRUCTURING

    The electric service industry has undergone great change in 
the past decade. The Federal Energy Regulatory Commission 
(``FERC'') has undertaken significant initiatives, such as 
Order No. 2000 and more recent guidance, to encourage 
organization of the electric transmission system into a 
national grid. At the present time, however, the ultimate 
structure of the industry when the currently anticipated 
industry restructuring is completed remains highly 
uncertain.\23\ For example, representatives of the Federal 
Energy Regulatory Commission (``FERC'') have stated there is a 
policy goal to form separate regional transmission 
organizations (``RTOs''), but the ultimate structure and 
ownership of such organizations is not fully resolved. Further, 
the role of public power entities, including the extent to 
which and the circumstances under which these entities legally 
or economically may be required to participate in open access 
arrangements, is unresolved.
---------------------------------------------------------------------------
    \23\ The Committee held a field hearing that addressed these issues 
in Billings, Montana, on August 24, 2001. In addition, the Committee 
scheduled a hearing for September 12, 2001, on electricity 
restructuring and associated tax issues. This hearing was cancelled due 
to the September 11, 2001, terrorist attacks, but the Committee has 
reviewed the written testimony of the witnesses who were scheduled to 
appear. The scheduled witnesses were John Tiencken, Jr., on behalf of 
the American Public Power Association and the Large Public Power 
Council; Theodore Vogel on behalf of the Edison Electric Institute; 
Robert Bauman with the Butler County Rural Electric Cooperative, 
Allison, Iowa; Brett Harvey with CONSOL Energy, Inc., Pittsburgh, 
Pennsylvania (testimony relating to clean coal incentives); and Howard 
Gruenspecht, Ph.D., with Resources for the Future, Washington, D.C.
---------------------------------------------------------------------------
    The Committee believes that the tax code should not be an 
obstacle to this changing electric industry marketplace. 
However, the Committee concluded that it is not possible at the 
present time to design tax provisions that will address as yet 
undefined legal and economic industry structures. The bill puts 
in place a mechanism to ensure that up-to-date information on 
tax issues that arise from future developments is available to 
the Congress so that appropriate changes to the tax law can be 
considered on a timely basis.
    With respect to changes that already have occurred in the 
electric service industry, the Committee believes it is 
appropriate to provide certainty to industry participants. On 
January 18, 2001, the Department of the Treasury (``Treasury'') 
published temporary and proposed regulations to provide 
guidance to issuers of governmental bonds for electric output 
facilities. Those regulations provide interim relief for 
outstanding electric output facility bonds. Because of this 
interim relief and the aforementioned uncertainty regarding 
future industry structure, the bill does not address issues 
related to issuance of tax-exempt bonds. The bill does, 
however, address certain aspects of electric industry 
restructuring that are known at the present time and for which 
comparable interim regulatory relief has not been provided--
issues relating to certain transfers of nuclear decommissioning 
plants by investor-owned utilities (``IOUs'') and certain 
transactions engaged in by rural electric cooperatives.

 A. Ongoing Study and Reports With Regard to Tax Issues Resulting From 
                     Future Restructuring Decisions

(Sec. 601 of the bill)

    The bill directs Treasury to conduct an ongoing study of 
tax issues resulting from restructuring of the electric service 
industry. Treasury (after consultation with FERC) is required 
to report to the Senate Committee on Finance and the House 
Committee on Ways and Means at least annually, no later than 
December 31, on tax issues identified since its last report. 
The first report is due no later than December 31, 2002. These 
annual reports are to continue until such time as the electric 
industry restructuring activities contemplated under the 
legislation in conjunction with which the provision is to be 
considered have been completed.
    Among other issues, this ongoing study is expected to focus 
on the tax consequences of restructuring for IOUs and 
cooperatives (e.g., asset divestitures). In addition, the 
Committee anticipates that Treasury as part of the analysis 
underlying its ongoing study will review the interim relief 
provided to certain tax-exempt bonds in the regulations 
described above. The Committee hopes that Treasury will 
finalize as quickly as possible regulations relating to the 
definition of private activity bond for public power entities. 
In adopting its regulations, the Committee hopes that Treasury 
will use its regulatory authority, as appropriate, to provide 
flexibility to foster the participation of public power in a 
restructured electric industry (e.g., relating to participation 
in RTOs and treatment of distribution facilities). Where 
Treasury determines that changes in the Code's private business 
use rules to accommodate restructuring exceed its regulatory 
authority or otherwise are more appropriately accomplished 
through legislation, the Committee anticipates that Treasury 
will include recommendations on such changes in its annual 
reports to Congress.
    Further, in connection with its study, the Committee 
believes that Treasury should exercise its authority, as 
appropriate, to modify or suspend regulations that may impede 
an IOU's ability to reorganize its capital stock structure to 
respond to a competitive marketplace.

   B. Modification to Special Rules for Nuclear Decommissioning Costs

(Sec. 602 of the bill and sec. 468A of the Code)

                              Present Law

Overview

    Special rules dealing with nuclear decommissioning reserve 
funds were adopted by Congress in the Deficit Reduction Act of 
1984 (``1984 Act''), when tax issues regarding the time value 
of money were addressed generally. Under general tax accounting 
rules, a deduction for accrual basis taxpayers is deferred 
until there is economic performance for the item for which the 
deduction is claimed. However, the 1984 Act contains an 
exception under which a taxpayer responsible for nuclear 
powerplant decommissioning may elect to deduct contributions 
made to a qualified nuclear decommissioning fund for future 
decommissioning costs. Taxpayers who do not elect this 
provision are subject to general tax accounting rules.

Qualified nuclear decommissioning fund

    A qualified nuclear decommissioning fund (a ``qualified 
fund'') is a segregated fund established by a taxpayer that is 
used exclusively for the payment of decommissioning costs, 
taxes on fund income, management costs of the fund, and for 
making investments. The income of the fund is taxed at a 
reduced rate of 20 percent for taxable years beginning after 
December 31, 1995.\24\
---------------------------------------------------------------------------
    \24\ As originally enacted in 1984, a qualified fund paid tax on 
its earnings at the top corporate rate and, as a result, there was no 
present-value tax benefit of making deductible contributions to a 
qualified fund. Also, as originally enacted, the funds in the trust 
could be invested only in certain low risk investments. Subsequent 
amendments to the provision have reduced the rate of tax on a qualified 
fund to 20 percent and removed the restrictions on the types of 
permitted investments that a qualified fund can make.
---------------------------------------------------------------------------
    Contributions to a qualified fund are deductible in the 
year made to the extent that these amounts were collected as 
part of the cost of service to ratepayers (the ``cost of 
service requirement'').\25\ Funds withdrawn by the taxpayer to 
pay for decommissioning costs are included in the taxpayer's 
income, but the taxpayer also is entitled to a deduction for 
decommissioning costs as economic performance for such costs 
occurs.
---------------------------------------------------------------------------
    \25\ Taxpayers are required to include in gross income customer 
charges for decommissioning costs (sec. 88).
---------------------------------------------------------------------------
    Accumulations in a qualified fund are limited to the amount 
required to fund decommissioning costs of a nuclear powerplant 
for the period during which the qualified fund is in existence 
(generally post-1984 decommissioning costs of a nuclear 
powerplant). For this purpose, decommissioning costs are 
considered to accrue ratably over a nuclear powerplant's 
estimated useful life. In order to prevent accumulations of 
funds over the remaining life of a nuclear powerplant in excess 
of those required to pay future decommissioning costs of such 
nuclear powerplant and to ensure that contributions to a 
qualified fund are not deducted more rapidly than level funding 
(taking into account an appropriate discount rate), taxpayers 
must obtain a ruling from the IRS to establish the maximum 
annual contribution that may be made to a qualified fund (the 
``ruling amount''). In certain instances (e.g., change in 
estimates), a taxpayer is required to obtain a new ruling 
amount to reflect updated information.
    A qualified fund may be transferred in connection with the 
sale, exchange or other transfer of the nuclear powerplant to 
which it relates. If the transferee is a regulated public 
utility and meets certain other requirements, the transfer will 
be treated as a nontaxable transaction. No gain or loss will be 
recognized on the transfer of the qualified fund and the 
transferee will take the transferor's basis in the fund.\26\ 
The transferee is required to obtain a new ruling amount from 
the IRS or accept a discretionary determination by the IRS.\27\
---------------------------------------------------------------------------
    \26\ Treas. reg. sec. 1.468A-6.
    \27\ Treas. reg. sec. 1.468A-6(f).
---------------------------------------------------------------------------

Nonqualified nuclear decommissioning funds

    Federal and State regulators may require utilities to set 
aside funds for nuclear decommissioning costs in excess of the 
amount allowed as a deductible contribution to a qualified 
fund. In addition, taxpayers may have set aside funds prior to 
the effective date of the qualified fund rules.\28\ The 
treatment of amounts set aside for decommissioning costs prior 
to 1984 varies. Some taxpayers may have received no tax benefit 
while others may have deducted such amounts or excluded such 
amounts from income. Since 1984, taxpayers have been required 
to include in gross income customer charges for decommissioning 
costs (sec. 88), and a deduction has not been allowed for 
amounts set aside to pay for decommissioning costs except 
through the use of a qualified fund. Income earned in a 
nonqualified fund is taxable to the fund's owner as it is 
earned.
---------------------------------------------------------------------------
    \28\ These funds are generally referred to as ``nonqualified 
funds.''
---------------------------------------------------------------------------

                           Reasons for Change

    The Committee does not believe a utility should be denied 
the opportunity to contribute to a qualified fund simply 
because it operates in a deregulated environment. In addition, 
the Committee recognizes the importance of providing clear and 
concise rules to minimize disputes between taxpayers and the 
IRS.

                        Explanation of Provision

Repeal of cost of service requirement

    The provision repeals the cost of service requirement for 
deductible contributions to a nuclear decommissioning fund. 
Thus, all taxpayers, including unregulated taxpayers, would be 
allowed a deduction for amounts contributed to a qualified 
fund.

Clarify treatment of transfers of qualified funds and deductibility of 
        decommissioning costs

    The provision clarifies the Federal income tax treatment of 
the transfer of a qualified fund. No gain or loss would be 
recognized to the transferor or the transferee (or the 
qualified fund) as a result of the transfer of a qualified fund 
in connection with the transfer of the power plant with respect 
to which such fund was established. In addition, the provision 
provides that all nuclear decommissioning costs are deductible 
when paid or incurred.

                             Effective Date

    The provision is effective for taxable years beginning 
after December 31, 2002.

        C. Treatment of Certain Income of Electric Cooperatives

(Sec. 603 of the bill and sec. 501 of the Code)

                              Present Law

In general

    Under present law, an entity must be operated on a 
cooperative basis in order to be treated as a cooperative for 
Federal income tax purposes. Although not defined by statute or 
regulation, the two principal criteria for determining whether 
an entity is operating on a cooperative basis are: (1) 
ownership of the cooperative by persons who patronize the 
cooperative; and (2) return of earnings to patrons in 
proportion to their patronage. The Internal Revenue Service 
requires that cooperatives must operate under the following 
principles: (1) subordination of capital in control over the 
cooperative undertaking and in ownership of the financial 
benefits from ownership; (2) democratic control by the members 
of the cooperative; (3) vesting in and allocation among the 
members of all excess of operating revenues over the expenses 
incurred to generate revenues in proportion to their 
participation in the cooperative (patronage); and (4) operation 
at cost (not operating for profit or below cost).\29\
---------------------------------------------------------------------------
    \29\ Announcement 96-24, Proposed Examination Guidelines Regarding 
Rural Electric Cooperatives, 1996-16 I.R.B. 35.
---------------------------------------------------------------------------
    In general, cooperative members are those who participate 
in the management of the cooperative and who share in patronage 
capital. As described below, income from the sale of electric 
energy by an electric cooperative may be member or non-member 
income to the cooperative, depending on the membership status 
of the purchaser. A municipal corporation may be a member of a 
cooperative.
    For Federal income tax purposes, a cooperative generally 
computes its income as if it were a taxable corporation, with 
one exception--the cooperative may exclude from its taxable 
income distributions of patronage dividends. In general, 
patronage dividends are the profits of the cooperative that are 
rebated to its patrons pursuant to a pre-existing obligation of 
the cooperative to do so. The rebate must be made in some 
equitable fashion on the basis of the quantity or value of 
business done with the cooperative.
    Except for tax-exempt farmers' cooperatives, cooperatives 
that are subject to the cooperative tax rules of subchapter T 
of the Code (sec. 1381, et seq.) are permitted a deduction for 
patronage dividends from their taxable income only to the 
extent of net income that is derived from transactions with 
patrons who are members of the cooperative (sec. 1382). The 
availability of such deductions from taxable income has the 
effect of allowing the cooperative to be treated like a conduit 
with respect to profits derived from transactions with patrons 
who are members of the cooperative.
    Cooperatives that qualify as tax-exempt farmers' 
cooperatives are permitted to exclude patronage dividends from 
their taxable income to the extent of all net income, including 
net income that is derived from transactions with patrons who 
are not members of the cooperative, provided the value of 
transactions with patrons who are not members of the 
cooperative does not exceed the value of transactions with 
patrons who are members of the cooperative (sec. 521).

Taxation of electric cooperatives exempt from subchapter T

    In general, the cooperative tax rules of subchapter T apply 
to any corporation operating on a cooperative basis (except 
mutual savings banks, insurance companies, other tax-exempt 
organizations, and certain utilities), including tax-exempt 
farmers' cooperatives (described in sec. 521(b)). However, 
subchapter T does not apply to an organization that is 
``engaged in furnishing electric energy, or providing telephone 
service, to persons in rural areas'' (sec. 1381(a)(2)(C)). 
Instead, electric cooperatives are taxed under rules that were 
generally applicable to cooperatives prior to the enactment of 
subchapter T in 1962. Under these rules, an electric 
cooperative can exclude patronage dividends from taxable income 
to the extent of all net income of the cooperative, including 
net income derived from transactions with patrons who are not 
members of the cooperative.\30\
---------------------------------------------------------------------------
    \30\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
---------------------------------------------------------------------------

Tax exemption of rural electric cooperatives

    Section 501(c)(12) provides an income tax exemption for 
rural electric cooperatives if at least 85-percent of the 
cooperative's income consists of amounts collected from members 
for the sole purpose of meeting losses and expenses of 
providing service to its members. The Internal Revenue Service 
takes the position that rural electric cooperatives also must 
comply with the fundamental cooperative principles described 
above in order to qualify for tax exemption under section 
501(c)(12).\31\ The 85-percent test is determined without 
taking into account any income from qualified pole rentals and 
cancellation of indebtedness income from the prepayment of a 
loan under sections 306A, 306B, or 311 of the Rural 
Electrification Act of 1936 (as in effect on January 1, 1987). 
The exclusion for cancellation of indebtedness income applies 
to such income arising in 1987, 1988, or 1989 on debt that 
either originated with, or is guaranteed by, the Federal 
Government. Rural electric cooperatives generally are subject 
to the tax on unrelated trade or business income under section 
511.
---------------------------------------------------------------------------
    \31\ Rev. Rul. 72-36, 1972-1 C.B. 151.
---------------------------------------------------------------------------

                           Reasons for Change

    The purpose of the 85-percent test under section 501(c)(12) 
is to ensure that the primary activities of a tax-exempt 
electric cooperative fulfill the statutory purpose of providing 
electricity services to the members of the cooperative. 
Similarly, the fundamental cooperative principles described 
above are the defining characteristics of a cooperative upon 
which the Federal tax rules condition conduit treatment.
    The Committee believes that the nature of an electric 
cooperative's activities does not change because it has income 
from open access transactions with non-members or from nuclear 
decommissioning transactions (as these terms are defined in the 
bill). Accordingly, the Committee believes that the 85-percent 
test for tax exemption under present law should beapplied 
without regard to such income. The Committee intends that the term 
``open access transaction'' shall be applied in a manner that allows an 
electric cooperative to carry out its statutory purpose in a 
restructured electric energy market environment without adversely 
impacting its tax-exempt status.
    For similar reasons, the Committee believes that the 85-
percent test for tax exemption under present law should be 
applied without regard to cancellation of indebtedness income 
from the prepayment of certain loans that are provided, 
insured, or guaranteed by the Federal government, as well as 
income from certain transactions that would otherwise qualify 
for deferred gain recognition under section 1031 or 1033.
    The Committee further believes that electric energy sales 
to non-members should not result in a loss of tax-exempt status 
or cooperative status to the extent that such sales are 
necessary to replace lost sales of electric energy to members 
as a result of restructuring of the electric energy industry. 
Accordingly, the Committee believes that replacement electric 
energy sales to non-members (defined as ``load loss 
transactions'' in the bill) should be treated, for a limited 
period of time, as member income in applying the 85-percent 
test for tax exemption of rural electric cooperatives. The 
Committee believes that such treatment also should apply for 
purposes of determining whether tax-exempt and taxable electric 
cooperatives comply with the fundamental cooperative 
principles. Finally, the Committee believes that income from 
replacement electric energy sales should not be subject to the 
tax on unrelated trade or business income under Code section 
511.

                        explanation of provision

Treatment of income from open access transactions

    The bill provides that income received or accrued by a 
rural electric cooperative from any ``open access transaction'' 
(other than income received or accrued directly or indirectly 
from a member of the cooperative) is excluded in determining 
whether a rural electric cooperative satisfies the 85-percent 
test for tax exemption under section 501(c)(12). The term 
``open access transaction'' is defined as--
          (1) The provision or sale of electric energy 
        transmission services or ancillary services on a 
        nondiscriminatory open access basis: (i) pursuant to an 
        open access transmission tariff filed with and approved 
        by the Federal Energy Regulatory Commission (``FERC'') 
        (including acceptable reciprocity tariffs), but only if 
        (in the case of a voluntarily filed tariff) the 
        cooperative files a report with FERC within 90 days of 
        enactment of this provision relating to whether or not 
        the cooperative will join a regional transmission 
        organization (``RTO''); or (ii) under an RTO agreement 
        approved by FERC (including an agreement providing for 
        the transfer of control--but not ownership--of 
        transmission facilities); \32\
---------------------------------------------------------------------------
    \32\ Under this provision, references to FERC are treated as 
including references to the Public Utility Commission of Texas or the 
Rural Utilities Service.
---------------------------------------------------------------------------
          (2) The provision or sale of electric energy 
        distribution services or ancillary services on a 
        nondiscriminatory open access basis to end-users served 
        by distribution facilities owned by the cooperative or 
        its members; or
          (3) The delivery or sale of electric energy on a 
        nondiscriminatory open access basis, provided that such 
        electric energy is generated by a generation facility 
        that is directly connected to distribution facilities 
        owned by the cooperative (or its members) which owns 
        the generation facility.
    For purposes of the 85-percent test, the bill also provides 
that income received or accrued by a rural electric cooperative 
from any ``open access transaction'' is treated as an amount 
collected from members for the sole purpose of meeting losses 
and expenses if the income is received or accrued indirectly 
from a member of the cooperative.

Treatment of income from nuclear decommissioning transactions

    The bill provides that income received or accrued by a 
rural electric cooperative from any ``nuclear decommissioning 
transaction'' also is excluded in determining whether a rural 
electric cooperative satisfies the 85-percent test for tax 
exemption under section 501(c)(12). The term ``nuclear 
decommissioning transaction'' is defined as--
          (1) Any transfer into a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs if 
        the transfer is in connection with the transfer of the 
        cooperative's interest in a nuclear powerplant or 
        nuclear powerplant unit;
          (2) Any distribution from a trust, fund, or 
        instrument established to pay any nuclear 
        decommissioning costs; or
          (3) Any earnings from a trust, fund, or instrument 
        established to pay any nuclear decommissioning costs.

Treatment of income from asset exchange or conversion transactions

    The bill provides that gain realized by a tax-exempt rural 
electric cooperative from a voluntary exchange or involuntary 
conversion of certain property is excluded in determining 
whether a rural electric cooperative satisfies the 85-percent 
test for tax exemption under section 501(c)(12). This provision 
only applies to the extent that: (1) the gain would qualify for 
deferred recognition under section 1031 (relating to exchanges 
of property held for productive use or investment) or section 
1033 (relating to involuntary conversions); and (2) the 
replacement property that is acquired by the cooperative 
pursuant to section 1031 or section 1033 (as the case may be) 
constitutes property that is used, or to be used, for the 
purpose of generating, transmitting, distributing, or selling 
electricity or natural gas.

Treatment of cancellation of indebtedness income from prepayment of 
        certain loans

    The bill provides that income from the prepayment of any 
loan, debt, or obligation of a tax-exempt rural electric 
cooperative that is originated, insured, or guaranteed by the 
FederalGovernment under the Rural Electrification Act of 1936 
is excluded in determining whether the cooperative satisfies the 85-
percent test for tax exemption under section 501(c)(12).

Treatment of income from load loss transactions

    Tax-exempt rural electric cooperatives.--The bill provides 
that income received or accrued by a tax-exempt rural electric 
cooperative from a ``load loss transaction'' is treated under 
501(c)(12) as income collected from members for the sole 
purpose of meeting losses and expenses of providing service to 
its members. Therefore, income from load loss transactions is 
treated as member income in determining whether a rural 
electric cooperative satisfies the 85-percent test for tax 
exemption under section 501(c)(12). The bill also provides that 
income from load loss transactions does not cause a tax-exempt 
electric cooperative to fail to be treated for Federal income 
tax purposes as a mutual or cooperative company under the 
fundamental cooperative principles described above.
    The term ``load loss transaction'' is generally defined as 
any wholesale or retail sale of electric energy (other than to 
a member of the cooperative) to the extent that the aggregate 
amount of such sales during a seven-year period beginning with 
the ``start-up year'' does not exceed the reduction in the 
amount of sales of electric energy during such period by the 
cooperative to members. The ``start-up year'' is defined as the 
calendar year which includes the date of enactment of this 
provision or, if later, at the election of the cooperative: (1) 
the first year that the cooperative offers nondiscriminatory 
open access; or (2) the first year in which at least 10 percent 
of the cooperative's sales of electric energy are to patrons 
who are not members of the cooperative.
    The bill also excludes income received or accrued by rural 
electric cooperatives from load loss transactions from the tax 
on unrelated trade or business income.
    Taxable electric cooperatives.--The bill provides that the 
receipt or accrual of income from load loss transactions by 
taxable electric cooperatives is treated as income from patrons 
who are members of the cooperative. Thus, income from a load 
loss transaction is excludible from the taxable income of a 
taxable electric cooperative if the cooperative distributes 
such income pursuant to a pre-existing contract to distribute 
the income to a patron who is not a member of the cooperative. 
The bill also provides that income from load loss transactions 
does not cause a taxable electric cooperative to fail to be 
treated for Federal income tax purposes as a mutual or 
cooperative company under the fundamental cooperative 
principles described above.

                             effective date

    This provision is effective for taxable years beginning 
after the date of enactment.

                    TITLE VII. ADDITIONAL PROVISIONS

 A. Extension of Accelerated Depreciation and Wage Credit Benefits on 
                          Indian Reservations

(Sec. 701 of the bill and secs. 45A and 168(j) of the Code)

                              present law

    Present law includes the following tax incentives for 
businesses located within Indian reservations.

Accelerated depreciation

    With respect to certain property used in connection with 
the conduct of a trade or business within an Indian 
reservation, depreciation deductions under section 168(j) will 
be determined using the following recovery periods:

                                                                   Years
3-year property...................................................     2
5-year property...................................................     3
7-year property...................................................     4
10-year property..................................................     6
15-year property..................................................     9
20-year property..................................................    12
Nonresidential real property......................................    22

    ``Qualified Indian reservation property'' eligible for 
accelerated depreciation includes property which is (1) used by 
the taxpayer predominantly in the active conduct of a trade or 
business within an Indian reservation, (2) not used or located 
outside the reservation on a regular basis, (3) not acquired 
(directly or indirectly) by the taxpayer from a person who is 
related to the taxpayer (within the meaning of section 
465(b)(3)(C)), and (4) described in the recovery-period table 
above. In addition, property is not ``qualified Indian 
reservation property'' if it is placed in service for purposes 
of conducting gaming activities. Certain ``qualified 
infrastructure property'' may be eligible for the accelerated 
depreciation even if located outside an Indian reservation, 
provided that the purpose of such property is to connect with 
qualified infrastructure property located within the 
reservation (e.g., roads, power lines, water systems, railroad 
spurs, and communications facilities).
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum tax. 
The accelerated depreciation for Indian reservations is 
available with respect to property placed in service on or 
after January 1, 1994, and before January 1, 2004.

Indian employment credit

    In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by theemployer with respect to certain employees (sec. 45A). 
The credit is equal to 20 percent of the excess of eligible employee 
qualified wages and health insurance costs during the current year over 
the amount of such wages and costs incurred by the employer during 
1993. The credit is an incremental credit, such that an employer's 
current-year qualified wages and qualified employee health insurance 
costs (up to $20,000 per employee) are eligible for the credit only to 
the extent that the sum of such costs exceeds the sum of comparable 
costs paid during 1993. No deduction is allowed for the portion of the 
wages equal to the amount of the credit.
    Qualified wages means wages paid or incurred by an employer 
for services performed by a qualified employee. A qualified 
employee means any employee who is an enrolled member of an 
Indian tribe or the spouse of an enrolled member of an Indian 
tribe, who performs substantially all of the services within an 
Indian reservation, and whose principal place of abode while 
performing such services is on or near the reservation in which 
the services are performed. An employee will not be treated as 
a qualified employee for any taxable year of the employer if 
the total amount of wages paid or incurred by the employer with 
respect to such employee during the taxable year exceeds an 
amount determined at an annual rate of $30,000 (adjusted for 
inflation after 1993).
    The wage credit is available for wages paid or incurred on 
or after January 1, 1994, in taxable years that begin before 
December 31, 2003.

                           reasons for change

    The Committee recognizes the significant potential on 
Indian lands for development of energy resources and other 
projects. The special nature of Native American tribes and high 
poverty rates in certain areas in some circumstances create 
unique barriers to development that these incentives help 
overcome. The Committee understands that a significant portion 
of these incentives are used in development of energy projects.
    The Committee concluded that extending the accelerated 
depreciation and wage credit tax incentives within Indian 
reservations will both increase the supply of energy and expand 
business and employment opportunities in these areas.

                        explanation of provision

Accelerated depreciation

    The provision extends the accelerated depreciation 
incentive for two years (to property placed in service before 
January 1, 2006).

Indian employment credit

    The provision extends the Indian employment credit 
incentive for two years (to taxable years beginning before 
January 1, 2006).

                             effective date

    The provision is effective on the date of enactment.

                              B. GAO Study

(Sec. 702 of the bill)

                              present law

    Present law does not require study of the present law 
provisions relating to clean fuel vehicles and electric 
vehicles.

                           reasons for change

    The Committee believes it is important to gain information 
on the value of benefits compared to costs in order to make 
informed decisions regarding the propriety of special tax 
treatment of various products or technologies designed to 
reduce dependence on petroleum, reduce emissions of pollutants, 
or to promote energy conservation. The Committee believes it is 
important to have measures of the amount of conservation or 
reduction in pollution that results from provisions designed to 
achieve such results.

                        explanation of provision

    The bill directs the Comptroller General to undertake an 
ongoing analysis of the effectiveness of the tax credits 
allowed to alternative motor vehicles and the tax credits 
allowed to various alternative fuels under Title II of the bill 
and the tax credits and enhanced deductions allowed for energy 
conservation and efficiency under Title III of the bill. The 
studies should estimate the energy savings and reductions in 
pollutants achieved from taxpayer utilization of these 
provisions. The studies should estimate the dollar value of the 
benefits of reduced energy consumption and reduced air 
pollution in comparison to estimates of the revenue cost of 
these provisions to the U.S. Treasury. The studies should 
include an analysis of the distribution of the taxpayers who 
utilize these provisions by income and other relevant 
characteristics.
    The bill directs the Comptroller General to submit annual 
reports to Congress beginning not later than December 31, 2002.

                             effective date

    The provision is effective on the date of enactment.

                    III. BUDGET EFFECTS OF THE BILL

                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of the ``Energy Tax Incentives Act of 2002'' as 
reported.

                                         ESTIMATED REVENUE EFFECTS OF THE ``ENERGY TAX INCENTIVES ACT OF 2002,'' AS REPORTED BY THE COMMITTEE ON FINANCE
                                                                        [Fiscal years 2002-2012, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
             Provision                      Effective            2002      2003      2004      2005      2006      2007      2008      2009      2010      2011      2012     2002-07   2002-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Renewable Energy--Extend and        esfqfa DOE...............       -30      -133      -243      -336      -364      -375      -379      -372      -370      -364      -306    -1,481     -3,272
 Modify the Section 45 Credit for
 Producing electricity From
 Certain Sources.
                                   =============================================================================================================================================================
   Alternative Vehicles and Fuel
            Incentives

1. GAO study......................  DOE......................                                                          No Revenue Effect
2. Modified CLEAR Act:
    a. Credits for purchase of      10/1/02..................  ........       -61      -205      -319      -350      -219        22        15        10         4         1    -1,156     -1,104
     alternative motor vehicles
     and modifications to credit
     for electric vehicles.
    b. Credit for retail sale of    10/1/02..................  ........       -52      -100      -169      -215       -90        -1        -1        -1        -1     (\1\)      -627       -632
     alternative fuels (30 cents/
     gallon in 2002 and 2003, 40
     cents in 2004, and 50 cents
     in 2005 through 2006).
    c. Extension of deduction for   10/1/02..................  ........       -50      -122      -133       -62        50        73        48        29        12         3      -316       -150
     certain vehicles and
     refueling property.
    d. Credit for installation of   10/1/02..................  ........        -2        -2        -2        -2     (\1\)     (\2\)     (\2\)     (\2\)     (\2\)  ........        -9         -8
     alternative fueling stations.
3. Modifications to small producer  tyba DOE.................  ........       -16       -34       -34       -34       -34       -18     (\1\)     (\1\)     (\1\)  ........      -152       -171
 ethanol credit.
4. Transfer full amount of excise   10/1/03..................                                                          No Revenue Effect
 tax imposed on gasohol to the
 Highway Trust Fund.
5. Modify income tax and fuels      DOE......................                                                      Negligible Revenue Effect
 excise tax treatment of ETBE.
6. Biodiesel income tax credit and  1/1/03...................  ........       -12       -22       -30       -10  ........  ........  ........  ........  ........  ........       -74        -74
 excise tax rate reduction (sunset
 12/31/05) \3\.
                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Alternative          .........................  ........      -193      -485      -687      -673      -293        76        62        38        15         4    -2,334     -2,139
       Vehicles and Fuel
       Incentives.
                                   =============================================================================================================================================================
Conservation and Energy Efficiency
            Provisions

1. Business credit for              DOE & ppisb 1/1/08.......        -8       -16       -16       -11        -8        -7        -4        -1     (\1\)  ........  ........       -66        -72
 construction of new energy
 efficient homes.
2. Credit for energy efficiency     tyeo/a DOE...............  ........       -89      -117      -128      -111       -38       -10  ........  ........  ........  ........      -483       -494
 improvements to existing homes.
3. Tax credit for energy efficient  ppb 1/1/07...............  ........       -19       -31       -33       -65       -50       -28       -13        -2  ........  ........      -198       -241
 appliances.
4. Tax credit for residential fuel  tyea 12/31/02 & ppb......  ........        -4       -18       -22       -29       -32       -30  ........  ........  ........  ........      -105       -135
 cell, solar, and wind energy       1/1/08...................
 property.
5. Credit for energy efficient air  tyea 12/31/02............  ........       -21       -97       -55       -47       -38       -33       -34       -35       -36       -36      -259       -433
 conditioners, water heaters, heat
 pumps, and geothermal heat pumps.
6. Business tax incentives for
 qualifying fuel cells (through 12/
 31/06):
    a. Stationary.................  ppisa 12/31/02...........  ........        -3        -8       -14       -16       -10        -6        -3        -2     (\1\)  ........       -51        -62
    b. Portable...................  ppisa 12/31/02...........                                                      Negligible Revenue Effect
7. Allowance of deduction for       pcpt 1/1/08 & 10/1/02 &    ........       -60       -61       -63       -64       -65       -65       -23  ........  ........  ........      -313       -401
 certain energy efficient            ccb 1/1/10.
 commercial building property.
8. Allowance of deduction for new   ppisa DOE................       -11       -17       -20       -23       -24       -22       -20       -18       -17       -16       -16      -117       -205
 and retrofitted energy management
 devices; three-year applicable
 recovery period for depreciation
 of qualified new energy
 management devices.
9. Energy credit for combined heat  episa 12/31/02 & episb...  ........       -34       -65       -72       -76       -51       -26       -15        -7        -1  ........      -298       -347
 and power system property.         1/1/07...................
                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Conservation and     .........................       -19      -263      -433      -421      -440      -313      -222      -107       -63       -53       -52    -1,890     -2,390
       Energy Efficiency
       Provisions.
                                   =============================================================================================================================================================
 Clean Coal Incentives--Investment
 and Production Credits for Clean
          Coal Technology

1. Credit for production from a     pa DOE...................  ........        -2       -33       -61       -73       -84       -91       -94       -97       -99      -101      -253       -733
 qualifying clean coal technology
 unit.
2. Credit for investment in         ppisa DOE................  ........        -1       -22       -54       -56       -47       -31       -77       -62       -26       -17      -180       -394
 qualifying advanced clean coal
 technology.
3. Credit for production of         pa DOE...................  ........       \1\        -5       -19       -42       -63       -80      -104      -136      -158      -171      -129       -780
 electricity from qualifying
 advanced clean coal technology
 units.
                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Clean Coal           .........................  ........        -3       -60      -134      -171      -194      -202      -275      -295      -283      -289      -562     -1,907
       Incentives--Investment and
       Production Credit for Clean
       Coal Technology.
                                   =============================================================================================================================================================
      Oil and Gas Provisions

1. Tax credit for marginal          DOE......................                                                          No Revenue Effect
 domestic oil and natural gas well
 production.
2. Natural gas gathering pipelines  ppisa DOE................        -1        -4        -5        -6        -7        -8        -9       -11       -11       -12       -13       -31        -87
 treated as 7-year property.
3. Repeal of requirement that       1/1/02...................                                                      Negligible Revenue Effect
 certain terminals offer both dyed
 and undyed diesel fuel and
 kerosene as a condition of
 registration.
4. Expensing of capital costs       epoia DOE................  ........  ........  ........  ........        -5       -10       -17       -27        -7         5         4       -14        -57
 incurred and credit for
 Production in complying with
 Environmental Protection Agency
 sulfur regulations for small
 refiners.
5. Determination of small refiner   tyba 12/31/02............  ........        -4        -7        -7        -7        -7        -7        -8        -8        -8        -8       -32        -71
 exception to oil depletion
 deduction--modify definition of
 independent refiner from daily
 maximum run less than 50,000
 barrels to average daily run less
 than 60,000 barrels.
6. Extension of suspension of 100%  tyba 12/31/01............       -21       -35       -38       -40       -42       -15  ........  ........  ........  ........  ........      -191       -191
 of taxable income limit with
 respect to marginal production
 (through 12/31/06).
7. Election to amortize geological  cpoii tyba 12/31/02......  ........       291       205       -73      -154      -146      -146      -155      -161      -165      -170      -122       -675
 and geophysical expenditures over
 2 years (no transition rule).
8. Election to amortize delay       apoii tyba 12/31/02......  ........       107        44       -82      -116      -116       -55       -86      -121      -123      -124      -162       -672
 rental payments over 2 years (no
 transition rule).
9. Study of coal bed methane......  DOE......................                                                          No Revenue Effect
10. $3 credit for refined coal....  fsa DOE..................  ........       \1\        -1        -4        -8        -9        -8        -8        -5        -1  ........       -22        -44
11. Natural gas distribution lines  ppisa DOE................        -8       -30       -59       -87      -111      -133      -152      -173      -199      -226      -254      -427     -1,431
 treated as 15-year property.
12. Extend section 29 credit for    DOE......................       -32      -177      -380      -445      -297       -77  ........  ........  ........  ........  ........    -1,409     -1,409
 facilities placed in service
 after the date of enactment
 including viscous oil and coal
 mine methane ($3 credit) \4\.
                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Oil and Gas          .........................       -62       148      -241      -744      -747      -521      -394      -468      -512      -530      -565    -2,166     -4,637
       Provisions.
                                   =============================================================================================================================================================
  Provisions Relating to Electric
      Industry Restructuring

    1. Ongoing study and reports    DOE......................                                                           No Revenue Effect
     with regard to tax issues
     resulting from future
     restructuring decisions.
    2. Modification to Special      tyba 2002................  ........       -18       -46       -56       -75       -99      -131      -143      -152      -161      -171      -294     -1,052
     Rules for Nuclear
     Decommissioning Costs--
     eliminate cost of service
     requirement and clarify
     treatment of fund transfers.
    3. Treatment of certain income  tyba DOE.................        -6       -13       -16       -19       -21       -23       -25       -27       -29       -32       -35       -97       -245
     of electric cooperatives.
                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------
      Total of Provisions Relating  .........................        -6       -31       -62       -75       -96      -122      -156      -170      -181      -193      -206      -391     -1,297
       to Electric Industry
       Restructuring.
                                   =============================================================================================================================================================
Extension of Tax incentives for     DOE......................  ........         8      -153      -468      -427      -100        97       200       225       157        62    -1,140       -399
 Indian Reservations--Extension of
 Accelerated Depreciation and Wage
 Credit Benefits for Businesses on
 Indian Reservation (through 12/31/
 05).
                                   -------------------------------------------------------------------------------------------------------------------------------------------------------------
      Net Total...................  .........................      -117      -468    -1,677    -2,865    -2,918    -1,918    -1,180    -1,130    -1,158    -1,251    -1,352    -9,964    -16,041
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ Gain of less than $500,000.
\3\ This provision may also have indirect effects on Federal outlays for certain farm programs. Outlay effects will be estimated by the Congressional Budget Office.
\4\ Effective for facilities placed in service from the date of enactment through December 31, 2004. Qualified facilities would be given 3 years of credit.

Legend for ``Effective'' column: apoii=amounts paid or incurred in; ccb=construction completed before; cpoii=costs paid or incurred in; DOE=date of enactment; epoia=expenses paid or incurred
  after; episa=equipments placed in service after; episb=equipment placed in service before; esfqfa=electricity sold from qualifying facilities after; fsa=fuels sold after; pa=production
  after; pccpt=plans certified prior to; ppb=property purchased before; ppisa=property placed in service after; ppisb=property placed in service before; tyba=taxable years beginning after;
  tyea=taxable years ending after; and tyeo/a=taxable years ending on or after.

Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.

                B. Budget Authority and Tax Expenditures

Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the revenue provisions of the bill as 
reported involve no new or increased budget authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part III. A., above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill:

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, February 27, 2002.
Hon. Max Baucus,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Energy Tax 
Incentives Act of 2002.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Erin 
Whitaker.
            Sincerely,
                                            Dan L. Crippen,
                                                          Director.
    Enclosure.

Energy Tax Incentives Act of 2002

    Summary: The Energy Tax Incentives Act (ETIA) would amend 
numerous provisions of tax law relating to energy. The bill 
would enhance and create credits for the use and development of 
energy-efficient technologies, amend tax rules to provide 
deductions for certain devices and credits for businesses that 
provide energy, and enhance and create credits and deductions 
for the production of oil, gas, and other types of fuel. 
Provisions of the bill would generally take affect in 2003, but 
some provisions would take effect in 2002, and some provisions 
would expire during the 2006-2012 period.
    The Congressional Budget Office (CBO) and the Joint 
Committee on Taxation (JCT) estimate that enacting the bill 
would decrease governmental receipts by $117 million in 2002, 
by about $10 billion over the 2002-2007 period, and by about 
$16 billion over the 2002-2012 period. CBO estimates that 
certain provisions requiring studies and reports would have an 
insignificant impact on spending subject to appropriation. 
Since ETIA would affect receipts, pay-as-you-go procedures 
would apply.
    JCT and CBO have determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act (UMRA) and would not affect the 
budgets of state, local, or tribal governments.
    Estimated Cost to the Federal Government: The estimated 
budgetary impact on the bill is shown in the following table. 
All revenue estimates were provided by JCT.

----------------------------------------------------------------------------------------------------------------
                                                            By fiscal year, in millions of dollars--
                                               -----------------------------------------------------------------
                                                   2002       2003       2004       2005       2006       2007
----------------------------------------------------------------------------------------------------------------
                                               CHANGES IN REVENUES

Estimated Revenues............................       -117       -467     -1,677     -2,865     -2,918     -1,918
----------------------------------------------------------------------------------------------------------------

Basis of estimate

            Revenues
    All estimates of the revenue provisions were provided by 
JCT. Four provisions would compose a significant portion of the 
effect on revenues if enacted. Those provisions would extend 
the credit for producing energy from certain sources, extend 
the credit for purchase of alternative motor vehicles, and 
modify the credit for purchase of electric vehicles. They also 
would establish a statutory 15-year recovery period for natural 
gas distribution lines, expand the credit for certain 
qualifying fuels produced from coal to fuels produced in 
facilities placed in service after the date of enactment, and 
modify the rules governing certain requirements for 
contributions to, and transfers of, qualified nuclear 
decommissioning funds. These provisions would, if enacted, 
reduce revenues by $40 million in 2002, $3.2 billion over the 
2002-2007 period, and $4.9 billion over the 2002-2012 period.
            Spending subject to appropriation
    The bill would require the General Accounting Office and 
the Department of the Treasury to provide annual reports on 
energy tax incentives. Based on information from these 
agencies, CBO expects that preparing the reports would cost 
less than $500,000 per year, assuming appropriation of the 
necessary amounts.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. For the 
purposes of enforcing pay-as-you-go procedures, only the 
effects through 2006 are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         By fiscal year, in millions of dollars--
                                ------------------------------------------------------------------------------------------------------------------------
                                    2002       2003       2004       2005       2006       2007       2008       2009       2010       2011       2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays.............                                                       Not applicable
Changes in receipts............       -117       -467     -1,677     -2,865     -2,918     -1,918     -1,180     -1,130     -1,158     -1,251     -1,352
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: The bill 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Estimate prepared by: Revenues: Erin Whitaker; Federal 
Costs: Matthew Pickford; Impact on State, Local, and Tribal 
Governments: Susan Sieg Tompkins; and Impact on the Private 
Sector: Paige Piper/Bach.
    Estimate approved by: G. Thomas Woodward, Assistant 
Director for Tax Analysis and Robert A. Sunshine, Assistant 
Director for Budget Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of the ``Energy Tax Incentives Act of 2002.''

Motion to report the bill

    The bill (S.______, the ``Energy Tax Incentives Act of 
2002'') was ordered favorably reported, by a unanimous voice 
vote on February 13, 2002.

Votes on other amendments

    An amendment by Senator Thomas to provide a tax credit for 
producing fuel from a nonconventional source was agreed to by 
voice vote.
    An amendment by Senator Lincoln to provide tax benefits for 
biodiesel fuel mixtures was agreed to by a record vote of 16 
ayes and 5 nays. The ayes and nays were:
    Ayes.--Senators Baucus, Rockefeller, Daschle (proxy), 
Breaux, Conrad (proxy), Graham, Jeffords, Bingaman, Kerry, 
Torricelli (proxy), Lincoln, Grassley, Hatch, Murkowski, 
Thompson, and Snowe.
    Nays.--Senators Nickles, Gramm, Lott, Kyl (proxy), and 
Thomas.
    An amendment by Senator Baucus (for Senator Kyl), and 
modified by Senators Hatch and Nickles to study the efficacy of 
the new credits for vehicles and fuels and the new tax credits 
and enhanced deductions for energy conservation, was agreed to 
by voice vote.

                 V. REGULATORY IMPACT AND OTHER MATTERS

                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

    With respect to individuals and businesses, the bill 
modifies the rules relating to (1) tax benefits for alternative 
fuels; (2) coal production; (3) oil and gas production; (4) 
energy conservation; and (5) electric industry participants 
involved in industry restructuring activities. Taxpayers may 
elect whether to avail themselves of the provisions of the 
bill. Thus, the provisions do not impose increased regulatory 
burdens on individuals or businesses. Certain provisions of the 
bill, such as the provision relating to transfers of 
decommissioning funds associated with nuclear generating 
facilities, simplify the present-law rules and, therefore, 
reduce burdens on taxpayers electing to utilize the provision. 
Thus, the bill does not impose increased regulatory burdens on 
individuals and businesses.

Impact on personal privacy and paperwork

    The provisions of the bill do not impact personal privacy. 
Individuals may elect whether to avail themselves of the 
provisions of the bill. Thus, the bill does not impose 
increased paperwork burdens on individuals. Individuals who 
elect to take advantage of the bill may in some cases need to 
keep records in order to demonstrate that they qualify for the 
tax treatment provided by the bill. In some cases the bill 
simplifies present law, thus reducing recordkeeping 
requirements.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has determined that the revenue provisions of 
the bill do not contain Federal mandates on the private sector. 
The Committee has determined that the revenue provisions of the 
bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
(the ``Code'') and has widespread applicability to individuals 
or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that amend the Internal Revenue Code and that have 
``widespread applicability'' to individuals or small 
businesses.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  
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