Bush Energy Policy: Overview of Major Proposals and Legislative Action

Bush Energy Policy: Overview of Major Proposals and Legislative Action

Order Code RL31096
CRS Report for Congress
Received through the CRS Web
Bush Energy Policy:
Overview of Major Proposals
and Legislative Action
August 22, 2001
Robert L. Bamberger and Mark E. Holt, Coordinators
Specialists in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

Bush Energy Policy: Overview of Major Proposals and
Legislative Action
Summary
The Bush Administration outlined its proposals for addressing the nation’s
energy problems in May 2001 with a 170-page report by the National Energy Policy
Development Group (NEPD) titled National Energy Policy (NEP). In June, the
President transmitted to Congress a summation of the report’s concepts and strategies
that call for legislative action.
Many of the Administration’s legislative proposals are included in the Securing
America’s Future Energy Act of 2001 (H.R. 4), an omnibus energy bill approved by
the House on August 1, 2001. Passage of H.R. 4 was widely interpreted as an
endorsement of the Bush energy strategy, particularly since a number of key
amendments opposed by the White House were defeated.
The Bush Administration NEP report is divided into eight chapters, the first two
of which summarize the Administration’s view of the energy challenges facing the
nation, and the likely consequence of high energy prices. The remaining six chapters
are developed around the several stated goals of the Bush Administration strategy –
increasing energy supply while sustaining health and the environment; increasing
conservation and efficiency as well as the use of renewables and alternative energy
supply; expanding the national energy infrastructure; and enhancement of “national
energy security and international relationships.”
The report of the National Energy Policy Development (NEPD) group included
more than 100 recommendations, but only about 20% of these recommendations
called for legislation. Consequently, the report leaves Congress with considerable
latitude to take a major role in crafting a comprehensive energy policy response.
Perhaps the most controversial element of the Bush energy strategy included in
H.R. 4 is the opening of the Arctic National Wildlife Refuge (ANWR) to oil and gas
leasing. An amendment to eliminate that provision was defeated on the House floor.
Other major Administration proposals in H.R. 4 include energy tax incentives,
boosting the Low-Income Home Energy Assistance Program (LIHEAP), review of
corporate average fuel economy (CAFE) standards, research on cleaner-burning coal
technologies, and offshore oil and gas leasing.
H.R. 4 also includes many provisions not in the Bush policy, and excludes some
significant provisions, such as extension of the Price-Anderson Act nuclear accident
liability system. It also would significantly modify some of the Administration’s
recommendations, such as the proposed administrative review of CAFE standards;
H.R. 4 would require the standards to be raised sufficiently to save 5 billion gallons
of fuel through 2010.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legislative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Competing Policy Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Major Principles of the Bush Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Balancing Energy and the Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Air Quality and Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Energy Efficiency and Energy Conservation . . . . . . . . . . . . . . . . . . . . 5
Energy Supply Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Energy Leasing on ANWR and Other Federal Lands . . . . . . . . . . . . . 7
Alaska Natural Gas Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Natural Gas Transportation System Expansion . . . . . . . . . . . . . . . . . . 9
Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Hydropower Relicensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Nuclear Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transportation Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Administrative Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Transportation Provisions in H.R. 4 . . . . . . . . . . . . . . . . . . . . . . . . . 14
Electricity Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Energy Tax Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Liberalization of the Current §45 Tax Credit . . . . . . . . . . . . . . . . . . 17
15% Energy Tax Credit for Residential Solar Property . . . . . . . . . . . 18
Tax Treatment of Nuclear Decommissioning Funds . . . . . . . . . . . . . 18
Net Income Limitation for Percentage Depletion . . . . . . . . . . . . . . . 19
Income Tax Credit for Hybrid and Fuel Cell Vehicles . . . . . . . . . . . . 20
Investment Tax Credit for Distributed Power Technologies . . . . . . . 21
Liberalization of the §29 Tax Credit for the Production of Fuels from
Unconventional Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Continuation of the Excise Tax Exemption for Alcohol Fuels . . . . . . 22

Bush Energy Policy: Overview of Major
Proposals and Legislative Action
Introduction
In late January 2001, the Bush Administration established a National Energy
Policy Development (NEPD) Group under the direction of the Vice President. The
NEPD Group’s recommendations were released on May 16, 2001, in a 170-page
report titled National Energy Policy (NEP). Subsequently, the President transmitted
to Congress a summation of the report’s concepts and strategies that call for
legislative action.1
Many of the Administration’s legislative proposals are included in the Securing
America’s Future Energy Act of 2001 (H.R. 4), an omnibus energy bill approved by
the House of Representatives on August 1. Passage of H.R. 4 was widely interpreted
as an endorsement of the Bush energy strategy, particularly since a number of key
amendments opposed by the White House were defeated. This CRS report discusses
the Administration’s most significant energy proposals and describes their progress
in Congress. If enacted, these proposals would constitute the most far-reaching
energy legislation in nearly a decade.
The Bush Administration NEP report is divided into eight chapters, the first two
of which summarize the Administration’s view of the energy challenges facing the
nation, and the likely consequence of high energy prices. The remaining six chapters
are developed around the several stated goals of the Bush Administration strategy –
increasing energy supply while sustaining health and the environment; increasing
conservation and efficiency as well as the use of renewables and alternative energy
supply; expanding the national energy infrastructure; and enhancement of “national
energy security and international relationships.”
Underlying the NEP report’s recommendations is a concern that the growth in
U.S. energy consumption has been sharply exceeding increases in domestic energy
production. “Between 1991 and 2000, Americans used 17 percent more energy than
in the previous decade, while during that same period, domestic energy production
rose by only 2.3 percent.”2 This would seem to confirm the impression of Americans
1 “The President’s Energy Legislative Agenda.” June 28, 2001. Available on White House
web site: [http://www.whitehouse.gov/news/releases/2001/06/energyinit.html]
2 National Energy Policy: Report of the National Energy Policy Development Group, May
2001, p. 1-1.

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that the nation may continue to experience periodic, and possibly prolonged,
insufficiencies of electricity, gasoline, natural gas and home heating oil.
Legislative Proposals
The report of the NEPD Group included more than 100 recommendations, but
only about 20% of these recommendations called for legislative action. Consequently,
the report leaves Congress with considerable latitude to take a major role in crafting
a comprehensive energy policy response.
Initially, comprehensive energy legislation was introduced in the Senate by both
parties. Senator Murkowski introduced the National Energy Security Act of 2001 (S.
388, S. 389) in late February. A Democratic proposal (S. 596, S. 597) was introduced
by Senator Bingaman March 22, 2001. There is common ground between these
Republican and Democratic bills. Both propose, for example, to expedite
construction of a pipeline to transport natural gas from the Alaskan North Slope; to
expand efforts in “clean coal” research; to provide tax credits for renewable and
alternative energy development and use; and to expand weatherization programs for
homes and other structures. Clearly, all proposals include a mix of policies intended
to increase supply and to reduce the demand for conventional fuels.
Many elements of the Bush energy strategy are included in the House-passed
omnibus energy bill, H.R. 4. Chief among them are oil and gas leasing in ANWR,
energy tax incentives, boosting the Low-Income Home Energy Assistance Program
(LIHEAP), review of corporate average fuel economy (CAFE) standards, research
on cleaner-burning coal technologies, and offshore oil and gas leasing. The bill also
includes many provisions not in the Bush plan, and excludes some significant
provisions, such as extension of the Price-Anderson Act nuclear accident liability
system. House Energy and Commerce Committee leaders have indicated that such
provisions may be included in additional energy legislation after the August recess.
The Senate Energy and Natural Resources Committee began marking up S. 597
before the August recess. The committee approved the energy research and
development titles of the omnibus legislation, providing significantly higher
authorizations than recommended by the Bush Administration. With many of the
most contentious issues yet to be addressed, the markup is to resume in September.
Competing Policy Goals
The Bush energy strategy, the House-passed legislation, and the Senate
Republican bills generally place more emphasis on increased supply of conventional
fuels than Democratic proposals, which tend to focus more on energy conservation,
efficiency, and alternative and renewable fuels development. An underlying theme of
the NEP report is that energy policy in recent years has been shaped by environmental
objectives for cleaner air and reduced emissions of greenhouse gases, with too little
concern for energy security. Some critics of the Bush strategy have expressed
concern that the tight supply and volatility in energy markets will provide cover for
relaxing environmental standards or slowing the timetable for achieving certain
environmental objectives. In contrast, the argument continues, the Democratic

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legislation would try to limit petroleum consumption by passenger automobiles and
light-duty trucks, and does not include provisions to lease the Arctic National Wildlife
Refuge (ANWR) for oil and gas exploration.
At issue, too, has been the balance to be struck between short-term and long-
term policies. In presenting the report of National Energy Policy Development
Group, Vice President Cheney has underscored that the problems in energy markets
today cannot be fixed overnight, and that there are few short-term remedies.
Another dynamic at work in the current energy policy debate is the appropriate
role for the federal government and the extent to which unregulated markets can be
counted upon to price fuels and allocate supply. Here, the divisions have been less
clear. Some Democrats have expressed support for temporary regional controls on
wholesale electricity to alleviate high prices in California. Republican critics argued
that price controls send misleading signals to consumers and discourage investment
in new supply capacity. At the same time, the Administration strategy favors granting
the Federal Energy Regulatory Commission (FERC) eminent domain authority for
siting electric transmission lines. Many Republicans are opposed to this
Administration initiative, arguing that it is an intrusion on states’ rights.
Major Principles of the Bush Policy
The fundamental premise of the report from the NEPD Group is that “a
fundamental imbalance between supply and demand defines our nation’s energy crisis.
. . . This imbalance, if allowed to continue, will inevitably undermine our economy,
our standard of living, and our national security.”3 The nation faces three challenges:
[1] “using energy more wisely;” [2] “to repair and expand our energy infrastructure;”
and [3] “increasing energy supplies while protecting the environment.”4
What follows is a summary of the fundamental themes and major proposals of
the Bush policy, with particular attention to the recommendations that will require an
active congressional role. The sections are listed roughly according to their order in
the Administration’s NEP report, with the major exception being that the tax
proposals are treated separately at the end. Each section describes the
Administration’s major proposals, briefly sets the policy background, and indicates
how the proposals are treated in H.R. 4. The following CRS analysts from the
Resources, Science, and Industry Division contributed to this overview:
! Amy Abel – electricity restructuring
! Carl Behrens – hydropower relicensing
! Mark Holt – nuclear power
! Marc Humphries – coal, energy leasing on ANWR and other federal lands
3 Reliable, Affordable, and Environmentally Sound Energy for America’s Future. Report
of the National Energy Policy Development Group. U.S. Govt. Print. Off., ISBN 0-16-
050814-2, p. viii. Also available online at: [http://www.whitehouse.gov/energy/].
4 Ibid., p. viii-ix.

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! Lawrence Kumins – natural gas transportation
! Salvatore Lazzari – energy tax incentives
! Larry Parker – air quality and electricity
! Fred Sissine – energy efficiency, renewable energy
! Brent Yacobucci – transportation
Balancing Energy and the Environment
Air Quality and Electricity. The NEPD group makes only one specific
recommendation that directly responds to air quality concerns surrounding increased
energy production: the EPA would be directed to propose legislation to control three
pollutants emitted by fossil fuel-fired powerplants: sulfur dioxide, nitrogen oxides, and
mercury (p. 3-3). Using the successful acid rain reduction program as a model, the
proposed legislation would establish a consistent framework of emissions caps on all
powerplants (new and existing), implemented through emissions trading. Phased in
over a “reasonable” time frame, the NEP asserts that the program would provide
significant public health benefits and provide electric utilities and other generators
with more regulatory certainty with respect to the Clean Air Act’s New Source
Review process for existing facilities.5
The effect of a multi-pollutant strategy on powerplant construction and operation
would depend on three factors: (1) the stringency of the emission caps imposed; (2)
the implementing time frame; and (3) the regulatory certainty provided electricity
providers in exchange for meeting the caps. The NEP report goes into no detail on
these factors, so until legislative language is drafted, any assessment would be purely
speculative. However, there are several multi-pollutant strategies that have been
proposed in the 107th Congress.6 These bills generally called for sulfur dioxide
reductions in the 50% to 75% range, nitrogen oxide reductions in the 70% to 75%
range, and mercury reductions in the 90% range, with compliance required by 2005
to 2007. Whether these levels meet the NEPD Group’s definition of “significantly
reduce” and “reasonable period of time” is unknown. In addition, none of the bills
introduced includes any provisions with respect to New Source Review. In any case,
the bills provide a yardstick by which some will judge EPA’s efforts.
The recommendation for multi-pollutant legislation follows very closely a similar
proposal contained in the Bush/Cheney Comprehensive National Energy Policy
released during the 2000 presidential campaign. The NEPD’s four bullets describing
the recommended multi-pollutant approach are identical to those contained in the
5 For a further discussion of multi-pollutant strategies, see Larry Parker and John Blodgett,
Electricity Generation and Air Quality: Multi-Pollutant Strategies, CRS Report RL30878,
March 13, 2001. For further information on the New Source Review process and EPA’s
current enforcement initiative, see: Larry Parker and John Blodgett, Air Quality and
Electricity: Enforcing New Source Review, CRS Report RL30432, January 31, 2000; and,
Larry Parker and John Blodgett, Air Quality and Electricity: Initiatives to Increase Pollution
Control, CRS Report RS20553, updated March 9, 2001.
6Larry Parker, Electricity and Air Quality: Comparison of Proposed Multi-pollutant
Legislation, CRS Report RS20894, April 18, 2001.

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campaign document with one exception – carbon dioxide control is not included in
the NEPD recommendation where it was in the campaign’s energy plan.
This deletion reflects the President’s decision not to include carbon dioxide as
a pollutant to be controlled.7 The NEPD’s decision not to seek carbon dioxide
control contrasts with three of the five multi-pollutant bills currently before the
Congress that include carbon dioxide as a fourth pollutant to be controlled. These
bills would cap carbon dioxide emissions from electric generating facilities at their
1990 levels – in line with the 1992 Framework Convention on Climate Change that
the United States ratified in 1992.
H.R. 4 contains no provisions with respect to creating a multi-pollutant control
strategy. The Environmental Protection Agency (EPA) continues to work on draft
multi-pollutant legislation; however, whether that draft legislation will be available for
consideration by the Senate during its deliberations on the NEPD proposals remains
to be seen.8
Energy Efficiency and Energy Conservation. Increased funding
authorizations are the Administration’s primary legislative proposals for energy
efficiency and conservation. In the NEP report, the R&D funding proposal is made
contingent on a review of past funding and performance. For weatherization grants,
the report proposes that annual funding be increased by $120 million over the FY2001
baseline appropriation of $150 million, which would amount to a total of $1.1 billion
over four years and $2.7 billion over 10 years. Also, for the Low-Income Home
Energy Assistance Program (LIHEAP), the report calls for annual spending to
increase from $1.4 billion to $1.7 billion. Further, the NEP report calls for legislation
to create long-term public education programs about energy and its relationship to
industry and to a clean environment. Legislation to promote technologies and
strategies for mitigating traffic congestion is also proposed.
The other energy efficiency and conservation provisions in the Bush report call
only for administrative action. These provisions include energy conservation at
federal facilities, improvements to appliance efficiency, and expansion of Energy Star
programs. Further provisions call for greater use of combined heat and power (CHP),
a focus on regional energy concerns, a study of ways to use the nation’s energy
resources more efficiently, and establishing a national priority for improving energy
efficiency as measured by the energy intensity of the economy.
7 The NEPD recommendation with respect to climate change is to continue current efforts with
respect to research, developing market-based strategies, developing new technology, and
cooperation with allies. It is unlikely that the plan will significantly affect current projections
of increased carbon dioxide emissions from energy consumption. See also: CRS Report
RL31020,. The National Energy Policy Report: Environmental Permitting and Regulatory
Issues.
8Testimony of EPA Administrator Christine Todd Whitman before the Senate Environment
and Public Works Committee, July 26, 2001.

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H.R. 4 covers many of the legislative proposals in the Bush energy report and
would legislate on several topics for which the report recommended only
administrative action. The bill includes funding authorizations, goals, and incentives
for energy efficiency and conservation. It covers programs for federal conservation,
grants, equipment (consumer products, distributed power, lighting), and buildings.
Regarding grant programs, the bill would authorize $1.5 billion total for
weatherization grants over four years through FY2005 and $3.4 billion annually for
LIHEAP through 2005. In contrast to the Administration’s recommendations, H.R.
4 does not propose that DOE be allowed to transfer funds for weatherization and
state energy programs to LIHEAP. Also, it would require each state energy grant
recipient to have a goal of improving energy efficiency by 25% from 1990 to 2010.
Regarding the NEP report’s recommendation for public education about energy,
H.R. 4 calls only for DOE to consider support of education programs about
maintenance of heating, ventilation, and air conditioning equipment. For the traffic
congestion provision in the Bush report, there is no corresponding legislative proposal
in H.R. 4.
For federal facilities, an area where the NEP report recommended administrative
action, H.R. 4 would raise the energy efficiency goal from 35% in 2010 to 45% in
2020; create a grant program for “unconventional and renewable energy;” require all
federal buildings to be metered by 2004; and establish a program to develop, test, and
demonstrate energy-efficient technology innovations in federal buildings.
Regarding appliance efficiency, H.R. 4 would direct DOE to determine whether
there are “noncovered” consumer products (such as fans and vending machines) that
should be subjected to an efficiency standard and energy labels, and it would set a new
one-watt standard for household appliances operating in standby mode. Also, the bill
would extend the labeling list for Energy Star buildings and products to include
schools, homes, and hotels, and boilers, vending machines, and windows.
H.R. 4 would not directly support CHP for brownfields (contaminated industrial
sites), as recommended by the Administration, although it would provide for CHP
incentives and labeling. Further, it does not address the Administration’s call for a
special focus on regional energy concerns. Also, H.R. 4 does not provide for a
general study of ways to use the nation’s resources more efficiently. While H.R. 4 has
no overall priority for improving the energy intensity of the national economy, it does
include a goal for major energy-consuming industries to reduce energy intensity by
25% by 2010.9
H.R. 4 includes several legislative proposals for energy efficiency and
conservation that were not included in the Bush report. These proposals include
support for distributed power hybrid systems, a “next generation” lighting initiative,
a “high performance public buildings” program that provides grants to local
governments, and several others. H.R. 4 also includes several tax provisions for
9Although the term “energy intensity” is not defined in the bill, it presumably means a measure
of energy use relative to the monetary value of the goods produced by these industries.

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energy efficiency and energy conservation, which are described in another section of
this report.
Energy Supply Initiatives
Energy Leasing on ANWR and Other Federal Lands. A significant
amount of federal lands – both on-shore and on the outer continental shelf (OCS) –
has been placed off-limits to oil and gas drilling. The U.S. Geological Survey
estimates that these lands could contain sizable amounts of oil and natural gas.
However, energy development on these lands has often been restricted because they
are considered environmentally sensitive or unique, and efforts to open them to
leasing can be highly controversial.
One of the largest potential sources of oil and gas on restricted federal lands is
the 1002 Area of the Arctic National Wildlife Refuge (ANWR). The NEPD Group
called for legislation to open ANWR for oil and gas leasing, which is currently
prohibited by law. Supporters of leasing ANWR contend that new technology would
allow oil and gas exploration, development, and production with minimal
environmental damage. Opponents counter that any major industrial activity in
ANWR would ruin a unique wilderness and that equivalent amounts of energy could
be provided through energy conservation and other measures.
In addition to the ANWR proposals, the NEPD Group recommended that the
President direct the Secretary of the Interior to examine various impediments to oil
and gas exploration and development on federal lands. Further, the NEPD Group
called for consideration of royalty relief or other financial incentives that might
encourage more offshore oil and gas development. The underlying concern for the
Administration is how to best increase U.S. domestic oil and gas supplies for future
domestic consumption.
H.R. 4 includes the above-mentioned Administration proposals. In addition,
H.R. 4 includes a provision that expands the existing royalty-in-kind program by
allowing the Secretary of the Interior to require that all royalties from oil and gas
leases be paid “in kind” – giving the federal government a share of the actual oil and
gas production rather than cash payments. Oil and gas producers contend that the
royalty-in-kind system most accurately reflects the amount they owe to the
government for production from federal lands.
(For more background, see CRS Issue Brief IB10073, The Arctic National
Wildlife Refuge: The Next Chapter.)
Alaska Natural Gas Transportation. The Administration’s NEP report
calls for expediting construction of a pipeline to deliver the large natural gas reserves
in Alaska’s North Slope to the lower 48 states. Coordination with Canada is urged,
although no particular route is recommended.
Interest in constructing a natural gas pipeline from the North Slope to the lower
48 states diminished after passage of the Alaska Natural Gas Transportation Act of
1976 (ANGTA). The Act, crafted in reaction to the Arab Oil Embargo of 1973-74,
established a special process for granting a right-of-way across federal lands to

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facilitate pipeline construction. The President was required to select among three
competing proposals offered by industry, submitting his decision to Congress for
approval. In 1977, President Carter’s designation of the Alcan Pipeline Company’s
proposal was approved by Congress. Due to the unavailability of financing, because
of relatively low natural gas prices, the Alcan project never moved past the right-of-
way approval stage.
Proposals for the transportation of Alaskan gas remained dormant for 20 years.
They were revived in 2000, as the natural gas supply-and-demand situation in the
United States caused sharp price increases. Three proposals are under discussion,
including the Alcan project, now commonly referred to as the Highway Plan. This
would largely follow the 1977 route, paralleling the Alcan Highway to Fairbanks, and
then heading east across Canada, interconnecting with the pipeline grid in Alberta.
This gas could make its way to points in the midwest and on the Pacific coast.
Also under discussion are proposals made by the Alaska Resource Company for
North Slope routes into Canada to Norman Wells in the Northwest Territories, and
then south to Alberta. A variation of this route – opposed by some U.S. gas interests
and environmental groups, and banned in H.R. 4 – would transit an underwater route
passing off the North Slope and ANWR, crossing into the Canadian Arctic and
potentially opening new Canadian gas reserves. Another proposal envisions a pipeline
along the Trans Alaska Oil Pipeline route, with the gas liquefied at the seaport of
Valdez and shipped to market by LNG (liquefied natural gas) vessel. This project is
still in the conceptual stage, but is being promoted as an all-U.S. route, avoiding
crossing Canada and the possibility of being required to transport Canadian gas to
U.S. markets.
Proponents of Alaska gas projects have asserted the need to move through the
approval process with a minimum of potential delays. In 1981, Congress considered
– in an attempt to make the original Alcan project more attractive to investors – a
package of special waivers of existing laws to lower the financing risk involved.
Two of the proposals transit Canada’s gas-producing regions, and would
connect with Canadian pipelines to carry gas on to the lower 48 states. Canada
supplies about 15% of U.S. gas consumption; natural gas is one of Canada’s most
important exports. Canada has a strong interest in ensuring that a pipeline project
crossing its gas-producing provinces would be available to bring to market Canadian
as well as Alaskan gas. Ease of access and availability of capacity for Canadian gas
– as well as location proximate to Canadian gas fields – may be important
considerations in the initiative to secure right of transit across Canada.
Section 801 of H.R. 4 would ban the authorization of any pipeline right of way
transiting submerged lands or shoreline of the Beaufort Sea. Additionally, it would
prohibit authorization of any pipeline crossing the U.S.-Canada border North of 68
degrees north latitude. This would prohibit the northern Alaska Resource Company
proposal, which would likely be called upon to transport new gas supplies from the
Canadian Arctic. Canadian Arctic gas is seen by some in the industry as competitive
with Alaskan gas. Industry concerns may include:

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! The pipeline would likely be financed by U.S. gas producer interests. Canadian
producers might not have to bear a full share of the capital outlays.
! Any gas from the Canadian Arctic – and there could be significant supplies –
would compete in U.S. gas markets, affecting domestic producers’ prices and
market share.
! Construction of the Alcan/ANGTS route lying to the south could strand gas
resources in Canada’s Mackenzie Delta (the Canadian North Slope, in the
Yukon and NW Territories), delaying their development for years.
Overland routes would all require the cooperation of the Canadian government
at both the provincial and federal levels. How this might play out is now in very early
discussion. In a July 17, 2001, press conference,10 President Bush noted that there
were competing visions about how to get Alaskan and Canadian Arctic gas to market,
including the preference of some Alaska state officials for an “all-Alaska” route. The
President went on to note:
“We are willing to work with [the Canadian] government to figure out a way that
can expeditiously move gas.....[O]bviously, to the extent that it would be an American
pipeline, a pipeline on American soil would make it easier for me politically. There are
perhaps enough reserves to justify an Alaska pipeline. I know there’s enough reserve
to justify a Canadian line. It’s conceivable we could have both, and that would both
feed the midwestern market and the western market.”
Other than the route prohibitions, H.R. 4 contains no provisions regarding
Alaska natural gas transportation.
Natural Gas Transportation System Expansion. A stated goal of the
Administration’s energy program has been to coordinate the expansion of the energy
transportation system in order to supply growing demand in areas currently
underserved by existing infrastructure. It maintains that the need for coordinated and
expeditious construction of new pipelines and expansion projects was made clear by
natural gas shortages in California during 2000 and the early months of 2001. Low
rainfall in the Pacific Northwest led to reduced hydropower generation. The need to
offset this shortfall caused a spike in natural gas prices, deemed to be due more to a
shortage of transportation capacity into California than a shortage of the commodity.
This is because delivered California prices were much higher than delivered gas
elsewhere in the nation. The rise in natural gas prices was quickly reflected in
electricity rates.11 The high visibility of California difficulties focused attention on the
slow completion of new capacity for other parts of the country as well.
The need for coordinated infrastructure development became embodied in Sec.
6106 of H.R. 4. This language calls for a study of western states’ natural gas needs
by the Secretary of Energy and Chairman of FERC. The study would consider:
10 The Energy Daily, Bush: Two Pipelines Better Than One? July 25, 2001, page 2.
11 See: California Energy Commission website: “Natural Gas Price Increases. Frequently
Asked Questions,” [http://www.energy.ca.gov/naturalgas/natural_gas_faq.html].

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! western state officials forecasts, such as those of the California Energy
Commission;
! a review of gas power plant construction projects, both underway and planned;
and
! a review of the current long-distance gas transmission systems, their capacity
and how they interrelate.
Recommendations for coordinated infrastructure development in the western
states would be made in a report to the House Energy and Commerce Committee and
Senate Energy and Natural Resources Committee with in six months. The Chairman
of FERC would also have to report on how the Commission would consider the
report’s conclusions in the process of reviewing pipeline construction applications.
Renewable Energy. One key legislative element in the Bush report proposes
“appropriate funding” for solar and other renewable energy, subject to the results of
a review of past funding and performance. Related to this, another proposal calls for
legislation to fund $1.2 billion of renewables R&D with bonuses from leasing of
ANWR. Also, one legislative proposal would reauthorize funding for hydrogen R&D.
All the other renewables provisions are designed as administrative actions. They
include an assessment of access limitations for developing renewables on federal
lands, changes to geothermal leasing requirements, EPA creation of a partnership
program that would encourage private-sector companies to purchase renewable
energy, an effort to integrate R&D programs involving hydrogen, fuel cells, and
distributed energy, and development of an education campaign for alternative energy.
H.R. 4 would not require a review of past renewables funding and performance
or authorize appropriations for all renewable energy programs. However, it would
authorize $400 million through 2006 for the hydrogen program and about $670
million through 2006 for bioenergy programs. Further, the bill specifies that 50% of
the bonus, rental, and royalty revenues from oil and gas leasing in ANWR would go
to a Renewable Energy Technology Investment Fund that would be used to finance
DOE research expenses, including grants, contracts, cooperative agreements, and
deployment studies.
The Bush Administration report recommends only administrative action to
inventory renewable energy production potential on federal public lands. H.R. 4
would require an inventory of wind, solar, and geothermal energy, but differs from the
Administration report by excluding biomass energy. In other places where the
Administration calls for administrative actions, the bill would expedite geothermal
leasing; create a new government-industry partnership that employs an “Energy Sun”
label to promote renewable energy and alternative energy equipment; authorize about
$250 million through 2006 for integrated bioenergy R&D and applications; and
require a report on distributed power hybrid systems that include renewable energy
technologies. In response to the education aspect in the Bush report, H.R. 4 would
direct DOE and EPA to “enhance public awareness” through use of the Energy Sun
label.

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H.R. 4 includes some legislative proposals for renewables that were not included
in the Bush report. These proposals include cost and production goals for various
technologies, a high performance buildings initiative, and a reassessment of renewable
resources for the Insular Areas (island territories), among others. H.R. 4 also includes
several tax provisions for renewable energy, which are described in the last section of
this report.
(For more information, see CRS Issue Brief IB10020, Energy Efficiency:
Budget, Oil Conservation, and Electricity Conservation Issues.)
Coal. The Bush energy report calls for a $2 billion federal expenditure over 10
years for research on technologies for the cleaner use of coal. H.R. 4 includes the
Clean Coal Power Initiative (CCPI), authorized for fiscal years 2002 through 2011
to spend $200 million annually. The CCPI would be a cost-sharing
industry/government program to demonstrate advanced power technologies, with an
emphasis on coal-based gasification projects. Supporters of the program note that
coal is a major domestic energy resource that could be more fully utilized if its
environmental drawbacks could be reduced. But opponents contend that new
technology would not make coal environmentally acceptable at a competitive cost and
view such federal support as an unjustified subsidy.
(For more information, see CRS Report RS20877, The Clean Coal Technology
Program: Current Prospects.)
Hydropower Relicensing. The Administration energy report supports
administrative and legislative reform of hydropower licensing. The issue here is
primarily timely relicensing of large existing hydro facilities. Legislation has been
introduced (S. 71, Senator Craig) to achieve this; however, the Bush report did not
make any specific recommendations. The issue for hydro operators relates to
environmental and operating conditions imposed in new licenses that were not in the
old ones, plus the possibility that license renewal applications would be denied on
environmental grounds. The major issue for environmentalists is that the
environmental requirements required by the 1986 relicensing act have not, to their
satisfaction, been implemented. H.R. 4 would allow hydroelectric license applicants
to propose alternatives to license conditions required by federal agencies, who would
have to accept the alternatives if there were substantial evidence that they would
provide equivalent environmental protection.
Additionally, the Bush energy report mentions incentives to operators to
“optimize the efficiency and reliability” of existing facilities. Several bills have been
introduced that would do this as well. A number of related hydroelectric provisions
are also included in H.R. 4.
Nuclear Power. The NEP report recommends the expansion of nuclear energy
in the United States, citing potential clean air and energy security benefits. A variety
of administrative actions are recommended to encourage the licensing of new
reactors, expand production from existing reactors and extend their licenses, and
move forward with nuclear waste disposal. Most of these administrative proposals
would continue efforts already underway at DOE and the Nuclear Regulatory
Commission (NRC).

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The primary legislative proposal in the NEP report is to extend the Price-
Anderson Act,12 which requires nuclear power producers to jointly pay for damages
to the public from a severe accident and places a cap on total industry payments.
Authority for new reactors to be included in the system expires in August 2002,
although existing reactors would continue to be covered. The nuclear industry and
other supporters of the Price-Anderson Act contend that the system has worked well
and is necessary for the construction of new reactors. Environmental groups and
other opponents see it as a hidden subsidy to the nuclear industry.
A particularly controversial provision in the Administration’s nuclear energy
policy is its call for renewed consideration of reprocessing technology, which
chemically extracts plutonium and uranium from highly radioactive spent fuel for use
in new fuel. Several U.S. programs involving nuclear reprocessing have been halted
during the past 25 years, because of poor economics and concerns that commercial
separation of weapons-useable plutonium could pose a nuclear weapons proliferation
risk. The NEP report contends that new reprocessing technologies might reduce the
proliferation risk as well as reducing the hazards of nuclear waste.
H.R. 4 does not include an extension of the Price-Anderson Act, although
leaders of the House Energy and Commerce Committee have reportedly announced
plans to move an extension bill before the authorization expires.13 The House-passed
bill would authorize an “Advanced Fuel Recycling Technology Research and
Development Program” (Section 2321) that is related to the Bush Administration
spent fuel reprocessing recommendations.
(For more background, see CRS Issue Brief IB88090, Nuclear Energy Policy.)
Transportation Initiatives
The Bush Administration’s energy policy includes several recommendations
directly related to transportation. Most of these recommendations are for the
Administration to study various policy options, or to pursue the Administration’s
energy goals through regulatory changes. These include improving the fuel economy
of automobiles and simplifying the gasoline distribution system in the United States.
However, two recommendations would require legislation. These are tax credits for
hybrid and fuel cell vehicles, and an extension of the existing excise tax exemption for
alcohol fuels.
First, the Administration has proposed a consumer tax credit for the purchase of
hybrid and fuel cell vehicles between 2002 and 2007. Hybrid vehicles combine a
gasoline engine with an electric motor system to improve fuel economy, in some cases
significantly. Fuel cell vehicles utilize an electrochemical process, as opposed to
combustion, to generate energy for motion. While there are two production hybrid
vehicles currently, and most auto makers plan to introduce more models in the near
12 Section 170 of the Atomic Energy Act of 1954 (42 U.S.C. 2210)
13 “House Energy Bill May See Managers’ Amendment on Fuel Efficiency.” Green Sheets
Express. July 11, 2001.

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future, current production runs are small. Further, it is unlikely that there will be
many fuel cell vehicles available for consumer purchase by 2007.14
The second legislative proposal from the energy plan is an extension of the
current alcohol fuels exemption from the motor fuels excise tax.15 Gasoline blended
with 10% alcohol, usually ethanol, receives a 5.3 cent per gallon exemption from the
standard 18.4 cent per gallon excise tax. Most of this tax goes to the Highway Trust
Fund. The current exemption will be phased out by January 1, 2008. This was an
extension from the original expiration date of January 1, 2001.16 Because most
ethanol is derived from corn, the passage of another extension is supported by
agricultural interests, in addition to the Administration. (More details on the
Administration tax proposals are in the tax section at the end of this report.)
Another part of the plan that could lead to legislation is a recommendation that
the Administration study improving the flexibility of the clean fuels system in the
United States. In response to federal, state, and local requirements, there are some
gasoline blends that are only sold in certain areas of the country. When there is a
local supply disruption, it may be difficult to move fuel from one area to another to
meet the demand. As these various standards are due partly to the Clean Air Act,
some suggest that an amendment to the law would be appropriate to normalize the
standards.
Administrative Action. Many transportation provisions of the
Administration’s energy policy recommend administrative, as opposed to legislative,
action. In many cases, the recommendations are for further study of promising
technologies or policy options. The first of these recommendations is that the
Department of Transportation (DOT) should review whether fuel economy standards
for automobiles and light trucks should be changed. A study by the National Academy
of Sciences (NAS), requested by Congress in the FY2001 DOT appropriations,
concluded that the fuel economy of light trucks could be increased without additional
cost, if fuel savings were taken into account.17 DOT has the authority to increase or
decrease corporate average fuel economy (CAFE) standards, but yearly riders to
DOT’s appropriations bill have held CAFE constant. No rider is expected in the
FY2002 appropriations, especially in light of the reports in late June that the
Administration was seriously considering proposing a boost in the CAFE standard for
light-duty trucks, including SUVs.18
14For more information on fuel cell and hybrid vehicles, see CRS Report RL30484, Advanced
Vehicle Technologies: Energy, Environment, and Development Issues.
15For more information on the alcohol fuel tax incentives, see CRS Report 98-435E, Alcohol
Fuels Tax Incentives.
16P.L. 105-178.
17National Academy of Sciences, National Research Council, Effectiveness and Impact of
Corporate Average Fuel Economy (CAFE) Standards. July 30, 2001 (Prepublication copy).
18For more information on fuel economy standards, see CRS Issue Brief IB90122, Automobile
and Light Truck Fuel Economy: Is CAFE Up to Standards?

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The energy policy report also recommends that the government continue
investment and research into intelligent transportation systems (such as electronic
messaging boards and fast toll systems), fuel cell buses, and other clean fuel buses.
However, the Administration does not recommend new funding, only a continuing
commitment to existing funding.
In terms of new initiatives, the energy report recommends that the government
partner with the trucking industry to study ways to reduce emissions and fuel
consumption caused by idling at truck stops. This could be achieved through portable
generators or through truck stop electrification. After such a study is completed,
funding could be proposed for implementation of any further plans.
As was mentioned above, the Administration also recommends the simplification
of the clean gasoline system in the United States. While major changes would likely
require legislation, some goals could be achieved through regulation. Therefore, the
energy plan recommends that the Environmental Protection Agency (EPA) study
possible regulatory changes. Finally, the plan recommends that the President
cooperate with other countries to find alternatives to oil consumption, particularly in
the transportation sector.
Transportation Provisions in H.R. 4. The comprehensive House energy
bill, H.R. 4, covers many of the same transportation issues as the Administration’s
energy policy, but goes further on some initiatives, such as alternative fuels and fuel
economy. However, it does not address some issues, such as the alcohol fuels tax
incentives.
In the realm of advanced technology and alternative fuel vehicles, the bill has
several provisions. The bill would provide tax credits for the purchase of alternative
fuel, fuel cell, and hybrid vehicles, and expand the existing credit for electric vehicles.
Further, it would extend the existing tax deduction for the installation of refueling
infrastructure for alternative fuel vehicles. The bill would authorize $200 million to
provide grants to state and local governments, as well as transit authorities, for the
purchase of alternative fuel and advanced diesel vehicles, and fueling infrastructure
for those vehicles. Further, the bill would authorize $40 million in FY2002, increasing
to $80 million in FY2006, as grants for the purchase of alternative fuel and advanced
diesel school buses. Finally, the bill would allow states to exempt alternative fuel and
hybrid vehicles from high-occupancy vehicle (HOV) restrictions, allowing such
vehicles to use HOV lanes with no minimum occupancy requirement.19
H.R. 4 also aims to reduce petroleum consumption. The bill would require DOT
to increase CAFE standards for light trucks for model years 2004 through 2010 such
that 5 billion gallons of gasoline will be saved, about 0.5% of total U.S. projected
gasoline consumption during the period.20 In addition, the bill would require that the
average fuel economy of federal vehicles purchased in 2003 be 1 mile per gallon
(mpg) higher than the current federal fleet average, and 3 mpg higher in 2005.
19For more information on alternative fuels, see CRS Report RL30758, Alternative
Transportation Fuels and Vehicles: Energy, Environment, and Development Issues.
20Energy Information Administration. Annual Energy Outlook 2001. Table 11.

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Other provisions of H.R. 4 would require federal studies. For example, the bill
would require EPA to study systems to eliminate idling at truck stops. In addition,
EPA would be required to study ways in which the clean gasoline system could be
simplified and the costs of gasoline regulations minimized.
(For more background, see CRS Issue Brief IB90122, Automobile and Light
Truck Fuel Economy: Is CAFE Up to Standards?)
Electricity Restructuring
The Bush Administration’s energy policy calls for comprehensive electric
restructuring legislation and makes recommendations touching upon broad principles
of restructuring, as well as on generation and transmission infrastructure. The plan
includes several legislative, as well as administrative, proposals.
Comprehensive legislation involves at least three issues. The first is reform of the
Public Utility Holding Company Act (PUHCA, 15 U.S.C. 79). Some electric utilities
want PUHCA changed so they can more easily diversify their assets. State regulators
have expressed concerns that increased diversification could lead to abuses such as
cross-subsidization. Consumer groups have expressed concern that a repeal of
PUHCA could exacerbate market power abuses in a monopolistic industry where true
competition does not yet exist.
The second issue concerns the provisions of the Public Utility Regulatory
Policies Act of 1978 (PURPA, 16 U.S.C. 2601) that require utilities to purchase
power from certain classes of non-utility generators. Many investor-owned utilities
support repeal of these provisions. They argue that their state regulators' "misguided"
implementation of PURPA has forced them to pay contractually high prices for power
that they do not need. Opponents of this legislation argue that it will decrease
competition and impede development of renewable energy.
The third issue is retail wheeling. It involves allowing retail customers to choose
their electric generation supplier. Currently, this is under state jurisdiction; 24 states
and the District of Columbia have moved toward retail wheeling. However, some
have argued that the federal government should act as a backstop to ensure that all
states introduce retail wheeling, preempting state authority if necessary.
In addition, the Bush Administration’s energy policy calls for comprehensive
electric restructuring legislation to include: promotion of competition, consumer
protection, reliability enhancements, efficiency improvements, and a promotion of
renewable energy. No comprehensive electric restructuring legislation has been
introduced in the 107th Congress, though several comprehensive bills were introduced
in the 106th Congress (see CRS Report RL30087).
The Administration energy report includes proposals that could affect the
transmission system. The regulatory regime has been shifting in the electricity
industry, but investment in infrastructure has not kept up with increases in bulk power
transfers and electricity demand. Electricity demand has been growing at 2-3% per
year, but additions to the transmission system have been growing by only 0.7% per
year. So, in addition to generation capacity shortages that have recently become

CRS-16
apparent in the Western United States, transmission lines are congested in several
regions of the United States.
Currently, membership in North American Electric Reliability Council (NERC),
an organization formed to promote the reliability of the generation and transmission
system, is voluntary. NERC has no authority to enforce reliability standards. Under
the Bush Administration policy, the Secretary of Energy is to work with the Federal
Energy Regulatory Commission (FERC) to enhance reliability of the transmission grid
and to develop reliability legislation to create a self-regulatory organization that would
be subject to FERC oversight. There are four bills that have been introduced in the
107th Congress that would establish an Electric Reliability Organization (ERO) that
would prescribe reliability standards that would be enforceable by FERC.21
Membership in an ERO would be mandatory under these bills.
One reason that transmission lines have not been built in recent years is the
difficulty in siting the lines. Even though the transmission of electricity is considered
interstate commerce, the siting of transmission lines remains the responsibility of the
states. In addition, several federal agencies play various roles in the siting process,
primarily with regards to environmental impacts. Siting and building transmission lines
has been very difficult because of citizen opposition as well as inconsistent siting
requirements among states. To address this issue, the NEP report calls for legislation
that would extend federal authority to obtain rights-of-way for electricity transmission
lines. Similar authority exists for natural gas pipelines. Some states’ rights and
property rights groups oppose such legislation.
The third transmission proposal in the NEP report is for the Secretary of Energy
to authorize the Western Area Power Administration (WAPA), a DOE agency that
sells electricity from federal dams, to explore relieving the transmission system
congestion in California at the Path 15 constraint, where there is insufficient
transmission capacity between the northern and southern parts of the state.. The Path
15 line is owned by Pacific Gas and Electric (PG&E). Legislation is not required for
WAPA to conduct an investigation of the problem and to propose possible solutions
The NEP proposes that construction be financed by non-federal contributions. On
May 28, 2001, Energy Secretary Abraham directed WAPA to complete its planning
of the Path 15 upgrade and determine whether outside parties would be interested in
financing and co-owning the transmission line. Western is now in the process of
reviewing the 13 proposals submitted by private investors and utilities, and will make
a recommendation to the Secretary of Energy. However, electricity carried on Path
15 is generated primarily by non-federal entities. If WAPA gains ownership of Path
15 beyond the actual portion that moves federal power, WAPA’s role would be
expanded beyond its current statutory authority of marketing federal power.
Electricity restructuring provisions were not included in H.R. 4, other than
various tax provisions related to industry regulatory changes. The House Energy and
21H.R. 312, S. 172, S. 388, and S. 597

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Commerce Committee leadership has announced plans to circulate draft electricity
restructuring legislation in September and mark up legislation in October.22
(For more information, see CRS Electronic Briefing Book on Electric Utility
Restructuring.)
Energy Tax Incentives
In general, the Bush Administration has not been supportive of widespread use
of energy tax subsidies and incentives, which it views as being inconsistent with the
free market. It has, however, recommended a selected number of energy tax
incentives, mostly for renewable technologies and alternative fuels. Four of these
incentives first appeared in the Administration’s FY2002 budget proposal, but they
were incorporated into the NEP report, which also recommended four additional
energy tax incentives.
The Administration provided far more details about its energy tax incentives that
were first proposed in the budget than those in the NEP report, which are described
only in the most general way. All of these proposals have been included in H.R. 4,
which proposes a major expansion of energy tax incentives for energy supply and
conservation. In the following discussion, differences between the Bush proposals and
H.R. 4 are noted wherever possible.
Liberalization of the Current §45 Tax Credit. Internal Revenue Code §45
allows taxpayers to claim a 1.5¢ credit in 1992 dollars (adjusted for inflation this
credit is 1.7¢ for the year 2001) per kilowatt-hour for electricity produced from
qualified wind energy, "closed-loop" biomass (organic material from plants grown
exclusively as fuel for electricity production), or poultry waste. The electricity must
be produced from a facility owned by a taxpayer and it must be sold to an unrelated
third party. The credit is allowed for the first 10 years of production from a new
facility placed into service before January 1, 2002. Use of waste materials (such as
scrap wood or agricultural/municipal waste) or timber does not qualify for the credit.
Also, plants cannot be co-fired with any petroleum-based fuel or coal.
The Bush Administration FY2002 budget proposes to 1) extend the placed-in-
service rule for wind and biomass facilities to January 1, 2005, 2) extend the credit,
but at reduced rates, to forest-related products and agricultural biomass products, and
3) allow biomass co-fired with coal to qualify for a reduced tax credit for electricity
produced from January 1, 2002, through December 31, 2004.
Like the Administration’s proposal, H.R. 4 would extend and modify the credit,
expanding the types of qualifying technologies. However, H.R. 4 would extend the
placed-in-service rule to January 1, 2007, rather than January 1, 2005. Like the
Administration’s proposal, H.R. 4 would expand the credit to open-loop biomass and
22Opening Statement of Rep. Joe Barton, Chairman of House Subcommittee on Energy and
Air Quality, Energy and Commerce Committee. National Electricity Policy: Barriers to
Competitive Generation. Hearing, July 27, 2001.

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to landfill gas. But H.R. 4 would not expand the credit to gas produced from dual
fired coal-biomass systems.
15% Energy Tax Credit for Residential Solar Property. There is no tax
credit for residential application of renewable energy technologies such as solar and
wind under current law although business investment in solar and geothermal systems
qualify for a 10% investment tax credit. A tax credit for residential applications of
solar and wind technologies was part of President Carter’s National Energy Plan of
1978. The residential tax credits for solar and wind were initially 30% up to $2,000
of cost and 20% of the next $8,000 of cost (the maximum cost was $10,000, and the
maximum credit was $2,200). In 1980 the rate was increased to a flat 40% of up to
$10,000 in system cost, for a maximum per dwelling tax credit of $4,000. For solar,
the tax credit covered only active (or mechanical) solar systems and photovoltaic
systems; passive solar investments were excluded. These credits expired at the end of
1985 and have not been reinstated.
The Bush FY2002 budget and the NEP report propose a nonrefundable income
tax credit of 15% of the costs of several types of residential solar technologies to
either heat or cool a building or to heat water (except in swimming pools). The
maximum credit would be $2,000. The provision in H.R. 4 appears to be identical
to the President’s proposal.
Tax Treatment of Nuclear Decommissioning Funds. Owners of
nuclear power plants are required to establish independent trust funds, and to make
contributions to those funds, as a reserve to ensure that funds are available to
decommission those plants when they are retired. Decommissioning basically means
the dismantling of the plants, disposal of the resulting nuclear waste, and cleaning up
of the sites.
Nuclear decommissioning funds may be transferred tax-free in connection with
a change in ownership of the nuclear facility to which they relate, but the transferee
generally has to be a regulated utility eligible to maintain a qualified decommissioning
fund. This and other rules spelling out the tax treatment of nuclear decommissioning
costs were enacted during a time when all nuclear power plants were operated by
regulated public utilities, and when any transfers of plant assets occurred between
such regulated entities.
Electric industry restructuring, with its separate ownership of generation,
transmission, and distribution facilities, may lead to the sale or disposition of nuclear
generating plants – and, therefore, of the decommissioning fund assets to which they
relate – to parties that are not regulated public utilities as the law requires for tax-
exempt transactions. Under certain conditions in a deregulated and restructured
industry, ambiguity regarding the tax treatment of decommissioning fund transfers
may make such transactions taxable.
The President’s budget proposal would specify that transfers of nuclear power
plants to non-regulated companies receive the same tax benefits as transfers to
regulated entities. Several other decommissioning provisions are also proposed:

CRS-19
! Remove the restriction that deductible amounts are limited to those reported
to public service commissions under cost-of-service regulations. This means
that deductions could be greater than allowed under current law and would still
be allowable in a restructured, competitive market.
! Repeal the requirement that a plant owner obtain a ruling from the Internal
Revenue Service (IRS) before determining the amount deductible, thus
reducing administrative burden.
! Eliminate the requirement under current law that actual decommissioning
expenses not be deductible until economic performance of the services occurs.
Instead, such expenses would be deductible when paid or incurred.
H.R. 4 appears to be identical to the President’s proposal, although H.R. 4 also
includes other tax provisions relating to electric industry restructuring.
The nuclear power industry has long contended that taxation of decommissioning
fund transfers could impede the ongoing consolidation of nuclear plant ownership,
which the industry says is crucial for maintaining the economic viability of many
reactors in competitive electricity markets. Environmental groups and other nuclear
opponents contend the Administration’s decommissioning tax proposals is an
unwarranted subsidy.
Net Income Limitation for Percentage Depletion. Firms that extract oil,
gas, or other minerals are permitted a deduction to recover their capital investment
in the mineral reserve, which depreciates due to the physical and economic depletion
or exhaustion of the reserve as the mineral is recovered (IRC §611). There are two
methods of calculating this deduction: cost depletion and percentage depletion. Cost
depletion allows for the recovery of the actual capital investment – the costs of
discovering, purchasing, and developing a mineral reserve – over the period during
which the reserve produces income. Under this method, the total deductions cannot
exceed the original capital investment. Under percentage depletion, the deduction for
recovery of capital investment is a fixed percentage of the "gross income" – i.e., sales
revenue – from the sale of the mineral. Under this method, total deductions may, and
typically do, exceed the capital invested.
IRC §613 states that mineral producers must claim the higher of the two
deductions. The percentage depletion rate for oil and gas is 15%. In 1990, a higher
depletion rate for marginal wells – oil from stripper wells – was enacted for
independent producers and royalty owners.
In a major reform of the nation’s energy tax laws in 1975, percentage depletion
was repealed for the major integrated oil companies – the majors would have to claim
cost depletion. After 1975, only independent producers would be able to claim
percentage depletion, and only on limited quantities of oil and gas. Currently, the 15%
percentage depletion allowance applies only up to average daily production of 1,000
barrels of oil, or its equivalent in gas per day. An independent oil and gas producer
is one that 1) never refines more than 50,000 barrels per day of crude oil on any given
day during the producer’s taxable year, and 2) has gross receipts from retail
operations of $5 million or less.

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There are other limitations. Percentage depletion for oil and gas is limited to the
lesser of 100% of the taxable income from each property before the depletion
allowance, or 65% of the taxable income from all properties for each producer. For
ten years ending December 31, 1999, the 100% taxable income limitation was
suspended for marginal wells. The suspension having ended, the 100% net income
limitation for marginal wells was reinstated on January 1, 2000. Several tax bills
during the 105th and 106th Congresses proposed to reinstate the suspension, but none
was enacted.
The President’s budget proposal would reinstate the suspension of the 100% net
income limitation, making it available through December 31, 2002. H.R. 4 would,
among other oil and gas tax liberalizations, extend the suspension of the 100% net
income limitation by 5 years through December 31, 2006.
Income Tax Credit for Hybrid and Fuel Cell Vehicles. Hybrid vehicles
combine an electric motor and battery pack with a gasoline or diesel engine in various
configurations. These vehicles tend to be very efficient, with higher fuel economy and
range than conventional vehicles. Fuel cell vehicles are basically electric vehicles but
the source of the electricity is a chemical reaction between fuels stored in the vehicles
tank (as opposed to batteries, which need regular recharging).
Alternative-fuel vehicles (AFVs) operating solely on specified alternative fuels
can qualify for tax deductions of up to $2,000 for a vehicle up to 10,000 lbs., up to
$5,000 for a truck or van of 10,000 to 26,000 lbs., and up to $50,000 for a truck or
van weighing more than 26,000 lbs. Within those limits, the tax deductions for a
dedicated AFV can be applied to the full cost of the engine, the fuel delivery system,
and the exhaust system. For a dual-fuel vehicle, the tax deductions are limited to the
incremental cost of the same components compared with the systems for conventional
fuels. Alternative fuels are defined as compressed natural gas, liquefied petroleum
gas, liquefied natural gas, hydrogen, electricity, and fuels that include 85% alcohol,
ether, or any combination of these. In addition, all of the property that qualifies for
the deduction — the new vehicle or the conversion equipment — must be new.
Qualifying vehicles must meet any applicable federal and state environmental
standards. For business taxpayers, the basis of the property for purposes of the
depreciation deduction is reduced by the amount of clean-fuel-vehicle deduction. In
general, each of these deductions terminates at the end of 2004. But for new clean-
fuel burning vehicles or retrofit equipment, the deduction is phased out evenly over
a 3-year period beginning in January 2002.
The NEP report recommends that Congress develop legislation to provide a
temporary income tax credit available for the purchase of a new hybrid or fuel cell
vehicle. Such a credit would be provided between 2002 and 2007. As part of a
significant expansion of these tax incentives for alternative-fuel vehicles, H.R. 4 would
provide an income tax credit for hybrid vehicles and fuel cell vehicles, which would
depend upon vehicle weight, energy efficiency, and emissions performance. The
credit for hybrid vehicles would range from $250 to $10,000; the credit for fuel cell
vehicles would range from $4,000 to $40,000, which would also apply to electric
vehicles under a significant liberalization of that tax credit. The proposal would also

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provide a new income tax credit, ranging from between $5,000 to $40,000 for an
“advanced lean-burn technology motor vehicle.”
Investment Tax Credit for Distributed Power Technologies.
Distributed power systems and technologies are small electricity generating and
storage systems (self-generated power) and small cogeneration systems, also called
combined heat and power systems. Such technologies allow industrial, commercial,
and even residential users (such as apartment buildings) to generate or store their own
electricity – generated for their own use rather than for sale to others – and thus
either be completely independent from or rely less on electric grids. The technologies
are defined primarily by size and by their on-site feature, and thus could include small
diesel engines, internal combustion engines, and microturbines.
Current tax law provides no tax credit for these types of energy equipment.
Cogeneration equipment was added in 1980 to the list of property qualifying for the
10% business energy investment tax credits under the Energy Tax Act of 1978 (P.L.
95-618). These expired at the end of 1982, three years before the expiration of the
residential energy tax credits and the other business energy tax credits.
Under current law, the depreciation treatment of these technologies also depends
on the application. In commercial and residential building applications these
technologies are generally treated as structural components for purposes of
depreciation, which means a much longer write-off period (39 years), and straight line
depreciation. In industrial applications, the depreciation system to be used depends
on the capacity of the technology: those rated at more than 500 kilowatts in capacity
are depreciated over 15 years using the 150% declining balance method; technologies
rated at 500 kilowatts or less have no uniform recovery period but are assigned to the
equipment class for the corresponding manufacturing activity of the taxpayer.
The NEP report recommends increased energy efficiency through promoting
combined heat and power projects either by shortening the depreciation life or by
providing investment tax credits for the equipment. H.R. 4 would provide both an
income tax credit – at the rate of 10% – and shorter depreciation period (15 years)
for systems that are not structural components.
Liberalization of the §29 Tax Credit for the Production of Fuels from
Unconventional Sources. IRC §29 provides for a production tax credit of $3 per
barrel of oil-equivalent (in 1979 dollars) for certain types of liquid and gaseous fuels
produced from alternative, “unconventional” energy sources – conventional fuels
(methane) mined from “unconventional” locations (such as coal mines) or produced
from alternative resources (such as landfills), or alternative fuels produced from
conventional fossil fuels (such as coal). This credit is also known as the non-
conventional fuels credit, or more simply, the “section 29 credit.”
The full credit is available if oil prices fall below $23.50 per barrel (in 1979
dollars); the credit is phased out as oil prices rise from $23.50 to $29.50 (again, in
1979 dollars). Thus, both the credit and the phase-out range has been adjusted for
inflation since 1979. Currently, the credit is over $6.00 per barrel of liquid fuels
($6.14 in 2000) and over $1.00 per thousand cubic feet (mcf) for gaseous fuels, and
the phase-out range for oil prices is currently from about $47 to $59 per barrel. The

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credit for tight sands gas is fixed at the 1979 level of $3 per barrel of oil equivalent
(about $0.50 per mcf) and is not indexed to inflation. With recent low per-barrel oil
prices (averaging $15.56 for 1999), the credit was fully in effect in 2000. Even with
the higher prices of 2000, the credit has been fully in effect and is expected to remain
so in the near future.
Qualifying fuels include oil produced from shale or tar sands, synthetic fuels
(either liquid, gaseous, or solid) produced from coal, and gas produced from either
geopressurized brine, Devonian shale, tight formations, or biomass, and coalbed
methane (a colorless and odorless natural gas that permeates coal seams and that is
virtually identical to conventional natural gas). For most qualifying fuels, the
production tax credit is available through December 31, 2002, provided that the
facilities were placed in service (or wells drilled) by December 31, 1992. For gas
produced from biomass such as biogas from landfills, and synthetic fuels produced
from coal or lignite, the credit is available through December 31, 2007, but only for
facilities that have been placed in service (or well drilled) before July 1, 1998,
pursuant to a binding contract entered into before January 1, 1997. Thus new landfill
projects do not qualify for the tax credit.
The §29 credit is reduced to the extent that a project is financed from
government grants, subsidized or tax-exempt bonds, or receives other subsidies or
benefits. For example, the credit is reduced to the extent that certain other energy tax
credits are claimed for the same project (such as the enhanced oil recovery tax credit).
Finally, the credit is nonrefundable, and it is limited to the excess of a taxpayer's
regular tax over several tax credits and the alternative minimum tax.
The Bush Administration policy proposes to expand the §29 tax credit to make
it available for new landfall methane gas (biogas). The credit would be tiered,
depending on whether local or federal air pollution laws required the taxpayer to
collect or flare the gas. H.R. 4 would extend the placed-in-service rule for existing
fuels from January 1, 1993 to between the date of enactment and January 1, 2007.
For such fuels the credit would be extended from December 31, 2002 – which means
that the credit expires at the end of next year – to four years after the onset of
production. For landfill gas, H.R. 4 would allow facilities placed in service between
July 1, 1998 through December 31, 2006 to qualify for the tax credit, which would
be available for five years after the onset of production.
Continuation of the Excise Tax Exemption for Alcohol Fuels. There
are four federal tax subsidies that are available for the production and use of alcohol
transportation fuels. The most important tax incentive for alcohol fuels — the one
most responsible for the development of the alcohol fuels market — is the partial
exemption, currently at 5.3¢ per gallon, from the otherwise standard excise tax rates
on gasoline, diesel, and other transportation fuels. Mixtures of 90% gasoline and
10% alcohol (typically called gasohol) are taxed at 13.1¢ per gallon — they are
exempt from 5.3¢ of the tax. Since January 1, 1993, mixtures that are 7.7% or 5.7%
alcohol (either ethanol or methanol) have received a prorated exemption. Thus, 7.7%
ethanol blends qualify for a 4.081¢ exemption (they are taxed at 14.319¢ per gallon);
and 5.7% ethanol blends qualify for a 3.021¢ per gallon exemption (they are taxed
at 15.379¢ per gallon).

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The 5.7% and 7.7% blends correspond, respectively, to the 2.0% and 2.7%
oxygen content standard for gasoline sold in ozone nonattainment areas and carbon
monoxide nonattainment areas under the Clean Air Act.23 Most gasohol sales are
exempt at the rate of 5.3¢ per gallon because they are 90/10 blends. In all these cases,
the exemption equates to 53¢ per gallon of ethanol.24 Finally, straight (or neat)
alcohol fuels — mixtures that contain a minimum of 85% alcohol — also qualify for
the excise tax exemption at varying rates. For example, straight biomass-ethanol is
taxed at a rate of 13.1¢ (a 5.3¢-exemption); straight biomass-methanol is taxed at
a rate of 12.4¢ per gallon (a 6.0¢-exemption). The market for these straight, or neat
fuels, is very small.25
The federal tax exemptions for alcohol fuels also apply to certain fuel additives
called oxygenates, provided they are produced from renewables such as corn and not
from fossil fuels such as natural gas. In 1995, the IRS ruled that blends of ETBE
(ethyl tertiary butyl ether) and gasoline would qualify for the partial excise tax
exemption. ETBE is a compound derived from a chemical reaction between ethanol
and isobutylene (a byproduct of both the petroleum refining process and natural gas
liquids).26 In this reaction, the ethanol is chemically transformed and is not present
as a separate chemical in the final product. In effect these rulings ensured that the
oxygenate required under the CAA would also qualify for the tax subsidies. Allowing
ETBE to qualify for this tax exemption was intended to further stimulate the
production of ethanol. Allowing ETBE to qualify for the federal tax subsidies reduces
the price differential between it and MTBE (methyl tertiary butyl ether), its main
competitor.
23 Clean Air Act (CAA), as amended in 1990 requires that all gasoline sold in the winter
months in the 40 carbon monoxide (CO) non-attainment areas contain at least 2.7%
oxygenate. Oxygenates add oxygen to gasoline and make the fuel burn more completely and
more cleanly. This part of the program began on November 1, 1992. The CAA also requires
that all gasoline sold in 9 ozone non-attainment areas be reformulated gasoline, containing at
least 2% oxygenates. Reformulated gasoline involves a more complex and extensive change
to the chemical properties of fuel to 1) reduce emissions of volatile organic compounds
(which form ozone), 2) reduce emissions of toxic compounds (such as formaldehyde), and 3)
keep emissions of nitrogen oxide from increasing.
24Alcohol blended with diesel fuel or any one of the other special motor fuels is also partially
exempt from tax. The exemption for “gasohol” blends also applies to blends of diesel and
biomass–derived alcohol and blends of a special motor fuel and biomass–derived alcohol,
whether ethanol or methanol.
25 To qualify for any of the above exemptions, the alcohol must be at least 190 proof (95%
pure alcohol, determined without regard to any added denaturants or impurities). Technically,
both ethanol and methanol qualify for the exemption as long as they are not derived from
petroleum, natural gas, coal, or peat. In practice, however, virtually all fuel alcohol is
ethanol produced from corn; very little, if any, methanol is produced from wood, and other
biomass (or renewable) sources because it is generally uneconomic. Although blends of
gasoline with biomass–derived methanol would also qualify under the tax code, such blends
are disqualified under the Clean Air Act because of the associated increase of emissions of
ozone–forming pollutants.
26 Natural gas liquids are those components of wellhead gas — ethane, propane, butanes,
pentanes, natural gasoline, and condensate, etc. — that are liquefied at the surface in lease
separators, field facilities, or gas processing plants.

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In place of the excise tax exemption, gasohol blenders may claim an income tax
credit, generally at 53¢ per gallon of alcohol, for alcohol used to produce a qualified
mixture (a mixture of alcohol and gasoline, or a mixture of alcohol and any other
special motor fuel) under §40 of the Internal Revenue Code. The mixture must either
be sold for use as a fuel (not merely as an octane enhancer) or used as a fuel in the
producer’s trade or business. An income tax credit is also available for straight alcohol
used as fuel. This credit is available only to the user directly (who must use it in a
trade or business), or to the seller who must sell it at retail to the ultimate user (as
long as it is placed in the fuel tank of the buyer’s vehicle). Thus, whether the alcohol
is a blend or straight fuel determines who qualifies for the tax credit. In all these cases,
the alcohol may be either ethanol or methanol but must not be produced from fossil
fuels, effectively limiting the tax credit to ethanol from corn.
The production of alcohol may also qualify for the §29 tax credit (which was
discussed above, on p. 6) if produced synthetically from coal. However, this
procedure is so uneconomic that there is no such production taking place.
The Bush proposal is not specific but indicates that the Administration will work
with the Congress to continue the excise tax exemption. There is no such provision
in H.R. 4.
(For more information, see CRS Issue Brief IB10054, Energy Tax Policy.)