Washington Energy Updates

2014 State of the Union – President Obama addressed the nation January 28 on myriad of national agenda goals, including energy. He called natural gas the “bridge fuel that can power our economy with less of the carbon pollution that causes climate change…”. Many in the industry would argue that natural gas is more than a transition fuel – it is a destination fuel, the “fuel of the future” for U.S. domestic production and consumption because of the abundant resource base that has materialized from hydraulic fracturing, and resulting low costs (aberration: natural gas prices have recently shot up this winter, particularly in the northeast, because of frigid weather and limited pipeline infrastructure). In response to environmental concerns about fracking, President Obama urged Congress to create “Sustainable Shale Gas Growth Zones” to “ensure we develop shale gas the right way…’, although no details were given. He promised to assist investments in new factories that would run on natural gas and he called on legislators to encourage the construction of natural gas fueling stations and create new jobs. The President also affirmed that “climate change is a fact”. President Obama stuck to his guns on EPA’s efforts to issue rules on future power plant emissions and expected rules this June on current power plant emissions. The President proposed a new “fuel-neutral” tax break for alternative fuel vehicles and tax reform to encourage renewable energy. There was no mention of possible approval of the Keystone XL oil pipeline. President Obama’s “all-of-the-above” approach to energy is heralded by some and criticized by others. Supporters say he is balancing U.S. energy development and environmental protection while opponents claim he cannot do both simultaneously. Quadrennial Energy Review – The White House launched the first chapter of the Administration’s Quadrennial Energy Review January 9 to study the nation’s aging and over-utilized energy infrastructure which is in need of repair and replacement. The review and its recommendations are due January 2015. “Our current infrastructure is increasingly challenged by transformations in energy supply, markets, and patterns of end use; issues of aging and capacity; impacts of climate change; and cyber and physical threats,” the announcement stated. This first installment of the QER will focus on the entire domestic energy infrastructure system – electricity transmission, storage and pipeline delivery. Because of growing domestic production of and demand for oil and natural gas, such leaps in growth are testing the capacity of pipelines. Related to the boom in U.S. fossil fuels, some high-profile energy experts are calling for the elimination of a long-time ban on U.S. crude oil exports, including U.S. Senator Lisa Murkowski (R-Alaska) who is the ranking Member on the Senate Energy and Natural Resources Committee. The QER may also pursue reductions in natural gas methane emissions. There does not seem to be much disagreement among policymakers, however, that the United States needs to modernize, expand and transform its energy infrastructure, even though such efforts could lead to higher capital expenditures for oil and gas pipeline improvements. Key U.S. Senate Chairmanship Changes – With the retirement of U.S. Senator Max Baucus (D-Montana) who is currently chairman of the powerful tax-writing Senate Finance Committee and his imminent Senate approval as the U.S. Ambassador to China, plans are that Senator Ron Wyden (D-Oregon) will take the rein at the Finance Committee, likely in February. Senator Wyden currently chairs the Senate Energy and Natural Resources Committee and is known to work well with his Republican counterparts. He will hand over the chairmanship gavel to Mary Landrieu (D-Louisiana). Representing a significant energy producing state, she is a strong promoter of U.S. oil and gas development, supports U.S. LNG exports and opposes a national renewable portfolio standard (RPS) where states would be mandated to meet percentage goals for the use of renewable energy in their energy production mix. Senators Wyden and Landrieu in these leadership positions could substantially change the political landscape for new tax and energy policy. Tax Reform or Tax Extenders? – With the departure of Senate Finance Committee Chairman Baucus who, along with the tax-writing House Ways and Means Committee Chairman Dave Camp (R-Michigan), have been pushing major tax reform proposals, chances of Congress passing comprehensive tax reform legislation this year are becoming less likely – already dim in a congressional election year. Of possible interest to WADE, however, is that the current Baucus tax reform discussion draft addresses clean electricity. Today, some clean energy production, such as generating electricity by capturing excess heat at manufacturing facilities, is ineligible for the production tax credit because it is not expressly listed in the tax code. The Baucus draft eliminates the myriad clean electricity tax incentives and provides for a new tax credit that is technology-neutral and performance-based. The cleanliness of the generating technology determines the size of the credit. For any type of electricity generation, a business can choose whether it wants to receive the credit as a production tax credit, which is claimed each year, or an investment tax credit, which is claimed when the facility begins to operate. The tax credit expires when the cleanliness of the U.S. electricity market increases significantly. This latest tax reform discussion draft does not directly address tax incentives for energy efficiency, clean vehicles, transmission, CHP and storage because the Committee staff was looking at bigger energy areas that enhance energy security and reduce pollution. Further, an earlier tax reform discussion draft dealing with cost recovery and tax accounting proposed repealing accelerated depreciation for solar, wind, and other energy property as an electricity generation incentive. While work will continue on major tax reform, Senator Wyden as Chairman of the Finance Committee is likely to push instead for extending expired or soon to expire energy tax credits particularly for renewable energy this early spring, which is easier to garner support for rather than tax reform. On the flip side and in the other Chamber, House Ways and Means Committee Chairman Camp insists on comprehensive tax reform and will not consider tax extenders until it is clear tax reform is dead in the water for the year. If congressional support for tax extenders overrides tax reform, their consideration may have to wait until a lame-duck session of Congress after the November 2014 elections. It is also possible Senator Wyden may revive his own updated major tax reform bill originally from 2010, authored along with Senator Dan Coats (R-Indiana). Cybersecurity – Primary legislation that may have a chance to actually pass this year in Congress is the National Cybersecurity and Critical Infrastructure Protection (NCCIP) Act which has bipartisan support. In brief, it would codify and solidify authorities within the U.S. Department of Homeland Security (DHS) to address liability issues related to cybersecurity threats, remove information-sharing barriers and provide for continuous monitoring. With some changes, the measure could also include some financial grants and other incentives for electric, natural gas, hydropower and oil pipelines to protect against cyber attacks on physical assets. Of particular concern is a cyber attack of the U.S. bulk power system and the electricity transmission grid which could result in massive outages and shutdowns. With the recent disclosures of cyber assaults on Target, Nieman Marcus and other customer accounts where personal information was stolen, there is potential public momentum to move this bill. Energy Efficiency – Administratively, energy efficiency measures are being implemented. The U.S. Department of Energy is pursuing rulemakings to strengthen minimum efficiency standards for appliances and other energy-consuming products and has imposed significant civil fines in excess of $1 million on manufacturers in noncompliance. An interesting question may arise with the issuance by the U.S. Environmental Protection Agency of its proposed rule on regulating greenhouse gas emissions from existing power plants and how the rule will deal with energy efficiency. The proposed rule is expected in June and a final rule in June 2015. States that ultimately will deal with end-use energy efficiency are compelled to submit their compliance plans in June 2016. Legislatively, the major vehicle addressing energy efficiency sponsored by U.S. Senators Jeanne Shaheen (D-New Hampshire) and Rob Portman (R-Ohio), failed to pass the Senate in 2013. However, there may be efforts to revive the measure this year to provide incentives for building efficiency investments.