HR 6 Summary

Doug Koplow, Earth Track, February 2004

(c) 2004, Earth Track

Scarcely a day passes without news of more forward motion on the famed Energy Policy Act of 2003/2004 (HR 6), that was blocked by a Senate fillibuster last November. It is likely that whatever form the revised legislation takes that information will be released to a wider audience only days before it is brought to a vote. The lack of lead time serves the leadership well, as it greatly reduces the ability for others, even others on the Senate Energy & Natural Resources Committee, to actually figure out what they are voting on. Most of the current press has focused on a "leaner," stripped down version on the bill, with its officially estimated cost of $31 billion roughly cut in half. This paper, and its associated data table, examines the real financial costs of the bill, and highlights provisions in the legislation from the titles we have reviewed that pose the largest environmental and fiscal risks.

Total Cost of the Bill. The cost of the bill should be viewed with great suspicion, given its complexity, short deadlines available to staff to generate cost estimates, and a tremendous incentive for potential beneficiaries to mask their subsidies, lest they be discovered and stripped prior to passage. The press has adopted the $31 billion cost figure, based on a preliminary evaluation by the Congressional Budget Office, almost unquestioningly. Of this, roughly 17% is associated with net budget outlays and 83% with net tax subsidies (estimated by the Joint Committee on Taxation). But much is not counted in these values, as even CBO admits: "In addition, enactment of H.R. 6 would affect spending subject to appropriation action. However, CBO has not completed an estimate of the potential discretionary costs of the act." (CBO, Nov. 18, 2003). Others have added up the authorized spending. These programs, if funded, would add roughly $67 billion additional to the cost of the bill according to work done by Aileen Roder at Taxpayers for Common Sense. While not all of this money will ultimately be appropriated, a substantial proportion will be, and it is inaccurate to assume a cost of zero.

But there is more: CBO's numbers also miss a range of expenditures that will cost us money without any additional Congressional action needed. These include new liability caps and exemptions (roughly $30 billion); loan guarantees ($1.8-$2.5 billion); unrecognized costs associated with continuation of strategic oil reserves ($0.85-$3.0 billion); mandated direct spending ($8.3 billion); underestimation of nuclear tax subsidies ($5.9-$19.4 billion); and increased consumer energy costs associated with ethanol mandates ($6.9 billion). These items alone bring the cost of the Chairman's mark to between $152 and $183 billion. (These cost elements and data sources are summarized in more detail in this associated table).

Since many of the missing cost elements surfaced only upon detailed review of the bill, it is reasonable to expect there is much more lurking in the titles and sections we've not yet examined in detail. Recent efforts to bring the cost of the bill down do lop an impressive $32 billion off the expected tab of this legislation, mostly (80%) by removing liability protection for MTBE producers. However, with a post-revision estimated cost of $119 to $150 billion, one can hardly call it "lean".

Process. While all bills contain some pork, and language so convoluted that is it clearly hiding something, process does matter. The fact that HR 6 was tightly controlled by the majority party on the Senate Energy Committee, with legislative language released only 48 hours before the intended vote, is hardly the stuff of either good democracy or good policy. Corporations may hate the ordeal, and sometimes the humiliation, associated with audited and public accounts. Yet this process of disclosure and visibility is what ensures that corporate practices are usually transparent, and that often provide the clues for discovering fraud when it exists. Adoption of a bit more openness and accountability by the Senate Committee on Energy & Natural Resources would certainly enhance our chances as taxpayers to get a reasonable return on our massive investment in an energy bill.

Legislative provisions likely to have a significant (often detrimental) environmental or fiscal impact are summarized below. Additional details on these items and more can be accessed here.

Renewable energy production incentive (sec. 202). Already a fairly weak program due to variability in available public funds that makes cost estimation for investors difficult. HR 6 would further weaken REPI by increasing payouts to the lower quality renewables, such as open-loop biomass. The bill would also expand the definition of renewables to include dirty fuels such as landfill gas, subsidizing landfilling at the expense of recycling.

Promotion of energy security in insular areas (sec. 204). Promotes increased linkage of these areas to centralized generation, transmission. What the bill should be doing is to force clear cost accounting of delivering energy to these areas. This market-oriented approach would show the cost of energy delivery rising as distance increased and population fell, promoting increased application of decentralized energy, and helping to build a more resilient energy system.

Subsidies to biomass mining on public lands (sec. 206). Increases allowed cutting of biomass on federal lands under guise of fire protection. However, language provides wide and unchecked discretion for secretary of interior to decide how much land to open, when and where to do it.

Reimbursement of NEPA compliance costs (sec. 217). Shifts costs of environmental planning from the project developer to the public taxpayer on geothermal projects (later provisions do the same for oil & gas development).

Geothermal leases as potential back-door to no-bid oil and gas extraction (secs. 220 and 223). Creates easier conversion of federal geothermal leases to include extraction of byproducts, which include oil, gas, and coal. Invites gaming strategies to use geothermal extraction to access more valuable fuel minerals without proper oversight or competitive bidding.

Permanent reauthorization of Strategic Petroleum Reserve and Northeast Heating Oil Reserve (sec. 301). Financial accounts for these entities dramatically understate actual costs of running the reserves, as they ignore the interest cost on working capital that is tied up as oil inventory. HR 6 should have fixed this problem, and set up an excise fee on oil/gas consumption to recover these costs from consumers. Instead, the bill continues to pretend these costs -- between $840 million and $3 billion per year even at today's historically low interest rates -- don't exist.

Royalties in Kind (sec. 312). Royalty collection on oil and gas leases on both federal and state lands have not gone well. Decades of royalty underpayment by a wide range of companies resulted in massive litigation and billions of dollars in recoveries.

• HR 6 should be simplifying royalty collection by disallowing virtually all deductions from cash royalties due (developers would adjust their bid prices accordingly), more closely mirroring practices in private sector franchising agreements. Instead HR 6 does the opposite, pushing the federal government into the oil and gas marketing business, in which it has no experience or expertise. Past experiments in having the government take royalties on production on federal leases in fuels, rather than cash, resulted in a loss of over 6% of the royalty value.
• Equally troubling, the bill would allow DOI (rather than the US Treasury) to oversee sales and to retain proceeds within the Department to pay for certain expenses associated with bringing the oil to market. The lack of transparency on funds flow this process creates, and the incentives to run inefficient operations (since you get to keep more funds from oil and gas sales) both pose significant risks of corruption and mismanagement and should not be allowed.

Assorted royalty relief for marginal oil and gas producers (sec. 313), natural gas from deep wells in the Gulf of Mexico (sec. 314), deep water (sec. 315), and Alaska) sec. 316) add to a long line of "special" cases in oil and gas. The industry never met a subsidy it didn't like. Proposed delays in implementing some of these in the leaner Energy Bill II should be made permanent.

Oil and Gas Leasing in the National Petroleum Reserve of Alaska (sec. 317). In addition to opening access, the secretary of interior has wide discretion to subsidize it as well.

Abandoned wells (sec. 318). Rather than clean up the financing and financial assurance for abandoned oil and gas wells around the country, HR 6 just subsidizes their cleanup, allowing bond surety subsidies of between $160 and $560 million per year to continue. Further obscuring the finances of well closure, HR 6 introduces barter (such as through royalty offsets) to pay for well plugging and abandonment, easing the way for corruption and mismanagement.

Combined hydrocarbon leasing (sec. 319). Effectively opens huge tracts of tar sands public lands to oil and gas extraction.

Reduced oversight on LNG facilities (sec. 320). Few things blow like an LNG facility, making them big potential terror targets. No matter: HR 6 seeks to strip away local oversight on siting and management. Big risks; dumb policy. Now, if one of these were sited next to Dick Cheney's summer house, the freezing out of public oversight would be a bit easier to take.

Reimbursement of Costs of NEPA Analyses, Documentation, and Studies (sec. 326). One of the few internationally-agreed upon environmental policies is that the polluter should pay for his or her own pollution. This works wonders when implemented, driving the prices of highly-polluting activities up, encouraging the development of cleaner and cheaper alternatives. HR 6 now wants to reverse this core tenet of sound environmental policy by shifting the costs of NEPA compliance from the project developer (who happens also to get the project profits) to the taxpayer. Again, strikingly dumb policy. The Senate Energy Committee has delayed NEPA reimbursement as part of its efforts to provide a "leaner" energy bill. The provision should be struck entirely.

Opening up federal lands to oil and gas leasing. More streamlining and coordination (sec. 344), quicker deadlines (sec. 348), standardized costing of rights of way (sec. 349). Efficiency is good, but should not be limited to opening access. Where are the provisions to streamline validation of financial assurance on leases, enforcement of non-compliance or environmental damages, and remediation of contaminated sites? They're probably still working on it for the revised bill…

Alaska natural gas pipeline (Subtitle D). Streamlined environmental reviews and restricted court challenges. Biased route selection to benefit the state of Alaska and the expense of the rest of us (cheaper route goes through more of Canada). Potential loan guarantees of up to $18 billion. If we need this thing so badly, private finance shouldn't be that big of a deal. We're talking major international oil companies here, firms able to dump huge sums into Russia and its former constituent states without even the rule of law to back up their financial stakes. What's the guarantee worth to the oil multinationals? Despite claims that the guarantee has no subsidy effect unless there is a default, we see it is actually quite valuable to its recipients. Assuming the cap is reached over 8 years, the federal guarantee will have saved the firms more than $2.5 billion in financing relative to their costs of borrowing on the open market during this time period alone. Benefits would continue to accrue until the debts are paid off; since they would be among the least expensive debt in the firm's portfolios, they won't be paid off for quite some time. Though this is only one of the many subsidies to fossil fuels in HR 6, it constitutes nearly 3 1/2 times the aggregate subsidy to wind power provided by the bill, and generates subsidized gas that feeds the utilities that wind must compete against.

More cash for "clean" coal. $200m/year, $1.8 billion total for projects to be named (sec. 401), despite a history of, how shall we put it, "limited" success. A $125m loan to the Healy Clean Coal project (sec. 411) and loan guarantees in the hundreds of millions (sec. 412-414) for specific coal projects in key congressional districts. Public investors get no royalty stake in successful innovations, other than warm fuzzies that we helped coal get cleaner (though it is still of course far dirtier than a whole range of other fuels). And for what? To underwrite a highly polluting, large scale industry to make investments that it must make anyway if it wishes to survive? It's called "creative destruction" when it happens to dry cleaners, or mom-and-pop retailers, or even in the electronics industry. Reinvest, restructure, or die. And the process of continual restructuring, while painful, does ensure the country has vibrant and innovative industries. Time for coal to grow up. Regulate their emissions like a normal polluting industry (by ending the ridiculous grandfathering of their pollutant levels), and let them finance their own innovation. Like the paper industry of the 1970s, they might actually be surprised by what they come up with all on their own.

Bigger (sec. 421), longer (sec. 422), cheaper (sec. 425) coal leases with less opportunity for public environmental oversight (sec. 425). Mine sizes on federal lands can increase by nearly a factor of 10; coal leases could be extended beyond 40 years; coal lease operation and reclamation plans can be delayed until mining operations begin, impeding the ability to force changes in mining operations to mitigate expected environmental damages. Sec. 425 allows selected firms to use a financial guarantee rather than a surety bond on the up-front payments associated with their bids. Cheaper for them; higher risk to the government. Are these changes needed to allow efficient mining, or simply to ensure the very largest mining companies can do what they want on federal lands? Big question. Important question. Don't expect to see it answered before the energy bill goes to vote. As the Senate Committee on Energy & Natural Resources notes in its February 11, 2004 press release, "Coal provisions remain unchanged" in the modified bill.

Subsidizing pollution control (sec. 441). $500 million in air pollution control research, and $1.5 billion for research into improved generation. Intel can spend $2 billion a pop to build a new chip plant every couple of years, but it takes you and me to help coal giants figure out their production process. The more we spend, the less they have to. And the more we subsidize controlling coal-related pollution (rather than having them pass the cost through to consumers via electricity prices), the less the market will value clean energy from wind, solar, and improved efficiency.

Billions for new reactors. The nuclear production tax credit (see nuclear energy tax credit link for more information) allows a tax credit of 1.8 cents for each kWh of nuclear-generated electricity that comes from new nuclear plants, subject to allocation rules and caps in the bill. The Joint Committee on Taxation assumed almost nobody would use the credit during their 10-year period of evaluation, and estimated the cost of the provision at a mere $167 million. The actual cost of the tax credit will almost certainly be much higher, even if the losses don't hit until after 2013. Expect revenue losses of at least $6 billion. But there is more: the language on who is eligible is not crystal clear (surprised?), and under reasonable interpretations, revenue losses could be as high as $15 billion. The value of these subsidies to the industry (since the tax breaks are themselves tax-exempt subsidies) would be roughly $19.5 billion, a huge blow to emerging power sources that must compete with this subsidized behemoth of an industry. New technologies also get a boost (HR 6 Title VI, Subtitle C) through the Advanced Hydrogen Cogeneration Project. Nearly $650 million through 2008 (with "such sums as may be necessary" after that date) is authorized in a high risk, high likelihood of failure effort to combine two very difficult tasks (new nuclear generating technology plus cost-efficient hydrogen production) into one impossible one.

More Price-Anderson (sec. 602). Another 20 years of federal liability caps on nuclear accidents for the commercial power industry. Current reactors are grandfathered (the cap is worth about $350 million per year to them); HR 6 would extend the subsidy to new market entrants, be they reactors or contractors. Efforts to allow some degree of financial accountability for contractors in the case of negligence and intentional misconduct was struck from the bill prior to the Chairman's Mark in November 2003. Not reassuring, given the large potential risks nuclear plants and shipments face in the post-9/11 world. As with reinvestment into your process, and paying to control your own pollution, insuring your own liabilities ensures the market price for your energy is a realistic one. The cost of this extension in estimates for the bill developed by CBO appears to be zero (there's not enough detail to tell for sure). The reason: the feds don't pay out cash for the cap, and they don't expect there will be an accident. Yet one need look no further than our own auto insurance to recognize that there is an actuarial cost to providing coverage even if a year passes incident free. Nuclear accident risks are no different. The value of the cap is hard to estimate, but has been pegged at between 2 and 3 cents per kWh (roughly $3.3 million per reactor-year) by economist Anthony Heyes. Depending on how the rules of the nuclear production tax credit are interpreted, there will be between 6 and 12 new reactors coming on line prior to 2020, each with a 40-year license (as is the industry's pattern, expect no reactors to enter production without large federal subsidies). This translates to an additional subsidy of $790 million to $1.6 billion to commercial reactors. Incremental subsidies to new fuel cycle facilities, transporters, or contractors could not be estimated.

Itty-bitty reactors can have itty-bitty insurance (sec. 608). The portion of accident risk that reactors do need to pay for under Price-Anderson (tier 1 direct policies and tier 2 retrospective premiums) would be linked to a single site, rather than to a single reactor as is now the case. It is not clear, however, that the risks are site-related rather than reactor-related (though, of course, the new generation of reactors are so "inherently safe" that they don't even need to have secondary containment). While new technologies that use tiny bits of fuel (like the Pebble-Bed Modular Reactor -- just five years out, you know), may have lower risks than bigger reactors, the human error factor is not likely to follow such a neat pattern. Scaled down insurance should not be slammed through an energy bill; it should be based on careful and unbiased research into the risk profiles of these facilities.

No anti-trust review for construction or operation of a nuclear utilization or production facility (sec. 625). With the industry already highly concentrated, and with this concentration beginning to put at risk the quality of Tier 1 and Tier 2 accident insurance, checking concentration would be good thing. Equally important, nuclear plants are large baseload power stations on which huge numbers of people rely for electricity, and where disruptions can sometimes mean suffering or death for certain sub-populations. There is no benefit to the country of allowing these plants to become ever more concentrated, though surely we would never expect large energy companies to abuse their market power and violate the trust of shareholders and the public.

Promote siting of new nuclear plants at existing DOE sites (sec. 629). You can offer subsidies for new nuclear plants until your Treasury is bare, but people still aren't going to want the thing next to them. Though the accident risk is zero to the Nuclear Energy Institute (the industry's PR front organization), plant neighbors just never seem to fully agree. So, dropping the new plants on already contaminated, often remote, federal lands solves many of the challenges likely to arise for new plant sitings. HR 6 promotes studying this issue. No harm in study, of course, but let's be sure the process is fair and the results are public.

Increased nuclear proliferation risks from allowing export of highly enriched uranium abroad (sec. 633). The reason: production of medical isotopes. But you can also make the isotopes using lower enrichment levels that don't have the same proliferation risks; many isotope producers have already switched. But not Ontario firm MDS Nordion. Every industry faces periods when it must modify the way it does things or die. The US should incur no increased proliferation risks to slow the time when MDS Nordion must embrace its own future.

New uranium enrichment facility (sec. 637). By removing many of the roadblocks to creating a new enrichment facility, HR 6 will be a huge boost to Lousiana Energy Services, the company this provision benefits most directly. Some of these roadblocks are kind of important though. Like technical review of the project, or an adequate and appropriate environmental review (old enrichment plant sites aren't exactly kid's playgrounds now), or environmental justice reviews, or figuring out what to do with the plant's wastes. Turns out, HR6 would make us buy that waste, dramatically improving the economic profile of the project. (If you have radioactive waste you'd like to sell the government at a good price, perhaps Pete Dominici will cut you a deal as well). Then there is the little economic problem. The current enrichment plant is operating well below capacity; in fact, there is so much extra capacity, that HR 6 forbids the Nuclear Regulatory Commission from considering market need in determining whether or not to issue LES a license. True, LES may, in the end be cheaper for nuke plants, as it will use newer technology and benefit from large public subsidies. But while cheaper toothpaste may be a good thing, increasing the number of people who can buy it, cheap uranium enrichment may well be a bad thing for all of us in terms of nuclear proliferation.

More nuclear security, compliments of the taxpayer (secs. 661-667). Large scale plants; radioactivity; huge disruptions if knocked off-line; huge terrorist targets. More security is clearly warranted. But costs of that security should be paid for by those who use the product (electricity) rather than by random taxpayers (dare I say, just like the airlines). Why? Because, like pollution controls, it forces these costs to be reflected in power prices, allowing energy sources with a more favorable security profile to gain market share. While the bill doesn't state the funding levels, earlier estimates by CBO pegged the cost at roughly $50 million per year for assessing risks, improving background checks and plant/fuel procedures. Extra costs currently being incurred by all levels of the policy and national guard at these facilities is not reflected in these estimates.

Section 45 Tax Credits to "Renewable" Energy Resources.

JCT cost estimates appear substantially too low. If renewables growth with no tax credits yields a revenue loss estimate on par with JCT, it is likely that actual losses from these provisions will exceed the current estimates ($3.0 billion revenue loss, roughly $4.7 billion outlay-equivalent) by many hundreds of millions of dollars. As the underage could not be estimated with any precision, it has not been included in the adjusted cost of the bill.

Subsidies to existing plants provide little energy gain at a high cost. Existing biomass plants, already economic in the current market environment, are nonetheless eligible for five years of tax credits for practices they have been doing for decades. While there is some uncertainty as to whether statutory language will allow plants where biomass does not comprise 100% of the input fuel to claim tax credits, Washington insiders have confirmed that the sponsors did intend for industries such as paper mills to access the provision. Should this occur, the revenue loss would exceed $800 million ($1.3 billion outlay equivalent), more than 80% of which would accrue to the paper and lumber industries. Because virgin paper production is the main source of biomass energy recovery, fiber recycling will be hurt. The gains are concentrated: of the more than $1 billion in subsidies flowing to paper and lumber, a single corporation (International Paper) is positioned to receive subsidies worth more than $400 million.

Many eligible resources are not renewable. HR6 provides virtually no constraints on where the biomass may come from in order to obtain the production tax credit. Thus, timber from old growth forests, from steep slopes (creating erosion problems), from clear-cuts, and from homogenous agricultural, silvicultural, and feedlot operations all receive subsidies. This is likely to:

• Harm small farmers and organic farming. Only large farms will have enough animal wastes to build a power plant; transport costs will make burning less economic for smaller farms. Subsidies to burning over composting worsen relative economics for small farmers, and for organic farmers for whom natural soil fertility is a key economic advantage.
• Harm recycling. Recycling is economic if the net value of recovered materials is less than the cost of alternative disposal options such as landfilling and combustion. HR 6 provides subsidies to disposal (both landfill gas and combustion of a wide range of wood and paper products get the tax breaks), undermining the economic value of recycling. Affected sectors include wood pallets, and construction and demolition debris. Paper recovery (the largest fraction of the waste stream) will be harmed both by tax credits to burning many types of waste paper (anything that is not "commonly" recycled), and by up to $1.1 billion in subsidies to pre-existing energy recovery and conversion operations inside of paper mills. Access to subsidies for waste-to-energy plants is not constrained by appropriate requirements to pull easily-recyclable or potentially toxic materials prior to combustion.

Surprise beneficiaries: hazardous "municipal solid waste." While MSW may not mean the same thing to all people, it is rare that this definition is stretched quite so far as in HR 6. The bill adopts what is actually a much broader definition for "solid waste," and includes, well, almost everything: pollution treatment sludges and "other discarded material, including solid, liquid, semisolid, or contained gaseous material resulting from industrial, commercial, mining, and agricultural operations, and from community activities," excluding only raw sewage and return irrigation flows. Can it be hazardous waste? Sure looks that way: hazardous waste is a sub-category of the definition of solid waste. What about coal mining residues not normally burned? Could be; these would seem to be solid byproducts from the mining industry. If HR6 passes, look for an onslaught of tax cases as firms work to cram their wastes into the eligible group.

Despite secret efforts to slim down HR 6 and get it through the Senate, it remains a massive bill with costs between $120 and $150 billion. Beneficiaries are primarily based on political power or regional interests, rather than on what the nation as a whole needs for clean energy, dynamic investment in new technologies, energy reliability, and energy security. When the revised bill is touted as costing only $15 billion, be sure to point out what's missing from their calculations, as well as the damage that passage will do to our pocketbook, our environment, and our ability to build a resilient energy system for the future.