Full text of "President Clinton's proposals for public investment and deficit reduction : hearings before the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, first session"

\M PRESIDENT CUNTON'S PROPOSALS FOR PUBUC
INVESTMENT AND DEHCIT REDUCTION

Y 4. W 3i: 103-27

I President Clinton's Proposals for P..

HEARINGS

BEFORE THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS
FIRST SESSION

MARCH 9, 10, 16, 17, 23, 31; AND APRIL 1, 1993

PART 2 OF 2
MARCH 23, 31; AND APRH. 1, 1993

Serial 103-27

Printed for the use of the Committee on Ways and Means

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PRESIDENT CUNTON'S PR0P0SAI5 FOR PUBUC
INVESTMENT AND DEHCIT REDUCTION

HEARINGS

BEFORE THE

COMMITTEE ON WAYS AND MEANS
HOUSE OP REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS
FIRST SESSION

MARCH 9, 10, 16, 17, 23, 31; AND APRIL 1, 1993

PART 2 OF 2
MARCH 23, 31, AND APRIL 1, 1993

Serial 103-27

Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT PRINTING OFFICE
70-700 WASHINGTON : 1993

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-041665-5

COMMITTEE ON WAYS AND MEANS
DAN ROSTEISIKOWSKI. Illinois. Chairman

SAM M. GIBBONS. Florida
JJ. PICKLE, Texas
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jr., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
MICHAEL A. ANDREWS, Texas
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM MCDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
L.F. PAYNE, Virginia
RICHARD E. NEAL, Massachusetts
PETER HOAGLAND, Nebraska
MICHAEL R. MCNULTY, New York
MIKE KOPETSKI, Oregon
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
MEL REYNOLDS, Illinois

BILL ARCHER, Texas
PHILIP M. CRANE, Illinois
BILL THOMAS, California
E. CLAY SHAW, JR., Florida
DON SUNDQUIST, Tennessee
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
FRED GRANDY, Iowa
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania
DAVE CAMP, Michigan

Janice Mays, Chief Counsel and Staff Director
Charles M. Brain, Assistant Staff Director
Philup D. MoseLEY, Minority Chief of Staff

(II)

CONTENTS

Page

Part 1 (March 9, 10, 16, and 17, 1993) 1

Part 2 (March 23, 31; and AprH 1, 1993) 651

Press releases of Friday, February 26, 1993, and Friday, March 12, 1993,

announcing the hearings 2

WITNESSES

Office of Management and Budget, Hon. Leon E. Panetta, Director 9

Council of Economic Advisers, Hon. Laura D'Andrea Tyson, Chair 69

U.S. Department of the Treasury, Hon. Lloyd Bentsen, Secretary 124

U.S. Department of Health and Human Services, Hon. Donna E. Shalala,

Secretary 221

Congressional Budget Office, Robert D. Reischauer, Ph.D., Director 314

Acevedo, Hon. Hector Luis, Mayor, City of San Juan, P.R 1249

Air Products & Chemicals, Inc., Dexter F. Baker 1419

Alderson, Gterald, Business Council for a Sustainable Energy Future, and

Kenetech Corp 784

All Pacific Mortgage Co., Concord, Calif., Herbert B. Tasker 891

American Automotive Leasing Association, James S. Frank 1218

American Bar Association, Section of Taxation, Albert C. O'Neill, Jr 512

American Council for Capital Formation, Mark Bloomfield 378

American Electronics Association, Robert DeHaven 1486

American Gas Association, Richard E. Terry 735

American Great Lakes Ports, Anne D. Aylward, Davis Helberg, and John

J. Terpstra 625

American Hotel & Motel Association, Darryl Hartley-Leonard 999

American Institute of Certified Public Accountants, Leonard Podolin 519

American Legion, James B. Hubbard 1116

American Petroleum Institute, Victor G. Beghini 748

American Public Power Association, Paul R. Fry 700

American Public Transit Association, Robert Belcaster 1135

American Trucking Associations, Thomas J. Donohue 392

American Waterways Operators, Joseph A. Farrell 619

Ames, Eugene L., Jr., Independent Petroleum Association of America, and

Venus Oil Co 775

Appreciated Property Working Group, Rear Adm. David M. Cooney, USN

(Ret.) 1074

Association of Postconsumer Plastics Recycler, Dennis M. Sabourin 809

Atkins, Elrod & Co., Oriando, Fla., Robert Elrod 951

Aylward, Anne D., Massachusetts Port Authority, American Great Lakes

Ports of Tacoma and Seattle 625

Baker, Dexter F., Committee on Royalty Teixation, and Air Products &

Chemicals, Inc 1419

Beghini, Victor G., American Petroleum Institute, and Marathon Oil Co 748

Belcaster, Robert, American Public Transit Association and Chicago Transit

Authority 1135

Berman, Chip, National Restaurant Association and Outta the Way Cafe 1009

Bemal, His Excellency Richard L., Ambassador of Jamaica, CBI Ambassadors

Group 1303

(III)

Page

Bore-Wamer Security Corp., Donald C. Trauscht 1124

Boyle, R. Emmett, Ormet Corp 1195

Bloomiield, Mark, American Council for Capital Formation 378

Brandt, Helmut, Lunt Manufacturing Co., Inc 1155

Bretz, Thomas R., Royalty Coalition, and Price Waterhouse 1408

Bucks, Dan R., Multistate Tax Commission 1466

Bumham, Duane L. (See Emergency Committee for American Trade.)

Business Council for a Sustainable Energy Future, Gerald Alderson 784

Campbell, Nancy Duff, National Women's Law Center 1095

Caribbean/Latin American Action, Peter B. Johnson 1379

Carrion, Arturo, Puerto Rico Private Sector 936 Coalition, and Puerto Rico

Bankers Association 1267

CBI Ambassadors Group, His Excellency Richard L, Bemal, Ambassador

of Jamaica 1303

Chapler, Ted R., Iowa Finance Authority 1163

Chemical Manufacturers Association, J. Roger Hirl 599

Chicago Transit Authority, Robert Belcaster 1135

Collie, H. Chris, Employee Relocation Council 1062

Colorado, Hon. Antonio J., former Resident Conmnissioner of Puerto Rico 1259

Committee on Royalty Taxation, Dexter F. Baker 1419

Computer and Business Equipment Manufacturers Association, Oliver R.

Smoot 1477

Cook, Harry N., National Waterways Conference, Inc 633

Cooney, Rear Adm. David M., USN (Ret.), Appreciated Property Working

Group, and (joodwill Industries of America, Inc 1074

Corrada Del Rio, Hon. Baltasar, Secretary of State from the Commonwealth

of P*uerto Rico 480

Correll, Donald L., National Association of Water Companies, and United

Water Resources 1223

Council on Research and Technology (CORETECH), Robert Z. Lawrence 1535

Dahlka, Edward A., Jr., Equipment Leasing Association of America 609

Deferral Preservation Coalition, Paul Oosterhuis 1433

de Ferrer, Miriam J. Ramirez, M.D., Puerto Ricans in Civic Action 1337

DeHaven, Robert, American Electronics Association, and Quality Systems

Inc 1486

Donahue, Thomas J., American Trucking Associations 392

Dwars, Peter R., National Council of State Housing Agencies, and Illinois

Housing Development Authority 912

Edison Electric Institute, Edward F. Mitchell 652

Electronic Industries Association, William A. Warren 1490

Elena, Luis P. Costas, Puerto Ricans in Civic Action , 1337

Elrod, Robert, National Association of Home Builders, and Atkins, Elrod

&Co 951

Emergency Committee for American Trade, Robert L. McNeill on behalf of

Duane L. Bumham 1505

Employee Relocation Council, H. Chris Collie 1062

Enterprise Foundation, F. Barton Harvey III 844

Environmental and Energy Study Institute, Dawn Erlandson 1086

Equipment Leasing Association of America, Edward A. Dahlka, Jr 609

Erlandson, Dawn, Friends of the Earth, and Environmental and Energy

Study Institute 1086

Fair Housing Implementation Office, Yonkers, N.Y., Karen V. Hill 833

Farmer, F. Sfcott, United States Council for International Business 1516

Farrell, Joseph A., American Waterways Operators 619

Feldstein, Hon. Martin, Harvard University, and former Chairman, Council

of Economic Advisers 361

Food Marketing Institute, Harry Sullivan 972

Foster, J.D., Tax Foundation 1524

Frank, James S., American Automotive Leasing Association, and Wheels,

Inc 1218

Friedman, Eisenstein, Raemer & Schwartz, Mark Mann 1150

Friends of the Earth, Dawn Erlandson 1086

Fry, Paul R., American Public Power Association 700

Gackenbach, Julie Leigh, U.S. Chamber of Commerce 573

General Aviation Manufacturers Association, Edward W. Stimpson 1144

Gladstone, David, National Association of Business Development Companies .. 409
Glunt, Roger, National Association of Home Builders, and Glunt Building

Co.. Inc 939

Page

Goodwill Industries of America, Inc., Rear Adm. David M. Cooney (Ret.) 1074

Gordon, Arthur I., New York State Society of Certified Public Accountants 534

Grogan, Paul S., Local Initiatives Support Corp 863

Hackard, Michael A., National Realty Committee, and Hackard & Taylor 938

Hall, Paulette, Maryland Department of Economic and Employment Develop-
ment 1129

Hartley-Leonard, Darryl, American Hotel & Motel Association; Hyatt Hotels

Corp.; U.S. Travel & Tourism Board; and Travel & Tourism Government

Affairs Council 999

Harvey, F. Barton, III, Enterprise Foundation 844

Hauptfuhrer, Robert P., Natural Gas Supply Association, and Oryx Energy

Co 790

Helberg, Davis, Seaway Port Authority of Duluth, Minn., Massachusetts Port

Authority, American Great Lakes Ports, and Ports of Tacoma and Seattle ... 625

Hewlett-Packard Co., Palo Alto, Calif., John Young 1459

Hill, Karen V., National Low Income Housing Coalition, and Fair Housing

Implementation Office 833

Hirl, J. Roger, Chemical Manufacturers Association and Occidental Chemical

Corp., Dallas, Tex 599

Holder, Richard G., U.S. Aluminum Association, and Reynolds Metals Co 1174

Hotel Employees and Restaurant Employees International Union, AFL-CIO,

Robert E. Juliano 1039

Huard, Paul R., National Association of Manufacturers 587

Hubbard, James B., American Legion 1116

Hurley, Gerard F., National Club Association 1055

Hyatt Hotels Coro., Darryl Hartley-Leonard 999

Illinois Housing Development Authority, Peter R. Dwars 912

Independent Petroleum Association of America, Eugene L. Ames, Jr 775

Intercontinental Energy Corp., Boston, Mass., Ellen S. Roy 800

Iowa Finance Authority, Ted R. Chapler 1163

Iowa Utilities Board, Hon. Dennis J. Nagel 687

Jackson, Carlos, Los Angeles County Community Development Commission ... 826

Jamaica, Government of, His Excellency Richard L. Bemal, Ambassador 1303

James McGraw, Inc., George W. Sydnor, Jr 962

Job Opportunities Business Symposium, Donald C. Trauscht 1124

Johnson, Peter B., Caribbean/Latin American Action 1379

Juliano, Robert E., Hotel Employees and Restaurant Employees Inter-
national, AFL-CIO 1039

Kanner, Marty, Public Power Council 665

Keating, David, National Taxpayers Union 444

Kenetech Corp., San Francisco, Calif., Gerald Alderson 784

King, Aubrey, Travel and Tourism Government Affairs Council 450

Lashof, Daniel A., Natural Resources Defense Council 814

Lawrence, Robert Z., Council on Research and Technology (CORETECH) 1535

League of American Producers, George A. Wachtel 1029

Lebron, Daniel, Puerto Rico Private Sector 936 Coalition, and Puerto Rico

Manufacturers Association 1269

Leffler, Marvin, National Council of Salesmen's Organizations 1023

Leonard, Richard W., Oil, Chemical and Atomic Workers International Union,

AFL-CIO 1355

Local Initiatives Support Corp., Paul S. Grogan 863

Los Angeles County Community Development Commission, Carlos Jackson .... 826
Losey, Michael R., Section 127 Coalition, and Society for Human Resource

Management 1078

Lucas, J. Stephen, National Grain and Feed Association, and Louis Dreyfus

Corp., Wilton, CT 625

Lunt Manufacturing Co., Inc., Helmut Brandt 1155

Mann, Mark, Friedman, Eisenstein, Raemer & Schwartz 1150

Marathon Oil Co., Victor G. Beghini 748

Marriott Corp., Frank Nerney 1120

Maryland Community Development Administration, Trudy P. McFall 899

Maryland Department of Economic and Employment Development, Paulette

Hall 1129

Massachusetts Port Authority, Anne D. Aylward, Davis Helberg, and John

J. Terpstra 625

McCarthy, Hon. Karen, National Conference of State Legislatures, and Chair,

House Ways and Means Committee, Missouri House of Representatives 1241

Page

McFaU, Trudy P., National Council of State Housing Agencies, and Maryland

Community Development Administration 899

McNeill, Robert L., Emergency Committee for American Trade (on behalf

of Duane L. Bumham) 1505

McSteen, Martha A., National Committee to Preserve Social Security and

Medicare 458

Missouri House of Representatives, Hon. Karen McCarthy, Chair, Committee

on Ways and Means 1241

Mitchell, Edward F., Edison Electric Institute, and Potomac Electric Power

Co 652

Motley, John J., Ill, National Federation of Independent Business 401

Mortgage Bankers Association of America, Herbert B. Tasker 891

Multistate Tax Commission, Dan R. Bucks 1466

Munoz, Eric, National Puerto Rican Coalition, Inc 1349

Murphy, Michael J., Tax Executives Institute, Inc 547

Nagel, Hon. Dennis J., National Association of Regulatory Utility Commis-
sioners, and Iowa UtUities Board 687

National Assisted Housing Management Association, Charles S. Wilkins, Jr ... 857

National Association of Business Development Companies, David Gladstone ... 409

National Association of Home Builders, Roger Glunt 939

National Association of Manufacturers, Paul R. Huard 587

National Association of Realtors, Robert Elrod 951

National Association of Regulatory Utility Conmiissioners, Hon. Dennis J.

Nagel 687

National Association of Water Companies, Donald L. Correll 1223

National Association of Wholesaler-Distributors, George W. Sydnor, Jr 962

National Club Association, Gerard F. Hurley 1055

National Committee to Preserve Social Security and Medicare, Martha A.

McSteen 458

National Conference of State Legislatures, Hon. Karen McCarthy 1241

National Corporation for Housing Partnerships, Charles S. Wilkins, Jr 857

National Council of Salesmen's Organizations, Inc., Marvin Leffler 1023

National Council of State Housing Agencies:

Trudy P. McFall 899

Peter R. Dwars 912

National Employment Opportunities Network, Frank Nemey 1120

National Federation of Independent Business, John J. Motley III 401

National Foreign Trade Council, Inc., John E. Pepper 1395

National Grain and Feed Association, J. Stephen Lucas 642

National Independent Energy Producers, Ellen S. Roy 800

National Low Income Housing Coalition, Karen V. Hill 833

National Puerto Rican Coalition, Inc., Eric Munoz ; 1349

National Realty Committee:

Steven A. Wechsler 927

Michael A. Hackard 938

National Restaurant Association, Chip Berman 1009

National Taxpayers Union, David Keating 444

National Waterways Conference, Inc., Hany N. Cook 633

National Women's Law Center, Nancy Duff Campbell 1095

Natural Gas Supply Association, Robert P. Hauptfuhrer 790

Natural Resources Defense Council, Daniel A. Lashof 814

Navajo Nation, Peterson Zah 433

Nemey, Frank, National Employment Opportunities Network, and Marriott

Corp 1120

New York State Society of Certified Public Accountants, Arthur I. Gordon 534

Nordberg, Carl A., Jr., Puerto Rico, U.S.A. Foundation 1291

Northwest Aluminum Co., Brett Wilcox 1188

Norton, Hon. Eleanor Holmes, a Delegate to Congress from the District of

Columbia 465

Occidental Chemical Corp., Dallas Tex., J. Roger Hirl 599

Oil, Chemcial and Atomic Workers International Union, AFL-CIO, Richard

W. Leonard 1355

O'Neill, Albert C, Jr., American Bar Association, Section of Taxation 512

Oosterhuis, Paul, Deferral Preservation Coalition 1433

Ormet Corp., R. Emmett Boyle 1195

Oryx Energy Co., Dallas, Tex., Robert P. Hauptfuhrer 790

Outta the Way Cafe, Chip Berman 1009

People's Energy Corp., Chicago, 111., Richard E. Terry 735

VII

Page

Pepper, John E., National Foreign Trade Council, Inc., and Procter & Gamble

Co 1395

Petroleum Marketers Association of America, Douglas Woosnam 767

Podolin, Leonard, American Institute of Certified Public Accountants 519

Port of Tacoma, Wash., John J. Terpstra 625

Ports of Tacoma and Seattle, Anne D. Aylward, Davis Helberg, and John

J. Terpstra 625

Potomac Electric Power Co., Edward F. Mitchell 652

Price Waterhouse, Thomas R. Bretz 1408

Principato, Anthony J., Tambrands Inc 1440

Procter & Gamble Co., John E. Pepper 1395

Public Power Council, Marty Kanner 665

Puerto Ricans in Civic Action, Miriam J. Ramirez de Ferer, M.D., and Luis

P. Costas Elena 1337

Puerto Rico, Commonwealth of, Hon. Baltasar Corrada Del Rio, Secretary

of State 480

Puerto Rico Bankers Association, Arturo Carrion 1267

Puerto Rico Manufacturers Association, Daniel Lebron 1267

Puerto Rico Private Sector 936 Coalition, Daniel Lebron and Arturo Carrion .. 1267

Puerto Rico, U.S.A. Foundation, Carl A. Nordberg, Jr 1291

Quality Systems Inc., Robert DeHaven 1486

Railroad Commission of Texas, Hon. Barry A. Williamson 676

Reynolds Metals Co., Richard G. Holder 1174

Romero-Barcelo, Hon. Carlos A., Resident Commissioner in Congress from

the Commonwealth of Puerto Rico 470

Rowell-Williams, Mollene, Taco Bell Corp 1112

Roy, Ellen S., National Independent Energy Producers, and Intercontinental

Energy Corp 800

Royalty Coalition, Thomas R. Bretz 1408

Sabourin, Dennis M., Wellman, Inc., and Association of Postconsumer Plastics

Recycler 809

San Juan P.R., City of, Hon. Hector Luis Acevedo, Mayor 1249

Santini, James D., Travel and Tourism Government Affairs Council 450

Seaway Port Authority of Duluth, Minn., Davis Helberg 625

Section 127 Coalition, Michael R. Losey 1078

Sinkler, Inc., South Hampton, Pa., Douglas Woosnam 767

Smoot, Oliver R., Computer and Business Equipment Manufacturers Associa-
tion 1477

Society for Human Resource Management, Michael R. Losey 1078

Stimpson, Edward W., General Aviation Manufacturers Association 1144

Sullivan, Harry, Tax Reform Action Coalition, and Food Marketing Institute .. 972
Sydnor, George W., Jr., National Association of Wholesaler-Distributors, and

James McGtraw, Inc 962

Taco Bell Corp., Mollene Rowell-Williams 1112

Tambrands, Inc., Anthony J. Principato 1440

Tasker, Herbert J., Mortgage Bankers Association of America, and All Pacific

Mortgage Co 891

Tax Executives Institute, Inc., Michael J. Murphy 547

Tax Foundation, J.D. Foster 1524

Tax Reform Action Coalition, Harry Sullivan 972

Terpstra, John J., Port of Tacoma, Wash., Massachusetts Port Authority,

Ainerican Great Lakes Ports, and Ports of Tacoma and Seattle 625

Terry, Richard E., American Gas Association, and Peoples Energy Corp 735

Theater and Performing Arts Coalition, George A. Wachtel 1029

Trauscht, Donald C, Job Opportunities Business Symposium and Borg-War-

ner Corp 1124

Travel & Tourism Government Affairs Council:

James D. Santini and Aubrey King 450

Darryl Hartley- Leonard 999

TRW Inc., Cleveland, Ohio, William A. Warren 1490

Tucker, Mitchell D., United Rubber, Cork, Linoleum & Plastic Workers of

America International Union , 1367

United Rubber, Cork, Linoleum & Plastic Workers of America International

Union, AFL-CIO, Mitchell D. Tucker 1367

United States Council for International Business, F. Scott Farmer 1516

United Water Resources, Donald L. Correll 1223

U.S. Aluminum Association, Richard G. Holder 1174

U.S. Chamber of Commerce, Julie Leigh Gackenbach 573

VIII

Page

U.S. Council for International Business, F. Scott Farmer 1516

U.S. Travel & Tourism Advisory Board, Darryl Hartley-Leonard 999

Velazquez, Hon. Nydia M., a Representative in Congress from the State

of New Yorii 1238

Venus Oil Co., Eugene L. Ames, Jr 775

Warren, William A., Electronic Industries Association, and TRW, Inc 1490

Watchel, George A., Theater and Performing Arts Coalition, and League

of American Theaters and Producers 1029

Wechsler, Steven A., National Realty Committee 927

Wellman, Inc., Shrewsbury, N.J., Dennis M. Sabourin 809

Wheels, Inc., James S. Frank 1218

Wilcox, Brett, Northwest Aluminum Co 1188

Wilkins, Charles S., Jr., National Assisted Housing Management Association,

and National Corporation for Housing Partnerships 857

Williamson, Hon. Barry A., Railroad Commission of Texas 676

Woosnam, Douglas, Petroleum Marketers Association of America, and

Sinkler, Inc 767

Young, John, Hewlett-Packard Co 1459

Zah, Peterson, Navajo Nation 433

SUBMISSIONS FOR THE RECORD

Acme Boot Co., Inc., statement 1546

Agnew, Timothy P., Finance Authority of Maine, and Council of Development

Finance Agencies, Washington, D.C., Joint statement and attachment 1619

American Bankers Association, Henry Ruempler, letter 1548

American Boiler Manufacturers Association, statement 1550

American College of Rheumatology, statement 1551

American Horse Council, statement and attachment 1555

American Methanol Institute, Raymond A. Lewis, statement 1564

American Movers Conference, and Household Goods Carriers' Bureau, Joseph

M. Harrison and Ann Wilson, joint statement 1566

American Society of Pension Actuaries, statement 1568

American Wind Energy Association, Michael L. Marvin, statement 1570

Association of Local Housing Finance Agencies, statement 1573

Bennett, Mary C, Continental European Insurance Coalition, letter 1598

Bergland, Bob, National Rural Electric Cooperative Association, statement 1755

Blocn, Thomas M., H&R Block, Inc., statement and attachments 1635

Center for the Study of Economics, Columbia, Md., Steven Cord, letter and

attachments 1578

Chicago (111.) Convention & Tourism Bureau, Gerald J. Roper, statement 1582

Citizens for an Alternative Tax System, Glendale, CaliL, Steven L. Hayes,

statement 1584

Coalition to FVeserve the Low Income Housing Tax Credit, and National

Leased Housing Association, joint statement and attachments 1733

Coffey, Matthew B., National Tooling &. Machining Association, statement 1759

College and University Personnel Association, statement 1593

Computer Leasing & Remarketing Association, William H. Sells III, letter

and attachments 1595

Continental European Insurance Coalition, Leonard B. Terr, Philip D. Morri-
son, and Mary C. Bennett, letter 1598

Cord, Steven, Center for the Study of Economics, Columbia, Md., letter and

attachments 1578

Council for Rural Housing and Development, statement 1602

Council of Development Finance Agencies, and Finance Authority of Maine,

Timothy P. Agnew, joint statement and attachment 1619

Du Pont Co.; Eastman Kodak Co.; Emerson Electric Co.; Genentech, Inc.;
General Electric Co.; General Mills, Inc.; General Motors Corp.; Hallmark
Cards, Inc.; Honeywell, Inc.; IBM Corp.; Merck & Co., Inc.; 3M Co.;
PepsiCo, Inc.; Philip Morris Cos., Inc.; Pillsbury Co.; Procter & Gamble
Co.; Quaker Oats Co; Sara Lee Corp.; Westinghouse Electric Corp., joint

statement 1607

Dyer, Herbert L., State Teachers Retirement System of Ohio, letter 1779

Eastman Kodak Co. (See listing for Du Pont Co.)
Emerson Electric Co. (See listing for Du Pont Co.)

European-American Chamber oT Commerce in Washington, D.C., Inc., state-
ment 1611

Page
Finance Authority of Maine, and Council of Development Finance Agencies,

Timothy P. Agnew, joint statement and attachment 1619

Fingado, David K., Rochester (N.Y.) Gas and Electric Corp., letter 1777

Foreign-Based Corp. Action Group, statement 1625

Fox, Eric R., Ivins, Phillips & Baker, Washington, D.C., letter 1630

Gas Processors Association, Tulsa, Okla., Mark F. Sutton, statement 1632

GJenentech, Inc. (See listing for Du Pont Co.)

General Electric Co. (See listing for Du Pont Co.)

General Mills, Inc. (See listing for Du Pont Co.)

General Motors Corp. (See listing for Du Pont Co.)

George, Tony, Indianapolis (Ind.) Motor Speedway Corp., letter (forwarded

by Hon. Andy Jacobs, Jr., a Representative in Congress from the State

of Indiana) 1664

Gregg, R. T., United States Telephone Association, statement 1787

H&R Block, Inc., Thomas M. Bloch, statement and attachments 1635

Hallmark Cards, Inc. (See listing for Du Pont Co.)

Harrison, Joseph M., American Movers Conference and Household Goods

Carriers' Bureau, joint statement 1566

Harvey, Campbell K., Duke University, Fuqua School of Business, Durham,

N.C., statement 1644

Harvey, George B., Pitney Bowes, Stamford, Conn., letter 1763

Hayes, Steven L., Citizens for an Alternative Tax System, Glendale, Calif.,

statement 1584

Honeywell, Inc. (See listing for Du Pont Co.)

Household (Joods Carriers Bureau, and American Movers Conference, Joseph

M. Harrison and Ann Wilson, joint statement 1566

Hufbauer, Gary C, Institute for International Economics, statement 1540

IBM Corp. (See listing for Du Pont Co.)

Independent Sector, Brian O'Connell, statement and attachment 1650

Indianapolis (Ind.) Motor Speedway Corp., Tony George, letter (forwarded

by Hon. Andy Jacobs, Jr., a Representative in Congress from the State

of Indiana) 1664

Inofetz Phase One, Inc., Philadelphia, Pa., Carl V.J. Norman, statement and

attachment 1666

International Trade Council, Peter T. Nelsen, statement 1503

Interstate Natural Gas Association of America, John Riordan, statement 1675

Knox, Dave, Tech CBI, Inc., Cayey, P.R., letter 1783

Lacey, Richard A., National Employment Opportunities Network, statement .. 1713

Lema, Joseph E., National Coal Association, statement 1710

Lewis, Raymond A., American Methanol Institute, statement 1564

Marvin, Michael L., American Wind Energy Association, statement 1570

McCuen, Douglas R., Niagara Mohawk Power Corp., Albany, N.Y., letter 1760

McEachron, Donald L., Drexel University, Biomedical Engineering and

Science Institute, Philadelphia, Pa., statement 1683

Merck & Co., Inc. (See listing for Du Pont Co.)

Milwaukee (Wis.), City of, Hon. John 0. Norquist, Mayor, statement 1690

3M Co. (See listing for Du Pont Co.)

Monsanto Co., St. Louis, Mo., Richard A. Overton, statement 1694

Morrison, Philip D., Continental European Insurance Coalition, letter 1598

National Automobile Dealers Association, statement 1702

National Basketball Association, statement 1703

National Clay Pipe Institute, E. J. Newbould, statement 1707

National Coal Association, Joseph E. Lema, statement 1710

National Emoloyment Opportunities Network, Richard A. Lacey, statement ... 1713

National Hocltey League, statement 1717

National Housing Law F*roject, Daniel D. Pearlman and Roberta L. Youmans,

statement 1725

National Hydropower Association, statement and attachment 671

National Leased Housing Association, and Coalition to Preserve the Low

Income Housing Tax Credit, joint statement and attachments 1733

National Marine Manufacturers Association, statement 1753

National Rural Electric Cooperative Association, Bob Bergland, statement 1755

National Tooling & Machining Association, Matthew B. Coffey, statement 1759

Native American Affairs, Subcommittee on. Committee on Natural Resources,

Hon. Bill Richardson, Chairman, and a Representative in Congress from

the State of New Mexico, letter 440

Nelsen, Peter T., International Trade Council, statement 1503

Newbould, E. J., National Clay Pipe Institute, statement 1707

Page

Niagara Mohawk Power Corp., Albany, N.Y., Douglas R. McCuen, letter 1760

Norman, Carl V.J., Inofetz Phase One, Inc., Philadelphia, Pa., statement

and attachment 1666

Norquist, Hon. John O., Mayor, City of Milwaukee (Wis.), statement 1690

O'Connell, Brian, Independent Sector, statement and attachment 1650

Overton, Richard A., Monsanto Co., St. Louis, Mo., statement 1694

Pearlman, Daniel D., National Housing Law Project, statement 1725

PepsiCo, Inc. (See listing for Du Pont Co.)

Philip Morris Cos., Inc. (See listing for Du Pont Co.)

Pillsbury Co. (See listing for Du Pont Co.)

Pitney Bowes, Stamford, Conn., GeoiTge B. Harvey, letter 1763

Procter & Gamble (See listing for Du Pont Co.)

Public Securities Association, statement 1765

Quaker Oats Co. (See listing for Du Pont Co.)

Renal Physicians Association, statement 1772

Richardson, Hon. Bill, Chairman, Subcommittee on Native American Affairs,

Committee on Natural Resources, and a Representative in Congress from

the State of New Mexico, letter 440

Riordan, John, Interstate Natural Gas Association of America, statement 1675

Rochester (N.Y.) Gas and Electric Corp., David K. Fingado, letter 1777

Roper, Gerald J., Chicago (111.) Convention & Tourism Bureau, statement 1582

Ruempler, Heniy, American Bankers Association, letter 1546

Sara Lee Corp. (See listing for Du Pont Co.)

Sells, William H., Ill, Computer Leasing & Remarketing Association, letter

and attachments 1597

State Teachers Retirement System of Ohio, Herbert L. Dyer, letter 1779

Sutton, Mark F., Gas Processors Association, Tulsa, Okla., statement 1632

Synthetic Organic Chemical Manufacturers Association, statement 1780

Tech CBI, Inc., Cayey, P.R., Dave Knox, letter 1783

Terr, Leonard B., Continental European Insurance Coalition, letter 1598

Udell, Walter B., Quakertown, Pa., letter 1784

United States Telephone Association, statement 1787

Westinghouse Electric Corp. (See listing for Du Pont Co.)

Wilson, Ann, American Movers Conference, and Household Goods Carriers'

Bureau, joint statement 1566

Youmans, Roberta L., National Housing Law Project, joint statement 1725

Young, Eric W., Columbia, Md., letter 1788

Zelenak, Lawrence, University of North Carolina at Chapel Hill, statement .... 1790

PRESroENT CLINTON'S PROPOSALS FOR PUB-
Lie INVESTMENT AND DEFICIT REDUCTION

TUESDAY, MARCH 23, 1993

House of Representatives,
Committee on Ways and Means,

Washington, DC.

The committee met, pursuant to call, at 10 a.m., in room 1100,
Longworth House Office Building, Hon. Michael A. Andrews presid-
ing.

Mr. Andrews. I would like to call the hearing to order, please,
and ask our first panel members to please take their seats.

Good morning. Today, we sire continuing our series of hearings
on President Clmton's economic and deficit reduction plan.

First, we will hear fi-om three panels, each consisting of rep-
resentatives of taxpayers who would be affected by the administra-
tion's proposed energy tax. We look forward to hearing about the
potential impact of that broad-based tax on consumers, producers,
marketers, transporters, and regulators.

In addition, we will hear fi*om representatives of local govern-
ments and organizations that are interested in housing and eco-
nomic development. We expect these witnesses to testify on the
President's proposals with respect to low-income housing, mortgage
revenue bonds, enterprise zones, and other measures providing re-
Uef to our Nation's distressed communities.

Finally, we will hear fi-om a panel representing State housing
agencies and the real estate and mortgage banking industries.
Tnese witnesses are expected to testify regarding provisions in
President Clinton's proposal that would affect housing and real es-
tate, such as the provisions relating to the low-income housing tax
credit, passive loss rules, and pension investments.

I would like to suggest to my fidends fi*om the producing States
who are here to testify today not to misread anything into the fact
that Congressman Archer and I are in charge. I wish it were true.

I would now like to welcome our first panel to the committee. If
each of you, please, as we go from my left to my right, would intro-
duce yourself and state who you represent, so that your testimony
may be made a part of the record, and please, if possible, narrate
your testimony. Please give us your thoughts and then we wiU open
the panel for questions.

First, Mr. Archer, did you have a statement you wanted to make?

Mr. Archer. Mr. Chairman, thank you very much. I just want
to welcome the gentlemen here before the committee, and we look
forward to your testimony today.

(651)

652

Mr. Andrews. Would any other member of the committee like to
make an opening statement?

Mr. Mitchell, we will proceed with you.

STATEMENT OF EDWARD F. MITCHELL, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, POTOMAC ELECTRIC POWER CO.,
WASHINGTON, DC, AND CHAIRMAN, EDISON ELECTRIC IN-
STITUTE

Mr. Mitchell. My name is Edward F. Mitchell. I am chairman
and CEO of the Potomac Electric Power Co. and here today rep-
resenting the Edison Electric Institute as chairman of that organi-
zation.

Thank you very much, Mr. Chairman, for the opportunity to
present some concerns to you. We have also had the opportunity,
and greatly appreciate it, to meet with the administration in var-
ious departments and we appreciate the opportunity to talk with
them. We have no idea what the outcome of that is as of the cur-
rent time, of course.

What I want to do is focus on the Btu energy tax and touch on
the corporate tax increase, the investment tax credit and the pro-
posed changes to the alternative minimum tax.

Let me begin by saying that our organization is strongly support-
ive of the Congress and of the administration in trying to find some
way to reduce the deficit and to put a little boom into the economy.
We are strongly supportive of every activity there, and many of the
President's proposals will help reach those goals.

We would suggest to you, however, that the proposed energy tax
will not stimulate the economy and should be rejected. We do have
an alternative tax proposal to suggest to the committee.

We are very concerned that the Btu energy tax is going to have
a much greater negative effect on our Nation's economy than has
been projected. We ask you to c£irefully weigh the fact that low cost
and reUable energy is a fundamental ingredient of our economy. It
has been responsible for our economic well-being for decades and
will in the future.

President Clinton's proposed energy tax, if enacted, will result in
a substantial increase in the price of energy over time and will
turn what has been an economic strength into a weakness. For ex-
ample, for PEPCO, the proposed Btu energy tax, when it becomes
fiilly effective, will result in an annual tax increase of over $76 mil-
lion.

If you then figure in the piggyback tax effects, and this is one
thing that everyone has to understand, that the gross receipts tax
will go in on top of the energy tax as it is currently proposed, that
would increase our $76 million tax increase to $80 milKon. That is,
in one feU swoop, a 30-percent increase in our tax base. Our tax
load. Our pajonent to the Government in taxes. That does not in-
clude the impact of the change in the corporate income tax rate.

Although well-intentioned, we would suggest to you that the en-
ergy teix will increase the price of every U.S.-produced good in this
country and service and will end up making our Nation less com-
petitive in the world market.

653

The whole purpose of the proposal is to strengthen the economy,
create jobs, and it is quite likely the energy tax will do somewhat
the opposite from what everyone would expect it to do.

Since the Btu energy tax will increase the price of energy
consumed in the United States and, therefore, increase the price of
every domestically-produced product, it will surely harm us on the
global market. It is a tax on production, and the direct and indirect
effects of the tax will increase the price of ever3^hing produced in
the country and do nothing on the imports coming in from the glob-
al marketplace.

So, ironically, what we are doing with this process is not only
making us less competitive but, in effect, we are providing a sub-
sidy for foreign imports. We would suggest that tiiat is of signifi-
cant concern to us and to this committee.

If you look at our large industrial customers, which will be the
most significantly affected, they will bear the greatest percentage
increase. In some regions of the country those increases will exceed
10 percent. That is going to be very, very difficiilt. Many of the
basic industries, those which drives our whole economy, such as,
steel, aluminum, chemical, paper, agriculture, airlines, which
consume large amounts of energy, will be adversely impacted by
the implementation of this tax.

So at the time when our industries really should be focusing on
productivity gains, we are, instead, going to have to be focusing on
diverting all of our energy and resources to handle the Btu energy
tax.

If a new energy tax is required, we beUeve the administration
and the Congress should seriously consider and evaluate a broad-
based consumption tax which can be imposed in compUance with
the GATT trade rules on imported goods and remove from U.S. ex-
ports in order to maintain our competitive position in the world
marketplace. If we don't do that, we are at a huge disadvantage
and will remain so.

A broad-based consumption tax can be designed to be less regres-
sive. It could also help to resolve both our budget deficit and our
health care concerns, which will be shortly upon us in the legisla-
tive arena. Although no one really wants to consider a new tax, be-
fore we adopt the proposed energy tax which will really hurt the
economy, and hurt U.S. jobs, we need to seriously consider the al-
ternatives.

With respect to the proposed increase in the corporate income
tax, I was a little shocked to hear the proposal was going to be
made retroactive. For a regulated industry that, of coiirse, means
that whatever has been done for that retroactive period, you are
hereby forevermore excluded from recovering that as a cost. That
is literally impossible to do. No commission will allow retroactive
recovery of costs throughout this Nation.

So any corporate tax increase, we would suggest to you, should
have an effective date which takes into account a regulatory delay
which could be an5nvhere from 9 to 18 months. If, however, the
commission or the committee feels that a faster action is required,
that time can be shortened but it will still have the same ultimate
end result.

654

We do support the President's efforts to reenact the investment
tax credit. We would suggest to you, however, that the proposed in-
cremental rate, the ITC, really pimishes organizations which are
heavily capital intensive. ITiat is built in to the system. It would
be much better if the ITC were to be a broader based, an overall
investment, not just incremental.

Incremental is going counter to what the Congress has tried to
do with title passage of the Energy Act, for example, to create a
competitive market. But then putting into place something that
clearly penaUzes the utility and favors someone who did not actu-
ally build a power plant, let's say several years ago, or in the base
year, that is a great inequity that really should be dealt with.

The President's alternative minimum tax proposal, we beheve, is
good, and it will s\irely lessen the somewhat onerous impact of the
AMT on capital-intensive industries that we have had in recent
years.

In conclusion, we would suggest to you the best way to reduce
the deficit is, of course, as I am sure all of you support, to reduce
and control spending. However, if a tax increase is needed, then we
encourage you to fairly evaluate a broad-based consmnption tax.
The proposed Btu energy tax is unwise economic, environmental
and energy policy. It would seriously damage the economic recovery
and will h\irt the United States on the international market.

If it is the will of the Congress to put the proposed Btu energy
tax in effect, we would strongly iu;ge that the imposition of that tax
be in the form of an excise tax. This will minimize the cost of the
piggyback tax that I talked about before and will help protect oxir
customers.

That, basically, is what we are after here. We are concerned —
we don't pay taxes ultimately in the long nm. The consumers of
the United States, the ratepayers, pay the taxes, and our concern
is in that arena now.

So we appreciate the opportunity to appear this morning, Mr.
Chairman, and we will try to deal with any questions that the com-
mittee might have. Thank you.

Mr. A^fDREWS. Thank you, Mr. Mitchell.

[The prepared statement follows:]

655

STATEMENT

OF THE

EDISON ELECTRIC INSTITUTE

BEFORE THE

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

Mr. Chairman and Members of the Committee:

I am Edward F. Mitchell, Chairman of the Board and Chief Executive
Officer of Potomac Electric Power Company. I appreciate the
opportunity to appear today representing the Edison Electric
Institute (EEI) , as its current Chairman, to present our views on
President Clinton's proposals for public investment and deficit
reduction.

EEI is the association of electric utility companies. Our members
serve 99 percent of all customers served by the investor-owned
segment of the industry. We generate approximately 78 percent of
all electricity in the country and provide electric service to 76
percent of all ultimate electricity customers in the Nation'.

EEI strongly supports the efforts of the President and the Congress
to reduce the federal budget deficit and to promote a strong
economic recovery. The difficult issues to be decided involve how
much and which spending reductions and tax increases, if any, are
needed in order to strengthen the growth in the economy and to
reduce the deficit.

EEI strongly advocates sound economic, environmental, and energy
policies. These policies should be developed so that they are in
consonance with one another. Congress enacted new and strengthened
environmental and energy statutes in 1990 and 1992. The proposed
Btu energy tax must be examined in light of the cost of these new
laws and the effect they will have on our Nation's economy. We
believe the net effect of the proposed Btu energy tax will result
in unsound economic, environmental and energy policy.

Our testimony today focuses on the President's revenue proposals,
including the Btu energy tax, the corporate tax rate increase, as
well as the incremental investment tax credit and the depreciation
changes in the alternative minimum tax. Each of these proposals is
discussed below.

Btu Energy Tax

EEI believes the proposed Btu energy tax has serious economic,
environmental and energy policy implications, each of which are
outlined below and discussed in detail thereafter.

• Economic Impact

- International Competitiveness

- Customer Effects

- Regional Disparities

• Environmental and Energy Policy

• Implementation Concerns

• Btu Energy Tax Summary

Economic Impact

The U.S. economy is the strongest economy in the world, and worker
productivity is higher than in any other nation.' Against this

' Edison Electric Institute (1992) . Statistical Yearbook of the
Electric Utility Industrv/1991. (Washington, DC: Edison Electric
Institute) , p. 1.

- The Washington Post (November 22, 1992). Challenging
Convention on Productivity . (Washington, DC) .

656

background, new taxes can have unintended and undesirable economic
impacts. Careful consideration therefore must be given to the
economic implications of any new tax. A Btu energy tax reduces
economic growth, causes jobs to be lost and increases inflation.
Since a large tax increase would be imposed on a narrow base
(energy expenditures account for only about 8 percent of the gross
domestic product (GDP))', its negative impact is greater than other
possible revenue raising choices.

The harmful impact of the Btu energy tax on the Nation's GDP is
confirmed by a recent study conducted by the National Association
of Manufacturers. This study estimated that the proposed Btu energy
tax could reduce GDP by more than one-half percent in 1996, 1997
and 1998 and reduce employment by more than 600,000 jobs, when the
Btu energy tax is fully phased in^. Other studies have shown lower
job losses, depending upon the effectiveness of monetary policy to
accommodate the tax changes. In our view, while the magnitude of
the impact may be in question, the direction is not. A Btu energy
tax will harm the economy.

International Competitiveness

Since the Btu energy tax will increase the price of energy consumed
in the U.S. and therefore increase the prices of all domestically
produced goods and services, it will harm our Nation's
international competitiveness. The Btu energy tax is a tax on
production; therefore, the direct and indirect effects of the tax
will increase the cost of all goods and services produced in the
U.S., thereby exacerbating the trade deficit as foreign goods
displace U.S. goods in domestic and world markets.

INTERNATIONAL COMPETl

T10N

|rwoRLO mahketsI

U.8.

PRODUCED

OOOOe t KRVICEB

INTERNXnOHALLY

PROOUCED

OOGOS t 8ERVICEe

♦

lUTERlALS

PROOUCnON

coerv

LABOR 1

■p.

ENEBOr
COBT8

Ironically, the proposed Btu energy tax will act as a subsidy for
foreign imports since these goods will be exempt from this tax.
EEI is very concerned about the effect of this tax on U.S. exports
and the exemption the proposed Btu energy tax provides for foreign
imports as highlighted by the following chart.

' Energy Information Administration. Annual Energy Review 1991.
(Washington DC: Energy Information Administration/Department of
Energy) , p.73 .

" National Association of Manufacturers (February 24, 1993).
Testimony of Jerry J. Jasinowski. President, National Ass ociation
of Manufacturers. On the Comparative Merits of the Administ ration's
Energy Tax Proposal and a Broad-Based National Consumption Tax.
Before the Committee on Energy and Natural Resources. United States
Senate. (Washington, DC), p. 15.

657

GROSS DCMFSTIC PRODUCT

jj^^t '990 1$ BILLIONS)

NET IMPOfiTS J69.9 BILLION

IMPORTS

$625.9

Source: DRI /McGraw-Hill U.S. Review, February 1993

Although several of our largest trading partners in Europe and the
Pacific Rim may have higher gasoline taxes, they have generally
rejected other unilateral broad-based energy taxes as too harmful
to their domestic economies and international competitiveness*. So
should we.

Customer Effects

The burden of the Btu energy tax will fall unevenly across income
classes, industries and regions of the economy. It is estimated
that 27 percent of the additional revenue raised by the
Administration's entire tax package will fall on energy consumers*.
A recent Wall Street Journal/NBC News poll, found that 35 percent
of Americans support the energy tax, while 62 percent oppose it.'
EEI has estimated the percentage cost increases on electricity for
each of our customer groups resulting from the proposed Btu energy
tax. The Btu energy tax will cause the average price of
electricity for our customer groups to increase as follows:

Overall Residential Commercial Industrial
Percent 4.2% 3.5% 3.8% 5.9%

Increase'

Note: These percentage increases in the cost of

electricity reflect the fully phased in Btu energy tax
rates but do not include the additional cost effects of
piggyback taxes and the increased corporate tax rate.

Our large industrial customers will be significantly affected.
These customers bear the greatest percentage increase in their cost
of energy of all customer classes from the proposed Btu energy tax.
In some regions of the Nation, the increase in the cost of
electricity will exceed 10 percent for industrial consumers.' With
such price increases, there will be regional and industry
dislocations along with associated job losses. Basic industries,
such as steel, aluminum, chemical, paper, agriculture and airlines,
which consume large amounts of energy, will be significantly and

' lEA Coal Research (August 1990) . Market Mechanisms for
Pollution Control: Impacts for the Coal Industry. (Washington, DC) .

' President Clinton's Revenue Provisions.

'' The Wall Street Journal (March 11, 1993) . Clinton. Seeking
Help for Economic Plan, Mulls Energy-Tax Break on Ethanol. Some
Natural Gas. (Washington, DC) .

* Edison Electric Institute (1993). EEI Summary of President
Clinton's Btu Energy Tax Proposal. (Washington, DC) .

' Edison Electric Institute (1993). Company Estimate of Btu
Energy Tax. (Washington, DC) .

658

adversely affected by energy taxes. At a time when industries need
to concentrate resources on productivity improvements, resources
would be diverted to pay for a Btu energy tax.

In addition, included in the Administration's Btu energy tax
proposal is a provision that calls for the Btu energy tax rates to
be indexed to inflation after 1997, which would worsen the
inflationary effects and the regional disparities inherent in the
proposed Btu energy tax. Further, the indexing provision would
cause an inflationary spiral with Btu energy taxes contributing to
higher inflation and higher inflation contributing to even higher
Btu energy tax rates. Regional disparities would also increase
under the tax since regions with slower economic growth would be
subject to increased Btu energy taxes indexed to the national rate
of inflation, even though these regions' price increases would be
held to lower than average levels because of reduced demand.

A tax on an essential service such as electricity would be
especially regressive for residential consumers. This tax is not
based on the ability to pay. The proposed Btu energy tax is a
major tax increase on low and moderate-income households and senior
citizens. These households spend a greater proportion of their
income on energy needs and generally are financially unable to pay
for additional measures to conserve energy. A recent study by the
Environmental Protection Agency found that consumers in the bottom
20 percent of incomes spend 7.5 percent of their incomes on energy
consumption versus those consumers in the top 20 percent of
incomes, who spend only 4.7 percent.'" Similarly, this tax will
fall on the elderly and others on fixed-incomes at a time when
lower investment earnings and skyrocketing health care costs
already are decreasing their standard of living. This is the worst
type of regressive tax in that it is placed on a necessity. Unlike
a tax on discretionary spending, this tax falls directly on
essential services such as home heating and lighting.

We applaud the Administration's desire to counter the
regressiveness of the proposed Btu energy tax. However, we believe
that the measures proposed by the Administration such as increased
funding for LIHEIAP (Low Income Home Energy Assistance Program) , the
Earned Income Tax Credit, food stamps and weatherization programs
will not counter, to the extent necessary, the regressive nature of
the proposed Btu energy tax.

Regional Disparities

As mentioned earlier, a Btu energy tax will result in regional
disparities, and its impact will vary across different states of
the country. Our studies indicate, as displayed in the chart on
Page 5, a significant regional disparity among the 25 largest
energy consuming states resulting from the fully phased in Btu
energy tax.

Environmental and Energy Policy

The Administration has said that the main goals of the Btu energy
tax are to promote energy conservation, encourage energy
efficiency, reduce pollution and reduce the deficit. However, the
costs of an energy tax are unlikely to lead to any meaningful
environmental benefits. The imposition of energy taxe? increases
the likelihood that production activities which are negatively
affected will seek locations elsewhere in the world where
environmental regulations are less stringent and costly. Thus,
over time, global emissions may actually rise.

'" Energy Policy Branch, The Distributional Impacts of a Carbon
Tax. U.S. Environmental Protection Agency (May 27, 1992).
Washington DC, p. 8.

659

$2.6 ^

$1.6

'^1

$0.6
$0

^i^-

TOTAL

BTI I TAY (Inoluding Net Intaratata)
b I U IAa Electric Flowa

BY STATE

y/^z

11^

III

TX CA NY LA M OH IL FL HI NJ IN QA Wt NC W TN HA MO AL KY Wl HM OK HD SC

STATES

state Energy Data Report 1960-1990. Table 4, p. 21

Substantial environmental improvements are already being achieved
and will continue to be achieved under existing U.S. laws and
regulations without the necessity of a Btu energy tax. Between
1970 and 1989, air pollution declined significantly: particulates
fell 61%, sulfur dioxide 26%, carbon monoxide 40% and volatile
organic compounds 31%." In 1972, the Nation spent about $17
billion on pollution abatement and control." By 1990, these
expenditures had risen to $90 billion according to the U.S.
Department of Commerce."

Moreover, energy is already substantially "taxed" because of the
costs of compliance with environmental regulations. For instance,
electric utilities spend billions of dollars each year to comply
with numerous environmental statutes. The Clean Air Act Amendments
of 1990 are expected to add $3 to $4 billion to consumer electric
bills annually."

The recently enacted Clean Air Act Amendments of 1990 and the
Energy Policy Act of 1992 both included significant provisions to
encourage conservation and for protection of the environment.
Neither of these Acts has yet been fully implemented. The Clean
Air Act Amendments, when fully implemented, are estimated to cost
the U.S. economy at least $21 billion annually". It makes sense
to allow these provisions to be fully implemented and to review
their benefits to the environment before increasing costs further
on the energy sector of the economy.

" Council of Economic Advisors (January 1983) . Economic Report
of the President. (Washington, DC) , p. 231.

'^ Bureau of Economic Analysis, U.S. Department of Commerce.
Survey of Current Business. (Washington, DC), p. 35.

" Ibid. , p. 36.

" Office of Air and Radiation, Environmental Protection Agency
(November 15, 1992) . Implementing the 1990 Clean Air Act: The
First Two Years. (Washington, DC), p. 39.

" Ibid, p. 17.

660

The Energy Policy Act of 1992 set out an energy policy designed to
meet future energy requirements for the Nation. Among other
provisions, this legislation encouraged increased emphasis on
conservation and alternative energy resources. Energy efficiency
programs in existence before this legislation represented a
significant dedication of resources on the part of electric
utilities toward conservation goals. For example, in excess of S2
billion was spent by the industry for energy efficiency programs in
1992". The programs already in existence and those yet to be
developed in accordance with the Energy Policy Act will be far more
constructive than a Btu energy tax in achieving energy efficiency
goals. Our industry currently has over 2,000 various energy
efficiency programs in place and none of these programs includes a
tax increase on our customers'^. It is important to emphasize that
America consumes substantially less energy per unit of GNP in 1990
than it has over the prior twenty years as is highlighted by the
chart below.

ENERGY CONSUMPTION PER UNIT OF QNP

(Thousand BTU Per S)

S6^^^^^^^^^^

24^^^^^^^^^^^^^^

22^^^^^^^^^^^^^^^^^^^^

20 ^^^^^^^^^^^H^^^^^^^^^^^^^

1970 1976 1980 1986

1990

Arthur Andersen/Cambridge
Associates. Table 2, p. 57.

Energy

One reason for expected gains in energy efficiency along with
continued growth in the use of electric power is that electricity
is a more efficient and environmentally sensitive energy source in
many applications where it is replacing direct fuel combustion at
the point of end use. This continuing growth in electricity is
highlighted in the chart on the next page.

Electricity is also being used in high-tech
alternative power sources, e.g. computers
future is one in which the combination
efficiency and greater electrification will
the use of electrotechnologies that are
technologies using other fuels include: el
induction heating, microwave drying, plasma
freeze concentration in the chemical, food
and petroleum industries.

applications that lack
and automation. The
of improving energy

continue. Examples of
more efficient than

ectric arc furnaces,

-fired technology, and
glass, paper, timber

" Barakat & Chamberlin, Inc., and EPRI (December 1992). Impact
of the Electric Utility Sponsored DSM Programs on Future Customer

Electricity Demand. EPRI Research Pro-ject 2863
Alto, California), p.ES-17.

-8. 3rd Ed.

(Palo

" Plexis Research, Inc. for EPRI. (January 1993) SURIS: DSM
Survey Information System. (Donegal, PA), p.l.

661

ELECTRICITY

PERCENT OF US ENERGY CONSUMPTION

32%

37%

AA'mm/ w;^;'m/ p^/j^f/^' ^7/f^^/i/' k%%^^//

' locn laeA laTrt -lODn lOon

1960 1970 1960

1950-1990

Source: Energy Information Administration, Annual Energy
Review 1991. Table 5, p. 15.

The electric utility industry has supported efforts to establish
sound energy policies, e.g., the policy of domestic self-reliance.
During 1991, approximately 55 percent of the electricity produced
by the industry was generated from coal, 22 percent from nuclear,
10 percent from hydro, 9 percent from natural gas, 4 percent from
oil, and less than one percent from other sources, such as solar,
wind, wood, waste and geothermal." The industry's fuel mix has
changed since the 1970's, when the oil embargo caused the industry
to reduce its reliance on oil in the production of electricity from
16 percent to 4 percent currently". The New York Times singled
out the electric utility industry as responding positively to the
energy crisis of the 1970s. ^° As a Nation, we should be
encouraging the use of electricity for environmental, energy and
economic policy reasons, not discouraging it with the proposed Btu
energy tax.

Implementation Concerns

The electric industry is comprised of the investor-owned segment,
the rural electric cooperative segment, the government-owned
(federal, state and local government) segments and non-utility
generators, including self -generators. The proposed Btu energy
tax, if enacted, should subject all segments of the electric
utility industry to the proposed Btu energy tax in order to ensure
competitive balance.

If the proposed Btu energy tax is enacted, serious problems would
have to be resolved which include a clarification of the tax base.
Such legislation should clearly state that such tax is imposed on
the fuel Btu content or the imputed fuel Btu content of all energy
sources. If the proposed Btu energy tax is enacted, with the tax

'* Edison Electric Institute (1992). Statistical Yearbook of
the Electric utility Industry/ 1991 . (Washington, DC), p. 29.

" Ibid.

'° The New York Times. (August 25, 1992)
Utilities Are Not So Worried. (New York) .

Oil?

662

imposed at the fuel source, then it is anticipated that the
resultant increased fuel costs would be recovered from utility
customers through regulatory energy fuel clauses, where available.

Conventional wisdom seems to be that the utility will pass the Btu
energy tax through to its customers and therefore will not bear the
burden of the tax. However, this erroneously assumes instantaneous
recovery of the tax cost by the utility. In some jurisdictions,
there are moratoria on rate increases, and an additional tax is not
likely to be passed through very quickly under such circumstances.
Moreover, even in the most responsive jurisdictions, some delay is
possible resulting in an adverse impact on utilities.

The current tax burden on electric utilities and their customers,
including the federal income tax and state and local taxes is among
the highest of any industry. As an example, the electric utility
industry has recently borne an average state and local tax rate
that is more than twice that imposed on all other business
sectors.'' A large portion of a utility customer's bill is made up
of taxes. In many states, 20 percent or more of a customer's
electric bill is for taxes either charged directly to the customer
or indirectly through the taxes paid by the electric utility. This
does not include the taxes built into the price of products and
services utilities buy. The proposed Btu energy tax will have a
compounding effect when additional taxes, i.e., gross receipts,
franchise fees, sales taxes and other utility taxes are
automatically increased due to an energy tax imposed on electric
utilities. The increase in these "piggyback" tax costs is
significant and substantially adds to the cost of the energy tax
for electric customers. These piggyback tax costs are a direct
result of the way the proposed Btu tax is imposed. Because the Btu
energy tax is imposed upon the utility and/or its fuel costs these
piggyback taxes will occur. If the Btu energy tax is imposed upon
the consumer of electricity, which is consistent with the energy
conservation and environmental goals of the Administration, these
piggyback tax costs could be avoided for our utility customers.

If the proposed Btu energy tax is implemented, the differing Btu
tax rates applied to fuel sources may affect competition among
various fuels. For example, certain fuel supply contracts may be
indexed to the price of other fuels subject to differing tax rates
under the proposed Btu energy tax. Unless such a tax is very
precisely imposed, unanticipated distortions of current
relationships among energy sources are inevitable. In some cases,
if the tax is not implemented properly, electricity could be
subject to double taxation, such as the case of pumped storage
hydro. These factors, if not taken into account, could have an
adverse impact on energy competition.

Btu Energy Tax Summary

In summary, EEI strongly opposes the proposed Btu energy tax
because it will be counterproductive in reducing the federal budget
deficit and promoting a strong economic recovery. Perhaps a better
answer to the federal deficit problem, if revenue needs to be
raised, is to consider a broad-based consumption tax. The proposed
Btu energy tax may be significantly inferior to a broad-based tax
on all consumption. Energy expenditures account for only about 8
percent of the GDP. A Btu energy tax, which by definition is
narrowly based, is simply an inequitable way for the government to
raise tax revenue by focusing only on energy and U.S. produced
goods and services.

'' Edison Electric Institute. (1993) Analysis of the Electric
Utility Industry 1991 Tax Burden. (Washington, DC) .

663

BTU

ENERGY

TAX

BROAD-BASED

CONSUMPTION

TAX

BUSINESS

CONSUMERS

U.S.
BUSINESS

CONSUMERS

IMPOSED

I
FOREIGN
IMPORTS

REMOVED

us.

EXPORTS

A broad-based consumption tax could be spread uniformly across the
U.S. economy and would not unduly penalize particular businesses or
regions of the country. Unlike a Btu energy tax, a broad-based
consumption tax will not harm our international competitiveness
because it could be border adjustable and as such could be removed
from U.S. exports and imposed upon foreign imports. A broad-based
consumption tax may also exempt essential goods and services and
thereby may not be as regressive as a Btu energy tax. A broad-
based consumption tax could encourage savings and investment, since
the incidence of the tax is on the ultimate consumer of all
domestically consumed goods and services.

Corporate Income Tax Rate

The President's proposal would increase the corporate income tax
rate from 34 percent to 36 percent. The President proposes that
the corporate tax rate increase be imposed retroactively to January
1, 1993.

EEI is concerned about two aspects of the proposed corporate tax
rate increase. First, the proposal to increase the corporate tax
rate unfairly taxes all industries, because it is retroactive. In
particular, regulated electric utilities would not be able to
recover this retroactive tax increase because the ratemaking
process generally prohibits electric utilities from collecting the
cost of a tax increase from customers until the electric service
rates are adjusted. Regulatory proceedings normally require a nine
to eighteen month period to complete. Electric rates are
established prospectively, not retroactively; therefore, until such
time, the opportunity to recover the proposed cost of a retroactive
corporate income tax rate increase would be lost. Hence, the cost
would be borne by the utility company and its shareholders,
therefore, any tax rate increase should have an effective date
which takes into account this regulatory delay.

Second, the increase in the corporate income tax rate will not
affect tax-exempt municipal utilities, many cooperative utilities,
and utilities operated by federal agencies. Investor-owned
electric utilities compete with the tax-exempt electric agencies.
Accordingly, the proposed increase in the corporate income tax rate
would widen the tax advantage granted to tax-exempt electric
agencies as compared to investor-owned electric utilities.

Incremental Investment Tax Credit

EEI supports the President's efforts to reenact the investment tax
credit (ITC) . The ITC is a. proven incentive to stimulate
investment in business machinery and equipment. However, the ITC
should not be limited to incremental expenditures. An incremental

664

ITC is too complicated to administer effectively, and the
complexity could lead to abuse. An incremental ITC is biased
against mature businesses, such as electric utilities, that have
substantial continuing investment in machinery and equipment. As
a result, only a small portion, on average, of utility investment
would cfualify for an ITC. By contrast, new businesses have the
opportunity to generate substantial amounts of ITC simply because
the business is acquiring an initial incremental base of property.
This creates an unfair competitive advantage by providing
incentives to some industries at the cost of others. For example,
a non-utility generator could receive an ITC to construct a plant,
while a regulated utility would not receive ITC if it were to
construct the same plant.

Therefore, EEI recommends that the investment tax credit be
applicable to all qualified business property rather than
incremental property.

Alternative Minimum Tax

EEI is pleased that the President has adopted a proposal to provide
relief from the alternative minimum tax (AMT) and we recognize the
Chairman of this Committee's commitment to the goal of AMT reform.
The proposal would eliminate the special depreciation computation
for the adjusted current earnings (ACE) adjustment. Additionally,
the AMT proposal would change the AMT depreciation for personal
property from the 150 percent declining balance method to the 120
percent declining balance method. These depreciation changes would
apply to property placed in service after 1993.

The AMT proposal would give much needed relief from the AMT to
capital-intensive industries such as the electric utility industry.
The AMT depreciation adjustment and preferences are the chief
reasons why more than 4 percent of our member companies have paid
the AMT or have an AMT credit carryforward^. The President's AMT
proposal will be a positive step toward reforming the AMT to remove
its onerous impact on many capital-intensive companies.

Conclusion

EEI strongly supports the efforts of the Administration and the
Congress to reduce the federal budget deficit and to promote a
strong economic recovery. We acknowledge and appreciate the
Administration meeting with representatives of our industry and
listening to our views. In our view, the Administration's proposed
Btu energy tax is counterproductive in accomplishing its stated
goals. EEI believes that the best way to reduce the deficit and to
improve the economy is to reduce and control government spending;
however, if a major new tax is needed then we encourage you to
thoroughly evaluate a broad-based consumption tax. The proposed
Btu energy tax is unwise economic, environmental and energy policy.
It would seriously damage the economic recovery and it will hurt
U.S. international competitiveness. In addition, the Btu energy
tax alters our Nation's energy policy and would result in
questionable environmental benefits. If it is the will of the
Congress that the proposed Btu energy tax should be enacted, then
we recommend that the imposition of the tax be upon the consumer of
electricity in the form of an excise tax. This would minimize the
cost of the piggyback tax effects to our customers and maximize the
opportunity to achieve the Administration's stated energy
conservation and environmental goals. EEI appreciates the
opportunity to present its views and we stand ready to assist this
Committee and the Administration in their deliberations on this
matter.

^ Edison Electric Institute. (1992) Alternative Minimum Tax
Survey. (Washington, DC) .

665

Mr. Andrews. Mr. Kanner.

STATEMENT OF MARTY KANNER, WASHINGTON
REPRESENTATIVE, PUBLIC POWER COUNCIL, PORTLAND, OR

Mr. Kanner. Thank you, Mr. Chairman.

The Public Power Council is a regional trade association rep-
resenting consumer-owned utiUties in the Pacific Northwest. Be-
cause of the inherent regressive and inflationary nature of energy
taxes, PPC has long opposed the adoption of any form of energy
tax.

We applaud the administration for taking significant steps to
mitigate the regressivity of the proposed tax and for exempting
from taxation both energy conservation and nonconventional liiels.
Nonetheless, PPC continues to oppose the energy tax in its current
form due to the excessive tax burdens that would be placed on con-
smners of hydroelectric energy. And I would note that 65 percent
of the electric needs of the Northwest are met through hydropower.

PPC beUeves the administration's proposed energy tax appUes a
scientifically invaUd heat rate for hydropower resulting in excessive
taxation of this energy source. Correction of this portion of the en-
ergy tax would not violate regional equity nor significantly reduce
the revenue generated by this tax. In contrast, failure to assign the
scientifically correct Btu value to hydropower will result in severe
regional economic dislocation and discourage the use of an impor-
tant renewable resource.

As the members of the committee are aware, the administration's
energy tax is purported to tax each fuel based on its heat content
as expressed in British thermal units. However, under the tax
plan, hydropower is taxed at nearly three times its actual Btu
equivalency.

Under the administration's proposal, the tax on hydropower is
based on the Btu input of an average fossil fuel plant rather than
the actual Btu equivalent of a kilowatt hour of electricity generated
by falling water. The higher Btu number incorrectly assumes that
converting falling water to electricity is as inefficient as generating
electricity with fossil fuel.

The Btu rate in the administration's proposal is 10,315 Btu's per
kilowatt hour. The correct number is 3,754. Administration officials
concede that the imputed Btu value for hydropower is not scientif-
ically justified. They suggest that the higher tax rate was nec-
essary to create equity in the impact of the tax on different regions
of the country. While this goal is understandable, in fact, the exces-
sive hydropower t£ix appears to impose a disproportionate burden
on the Pacific Northwest.

According to a preliminarily analysis of the tax based on Depart-
ment of Energy data, the per capita increase in Montana would be
30 percent higher than the national average. In Washington, the
impact is 20 percent above the national average. The impact in
Idaho would be 5 percent above the national average and Oregon
residents would be taxed at the national average.

According to an analysis by the Washington State energy office,
taxpayers in the State "would still pay more than the national av-
erage, even if the hydropower tax were correctly calculated, owing
to climate, long driving distances and energy-intensive industries."

666

Some will point to the lower electric rates in the Northwest and
question how the tax on hydropower can be reduced without violat-
ing regional equity. It must be understood that the higher-than-av-
erage tax burdens in the region results primarily from the petro-
leum surcharge due to long chiving distances.

According to the DOE data, the tax on oil will comprise 52 to 64
percent of the total energy tax burden within the States in the re-
gion. Correcting the Btu conversion rate for hydropower will not
create a windfall for the Northwest, nor will this correction violate
regional equity.

While the Pacific Northwest is historically characterized as hav-
ing low electric rates, these rates are steadily rising. The estimate
for the pending Bonneville Power Administration rate case has re-
cently been revised upwards to an anticipated 27 percent increase.
Resource acquisitions, Endangered Species Act compUance, and
sustained drought are likely to result in additional rate increases
of 20 percent over the next 2 years.

The administration's PMA repayment initiative, if adopted, will
add a 4-percent rate increase, and if unadjusted, the energy tax
will add an additional 12-percent increase to current BPA rates. If
combined, the region would face a 60-percent increase in the cost
of Bonneville power within 3 short years.

While the administration's energy tax is clearly designed to gen-
erate revenue for deficit reduction, this should not be an end in it-
self. Rather, it is the means of achieving the goal of long-term eco-
nomic growth and fiscal health.

If the overarching purpose of the plan is the restoration and
maintenance of a strong economy, then it must be recognized that
the economic condition in the Pacific Northwest is extremely fragile
and unlikely to sustain the impact of the proposed energy tax as
currently calculated.

Sixty percent of Bonneville's energy sales go to industricd cus-
tomers. Given the energy intensive nature of the Northwest econ-
omy, correcting the conversion factor for hydropower would provide
much needed economic relief. This relief can be provided without
dramatically decreasing the total revenue generated by the energy
tax.

PPC urges Congress to tax hydropower at its actual energy value
of 3,754 Btu's. Making this adjustment will ensure scientific con-
sistency, regional equity, and economic vitality.

Mr. Chairman, I would note that other users of hydropower have
concerns that are similar to those I expressed today, and I would
respectfully request permission to have included in the record a
statement by the National Hydropower Association.

Mr. Andrews. Thank you, Mr. Kanner. It will be included in the
record.

[The prepared statement and statement of the National Hydro-
power Association follow:]

667

Public Power Council

500 NE Multnomah. Suite 729

Portland. Oregon 97232

(503) 232-2427

FAX (503) 239-5959

Testimony of

Marty Kanner, Washington Representative

Public Power Council

on the

Administration's Proposed Energy Tax

before the

House Ways and Means Committee

March 23, 1993

I am Marty Kanner, Washington Representative for the Public Power Council (PPC).
PPC is a trade association representing consumer-owned utilities -- rural electric
cooperatives, public utility districts, and municipal utilities -- in the Pacific Northwest.
Because of the inherent inflationary and regressive nature of energy taxes, PPC has
long opposed the adoption of any form of energy tax. We applaud the Administration
for tal<ing significant steps to mitigate these negative impacts and for exempting from
taxation energy conservation and nonconventional fuels. Nonetheless, PPC
continues to oppose the energy tax in its current form due to the excessive tax burden
that would be placed on consumers of hydroelectric energy

PPC believes that the Administration's proposed energy tax applies a scientifically
invalid heat rate to hydropower that results in excessive taxation of this energy source.
Correction of this portion of the energy tax would not violate "regional equity," nor
significantly reduce the revenue generated by this tax. Furthermore, failure to assign
the scientifically correct Btu value to hydropower will result in severe regional
economic dislocation and discourage the use of an important renewable resource.

Hydropower Is Central to Regional Power Supply and Economy

in order to appreciate the concerns of the Public Power Council with respect to the
hydropower portion of the energy tax, it is necessary to understand the role of
hydropower in meeting the region's energy needs and fueling the region's economy.

All of PPC's 115 member utilities meet a portion of their total bulk power supply needs
through power purchases from the Bonneville Power Administration (Bonneville), and
Bonneville serves the entire bulk power needs of approximately 85 of these utilities.
Private power companies and certain large industrial consumers also receive large
blocks of power from Bonneville. The power that Bonneville markets is almost
exclusively generated at the federal multipurpose water projects of the Columbia River
system. For those regional utilities that are partial requirements customers of
Bonneville, utility owned hydro projects meet a large share of the remaining power
needs. Consequently through federal and non-federal projects, hydropower
represents approximately 65 percent of the total electric generation of the region.

Much of the economy of the Northwest is based on the presence of reasonably priced
and reliable electric supplies. Aluminum plants, pulp and paper mills, chemical
companies, air processing facilities, and other energy-intensive industries have
located in the Pacific Northwest, at least in part, because of affordable electric rates.
As discussed further tjelow, the price of electricity from the Bonneville Power
Administration is escalating at a rapid pace. Soon, many of the energy-intensive
industries in the region may be forced to close or relocate in Canada or overseas.

668

The region has been a showcase for conservation, fish mitigation and enhancement,
and multiple use of an interstate waterway. However, without competitive electric
rates, much of this success will be placed in jeopardy. As additional costs are imposed
on the region's ratepayers, large industries will downsize, shut-down, or relocate,
households will witness an ever increasing portion of their income dedicated to energy
costs, and the ability of the region to finance these important programs will dwindle.

While some inside and outside the region have criticized the region's dependence on
hydropower -- or its good fortune in securing once seemingly endless supplies of low-
cost electricity - few can discount the importance of cost-competitive hydropower to
the economic vitality of the region.

Hydropower Taxed at Artificially High Rate

As the members of the Committee are aware, the Administration's energy tax is
purported to tax each fuel based on its heat content as expressed in British Thermal
Units (Btus). However, under the tax plan, hydropower is taxed at nearly
three times its actual Btu equivalency.

A Idlowatt hour of electricity has a heat value of 3,413 Btus. This is an undisputed.
Internationally recognized standard. Because hydropower projects operate, on
average, at 90 percent efficiency (e.g., only 10 percent of the energy potential of falling
water is lost in generating electricity), the Btu value of one kilowatt hour of hydropower
is approximately 3,754 Btus. However, under the Administration's proposal, the tax on
hydropower is based on the Btu input of an average fossil fuel plant -- 10,315 Btus per
kilowatt hour - rather than the actual Btu equivalent of a kilowatt hour of electricity
generated by falling water

This scientifically inaccurate and unjustifiable Btu value incorrectly assumes that
hydropower is as inefficient as fossil fuel fired generation and results in nearly a
tripling of the tax rate applied to hydropower This excessive tax ignores the high
efficiency of hydropower and discourages the use of this important renewable energy
source.

Hydropower Tax Causes Regional inequity

Administration officials concede that the imputed Btu value for hydropower is not
scientifically justified. They suggest that the higher tax rate was necessary to create
equity in the impact of the energy tax on different regions of the country. While this
goal is understandable, in fact, the excessive hydropower tax appears to
impose a disproportionate burden on the Pacific Northwest.

The U.S. Department of Energy has prepared a preliminary analysis of the per capita
impact of the proposed tax. According to this analysis, the Pacific Northwest is
disproportionately impacted by the proposed energy tax:

• Montana has the sixth highest burden with a per capita tax impact 30 percent
higher than the national average;

• Washington comes in 12 with a per capita tax impact 20 percent above the
national average;

• Idaho ranks 19, with a per capita tax impact 5 percent above the national
average; and

• Oregon ranks 23, with a tax impact at the national average.

669

According to an analysis by the Washington State Energy Office, taxpayers in the state
"would still pay more than the national average even if the hydropower tax were
correctly calculated, owing to climate, long driving distances, and energy intensive
industries. "

Some will point to the lower electric rates in the Northwest and question how the tax
on hydropower can be reduced without violating regional equity It must be
understood that the higher than average tax burden in the region results primarily from
the petroleum surcharge due to long driving distances. According to the DOE
analysis, the tax on oil will comprise 52 - 64 percent of the total energy tax burden
within the states in the region. The higher than average tax impact in the region also
reflects the more severe climate conditions (resulting in higher energy consumption for
space conditioning), and the presence of numerous energy intensive industries.

Correcting the Btu conversion rate for hydropower will not create a "windfall" for the
Northwest. Nor will this correction violate regional equity.

Energy Tax Could Cripple Northwest Economy

While the Pacific Northwest is historically characterized as having low electric rates,
these rates are steadily rising. The pending Bonneville Power Administration rate
case is likely to result in at least a 15 percent rate increase. Resource acquisitions,
Endangered Species Act compliance, and sustained drought are likely to result in
additional rate increases of 20 percent over the next two years. The Administration's
PMA repayment initiative, if adopted, will add a 4 percent rate increase. If unadjusted,
the energy tax will add an additional 12 percent increase to current BPA rates.
Combined, the region could face a 50 percent increase in the cost of power within
three years

As previously mentioned, the economy of the Northwest is particularly energy
intensive. Many large industrial consumers depend on low-cost energy supplies to
remain competitive in international markets. For instance, the cost of electricity
represents approximately one-third the cost of producing aluminum. According to the
Direct Services Industries, an association of large Northwest energy consumers,
aluminum plants in the Northwest pay average electric rates that are 20 percent higher
than their world competitors. That differential will increase with adoption of the
pending rate case and would increase further under the energy tax.

Aluminum plants are not the only energy-intensive industries in the Northwest. Energy
costs are 25 to 35 percent of the cost of electrolytic chemicals produced in the region
and 7-20 percent of the cost of pulp and paper.

While the Administration's energy tax is clearly designed to generate revenue for
deficit reduction, this is not an end in itself. Rather, it is a means of achieving the goal
of long-term economic growth and fiscal health. It the overarching purpose of
the plan is the restoration and maintenance of a strong economy, then it
must be recognized that economic conditions in the Pacific Northwest are
extremely fragile and unlikely to sustain the impact of the proposed
energy tax as currently calculated. Some examples of the weakness of the
Northwest economy include:

• the world price of aluminum, due to dumping by the former Soviet Union, is
very low with little sign of improving. Aluminum companies directly employ
10,000 workers;

• Boeing has recently laid off 27.000 workers;

670

• the recovery of the endangered spotted owl has cxjst thousands of jobs in the
timber industry; and

• most major businesses are reducing their workforce and freezing salaries.

The current and future health of the region's economy is at stake. Access to cost-
effective energy supplies is the region's economic lifeline.

Reducing the tax rate for hydropower to the scientifically correct energy rate of 3,754
Btus would provide much need economic relief to the Northwest without dramatically
decreasing the total revenue generated by the energy tax. According to our
calculations, the reduction in tax receipts would be approximately $500 million per
year once the tax is fully phased in.

Because of the severe economic consequences of the resulting rate increase on
Northwest businesses and industries, failure to adjust the tax on hydropower will likely
result in a greater increase in the national deficit due to the likelihood of industry labor
reductions, shut-downs and relocations.

Value of Hydropower Should be Recognized

Finally it is important to recognize that the proposed energy tax is the first effort of the
Administration to fashion an energy policy The previously stated objectives of the
Administration's energy policy are the encouragement of energy conservation,
renewable resources, and environmentally sensitive fuel choices and the
discouragement of foreign energy dependence. Given these objectives, use of
existing hydropower projects should be advanced, not hindered. Hydropower;

• displaces foreign energy supplies;

• is an important renewable resource, representing 85 percent of our domestic
renewable electric generating capacity;

• has less severe environmental impacts than traditional fossil-fired generation.
While dams have impacted fish and wildlife and riverine habitat, to date
Bonneville ratepayers have paid more than $1 billion to mitigate these
impacts and will continue to pay at least $300 million per year - for the
foreseeable future -- on additional fish and wildlife expenditures; and

• its low-cost attributes, combined with enlightened utility planning, have
enabled the region to pioneer the nation's most aggressive energy
conservation program.

Accuracy. Equity, and Economy Justify Tax Rate Correction

PPC urges Congress to tax hydropower at its actual energy value of 3, 754 Btus.
Making this adjustment will ensure scientific consistency, regional equity, and
economic vitality.

NHA

671

Statement of the Natioaial Hyditqwwer Association

Submitted to the House Ways and Means Committee

March 23, 1993

The National Hydropower Association (NHA) supports the CUnton
Administration's poUcy goals to encourage renewable energy, reduce
greenhouse gases, and foster energy independence. We believe these are
critically important objectives.

Yet, the proposed energy tax plan contained in President Clinton's deficit
reduction proposal does not meet these key objectives in its treatment of
hydroelectricity. As a domestically abundant, non-polluting, highly
efficient and renewable resource, hydropower should be encouraged as
the cornerstone of an environmentally sound energy tax proposal.

NHA's specific concerns and recommendations to ensure the fair
treatment of hydropower in this area are Usted below:

L Hydropower is a Renewable Energy Resource

Existing hydropower resources provide over 85% of our nation's
renewable energy resources. In comparing hydro with conventional
fossil-fuel electric generation. Public Citizen estimated that energy
produced by this country's hydro annually displaces the consumption of
530 million barrels of oil and the subsequent 249 million tons of carbon
dioxide emissions. (In fact, this estimate is somewhat understated - it
would actually require about one billion barrels of oil to replace the
electricity generated by hydropower annually.) Yet, despite its role as our
nation's most valuable source of renewable generation, it has been
included in the energy tax proposal while all other renewable resources
have been exempted.

There are over 74,(X)0 MW of undeveloped hydroelectric potential in the
U.S. - if only half of this capacity is developed, it would generate an
amount of electricity equivalent to that produced by 20-25 large nuclear
power plants, and would prevent the consumption of over 270 million
barrels of oil. Clearly, a tax proposal designed to encourage renewable
energy, energy efficiency and security must recognize the renewable
benefits of hydropower and the vast potential for additional re80iux:es in
this country ~ and ensure that the resource is treated fairly.

RpmnmnwijnHiirinn; Hyd ropower is a renewable resource and should be
treated as sudh in all national poKdes. Renewables, conventional and
non-oonventianal, should be treated alik& Should hydropower be included
in the energy tax, it is vitally important that the American public knows
that such a decisicHi was based on regional fiaimess issues. It is critical

that th«» iiwhiBJni nf li y Hm[M t i M Mf ia nnt p<»rPM»wprf aa an inMraiiiwi of a lark

of support ft>r hydro as a valuable renewable resource.

672

n. A TVs Rate on Hydnqiower Should Reflect its Hi^EfBaency

Hydroelectric plants are 85%-95% efficient ~ very little energy is lost in the conversion of
falling water to electricity. The ciirrent energy tax proposal has assigned hydro a
conversion rate of 10,315 Btu/kwh reflecting only a 36% efficiency rate, the rate at which a
coal plant converts its resources to energy. As a result, under the current plan,
hydropower is taxed at a rate which is nearly three times that used for fossil fuels,
despite the fact that it represents over 85% of our nation's renewable non-polluting energy
generation and is highly efficient in its conversion of natural resources to energy.

BpcnanmffnHflrinn: The ocmversion rate for hydroelectricity should be lowered from 10^15
Btu^cwh to 3,792 Btu/kwh \(iuch is the oorresponding converafm rate fior 90% plant
efficiency.

We brieve this is a critical change necessary to enaure that hy dn^wwer is on a Lnrd
playing field with other energy resources affected by the tax plan. In addition, the
adofftian of the lower rate will better reflect hydropower's renewable and efficient
qualities, and will go a long way toward meeting the energy tax proposal's environmental
olgectives. In the end, the adoption of the lower conversion rate would result in less than
a 2% impact in overall energy tax revenues collected.

m. Small Hydro PrqjecU Should Be Exempted

The current tax proposal applies to all hydropower projects regardless of their size.
Across the nation, small projects have been developed to meet local energy needs through
the generation of renewable hydroelectridty. Despite the fact that many of these projects
are very Limited in scope and generating capabilities, they are subjected to the same
regulatory processes as larger projects. The imposition of a tax on the electricity suppUed
by the 1,421 projects that are equal to or less than 5MW would place a significant new
burden on these small generators, and would have the effect of discouraging local and
community-based renewable energy development. In fact, these small projects can be
deemed to be comparable to other non-conventional resources, such as solar and wind,
which have been fudly excluded from taxation under the current plan.

Moreover, a tax on projects equal to or under 5MW in size will not assist deficit reduction.
While they represent an important trend toward efficient renewable development, these
projects represent only one-tenth of one percent of our nation's overall energy capacity
and only 3.9% of all Federal Energy Regulatory Commission authorized hydro capacity.
NHA believes the costs of administering a tax on projects of this size would be higher than
overall revenue contribution from such projects.

Rp«Yimfn«mHntinn; Hydroelectric pnqects under 5MW should be exempt from taxation.
T irmtion of small projects is not costreffiective, and would serve to discourage co mmuni ty-
based renewable energy devdc^ment.

673

IV. Piunped storage Tedmolosy Should Be Exempted

Hydroelectric pumped storage is an energy management tool that improves the overall
efficiency of a utihty system, and provides energy storage capability necessary for periods
of peak consiuner demtrnd. Because pumped storage projects provide stored energy
which can be brought on-line almost instantaneously, utilities can avoid inefGdent use of
baseload units. As a result, pumped storage technology goes a long way toward attaining
emission standards and improving the efBciency of a utility system through its inherent
ability to respond to changes in the daily electric load. Moreover, as a source of stored
energy, pumped storage provides a safety-net for utilities by ensuring that emergency
power can be brought on-line immediately if needed.

A tjrpical pumped storage facility has an upper reservoir, a lower reservoir, and one or
more pumj^turbines. Water is pumped from the lower to the upper reservoir during low
energy demand periods to create stored energy. During peak consumer demand periods,
the water is released back into the lower reservoir through hydro turbines to produce
electricity. This peaking capacity is critical to a utility's ability to utilize non-dispatchable
renewables, such as windpower. Without storage capability, such renewables often
cannot be e£5dently utiUzed, and may not be developed due to an existing excess of base-
load within a system. Therefore, storage capability is of critical importance to the
development of renewable resoiut;es within a utility system.

Pumped storage is radically different in nature from other energy technologies in that it
requires energy to produce energy and to achieve its other effidency and energy
management benefits. Typically, off-peak power from excess base-load sources is used to
pump water to an upper reservoir to be released when it is needed or valued the most.
Because pumped storage both consumes and produces energy, it could potentially face
double taxation under the existing energy tax proposal. Conceivably, a pumped storage
operator would be forced to pay twice — once for the fuel or energy used to pump water,
and again for the energy produced by the fadhty. Double taxation on pumped storage
threatens the economic feasibility of these facilities relative to other, fossil-fueled peaking
resources.

R^YwnniffnHwtini; Energy production ftxan pumped storage fiiciliticH should be exempt
ftxun taxatinn.

Pumped storage is not a primary source of energy. According to the Woiid Resources
Institute, pumped strange ccmtidnites only 3% (rf the total U.S. electricity supply. It is
important to evaluate whether or not such a small nnvniTit of generation would justify the
administrative costs associated with the collection of a tax on this technology. In
addition, because of its value as a source of stored energy \diich enhances efficiency,
reduces emissions, and in some cases encxxirages the development of renewables within
9 utility system, pumped storage technology should be eaicauraged and such values
should be reflected in the structure of an energy tax proposal

Finally, the issue ofdoublejeopardy for pumped storage facilities must be addressed to
ensure faimpwH and to prevent this vitally important technology from being penalized and
disooura0Bd by federal tax policy.

674

NATIONAL HYDROPOWER ASSOCIATION MEMBERS

Alabama Po«ver Company
BinninghamAL

Eugene Water tt Electric Board
Eugene OR

Curtis Thaxter et. aL
Portland ME

Reid II Priest
Washington DC

Mid-Atlantic Energy
Reading PA

Harza Engineering Co.
Chicago IL

Eneigia Global, Inc.
WalthamMA

PUD No. 2 of Grant County
EphrataWA

New England Electric System
Washington DC

Weyerhaueser Company
Rothschild W I

Southern Company Services
Atlanta GA

Upper Yampa Water Cbnservancy
Steamboat Springs CO

Turlock Irrigation Dist
TurlockCA

City of Idaho Falls
Idaho Falls ID

Independent Hydro Developers
ScottsdaleAZ

Nonnandeau Assoc Inc
Bedford NH

Tacoma Public Ubl. Light Div.
TacomaWA

Portland General Electric
Portland OR

Northrop Devine tc Tarbell Inc.
PbrtlandME

Nebraska Public Power District
CohnnbusNE

Bangor Hydro-Electric Co.
Bangor ME

Paine Hamblin Coffin Brooke It Miller
Spokane W A

ACRES Intemabonal
Amherst NY

aty of LeOaire
LeClairelA

Woodward-Oyde
Minneapolis MN

City of Danville
Danville V A

PadfiCorp Electric Operations
Portland OR

EBASCO
AriingtonVA

Oglethorpe Power Corp.
TudterGA

Rochester Gas It Electric
Rochester NY

Louis Berger 6c Associates, Inc.
WaItham,MA

Duke Power Company
Huntersville NC

H <c M Engineering
CohimbiaMD

Richard Hunt Associates
Annapolis MD

Placer County Water Agency
ForesthilICA

Bailer Hammett
WashngtonDC

Van Ness Feklman Sutdiff
Washington DC

Bouvier Hydropower Inc.
Old Bridge NJ

Monison Knudsen Corp.
San Francisco CA

HYDRA-CO Enterprises Inc.
Syracuse NY

Duke Power Co.
Charlotte NC

Wilkinson Barker Knauer It Quinn
Washington DC

Hydro West Croup, Inc.
BellevueWA

Preti Flaherty Beliveau k Pachios
Augusta ME

Northrop Devine & Tarbell Inc.
Portland ME

Yuba Bear River Project
Colfax CA

PUD No. 1 of Okanogan County
OkanoganWA

Puget Sound Power & Light
Bellevue,WA

Kennebec Water Power Co.
WatervilleME

Henwood Energy Services
Sacramento C A

Allegheny Electric
HarrisburgPA

Edwards ManufKluring Co., Inc
Lisbon Falls ME

Voest-AlfMne International Corp.
Berlin N)

Consolidated Water Power Co.
Wisconsin Rapids W I

675

NATIONAL HYDROPOWER ASSOCIATION MENfBERS

Peak Power G>q>
Son Francia9>CA

Adirondack Hydro Devetopment Corp.
Qens Falls NY

Freese k NidwU, Inc.
Forth Worth TX

BrickAdd, Burchette 4c Ritis, P.C.
Washington DC

NEYRPICInc.
SheltonCT

Cent NE Pub. Power & Irrig. Dist
Holdi«geNE

R.W. Beck k Associates
Seattle W A

Kvaemer Hydro Power Inc.
Stamford CT

Sithe-Energies USA
New York NY

PUD No. 1 of Douglas County
E. WenatcheeWA

HDR Engineering
BellevueWA

Wisconsin Public Service Corp.
Green BayWI

H & M Engineering, Inc
Columbia MD

Troutman Sanders et aL
Atlanta GA

Consolidated Hydro, Inc.
Greenwich Cr

Ooville-Wyandotte Irrig. Dist
OrovilleCA

United American Energy
Wooddiff LakeNJ

Schwabe Williamson tc Wyatt
Washington DC

LeBoeuf, Lamb, Leiby k MacRae
New York NY

Voith Hydro, Inc.
York PA

Southern California Edison
RosemeadCA

Niagara Mohawk Power Corp.
Syracuse NY

Paul Nolan
Arlington V A

Northrop Devine k Tarbell Inc.
Portland ME

Ossberger Tuibines, Inc.
Richmond V A

PUD No. 1 of Chelan County
WenatcheeWA

Arkansas Electric Cooperative
Little RockAR

Ayres Lewis Norris k May
AnnAiborMl

Kankakee Wastewater Utility
Kankakee IL

Benham-Holway Power Group
Tulsa OK

STS Hydropower Ltd.
NorthbrookIL

Voith Hydro
AriingtonVA

Montana Power Co.
ButteMT

Stanley Consultants, Inc.
Minneapolis MN

White River Hydroelectric Project
BatesvilleAR

Hydro Devefepment Group
DexterNY

Synergies Inc.
Annapolis MD

Niagan Mohawk Power Corp.
SyracuseNY

Padfic Hydro Consulting Group
Alameda C A

Sorenson Engineering
Idaho Falls ID

lOngs River Conservation District
ResnoCA

New York Power Autfiority
New York NY

Hydro Review Magazine
Kansas QtyMO

PUD ^4o. lofPendOreiDeCo.
Newport W A

Burgess k Niple, Ltd.
Cotun^MsOH

Mead & Hunt Inc
MadisonWI

Attorney at Law
Washington DC

Highland Hydro Construction Inc
Redding CA

Kleinschmidt Associates
Pittsfield ME

Pacific Gas k Electric
San FrandscoCA

Geoigia Power Company
Atlanta GA

Ray Toney k Associates
Redding CA

Central Maine POfyer Company
Augusta ME

Rath,Young, Pignatelli et.al.
ConconlNH

NATIONAL HYDROPOWER ASSOCIATION MEIvlBERS

Yuba County Water Agency
Marys ville CA

Washington Water Power Co.
Spokane W A

Idaho Power Co.
Boise ID

National Hydro Corp.
Boston MA

676

Mr. Andrews. Out next witness, from Texas, is the Honorable
Barry A. Williamson, one of the railroad commissioners of Texas,
and I woxild like to ask all of the the remaining witnesses to please
try to pay attention to the three lights at the witness table.

We have 24 witnesses today, and if each of you will carefully try
to keep your statements within the 5-minute range, it would be ap-
preciated.

Mr. WiUiamson.

STATEMENT OF HON. BARRY A. WHXIAMSON, COMMISSIONER,
RAILROAD COMMISSION OF TEXAS

Mr. Williamson. Mr. Andrews, Mr. Archer, members of the com-
mittee, I appreciate the opportunity to testify today. I am one of
three statewide-elected officials for the Texas Railroad Commission.
Chairman Jim Nugent and Mary Scott Nabers asked me to come
to testify today to express their concerns and the State of Texas'
concerns about the proposed Btu tax. Among our other duties, we
regulate oil and gas and coal and intrastate transportation. We reg-
ulate production in Texas.

I was elected last November on my promise to work to create
jobs in Texas. First, I support the President's goal of reducing the
Federal budget deficit. A genuine budget deficit reduction will help
us all. However, I am not persuaded that a tax is necessary to ac-
compUsh that goal. Several reahstic but stringent cost-containment
proposals have been detailed, and those must be given serious re-
view before any tax increase is contemplated.

But, should it be necessary to consider a higher tax, I suggest the
energy tax, as it is proposed, is a bad idea. It is a poor idea for
three reasons: it has a disproportionate impact on energy-intensive
areas, specifically Texas; it will cost American and Texas jobs in
manufacturing and energy production; and it is an invitation for
more, not less, foreign imports.

Let us talk about Texas for a minute. In 1990, the Department
of Energy numbers showed Texas with the highest energy con-
sumption in the Nation at 9.8 quadrilHon Btu's. 0\ir per capita Btu
use in Texas is more than twice what it is for other residents, say
for instance, Maryland, New York, California. Based on that data,
Texas will bear 12y2 percent of the tax, although we only have 6.8
percent of the population. And that is why I am here today.

Texas motorists consume 720 million gallons of gasoline a month.
At 7.5 cents a gallon, that is $54 miUion a month in taxes. That
is two-thirds of a biUion dollars a year that we will pay just in gas-
oline taxes. But Texans do more than just drive. We work on farms
and in factories. We make products and create stable jobs: Manu-
facturing, petrochemicals, mining, construction, agriculture. These
are energy-intensive, job-rich industries which will be devastated
by this tj^e of a tax.

Energy is used to create things, to add value. By taxing the chief
featiire that makes our products competitive, you will be tying the
manufacturers' hands behind their backs as they try to compete in
a ^obal marketplace.

Recently, I visited Cooper Industries in Houston. They manufac-
ture precisely engineered products requiring a tremendous amount
of energy. Adding to the cost by means of this energy tax would

677

crunch, if not eliminate, their profit margins in an international
market. Low margins mean no expansion, no new hiring, no cor-
porate tax revenues and perhaps more layoffs. To make a long
story short, this tax is not a job-creating proposal.

Adopting a multibiUion dollar summer jobs spending program,
while placing high-pay, high-wage manufacturing jobs at peril is
not a good idea. We should be bending over backward to save high-
paying jobs in this country and not placing them at risk.

This new tax is a job loser also in the energy production sector
as well because the seller will bear a significant share of the pro-
posal. Those producers I have talked to recently operate on strict
cash flow requirements. They need the cash; they must make the
sales. As a result, they have to eat the tax; they cannot pass it
along.

Last week I was in Midland, TX. I met an individual who is an
energy producer, a small energy producer. He has been a growing
energy producer, and he indicated this tax will cost him 11 percent
of his gross profits in 1994 and 20 percent in 1995.

You may ask why, why do we assume that the producer will pay
the energy tax? That is simple. The energy market is highly com-
petitive. That is why prices have been relatively low over the last
few years. If one suppUer, say a low-cost Canadian producer, is
willing and able to absorb the new tax surcharge, he will make the
sale. The competing producer, like my finend Tnpp Wommack fi*om
Midland, in my example, will lose the sale. In order to get that
sale, Tripp must absorb more and more of the surcharge, and the
spiral inevitably leads to Tripp absorbing all the tax. Placing a tax
on top of the current price will only exacerbate the problem.

Natural gas producers — this is not theory, we have been Hving
with this, natiiral gas producers in the real world. All you have to
do is look at the pass-back surcharges that FERC has apphed the
last few years. It goes back up the pike.

The additional squeeze on the producers' market for this new tax
means they will have httle choice but to shut in marginal produc-
tion. First of January 1993, we had 246,000 wells in Texas; 77 per-
cent of them were marginal production, producing less than 10 bar-
rels a day. These wells employ thousands of people and contribute
tens of milhons of dollars to our State treasury. We estimate their
economic value at $11 billion. If you have this tax, it will put that
value at peril.

This is why over the past few weeks we have been traveling the
State and talking to the State legislature to come up with tax in-
centives to remove State severance taxes, but this particular Fed-
eral tax will obhterate our efforts in that regard.

The various problems would become somewhat mitigated, the
problems I mentioned, if the point of tax collection were moved as
close as possible to the ultimate consumption points, for iostance,
at the utihty city gate or at the refined product distribution point.
In the last 10 years, we lost 450,000 jobs in this industry; 170,000
in Texas. New field discoveries are at an all-time low. We have lost
51 percent of our exploration business and we have shut down 27
refineries in Texas.

678

Energy used to be the cornerstone of the Texas economy, 30 per-
cent of tiie tax base; now it is only 8 percent. Texas cannot afford
to continue to lose tiie tax base.

The energy tax also would increase imports because we are the
marginal producer. Overseas, they can produce energy at less cost;
tiierefore, they will be able to recover the cost more easily. As a re-
sult, we will continue to lose more of our domestic production.

In closing, I would like to note that our national economy is as
successful as it is because we have been blessed with abxindant en-
ergy suppUes in this country and have successfully adapted to
many changes over the years. Along the way, the energy sector has
taken some hard body blows. The loss of good jobs and State reve-
nues have caused a dramatic transformation of the Texas land-
scape, but we have swallowed hard and survived and we continue
to grow.

The search for the Federal deficit reduction must begin with Fed-
eral Government spending reductions, and my message today is
clear: Balance the budget here in Washington and not on the backs
of hard working men and women.

Thank you, Mr. Chairman.

[The prepared statement follows:]

679

WRITTEN TESTIMONY OF COMMISSIONER BARRY WILLIAMSON,
RAILROAD COMMISSION OF TEXAS

Mr. Chairman and Members of the Committee:

I am one of the three statewide-elected members of the Railroad Commission
of Texas. Among other duties, we are charged with regulating oil, gas, and coal
production in the State of Texas. In addition to conserving natural resources and
preserving property rights, the Railroad Commission is charged with protecting the
environment in all of our endeavors. I hope my perspective as a regulator of
practically every major energy source used in the country will be useful in helping
you better understand how the proposed energy tax will affect Texas and our
nation. And thank you for this opportunity to appear here before you today.

Over its 102 years, the Railroad Commission has had the task of balancing
the various statutory charges placed on us by the Legislature with the mandate to
ensure the overall health of the various energy industries. Among the numerous
challenges we have balanced in Texas are:

increased competition from international energy supplies (including
the market-distorting impacts of oil cartel activities),

protecting air and water quality in the State and nation,

the drop in energy-derived state tax revenues,

the many technological advances in energy extraction and production
techniques, and

the painful but necessary transition in natural gas from a highly
regulated industry to one driven mainly by market forces.

I thought you would want to know what the people in Texas have to say
about the Administration's energy policy. As part of my job, I get out around the
State to talk to producers and consumers, assessing resource development and
conservation efforts as well as environmental concerns. I am hearing from
landowners, mom-and-pop independents, major oil and gas producers, municipal
utility companies, electric generators, farmers, manufacturers and taxpayers.

I was elected last November on my promise to the people of Texas to work
hard on the Commission to help create more jobs in the vital Texas energy sector
while protecting the broader long-term interests of the State of Texas. Any
supporter of this energy tax who looks to isolated players in the energy industry
for political "cover" is: (a) not talking to the people who will be directly impacted
by it, and (b) not going to like what I have to say.

As an initial point, I support the President's goal of reducing the federal
budget deficit. A genuine reduction in the federal deficit will benefit everyone .
However, I am not persuaded that a tax increase is necessary to accomplish that
goal. Several realistic but stringent cost-containment proposals have been detailed,
and those must be given serious review before any tax increase is contemplated.

680

Should it be necessary to consider higher taxes, however, I suggest that the
energy tax, as it has been proposed, is a poor idea. It is a poor idea because it is
a tax on the energy sector at a time when this nation needs this industry to rebuild
our economy and reestablish the independence we have historically enjoyed.

Over the past decade, more than 450,000 jobs were lost in the oil and gas
industry. Tax revenues derived from oil and gas have dropped from 30 percent
to 8 percent in Texas. These are the revenues that go to funding education,
prisons and health care.

As the Energy Belt of America is slowly waking up from the nightmare and
readjusting painfully to the brave new world, it cannot bear the brunt of a new tax
specifically directed at energy. This tax is a poor idea for three principal reasons:

1 . its impact will not be fair and equitable but will single out one region
of the country with the resulting loss of jobs,

2. depending on the point of collection, this tax will not be "broad-
based," but will be borne instead by producers, mostly independents
and smaller production companies, who are just now emerging from
a severe depression, and,

3. it runs counter to the national security and environmental goals touted
by its supporters.

Collection of the Proposed Energy Tax Will Not Be "Broad Based" But Will
Injure the Recovering Energy Belt

There are two ways of evaluating the impact of this tax ~ at the production
end and at the consumption end — and Texas is a loser on both counts. I believe
that, depending on how the President's energy tax is ultimately formulated, it will
directly impact producers of energy. Even if the collection problems are
addressed, this tax will still have a disproportionate impact on Texas consumers
because of our high energy usage.

Let's talk about Texas. 1990 Department of Energy data show that the
energy consumption in Texas is the highest in the country ~ some 9.8 quadrillion
Btus, and our per capita Btu use in Texas is more than twice what it is, for
example, for residents of Maryland, California and New York. By one well-
supported estimate, Texas would bear 12.5 percent of the energy tax burden while
having only 6.8 percent of the nation's population.

Texas motorists consume 720 million gallons of gas each month. With the
7.5 cents (or more) tax burden that the President's energy tax would place on
gasoline, that would add a burden of at least $54 million per month to Texans.
(That's 2/3rds of a billion dollars each year - just from driving). But Texans do
more than drive. We work on farms and in factories. We make products and
create stable jobs. This tax would have a tremendous negative economic impact
on those energy-intensive, job-rich industries that thrive in Texas: manufacturing
($29.7 billion in total 1990 wages), petrochemical ($16.2 billion), mining ($8.4

681

billion), construction ($8.6 billion), and agriculture ($1.3 billion).

Energy is used to create things, to add value. By taxing the one feature that
makes American, and specifically, Texas products competitive, you would be tying
the hands behind our manufacturers' backs as they fight for competitive advantage
in a global economy. You would be eliminating our competitive advantage across
the board.

We need to encourage industries that make things. In Texas, a tremendous
amount of energy is used to manufacture and produce products which add benefit
to the nation. Actions which retard expansion of energy-intensive industries make
it more profitable to perform low-value-added paper transactions than to actually
produce domestic products.

Recently, I visited a major industrial manufacturer in Houston. Its finely-
engineered products are textbook models of American know-how. As with many
other goods exported from the large Port of Houston, the manufacturing processes
used to create these products are energy-intensive. Energy is used to forge the
steel, run the complex machines tooling the steel, and drive the numerous post-
production processes. Petroleum is also the base source of the many plastics
which constitute the final product. These expenses are rolled into the cost of the
final American product.

When the costs of energy to this industrial user are increased by a surcharge
(to the extent it hasn't already been absorbed by the energy producer), either that
cost is passed on to buyers of the manufactured good or it is absorbed by the
company. For products that are competitively priced abroad today, it is likely that
the costs will have to be absorbed by the company. To remain competitive, the
Houston manufacturer will, most likely, have to bear the increased costs within the
company's operations, or risk losing the sale. This means less money to invest in
expansion, new technology, job training, or new employee hiring. In more drastic
cases, it may mean seeking cost savings within the company by letting people go -
- or in foregoing annual pay raises for the work force. This is not what I would
call a job-creating proposal.

Why the country needs to adopt a multi-billion dollar summer job spending
program while raising taxes which place high-wage manufacturing jobs at peril
simply does not make sense.

We should be bending over backward to save the good jobs we have in this
country, not eliminating them or placing them in jeopardy.

The Energy Tax. As Designed. Will Have A Serious Detrimental Effect on the
Recovering Energy Production Sector

Much of the cheerleading for the so-called "broad-based energy tax" is
founded on the misconception that it is the consumer who will pay the whole bill.
This leads some people to the conclusion that the tax will be spread evenly over
the country, impacting each region relatively equally.

682

, If the point of collection for this tax is anywhere other than at the final point
of sale, most of the tax will actually be borne by producers -- not consumers. The
fact is ~ surcharges and taxes go right back "up the pipe," as we say, and come
out of the producers' pockets.

In natural gas, for example, we have a decade of experience with FERC-
approved surcharges to study. A unit surcharge (assessed by the pipeline on each
unit of capacity and/or of gas) has been used to recover some $7-8 billion in "take-
or-pay" contract claims. This was another "tax" intended to be borne by aU
natural gas consumers in the country.

That premise could not have been more incorrect. The natural gas industry
found out the hard way that, like with an unwanted "collect call," the wrong guy
paid the bill. The impact of those surcharges is still being felt ~ although it
appears that the worst is finally past. The proposed Btu tax appears to be a "first
cousin" to this disastrous tax design theory.

The reason these taxes and surcharges are borne by the producer is that oil
and gas are highly competitive products ~ competitive with each other and among
themselves. The only days of the year when surcharges are truly borne by the
consumer are on those five or ten peak energy-use days each year when the market
is supply-driven, not demand-driven.

Most onshore and offshore producers I have talked with recently operate
under strict cash flow requirements from their banks. They need the cash and
must make the sale. This includes absorbing additional, externally-imposed costs,
such as the FERC surcharges, or this new federal Btu tax.

If one supplier (say, a low-cost Canadian producer) is willing and able to
absorb the surcharge, he will make the sale; a competing U.S. seller will lose the
sale. In order to get a sale, the U.S. seller in this example must absorb more and
more of the surcharge, and the spiral inevitably leads back to total absorption of
the tax by the seller.

This competitive situation already exists in energy markets. A tax on top
of the current price will only exacerbate the problem.

The point of collection of a tax determines who will actually pay the tax.
It also determines how domestic producers are treated with respect to foreign
competitors. If that tax is collected at the wellhead or even where the producer
delivers the gas to a pipeline, then that tax is undoubtedly going to be borne by the
producer.

Although I find the February 24, 1993 analysis of the energy tax by the
CBO's Robert Reischauer before the Senate Energy and Natural Resources
Committee generally correct, I found he skimmed over this critical issue. This
"collect call" impact of taxes and surcharges may be one of the best-kept secrets
in Washington, but it is of deadly serious concern in the energy patch. Most of
the independent producers that I have visited with over the past several weeks are
enraged about it. They are enraged because this reality coincides with the swirl

683

of rumors from Washington that the Btu tax and the double hit on oil are intended
to put them out of business.

Another often-overlooked aspect of placing the point of collection at or near
the wellhead is the administration problem. There are literally tens of thousands
of oil and gas wells and operators in the country - as of January 1, 1993, there
were 246,117 producing oil and gas wells in Texas alone. Ensuring proper tax
collection from each one will be difficult and costly, to say the least. If it must
be, the tax should be paid by the final consumer and collected by the ultimate
seller.

Similarly, the collection point for the oil Btu tax has important impacts.
Because of the competition from foreign sources, which are increasingly coming
to the United States in refined form, the assessment of any tax on crude coming
into the refinery and not on the final product would favor imports and possibly
close more domestic refineries. We've already lost 27 refineries in Texas in the
past decade. In Texas, as elsewhere in the country, those closures cost jobs and
make us more , not less, dependent on foreign sources of energy.

I think it goes without saying that the "collect call" impact and the collection
problem would be somewhat mitigated if the point of tax collection were moved
as close as possible to the ultimate consumption point, for instance, at the utility
city gate or at the refined product distribution point.

Re gardless of the Point of Collection, the Proposed Energy Tax Will Shut In
a Significant Amount of Domestic Production

In the last 10 years the domestic oil and gas industry has lost some 450,000
jobs ~ more than any other industry. New field discoveries and drilling are at an
all-time low, so new reserves are not being lined up for future use. 51 percent of
the exploration jobs have either gone overseas or have been lost altogether. The
refining business is off 28 percent; in Texas we have seen the closure of some 27
refineries. Energy, once the cornerstone of the State's tax base, has dwindled.
Texas simply caimot afford to lose any more of this industry.

The additional pressure of a tax, seen in the context of a fiercely competitive
international market for oil and gas, will inevitably lead to shutting in many
marginal wells. About 77 percent of Texas' oil wells (134,276 wells) and 41
percent of Texas natural gas wells (20,646 wells) are stripper wells producing less
than 10 barrels/day of oil and 60 Mcf/Day of natural gas. These stripper wells
employ thousands of people and contribute tens of millions of dollars per year to
the State treasury. The Railroad Commission's Economic Value Estimates
(analyzing the total impact of this production on the Texas economy) for these
marginal wells is $11.30 billion per year.

That is why these past two weeks my colleagues and I have worked with
members of the Texas Legislature to actively promote several State severance tax
incentives for exploration, drilling and production in Texas. I am not up here to
sell those ideas to you, but suffice it to say that everything we could do through
Texas regulatory and tax codes to create new jobs and increase production will be

684

more than wiped out by the imposition of the new federal energy taxes on these
same businesses and people we are trying to help.

The State of Texas has a 7.5 percent severance tax on natural gas and a 4.6
percent severance tax on crude oil. Even if we were able to totally exempt aU new
production from those taxes (an outcome I doubt our Legislature would support),
the effects of the proposed new federal tax would obliterate our efforts.

The Energy Tax Will Not Achieve the Additional Goals Touted by its
Su pporters

The Energy Tax will Lead to Greater, not Fewer, Energy Imports

The reason this country imports as much foreign oil as it does is that the
easily, cheaply recoverable sources in the United States have largely been
discovered and produced. It is now necessary to drill deeper to find new fields.
Exploratory seismic testing to find those fields is far more complex and more
expensive. Protection of the environment during exploration and production as
well as during construction of pipelines isn't cost-free, either. In addition, banks
are much more cautious about financing an increasingly risky business.

The bottom line is ~ it costs more to produce reserves here than it does
overseas. Even with substantial transportation costs rolled in, foreign oil is
competitive with our own oil because, by and large, it is cheaper to find and
produce. We also have placed many significant offshore (Outer Continental ShelO
areas with large potenfial for natural gas or oil production off limits for the next
decade.

As a consequence, domestic production and refining have declined
significantly. Additional costs which would be placed on top of that sector,
particularly in light of the "collect call" situation discussed earlier, will shrink it
even more. Marginal production will become uneconomic and investors will shift
to more productive investments.

Our demand for oil is relatively inelastic, so the disappearance of domestic
production will lead to more not fewer foreign oil imports.

Therefore, I question the "double hit" proposal, which would add a
surcharge to the tax on aU oil, regardless of source. If there has to be any energy
tax, it seems to me that a surcharge which is placed only on foreign oil supplies
would, at least, prevent domestic producers from being placed at a disadvantage
to foreign producers and prevent further contractions in domestic oil employment
and producfion.

685

The oil-on-oil competition that would result would, in all likelihood, keep
the price at its current level since foreign suppliers can afford to (and would)
discount the base price of their oil to maintain market share in this, their largest
market. In such a case, the absorption of the Btu surcharge by the foreign supplier
would be virtually guaranteed; foreign oil suppliers, then, would help the United
States reduce its federal deficit.

The "national security" aspect of the "double hit" oil surcharge rings a bit
hollow to offshore producers I talked to in Houston recently. They question
whether any realistic drop in oil imports will be observed so long as significant
new domestic discoveries in offshore waters are prohibited by federal fiat. From
my own experience as a former Director of the federal Minerals Management
Service, I have to agree. Trying to sell this energy tax as a national security
program is a bit disingenuous when the best solution to imported oil lies right off
our shores.

The Energy Tax Doesn't Make Good Environmental Sense

I think it goes without saying that we all are more aware of environmental
impacts of various activities than we were ten years ago. I salute the Congress for
its passage of the Clean Air Act Amendments in 1990. Provisions in that Act
were favorable to alternative fuels and to greater natural gas use.

In Texas, we have adopted a brisk implementation schedule for conversions
to alternative fuels (natural gas, propane and methanol), requiring that 90 percent
of public fleets to be converted by 1998. In addition, the Legislature has set up
a $2.7 million/year program to support marketing of propane, and we are seeking
a similar program to support natural gas marketing and vehicle conversion efforts.

Natural gas was supposed to be "the fuel of choice for the 90's," yet under
the latest version of the energy tax, the price of a standard unit of natural gas will
rise some 15 percent. Also, propane and methanol, which are composed chiefly
of natural gas, would be taxed at the higher oil tax rate. Is this plan really how
we want to favor clean, domestic energy sources? These fuels need to be
encouraged, not discouraged.

Environmental issues related to this tax manifest themselves in other ways.
When producers go bankrupt, plugging their abandoned wells (sealing them up)
is often an impossibility for them. Because of safety concerns and environmental
concerns, it is vitally important to Texas that these wells be plugged. In fact, the
Legislature has recently given the Railroad Commission responsibility to plug
abandoned wells. Texas has the only publicly-funded plugging program in the
nation.

However, it will be more than ten years before all unused wells are located
and plugged in Texas. Thus, for many reasons, we at the Commission would
rather have a producing oil or gas well than an abandoned well.

686

Conclusion

Energy is the lifeblood of our country. Our economy is as successful as it
is because we have been blessed with abundant energy supplies and have
successfully adapted to changes in those supplies over the years. In adapting to
these changes, however, the energy sector has recently taken some hard blows.
The loss of good jobs and State revenues has caused a dramatic transformation in
the Texas landscape, but we have swallowed hard and directed our energies toward
making a better future.

As a Commissioner in an agency that is as frugal as any I have ever seen
in government, I believe strongly that the search for federal deficit reduction must
begin with federal government spending reductions. I am encouraged that the
President has recently expressed an interest in the cost-containment measures and
agency audits we have been implementing in Texas State government over the past
few years. I am also encouraged by the recent serious alternative plans which call
for deeper reductions in spending in lieu of tax increases.

In closing, my message is clear: balance the budget here in Washington,
and not on the backs of hardworking men and women.

687

Mr. Andrews. Mr. Nagel.

STATEMENT OF HON. DENNIS J. NAGEL, CHAIRPERSON, IOWA
UTILITIES BOARD, AND PRESIDENT, NATIONAL ASSOCIA-
TION OF PEGULATORY UTILITY COMMISSIONERS

Mr. Nagel. Thank you, Mr. Chairman, and members of the com-
mittee. I serve as chairperson of the Iowa Utihties Board and presi-
dent of the National Association of Regulatory Utility Commis-
sioners, or NARUC, on whose behalf I testify today. The NARUC
greatly appreciates this opportunity to appear before the committee
to present its views on the proposed energy tax.

EarUer this month, the NARUC executive committee adopted a
resolution rescinding our 1990 position opposing broad-based en-
ergy taxes and taking a position of neutrality on the issue for now.
While this resolution does not advocate a position for or against the
President's Btu tax proposal, its does state six issues NARUC be-
lieves must be addressed in the design of any broad-based energy
tax including the President's proposal. A copy of this resolution is
attached with NARUC's written testimony.

Because my written statement goes into greater detail on each
of these six items contained in the resolution, I want to use my
time this morning to focus on two major points, possible preemp-
tion of State regulatory authority and assistance to low-income
ratepayers.

One of the fundamental principles of our association is to oppose
any form of Federal preemption of States' regulatory authority. I
raise this at the outset because the NARUC is aware of options to
modify the President's proposal that would, in essence, mandate
the passthrough of the tax to utility ratepayers.

A mandatory passthrough requirement, such as via amendments
to the existing normalization rules of the U.S. Tax Code, would pre-
empt State commissions' ability to balance all the factors involved
in setting utility rates. We also question the need for such a man-
datory requirement given the lack of evidence to warrant it.

We are not aware of any State commission today denying the re-
covery of Federal taxes paid by a utility. In fact, the majority of
State commissions allows utilities to passthrough to ratepayers in-
creases in the cost of their fuel, including increases due to taxes,
through what are commonly known as fuel adjustment clauses in
the electric utility industry and purchase gas adjustments in the
tax utility industry.

These adjustments to utility rates are done periodically, either
monthly, annually, or on some other basis depending on each com-
mission's rules. Our written testimony includes a summary of those
rulings. I commend you to it.

Some States, however, do not have these adjustment mechanisms
in place. In those instances, State commissions either hold special
hearings dedicated to fuel cost increases of utilities or review these
at the time of the utility's general rate proceeding.

There is a related issue that could impact the passthrough issue
I have just discussed; that is the issue of where the point of collec-
tion for the tax will be. We are aware that there are some discus-
sions to move the points of collection as far downstream as possible

688

and have, in effect, the utihty customers bear directly the entire
cost of the tax.

Consistent with our resolution, NARUC believes such a proposal
would leave little or no discretion to State utility commissions. In
addition, it is not clear collecting the tax only on utihty customers
would meet the goals of encouraging energy efficiency and assisting
our Nation's use of cleaner technologies and renewable resources.
For these reasons, NARUC would have to oppose such a provision.

The second issue I want to address is the issue of the impact of
any broad-based energy tax on low-income utihty cost matters. The
NARUC beheves any tax proposal must have a component that
mitigates the impact on low-income utihty ratepayers. We are
aware that the President's proposal includes certain offsets.

The NARUC has consistently supported funding for these pro-
grams as the best insurance that low-income ratepayers will be
able to meet their energy bills. Yet in recent years, the effective-
ness of these programs have been diminished by reduced Federal
fimding. We urge Congress to appropriate sufficient funds for these
programs to restore their effectiveness in reaching the people who
most need the assistance as well as making up tor the increased
energy cost that would result from the imposition of a broad-based
energy tax.

Of course, any broad-based energy tax would directly impact the
ratepayers of the utihties we regulate. At this time we are open-
minded about the President's Btu tax proposal. Our position nei-
tiier favors nor opposes the tax as it has been originally proposed.
However, as our resolution states, if tiiere is to be a broad-based
energy tax, there are certain principles that must be part of the
package.

There are several difficult issues associated with the implemen-
tation of a broad-based energy tax. I have touched on two of those
today. My written comments address the remaining issues.

We pledge the NARUC is willing to work with your committee,
Mr. Chairman, the Congress, and the administration in determin-
ing what proposals would be in the Nation's best interest.

Thank you. I would be glad to answer any questions.

[TTie prepared statement follows:]

689

TESTIMONY OF

THE HONORABLE DENNIS J. NAQEL
CHAIRPERSON, IOWA UTILITIES BOARD

ON BEHALF OF THE

■ATIOMAL ASSOCIATION OF REQDLATORY OTILITY COMMISSIONERS

Chairman Rostenkowski and Members of the Conunlttee:

Good morning. I am Dennis Nagel, Chairperson of the Iowa
Utilities Board and President of the National Association of
Regulatory Utility Commissioners (NARUC) , on whose behalf I am
testifying here today. The NARUC greatly appreciates the
opportunity to present its views on the subject of the President's
energy tax proposal.

The NARUC is a quasi-governmental, nonprofit organization
founded in 1889. Within its membership are the governmental
agencies of the fifty States, the District of Columbia, Puerto Rico
and the Virgin Islands engaged in the regulation of carriers and
utilities. NARUC's chief objective is to serve the public interest
by seeking to improve the quality and effectiveness of regulation.

Introduction

The NARUC takes the matter of energy taxes very seriously. In
fact. President Clinton's proposed BTU tax on fuel sources of
energy commanded a great deal of attention and debate during the
NARUC's recently concluded Winter Committee Meetings. In all,
three of our committees, the Committees on Electricity, Energy
Conservation and Gas, debated and took action on resolutions
addressing the issue of broad-based energy taxes. The result of
these deliberations was final action in the Executive Committee of
the Association, which adopted a resolution rescinding a 1990 NARUC
resolution opposing broad-based energy taxes and taking a position
of neutrality on the issue for now. A copy of this resolution is
attached to this statement (Attachment #1) . While this resolution
does not advocate a position for or against President Clinton's BTU
tax proposal, it states what issues the NARUC believes should be
addressed in the design of any broad-based energy tax, including
the President's proposal.

In my statement today, I would like to explain further each of
the items contained in our resolution and how they relate to what
we know about the President's BTU tax proposal. Let me say that
although we know the outlines of the President's BTU tax, there are
important details about it that are still being discussed. We have
discussed the proposal with the Administration and other interested
parties and are continuing these discussions. As the State
agencies responsible for regulating the rates and services of
electric and gas utilities, we have a great deal to contribute to
the National debate about energy taxes. There seems to be little
doubt that any energy tax proposal will impact the Nation's
electric and gas utility ratepayers, and with this in mind, we
enter this debate knowing that there will be real costs imposed on
real people, whose interests we are sworn to protect.

The President's BTU tax proposal is part of a comprehensive
package that is designed to reduce the Federal budget deficit as
well as encourage long-term economic growth. The NARUC in
rescinding its earlier resolution did so, in part, because the
President's BTU tax proposal was a component of a larger package of
economic proposals and that these combined with the BTU tax would
not only cut the deficit but help promote future economic growth.

No Res trictions on State Discretion in Treatment of Costs

Federal taxes, whether they are excise or income taxes, are
part of the costs of a utility's business. The NARUC believes that
the costs associated with an energy tax should be treated no
differently than any of the other costs that are included in the
State regulated utility rate-setting process. In fact, the
majority of State commissions allow utilities to pass through to
ratepayers increases in the cost of their fuel — including
increases due to taxes — through what are commonly known as fuel
adjustment clauses in the electric utility industry and purchased
gas adjustments in the gas utility industry. These adjustments to
utility rates are done periodically — either monthly, annually or
on another basis — depending on the State commission's rules.

690

(See Attachment #2 for a summary of State commission policies
regarding fuel adjustment clauses and purchased gas adjustments.)
Some States, however, do not have fuel adjustment mechanisms in
place. In those instances. State commissions will either hold
special hearings to deal with fuel cost increases of utilities or
review these at the time of the utility's rate proceeding.

A mandatory requirement that costs associated with an energy
tax should be passed through to ratepayers i.e. via amendments to
the existing normalization rules of the U.S. tax code would pre-
empt State commissions' ability to set rates according to the
process of balancing all the factors involved. If a mandatory
passthrough requirement is established, a State commission
reviewing the costs associated with a utility's operations would
have no choice but to increase rates to customers even though the
utility experienced substantial cost reductions e.g. due to the
recent decline in long-term interest rates or restructuring its
operations.

For the reasons stated above, the NARUC believes that any pre-
emption of States ' ratemaking authority in this area is unwarranted
and unsupported by the past experiences of State commissions in
dealing with Federal taxes paid by electric or gas utilities.

Geographic Equity and Fairly Spread Over All Fuels

The resolution we adopted calls for any broad-based energy tax
to be applied in a manner that assures geographic equity in tax
burdens and to assure that the tax burdens will be spread fairly
over all fuel sources, including hydro. This part of our
resolution deals with the issue of making any energy tax as fair as
possible to all those who will be affected by it. By applying the
tax to all fuel sources for electric generation, we believe that
some measure of geographic equity can be achieved with respect to
the potential impact on utilities and their customers in different
regions of the country. In addition, we believe that the tax
should be applied to all fuel sources so that it is not only the
utility fuel sector that is affected. The President's BTU tax
proposal appears to meet this objective by including fuels used for
electric utility generation as well as fuels used in other sectors
of the economy.

Encourage Energy Efficiency and Optimal Use of Fuels

Energy efficiency as many of you know was the cornerstone of
the recently enacted Energy Policy Act of 1992 (P.L. 102-486). The
NARUC took an active role in supporting many of the energy
efficiency provisions of this legislation. Consistent with this
past effort and with our continuing support of promoting cost-
effective energy efficiency investments by electric and gas
utilities, we believe that any broad-based energy tax should be
designed to further promote energy efficiency efforts not only by
regulated utilities but in all sectors of the economy. We are
concerned that the level of energy efficiency acquired through an
energy tax may be affected by the point at which it is assessed.
Based on our resolution, we believe that it should be applied where
it encourages the greatest total amount of energy efficiency and
efficient use of fuels. Although our country has made progress in
terms of reducing its energy consumption and improving its energy
efficiency, the potential for more energy efficiency gains is
tremendous. Energy efficiency also can lead to other benefits for
our country such as increased competitiveness in world markets. As
recognized by Congress in the Energy Policy Act, the United States
can and should do more to increase the efficient use of energy
among all its industries.

Consistent With Transition to Cleaner Technologies/Renewable
Resources

The NARUC has advocated the development of renewable energy

691

technologies. The association was supportive of provisions under
the Energy Policy Act to provide investment and production tax
incentives for renewable energy technologies, which this Committee
worked on in the last Congress. We did so based on evidence that
renewable energy technologies lag behind conventional energy
technologies in their acceptance by utilities and other businesses
as sources capable of producing clean, cost-effective electric
power. As we understand the President's tax proposal, renewable
energy sources would be exempt from the BTU tax. This part of the
proposal appears to meet our objective. However, careful
consideration should be given to determining what technologies
should qualify for exemptions from the BTU tax. For example, an
expansive definition of biomass facilities would include facilities
that have been shown to have significant environmental impacts.

Contribute to U.S. Productivity. Technology Export Opportunities
and Competitiveness

As our resolution states, the design of any broad-based energy
tax must contribute toward making the United States more
productive, and encourage greater export opportunities and
competitiveness. All of these objectives can in some measure be
accomplished through increased energy efficiency. As I indicated
briefly before, the NARUC believes that energy efficiency provides
real benefits for the nation. By making our country's industries
more energy efficient, we enhance our ability to compete in world
markets. In addition, it may spur development of clean energy
technologies in the U.S. that have great export potential. The
effect of energy taxes on the energy component of the products we
produce and export, however, should not be overlooked. These
additional costs must be weighed against the incentive an energy
tax would create to cut energy costs of producing domestic goods
and seirvices.

Offset Impacts on Low-Income Customers

The fifth point of our resolution addresses the issue of
impacts resulting from a broad-based energy tax on low-income
utility customers. The NARUC believes that any energy tax proposal
must mitigate the regressive impacts on low-income utility
ratepayers. We are aware that the President's proposal would
include offsets such as an expanded earned income credit and
increased funding for the Low-Income Home Energy Assistance Program
(LIHEAP) and the Department of Energy's Low-Income Weatherization
Assistance Program (WAP) . Our resolution also supports efforts
aimed at providing "education and targeted energy efficiency" for
low-income ratepayers to help them reduce the overall use of
energy. The NARUC has consistently supported funding for the these
programs as the best insurance that low-income ratepayers are able
to meet their energy bills. Yet in recent years the effectiveness
of these programs has been diminished by reduced Federal funds. We
would urge Congress to consider funding these programs to restore
their effectiveness in reaching the people who most need them as
well as making up for the increased energy costs that would result
from the imposition of an broad-based energy tax.

Other Issues

There are other important issues that could impact the pass
through issue I have just discussed but which our resolution does
not specifically address. These are the points of collection and
the treatment of the energy tax in contracts signed between
independent power producers and regulated utilities.

We are aware that there are discussions to move the points of
collection as far "downstream" as possible and have in effect the
utility customers bear the entire cost of the tax. It may have
»nri^^''^"^^Y ^i"e""t effects in encouraging energy efficiency
and the development of cleaner and renewable energy technologies
Consistent with the NARUC resolution and our historic opposition t^

692

Federal excise taxes, we believe that such a proposal would amount
to directly passing on the cost of the tax to utility ratepayers
and thereby leave no discretion to State utility commissions. In
addition, it is not at all clear that collecting the tax only on
utility customers would meet the goals of encouraging energy
efficiency and assisting our Nation's use of cleaner technologies
and renewable resources. For these reasons, the NARUC would have
to oppose such a proposal .

We also are aware of efforts to correct any financial
difficulties that would result in contracts entered into between
independent power producers and the utilities to which they sell
their power. Consistent with our resolution and our position
concerning wholesale power sales involving State-regulated electric
utilities, the NARUC believes that Congress should not mandate that
utilities pass through the increased costs related to the energy
tax as part of the utilities' contracts with independent power
producers, cogenerators or any affiliated or non-affiliated entity
selling power to a utility.

Investment Tax Credits

Unrelated to the issue I have discussed above, but which is
part of the President's overall tax package, is the revival of the
investment tax credit, which was repealed by the Tax Reform Act of
1986. Revival of the ITC would mean that utilities would be
allowed to claim credit against current and future income for their
investments in qualifying assets. The current tax code requires a
"normalization" treatment of these credits, which would mean that
the benefits are passed on to ratepayers over the lifetime of the
utility's asset. The NARUC opposes mandatory normalization
treatment of ITC. If normalization is required, we would advocate
that current tax law be changed to apply economic normalization to
the ITC, allowing more of the benefits of ITC to be passed on to
ratepayers.

Conclusion

As I said at the outset, energy taxes are a serious matter for
State commissioners; they directly impact the ratepayers of the
electric and gas utilities we regulate. At this time, the NARUC is
open minded about the President's BTU tax proposal. However, we
don't wish our position to be construed as favoring or opposing it.
As our resolution states, if there is to be a broad-based energy
tax, there are certain principles that must be part of the package.
There are several difficult issues associated with the
implementation of any broad-based energy tax. I have discussed
some of them with you today, and pledge that the NARUC is willing
to work with your Committee, the Congress and the Administration in
determining what proposal is the best for our country.

Thank you. I would be happy to answer any questions that you
may have.

693

Resolution on the Design of Energy Taxes

WHEREAS, The Administration and members of Congress will be considering adopting a
broad-based energy tax as part of a comprehensive package of actions to address the Federal deficit
and long-term economic growth; and

WHEREAS, State regulated utility ratepayers and shareholders will be affected by any such
tax through its impacts on costs, energy efficiency, and utility resource decisions; and

WHEREAS, By covering a portion of the economic impact not currently reflected in the
price of fuels, a properly designed tax policy which encourages energy efficiency may have long-
term positive economic benefits by increasing U.S. productivity and competitiveness as well as
avoiding or mitigating detrimental environmental impacts of resource decisions; and

WHEREAS, The National Association of Regulatory Utility Commissioners (NARUC)
previously adopted a resolution opposing a general broad-based energy tax at a time when such
taxes were being considered solely as a method to reduce the deficit and not as part of any
comprehensive economic plan; and now, therefore, be it

RESOLVED, That the Executive Committee of the National Association of Regulatory
Utility Commissioners (NARUC), convened at its Winter Meeting in Washington, D.C., hereby
rescinds the previous resolution on energy taxes adopted July 26, 1990; and be it further

RESOLVED, While the NARUC does not support or oppose a broad-based energy tax at
this time, the NARUC Executive Committee believes that any broad-based energy tax as part of
a comprehensive package of actions to reduce the Federal deficit and spur long-term economic
growth should:

(1) be applied in a manner that assures geographic equity in tax burdens and assures that
the tax burdens will be fairly spread over all fuels, including hydro;

(2) be designed to encourage energy efficiency and the optimal use of fuels;

(3) be consistent with the transition to use of cleaner technologies and renewable resources;

(4) contribute to U.S. productivity, technology export opportunities and competitiveness;

(5) be accompanied by programs that offset impacts on low-income customers, including
education and targeted energy efficiency programs that help reduce the use of energy; and

(6) not restrict State regulatory commissions' discretion in the treatment of costs associated
with the imposition of energy taxes.

Sponsored by the Committees on Electricity and Energy Conservation
Adopted March 3, 1993

694

SECTION 4
ENERGY COST ADJUSTMENT CLAUSES - ELECTRIC AND GAS

Table 24 displays electric utility use of energy cost adjustment clauses, whether a hearing is required prior to
recovering costs, whether periodic filings are required, what types of costs may be recovered via adjustment clause and
whether the agency uses a true-up procedure for over- or under-recoveries.

Table 25 displays the same information for gas utilities.

NARUC Ca^>ilatian of Utility Regulatory Policy 1991-1992

695

TABLE 24 - REGULATION OF ELECTRIC UTILITY ENERGY COST ADJUSTMENT CLAUSES

FAC=Fuel Adjust-
ment Clause

AGENCY

Has Auth-
ority to
Establish
Energy
Cost Ad-
justment
Procedure?

The Agency 1

Allows
Use of
FAC to
Recover
Cost
Chanqes

Requires
FAC Hear-
ing Prior
to Cost
Recovery?

Requires
Periodic

FAC
Filing(s)?

Allows Changes in these Cost Conponents to
be Recovered by Way of Fuel Adjustment
Clause (FAC)?

Uses a
True-up
Procedure
for Over-
or Under -
Recoveries

Fuel
Costs

Purchas

■d Power

Other

Energy
Charge

Demand
Charge

SEE KEY BELOW

FERC

YES

§35. 22(e) R&O

YES

ALABAtW PSC

YES

Taxes not assessed
uniformly statewide
(ie. municipal tax)

YES

ALASKA PUC

YES

Interest expense.

YES

ARIZONA CC

NO 7/

NO 1/

Rate Case

YES

NO 1/

ARKANSAS PSC

YES

Municipal franchise
tax. Co-ops - cost of
debt adjustment 9/

YES

CALIFORNIA PUC

YES

YES and
Annually

YES

Increased franchise
fees. Uncollectibles
associated with rev-
enue change.

YES

COLORADO PUC

YES

NO. Annual

M. A

YES

Interchange power.

YES

CONNECTICUT DPUC

YES

YES and
Annually

YES

Savings shares to FAC
& PGA revenues, gen-
eration uti lization.

YES

DELAWARE PSC

YES

DC PSC

YES

FLORIDA PSC

YES

YES i S

M. S

YES

Conservation costs.

YES

GEORGIA PSC

YES

Transportation.

YES

HAWAII PUC

YES

In Rate
Case

YES

Public service com-
pany tax. Public
utility fee. Fran-
chise tax on gross
revenues.

YES

IDAHO PUC

YES

NO 2/

YES 2/

ILLINOIS CC

YES

NO,
Annually

YES

Ad Valorem taxes on
large use rates that
are priced close to
costs. Gross revenue
taxes as affected by
cost increase collec-
ted via FAC.

YES

INDIANA URC

YES

Steam/Hydro generatio

YES

IOWA UB

YES

KANSAS sec 15/

YES

YES for
purchased
power

YES

Costs included in
FERC Acct 151, less
refunds Acct 555 -
co-ops. Acct 555 less
demand, capacity &
fixed charges for
lOUs. Limestone for
scruljbers, other.
KCC 106.850-U.

YES

KENTUCKY PSC

YES

NO. S & B

YES

FERC Acct 151-transp.

YES

LOUISIANA PSC

YES

YES & M

YES

Transportation/taxes

YES

MAINE PUC

YES

NO,
Annual ly

A, M

YES

Conservation cost,
indirect fuel cost.

YES

MARYLAND PSC

YES

YES & S

YES

MASSACHUSETTS DPU

YES

YES &

YES

MICHIGAN PSC

YES

YES and
Annually

YES

04M expenses other
than fuel, electric
production mainten-
ance costs.

YES

MINNESOTA PUC

YES 3/

YES

MISSISSIPPI PSC

YES

Transportation/ taxes

YES

MISSOURI PSC

NO 10/

MONTANA PSC

NEVADA PSC

YES

YES, A

YES

Capacity costs

YES

NOTE See also Table 57 for Audits
performed in conjunction with
Fuel Adjustment Clause.

A=Annual ly
S=Semi -Annual ly
Q=Quarterly
M=Monthly

Fuel Adjustment Clause <FAC) is the term
used generically to refer to energy cost
adjustment procedures for electric util-

l=Irregul
Necessa

sr Interval

or As

IMMC Co^tilatian of Utility Regulatory Policy 1991-199Z

696

REGULATION OF ELECTRIC UTILITY ENERGY COST ADJUSTMENT CLAUSES
(Continued)

FAC=Fuel Adjust-
ment Clause

AGENCY

Has Auth-
ority to
Establish
Energy
Cost Ad-
justment
Procedure?

The Agency 1

Allows
Use of
FAC to
Recover
Cost
Changes

Requires
FAC Hear-
ing Prior
to Cost
Recovery?

Requires
Periodic

FAC
Filing(s>?

Allows changes in these Cost Components to
be Recovered by Way of Fuel Adjustment
Clause (FAC)'

Uses a
True-up
Procedure
for Over-
or Under -
Recoveries

Fuel
Costs

Purchased Power

Other

Energy
Charge

Demand
Charge

SEE KEY BELOW

NEW HAMPSHIRE PUC

YES

YES & M.S

M. S

YES

NEW JERSEY BRC

YES

Revenue taxes and
energy losses.

NEW MEXICO PSC

YES

NEW YORK PSC

YES 3/

YES 5/

NO, Hear-
ings held
min U yrs

YES

Changes in city/
village revenue tax
surcharges.

NORTH CAROLINA UC

YES

YES and
annually

YES

Energy portion of
interchanged power.

YES

NORTH DAKOTA PSC

YES

min 4 yrs

YES

OHIO PUC

YES 6/

NO, semi-
annually

H, S, A

YES

System loss, Ohio
coal R&D costs.

YES

OKLAHOMA CC

YES

NO, semi-
annually

YES

All items charged to
fuel in FERC accounts

YES

OREGON PUC

YES

PENNSYLVANIA PUC

YES

Q, A

YES

Taxes on corp. stock,
net income, gross re-
ceipts, realty.

YES

RHODE ISLAND PUC

YES

SOUTH CAROLINA PSC

YES

YES 8/

NO. S

YES

Interchange power.

YES

SOUTH DAKOTA PUC

YES

TENNESSEE PSC

YES

TEXAS PUC

UTAH PSC

YES

YES. I. S

YES

OF energy, geothermal

YES

VERMONT PSB 11/

VIRGINIA sec

YES

Uses Projected Fuel
Factor.

YES
YES

WASHINGTON UTC

YES U/

WEST VIRGINIA PSC

YES

YES. A

YES

Off system sales.

YES

WISCONSIN PSC

YES

NO Ul

NO. A

YES

Transportation.

WYOMING PSC

YES

12/

VIRGIN ISLANDS PSC

YES

ALBERTA PUB

YES

NOVA SCOTIA PUB
16/

Fuel cost built into
rates.

NOTE See also Table 57 for Audits
performed in conjunction with
Fuel Adjustment Clause.

A=Annually
S=Senii -Annually
a=Quarterly
M=Monthly

Fuel Adjustment Clause (FAC) is the term
used generically to refer to energy cost
adjustment procedures for electric util-
ities.

l=lrregul
Necessa

ar Interval
ry

or As

** For greater detail on PGA and FAC, consult "Current PGA arxJ FAC Practices: Implications for Ratemaking
Competitive Markets'*, November 1991, National Regulatory Research Institute-NRRI 91-13.

NMtUC Co^ilation of Utility Regulatory Policy 1991-1992

697

FOOTNOTES - TABLE 24

1/ Aulomalic fuel adjustment clause was eliminated in November 1978 for investor-owned electric utilities.

2/ One electric utility has power cost adjustment clause to reflect changes in hydro-generation due to abnormal stream

flows; subject to evidentiary proceeding.
3/ Commission permits utilities to file rate schedules containing provisions for automatic adjustment of charges.

4/ Effective with their first rate case held after July 2, 1983, investor-owned electric utilities which generate more than

half of their energy requirements may not have an automatic adjustment clause.
5/ Utilities required to justify continuation of fuel adjustment clauses on an individual basis.

6/ Automatic fuel adjustment clause was eliminated as of 1/01/79 for investor-owned electric utilities. Fuel cost rate

changes every 6 months, after hearing and commission order. Company may include demand cost or purchased

economic power.
7/ In 1989 Commission eliminated adjustment clause for two large electric utilities.

8/ Adjusted on a semi-annual basis.

9/ "Other" - other areas of automatic adjustment clauses - not included in energy cost adjustment, but as a separate

line item. Purchased power for water/sewer utilities.
10/ In Missouri the fuel adjustment was ruled unconstitutional for electric service on October 1, 1979. See: Utility

Consumers Council of Missouri v. Public Service Commission, 562S.W.2d688.
11/ Abolished by Vermont Supreme Court Ruling in Docket No. 4496/4504, 1984.

12/ Opportunity for Hearing (Notice).

13/ Commission requires each regulated gas and electric utility to file its cost of fuel adjustment calculations for review

and approval prior to implementation. In 1987 changed to annual review and adjustment.
14/ Energy cost adjustment clause previously authorized to one lOU electric was eliminated January 1990 and replaced

in April 1991 with a limited adjustment clause.
15/ Eliminated April 1992 as a condition of approval of the merger of KPL and KG&E.

16/ Commission did not respond to request for update information; this data may not be current.

NMHJC Ca^iilation of Utility Regulatory Policy 1991-1992

698

TABLE 25 - REGULATION OF GAS UTILITY ENERGY COST ADJUSTMENT CLAUSES

PGA=Purchased Gas
Adjustment
C I ause

AGENCY

Has Auth-
ority to
Establish
Energy
Cost Ad-
justment
Procedure?

The Agency 1

Allows
Use of
PGA to
Recover
Cost
Changes

Requires
PGA Hear-
ing Prior
to Cost
Recovery?

Requires
Periodic

PGA
Filing(s)?

Allows Changes in these Cost Components to
be Recovered by Way of Purchased Gas Adjust-
ment C ause (PGA)?

Uses a
True-up
Procedure
for Over-
or Under-
Recoveries

Commo-
dity
Costs

Demand
Costs

port
Charge

Other

SEE KEY BELOW

FERC

YES

Q. A

YES

535.22(e) R&D

YES

ALABAMA PSC

YES

A, I

YES

TOP, GIC, storage,
competitive fuel
clause adjustments.

YES

ALASKA PUC

YES

ARIZONA CC

YES 3/

YES

YES 1/

TOP liability.

ARICANSAS PSC

YES

Municipal franchise
tax. Co-ops - cost of
debt adjustment 4/

YES

CALIFORNIA PUC

YES

YES and
Annual ly

YES

TOP, GIC, storage,
administrative costs
associated with fuel
procurement.

YES

COLORADO PUC

YES

YES & A

YES

CONNECTICUT DPUC

YES

YES and
monthly,
quarterly

YES

Savings shares to PGA
revenues, GIC, stor-
age, refunds, etc.

YES

DELAWARE PSC

YES

YES & S/A

S. A

YES

TOP, GIC, Storage.

YES

DC PSC

YES

TOP. GIC. Storage.

YES

FLORIDA PSC

YES

YES & S

YES

TOP. GIC. Storage.

YES

GEORGIA PSC

YES

TOP. GIC. Storage.

YES

HAWAII PUC 11/

YES

Public service com-
pany tax. Public
uti lity fee. Fran-
chise tax on gross

IDAHO PUC

YES

A. 1

YES

TOP. GIC. Storage.

YES

ILLINOIS CC

YES

NO,
Annual ly

M, A

YES

Ad Valorem taxes on
large use rates that
are priced close to
costs. Gross revenue
taxes as affected by
cost increase collec-
ted via PGA. TOP,
GIC. Storage.

YES

INDIANA URC

YES

0. S

YES

TOP, GIC. Storage.

YES

IOWA US

YES

TOP. GIC. Storage.

YES

KANSAS sec

YES

A, M

YES

Costs included in
FERC Acct 151, less
refunds Acct 555 -
co-ops. Acct 555 less
demand, capacity &
fixed charges for
lOUs. Limestone for
scrubbers, other.
KCC 106,85Q-U.
Storage.

YES

KENTUCKY PSC

YES

NO. S & B

Q. S

YES

TOP liability.

YES

LOUISIANA PSC

YES

YES. A

YES

TOP. taxes.

YES

MAINE PUC

YES

NO,
Annua 1 1 y

YES

Conservation cost,
indirect fuel cost.
TOP, Storage.

YES

MARYLAND PSC

YES

NO. S

YES

TOP, GIC, Storage.

YES

MASSACHUSETTS DPU

YES

TOP, GIC, Storage,
interest.

YES

MICHIGAN PSC

NO 10/

MINNESOTA PUC

YES 1/

YES

0. 1

YES

TOP. Storage.

YES

MISSISSIPPI PSC

YES

TOP. GIC. Storage.

YES

MISSOURI PSC

YES

TOP. GIC. Storage.

YES

MONTANA PSC

YES

A, B

YES

TOP, Storage.

YES

NOTE See also Table 67 for Audits
performed in conjunction with
Purchased Gas Adjustment Clause.

A=AnnuaUy
S=Semi -Annually
Q=Quarterly
M=Monthly

Purchased Gas Adjustment Clause (PGA) is
the term used generically to refer to
energy cost adjustment procedures for
gas utilities (LDCs).

I=Irre9Ul

or As N

B=Bi annua

ar Interval

ecessary

lly

NARUC Compilation of Utility Regulatory Policy 1991-1992

699

REGULATION OF GAS UTILITY ENERGY COST ADJUSTMENT CLAUSES
(Continued)

PGA=:Purchased Gas
Adjustment
Clause

AGENCr

Has Auth-
ority to
Establish
Energy
Cost Ad-
justment
Procedure?

The Aqency 1

Allows
Use of
PGA to
Recover
Cost
Changes

Requires
PGA Hear-
ing Prior
to Cost
Recovery?

Requires
Periodic

PGA
Filing(s)?

Allows changes in these Cost Components to
be Recovered by Way of Purchased Gas Adjust-
ment Clause (PGA)?

Uses a
True-up
Procedure
for Over-
or Under -
Recoveries

dity
Costs

Demand
Costs

Trans-
port
Charqe

Other

SEE KE

BELOW

NEVADA PSC

YES

YES. A

YES

Capacity costs

NEW HAMPSHIRE PUC

YES

YES & S

B. S

YES

TOP. Storage

YES

NEW JERSEY BRC

YES

YES & A

YES

Revenue taxes, energy
losses. TOP. Storage.

YES

NEW MEXICO PSC

YES

NO. B

YES

Market based GIC.

YES

NEW YORK PSC

YES 1/

YES

TOP, GIC, Storage,
changes in local tax
surcharges.

YES

NORTH CAROLINA UC

YES

TOP, market based GIC
and Storage.

YES

NORTH DAKOTA PSC

YES

OHIO PUC

YES 2/

YES

TOP, GIC, Storage,
propane .

YES

OKLAHOMA CC

YES

NO, semi-
annually

YES

All charged to gas in
FERC accts.. TOP.

YES

OREGON PUC

YES

YES 6/

NO. S. A

YES

Storage, interest.

YES

PENNSTLVANIA PUC

YES

NO,
annually

YES

Taxes on corp. stock,
net income, gross re-
ceipts, realty. GIC,
Storage.

YES

RHODE ISLAND PUC

YES 11/

YES

YES & A

YES

TOP. GIC. Storage.

YES

SOUTH CAROLINA PSC

YES

NO. S

M. S

YES

TOP. GIC. Storage.

YES

SOUTH DAKOTA PUC

YES 5/

YES

TOP. GIC. Storage.

YES

TENNESSEE PSC

YES

TOP. GIC. Storage.

YES

TEXAS RC 11/

YES

UTAH PSC

YES

YES. 1. S

S. A

YES

TOP. gathering.

YES

VERMONT PSB 7/

VIRGINIA sec

YES

YES 3/

YES

TOP. GIC. Storage.

YES

WASHINGTON UTC

YES

YES, A

YES

TOP, deficiency based
GIC. Storage.

YES

WEST VIRGINIA PSC

YES

YES. S. A

YES

TOP liability.

YES

WISCONSIN PSC

YES

NO, A

YES

TOP, deficiency based
GIC. Storage.

YES

WYOMING PSC

YES 9/

YES

TOP. GIC. Storage.

YES

VIRGIN ISLANDS PSC

ALBERTA PUB

YES

NOVA SCOTIA PUB
11/

YES

QUEBEC NGB

YES

NOTE See also Table 67 for Audits
performed in conjunction with
Purchased Gas Adjustment Clause.

A=Annually
S=Seffli -Annually
0=Quarterly
M=Monthly

Purchased Gas Adjustment Clause (PGA) is
the term used generically to refer to
energy cost adjustment procedures for
gas utilities (LOCs).

l=lrregul

or As N

B=Bi annua

r Interval
»cessary

** For greater detail on PGA and FAC, consult "Current PGA and FAC Practices: Implications for Ratemaking
Ccnpetitive Markets", Novei*er 1991, National Regulatory Research Insti tute-NRRI 91-13.

7/
8/
9/

10/
11/

energy cost adjustment, but as

Coomission permits utilities to file rate schedules containing provisions for automatic adjustment of charges.

Automatic fuel adjustment clause was eliminated as of 1/01/79 for investor-owned electric utilities. Fuel cost

rate changes every 6 months, after hearing and comnission order. Company may include demand cost or purchased

economic power.

Subject to Commission approval.

"Other" - other areas of automatic adjustment clauses • not included

separate line item. Purchased power for water/sewer utilities.

Required by Statute.

Purchased gas adjusted on a six-month or twelve-month basis - no automatic adjustment

PGA abolished in 1985.

Opportunity for Hearing (Notice).

Comnission requires each regulated gas and electric utility to file its cost of fuel adjustment ci

for review and approval prior to implementation. In 1987 changed to annual review and adjustment.

Abolished in 1982.

Commission did not respond to request for update information; this data may not be current.

pilation of Utility (egulatory Policy 1991-199Z

700

Mr. Andrews. Mr. Fry.

STATEMENT OF PAUL R. FRY, DEPUTY EXECUTIVE DIRECTOR,
AMERICAN PUBLIC POWER ASSOCIATION

Mr. Fry. Thank you, Mr. Chairman and members of the commit-
tee. I am Paul Fry, deputy executive director of the American Pub-
Uc Power Association.

APPA is a national service organization representing more than
1,750 mxinicipal and other local, pubUcly owned electric utility sys-
tems. These utiUties serve 15 percent of the Nation's electric con-
sumers and are located in 49 of the 50 States. We appreciate this
opportunity to present our views on the administration's economic
stimulus, public investment, and deficit reduction proposals.

I would like to use my time to comment specifically on the pro-
posed energy tax. APPA has a history of opposition to energy taxes.
This opposition has been based on concerns about the inequitable
regional distribution of the burdens of such taxes, the difficulty of
ensuring fair and efficient administration, potential adverse effects
on international competitiveness, and the fact that an energy tax
is inherently regressive.

Despite this history, last month APPA's Legislative and Resolu-
tions Committee voted to suspend this poUcy of opposition, and to
examine the administration's proposal in the spirit of accommoda-
tion. While APPA continues to be concerned by the inherent regres-
siveness of energy taxes, including the proposed Btu t£ix, and by
the potentially unequal burdens such taxes may impose, we are
willing to accept a Btu tax provided; No. 1, that the tax revenues
are used for the purpose of deficit reduction; No. 2, that the tax law
contains a sunset provision; No. 3, that the tax is fair for different
fuels, regions, customer classes, and electric utility industry sec-
tors; No. 4, the tax is structured with an eye to fair and efficient
administration; and finally, that the regressive nature of the tax is
mitigated.

Like the majority of Americans, APPA supports the goal of deficit
reduction. This shared goal is the major reason our association is
willing to accept the idea of an energy tax. If the administration's
economic package is successful, it could mean lower longrun costs
for all consumers. It is essential, however, that energy tax revenues
be applied to deficit reduction.

At the same time, our members beheve that the Btu tax should
not be perpetual. They recommend that there be a sunset feature
that c£incels the Btu tax automaticEilly and coincidentally with the
end of the administration's economic package. This is intended to
trigger a mandatory review of the degree of success the tax may
have had in reducing the deficit. It would also permit a reconsider-
ation of the fairness of the tax and permit an evaluation of unfore-
seen effects.

We assume that the overriding purpose of the Btu tax is to raise
revenue. The design of the tax appears to have been crafted with
an eye to spreading the burdens as evenly as possible among the
regions of the coimtry. APPA recognizes some regional inequities
remain and efforts to correct them wiU occur. If the revenue goals
of the tax are to be maintained, any tinkering with the tax will be
a zero-sum game.

701

A tax reduction for one State or region will require a tax increase
for some other States or regions. Modifications of the Btu tax as
proposed must be guided by concern for an equitable distribution
of the tax burdens.

The administration has proposed that the Btu tax be imposed
close to the production level. APPA agrees with this general propo-
sition on the grounds that it will entail fewer taxpayers and, hence,
be less costly to administer and more difficult to evade. We are con-
cerned, however, that there be no layering of other taxes on top of
the Btu tax. No tax on the tax should be permitted.

For instance, gross receipts taxes or similar levies. Likewise, sev-
erance taxes and royalties should not be applied to that portion of
a fuel's price occasioned by the Federal Btu tax.

We understand that the administration intends that the full bur-
den of the Btu tax will be borne by the end users of energy. In
keeping with this intention, we urge that there be no prohibition
of an electric utiht^s right to itemize the Btu tax on bills to ulti-
mate consumers. It should also be made clear that Federal faciU-
ties are responsible for their fair share of the tax applied to their
electricity bills.

The fact that the proposed energy tax is regressive must be rec-
ognized and addressed. One effective means of mitigating the bur-
dens of the tax on those least able to afford it is to provide ade-
quate funding to the existing low-income home energy assistance
programs, or LIHEAP. LIHEAP is a needs-based, block grant pro-
gram to help low-income households pay household energy costs.

APPA strongly urges that the trend of decreased funding for
LIHEAP be reversed, and additional funds be provided to meet ex-
isting needs and to offset the impact of the proposed Btu tax.

Thank you, Mr, Chairman.

Mr. Andrews. Thank you, Mr. Fry.

[The prepared statement follows:]

702

TESTIMONY OF THE
AMERICAN PUBLIC POWER ASSOCIATION

ON THE ADMINISTRATION'S PROPOSALS FOR
PUBLIC INVESTMENT AND DEFICIT REDUCTION

BEFORE THE
HOUSE WATS AND MEANS COMMITTEE

MARCH 23, 1993

Mr. Chairman, Members of the Committee, I am Paul R. Fry, Deputy
Executive Director of the American Public Power Association
(APPA). APPA is a national service organization representing more
than 1,750 municipal and other local, publicly owned electric
utility systems. These utilities serve fifteen percent of the
nation's electric consumers -- approximately thirty-five million
Americans.!/ Public power systems are owned by, and are
accountable to, the people they serve. APPA's member utilities
are located in forty-nine of the fifty states, only Hawaii is
excepted.

I. SUSPENSION OF CATEGORICAL OPPOSITION TO ENERGY TAXES

We appreciate this opportunity to present our views on the
Administration's economic stimulus, public investment and
deficit reduction proposals. I would like to comment
specifically on the proposed energy tax and then briefly
address some of the other provisions of particular interest
to public power systems.

APPA has a history of opposition to energy taxes. This
opposition has been based on concerns about the inequitable
regional distribution of the burden of such taxes, the
difficulty of ensuring fair and efficient administration,
potential adverse effects on international competitiveness
and the fact that an energy tax is inherently regressive.

Despite this history, last month, APPA's Legislative and
Resolutions Committee voted to suspend this policy of
opposition, and to examine the Administration's proposal in a
spirit of accommodation.

In addition, APPA President Robert E. Roundtree appointed a
broad-based task force of public power leaders from
throughout the country to chart specific interim policy
positions in response to Administration proposals affecting
public power.

II. CONCERNS WITH PROPOSED BTU TAX

While APPA continues to be concerned by the inherent
regressiveness of energy taxes, including the proposed Btu
tax, and by the potentially unequal burdens such taxes may
impose, we are willing to accept a Btu tax provided:

(1) tax revenues are used for deficit reduction;

(2) the tax law "sunsets" in 1998;

JT See attached charts for details of U.S. electric utility

industry structure by ownership type, generating capacity by
fuel type, etc.

703

(3) the tax is fair to different fuels, regions, customer
classes and electric industry sectors;

(4) the tax is structured with an eye to fair and
efficient administration; and

(5) the regressive nature of the tax is mitigated.

A. Importance Of Deficit Reduction

Like a majority of Americans, APPA supports the goal of
deficit reduction.

This shared goal is the major reason our association is
willing to accept the idea of an energy tax. If the
Administration's economic package is successful, it could
mean lower long-run costs for all consumers. It is
essential, however, that energy tax revenues be applied to
deficit reduction.

B. Desirability of Sunset Provision

At the same time, our members believe that the Btu tax
should not be perpetual . They recommend that there be a
"sunset" feature that cancels the Btu tax automatically
and coincidently with the end of the Administration's
economic package. This is intended to trigger a mandatory
review of the degree of success the tax may have had in
reducing the deficit. It would also permit a
reconsideration of the fairness of the tax and permit an
evaluation of unforeseen effects.

C. Fairness

We assume that the overriding purpose of the Btu tax is to
raise revenue. The design of the tax appears to have been
crafted with an eye to spreading the burden as evenly as
. possible among the regions of the country. APPA
recognizes that some regional inequities remain and
efforts to correct them will occur. If the revenue goals
of the tax are to be maintained, any tinkering with the
tax will be a zero-sum game.

A tax reduction for one state or region will require a tax
increase for some other state or region. Modifications of
the Btu tax as proposed must be guided by concern for an
equitable distribution of the tax burden.

D. Design and Administration

The Administration has proposed that the Btu tax be
imposed close to the production level. APPA agrees with
this general proposition on the grounds that it will
entail fewer taxpayers and, hence, be less costly to
administer and more difficult to evade.

Electric utilities with hydroelectric or nuclear
generating facilities are proposed as the collection
points for those energy sources.

We are concerned, however, that there be no layering of
other taxes on top of the Btu tax. No "tax on the tax"
should be permitted, for instance, gross receipts taxes or
similar levies. Likewise, severance taxes and royalties
should not be applied to that portion of a fuel's price
occasioned by the federal Btu tax.

We understand that the Administration intends that the
full burden of the Btu tax will be borne by the end users
of energy. In keeping with this intention, we urge that
there be no prohibition of an electric utility's right to
itemize the Btu tax on bills to ultimate consumers. It
should be made clear that federal facilities are

704

responsible for their fare share of the tax applied to
their electricity bills.

Also, the allocation of the tax among a utility's customer
classes should remain within the sole discretion of the
utility or appropriate regulatory body.

E . Mitigation of Reqressiveness

The fact that the proposed energy tax is regressive must
be recognized and addressed. One effective means of
mitigating the burden of the tax on those least able to
afford it is to provide adequate funding to the existing
Low-Income Home Energy Assistance Programs (LIHEAP).
LIHEAP is a needs-based, block grant program to help
low-income households pay household energy costs. APPA
strongly urges that the trend of decreased funding for
LIHEAP be reversed, and additional funds provided to meet
existing needs and to offset the impact of the proposed
Btu tax.

III. DISCUSSION OF FUEL-SPECIFIC FAIRNESS ISSUES

APPA offers the following suggestions regarding some
fuel-specific fairness issues:

A. Hydro power . Hydro power is our nation's most abundant
renewable resource, accounting for approximately 12
percent of our total installed electric generating
capacity. It will continue to make a significant
contribution to our energy mix. Federal policy should
encourage its use, both development of additional hydro
power facilities and relicensing of existing facilities.

1 . Pumped Storage . The Administration's proposal may
impose a double tax on pumped storage hydroelectric
projects — taxing the fuel (or the electricity itself)
used to generate the electricity needed to pump water
to the storage area, and taxing the electricity
generated as that water is released. This double
taxation is inequitable and should be explicitly
prohibited.

B. Coal . Coal should be treated as a "feedstock" where it is
used to produce another fuel, such as through coal
gasification. The Administration's program should exempt
from taxation this "feedstock" and impose the Btu tax only
on the Btu content of the fuel produced.

C. Nuclear . The Administration's proposal imputes a heat
rate for nuclear power plants that is in fact higher than
the national average heat rate for such plants, resulting
in a higher tax on nuclear power. The Department of
Energy's Energy Information Administration tabulates on an
annual basis the average heat rate for all domestic
nuclear power plants. That annual figure should be used
for assessing the Btu tax for all nuclear generation.

D. Imported Energy . In taxing imported electricity and
natural gas, the tax rate assessed should not alter the
competitive position of imported versus domestic sources
of energy, nor should it alter the mix of fuels.

E. "Unconventional Fuels." Electricity generated from
unconventional fuels such as wind, solar, biomass and
geothermal are exempt from the Btu tax. This exemption is
designed to help these fuels become economically viable
and should be continued only until they achieve such
viability. Once a determination has been made_that these
exempted fuels are commercial, then the tax exemption
should be removed. The definition of unconventional fuels
should be expanded to include such things as extraction
and combustion of methane from landfills, the use of

705

tire-derived fuels, and solid waste-to-energy projects.

1. Renewable Energy Incentive Section 1212 of the Energy
Policy Act of 1992 (Public Law 102-486) contained a
program authorizing the payment of 1.5 cents per kwh to
consumer-owned utility developers of various qualifying
renewable energy projects. Funding of this provision
is consistent with the purpose of the exemption of such
fuels from the Btu tax, is necessary to achieve parity
with the tax credit provided to investor-owned
utilities, and should be provided for in the budget to
be submitted for the Department of Energy.

Stockpiles . If stockpiles are to be taxed, care must be
taken to ensure that it does not result in double taxation
as the fuel is used to generate power. Similarly, if the
stockpile of one fossil fuel is taxed, then all fossil
fuel inventories must be taxed. Stockpiled uranium, of
course, needn't be taxed in any case since the Btu tax is
to be imposed on the electricity generated by nuclear
power plants rather than the fuel. Since inventories have
yet to generate revenue for their owners, collection of
the tax on stockpiles should be spread over time so as not
to create an unreasonable burden on cash flow.

PROVISIONS AFFECTING FEDERAL POWER MARKETING ADMINISTRATIONS

APPA reaffirms its support for cost-based rates for
electricity marketed by the federal power marketing
administrations (PMAs) and its opposition to changes in the
repayment practices of the PMAs. APPA opposes the provisions
of the Administration's economic package that would reduce
net outlays for the PMAs by $100 million annually beginning
in FY 1996 and that would authorize "market incentives" for
energy conservation by PMA customers. Federal power
customers will share in paying the Btu tax on power marketed
by the PMAs; it is unfair to levy additional costs on these
systems. The energy conservation market incentive program is
fraught with workability problems and violates the principle
that federal power should be distributed at cost-based rates.

The proposal levies a surcharge per acre-foot on water sales
by Reclamation projects. However, irrigators are required to
repay their capital costs of these Reclamation projects only
to the extent of their financial ability; those capital costs
beyond the ability of irrigators to repay ultimately are
repaid by power customers. Any surcharge legislation and
subsequent implementing regulations must specify that this
water surcharge shall not increase power customers' repayment
obligations .

Any Btu tax that is levied on PMA electricity production
should be charged proportionally to all beneficiaries of
federal power. Thus, the tax should be applied to PMA power
distributed to federal agencies and to project power utilized
for irrigation features of Reclamation projects. Again, care
must be taken in drafting the legislation and implementing
regulations to insure that none of these costs are ultimately
transferred to the repayment obligation of power customers
due to irrigators' limited ability to pay.

OTHER PROVISIONS OF CONCERN TO PUBLIC POWER

The Administration's proposal must be accompanied by other
provisions that will promote economic development, protect
consumers from the regressive nature of the Btu tax, and
encourage various energy efficiency technologies. They
include:

• the elimination of the $15 million private-use restriction
placed solely on public power (Section 141 (b)(4)'of Title
2 6 of the Internal Revenue Code);

706

• the inclusion of tax-exempt bond simplification provisions
contained in H.R. 13, the Tax Simplification Act of 1993,
introduced recently by Chairman Rostenkowski, along with
additional tax-exempt bond simplification provisions
passed twice last year in H.R. 4210, the Tax Fairness and
Economic Growth Act of 1992 and H.R. 11 the Revenue Act of
1992, but vetoed by President Bush. (This would include
provisions to increase from $10 million to $25 million the
amount banks can deduct and further simplify arbitrage
rebate requirements.); and

• full funding for Section 1212 of the Energy Policy Act of
1992 (Public Law 102-486), which provides for an incentive
payment program for qualifying renewable energy facilities
developed by consumer-owned utilities.

In addition, deficit reduction and increased public and
private sector efficiencies can be advanced by efforts
designed to make the government more efficient. The
Administration must concentrate on cost-cutting efforts, as
well as reducing regulatory lag and taking steps to ensure
better coordination and cooperation between federal agencies.

Lastly, APPA supports a number of energy and consumer
assistance programs already contained in the Administration's
economic package, including in particular the following:
energy conservation and efficiency projects, particularly
those supporting research, demonstration and
commercialization of electric vehicles; joint ventures in
support of research, demonstration and commercialization of
renewable energy and energy efficiency; magnetic levitation
and high-speed rail transportation; accelerating the
development of a nationwide broadband, interactive
telecommunications network; reducing the backlog of critical
operation and maintenance items at Corps of Engineers and
Bureau of Reclamation projects; and providing additional job
training and retraining.

707

Number of State and Local Publicly Owned Electric Utilities, By State, 1991

Figures include operanng |Oint acnon agcnao

Alabama 37

Alaska 39

American Samoa 1

Arizona 25

Arkansas 15

California 46

Colorado 32

Connecticut 7

Delaware 9

Flonda 35

Georgia 53

Guam 1

Idaho 11

Illinois 42

Indiana 73

Iowa 138

Kansas 123

Kentucky 29

Louisiana 23

Maine 5

Maryland 5

Massachusetts 42

Michigan 43

Minnesota 129

Mississippi 24

Missouri 91

Montana 1

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina ...

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Puerto Rico
Rhode Island
South Carolina...

South Dakota

Tennessee

Texas

Utah

Vermont .

Virgin Islands

Virginia

Washington
West Virginia
Wisconsin
Wyoming
Total

23
36
63
80
43
16

1
16
43

2
.83
.14

.2.026

708

U.S. Electric Utility Generating Capacity, 1991

NAMEPLATE CAPACITY IN KILOWATTS. NUMBERS REFLECT JOINT OWNERSHIP AND INCLUDE PUERTO RICO

COM.
322498.970

TOTAL U.S.

Ijfc^^

OTICR

4.082.246

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128,483.054 ^^^ /

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88.875.601

87.33L671

NUCLEAR
107.979.958

COOPERATIVE

WjaEAR
3,334.928

GAS

FEDERAL

lOAL

1.116.800

18511 864

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39.633,898

PRIVATE

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252 ■588.602 ^

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■ 3,227.906

105.288.158 \J

'if^

73.298,873

HYDRO

;9.050 7

NUCLEAR
88.009.695

PUBLICLY OWNED

COAL

rj».S ^..^^^ /- 26,513 195

18.831575 ^-^ ^^^^^^^

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18 426,063 ^ ^ '^

NUCLEAR

10. 728. 175

709

20 Largest State & Local Publicly Owned Elecmc Systems

ELECTRIC CUSTOMERS SERVED - 1991 (Ultimate eustomert Mrvod.)

/ 1 Uos Angeles Department of Water and Power 1 368 282

2 Puerto Rico Electric Power Authority 1 171548

3 Salt River Proiect Phoenix. Arizona 539 190

4 San Anton.o City PuDiic Service. Texas 473 955

5 Sacrannento Municipal Utility District. California 460 564

6 Men-pnis Lght Gas ano Water Division. Tennessee 356.794

7 Seattle C'ly Light Wasnmgion 331451

8 Jacksonville Electric Authority. Flonaa 295 407

9 Nashville Electric Service, Tennessee 275 81 1

10 Austin Utilities. Texas 273 449

1 1 Omaha PuDlic Power District. Nebraska 252 422

12 Public Utility District No 1 of Snohomish County, Washington 211367

13 Orlando Utilities Commission. Florida . 156 785

14 Knoxviile Utilities, Tennessee 150 548

15 Colorado Springs Utilities. Colorado 145 567

16 Chattanooga Electric Power Board, Tennessee 142 302

1 7 Tacoma City Light. Washington 1 30 225

18 Huntsville Utilities Alabama i09 133

19 Clark Public Utilities Washington 106 679

20 Nebraska Public Power District 1 06 231

ELECTRIC REVENUES - 1991 (Ravvnua* from sala* to ultimata cuatomers and from aalaa for reaala)

1 LOS Angeles Depanmeni of Water and Power . $1.771026.000

2 Puerto Rico Electric Power Authority 1 198 836 000

3 New York Power Authority 1 166 426 000

4 Salt River Project Phoenix. Arizona 1 134 687 000

5 San Antonio City Public Service. Texas 672 471 000

6 Sacramento Municipal Utility District. California 661658 000

7 Memphis Light. Gas and Water Division. Tennessee 624 622 000

8 Jacksonville Electric Authority. Florida 567 411000

9 Iniermountain Power Agency. Utah 565 687 000

10 South Carolina Public Sen/ice Authority (Santee Cooper) 557 736 000

1 1 Municipal Electric Authority of Georgia 550.637 000

12 Nashville Electric Service. Tennessee 530,996 000

13 Nebraska Public Power District 466.272 000

14 Washington Public Power Supply System 440 905.000

15 North Carolina Municipal Power Agency 438 810.000

16 Austin Utilities. Texas 415.492000

17 Omaha Public Power District. Nebraska 376 588.000

18 Nonh Carolina Eastern Municipal Power Agency 370.749 000

19 Lower Colorado River Authority. Texas 323 808 000

20 Seattle City Light Washington 280 945.000

KILOWATT-HOUR SALES - 1991 (Salaa to ultimata cuatomara and aalaa for raaala)

1 New York Power Authority 36 232.028.000

2 Los Angeles Department of Water and Power 21 520 786 000

3 Salt River Protect. Phoenix. Arizona . 17 563 423 000

4 South Carolina Public Service Authority (Santee Cooper) 13 597 271000

5 Puerto Rico Electric Power Authority 13 283 229 000

6 Nebraska Public Power Distnct . 13. O61 140.000

7 San Antonio City Public Service. Texas . 12.021153 000

8 Public Utility District No 1 of Chelan County. Washington 11.540 046 000

9 Memphis Light. Gas and Water Division. Tennessee 11.451.827 000

10 mtermountam Power Agency. Utah 10.750 184 000

11 Nashville Electric Service. Tennessee 9 912 965 000

12 Public Utility District No 2 of Grant County. Washington 9 903 037 000
"3 Muhicioai Electric Authority of Georgia 9 310 838 000

14 Seattle City Light. Washington 8 832 638 000

15 Jacksonville Electric Authority. Florida 8.693,944 000

16 Sacamenio Municipal Utility District. California 8 421 441 000
' 7 Nort" Carolina Municipal Power Agency 8 022 722 COO
"8 _cwer Colorado River Authority Texas 8 005 3ii000
•9 Omara P'^C'ic Power District Nebraska 6 859 '87 000
20 Austin ut.iii.es Texas 6 826 815 000

710

U.S. Electnc Utilitv Statistics

statistics for publicly owned systems, private systems, cooperative systems and federal systems are based on
Energy Information Administration Forms EIA-860 and EIA-861. Some adjustments have been made by APPA.

Number of Utilities 1991

P'jDlic:y ownea systems" 2 014

Private DOwer companies 264

Coooerative systems 947

FeOerai power agenices" 10

TOTAL 3 235

■Reliecis oniy Ifose uiiiilies «nccn iiie Form EiA-861 with itie Energy iriformalion Administration

"inciuQes A;asKa Power Aominislration Bonneville Ponet Aommistration Souineastern Po*er Aominisltalion Soutnwesterr' Power Aamimsiraiion Western Area Power
Aomin'straiion Tennessee Valley Auinoniy u S Army Cores ol Engineers Bureau ol Reciamaiion. Bureau of Indian Atlairs and iniernaiionai Boundary and Water Commis-
sion For additional mlormation on leoerai systems seeDagcl53

Number of Ultimate customers 1991 Percent

Publicly owned systems 16,565,893 14 6%

Private 84 973,561 75 0%

Cooperatives 11706,776 10 4%

Federal 29,700 0%

TOTAL 113,275,930 100 0%

Kilowatt-Hour Sales To Ultimate Customers (In millions of l(Wh) 1991 Percent

Publicly owned systems 408,385 14 7%

Private 2.110,528 76 0%

Cooperatives 204,921 7 4%

Federal 52,944 i 9%

TOTAL 2,776,778 100 0%

Electric Revenues from Sales to Ultimate Customers (in tl«ousands of dollars) 1991 Percent

Publicly owned systems 24 503,583 13 1%

Private 147,582.567 78 6%

Cooperatives 14 139 825 7 5%

Feoeral l ,479,079 8%

TOTAL 187,705.054 100 0%

Installed Capacity (in ttiousands of icilowatu) 1991 Percent

Publicly owned systems 88,234 1 1 9%

Private 551,564 74 6%

Cooperatives 32,880 4 5%

Federal 66.573 9 0%

TOTAL 739.251 100 0%

Noie installed caoacity includes adiusiments lor lomi owncrshio Data retlect utilities ttiat liie Form EIA-860 plus Puerto Rico Eleanc Power Authority

Data reiieci caoaciiy at start ol calendar year

Kilowatt-Hour Generation (in millions of ItWh) 1991 Percent

Publicly owned systems 320.017 11,2%

Private 2.121,827 74 4%

Cooperatives 156.405 5 5%

Federal rr.T 253.829 8 9%

TOTAL 2.852.078 100 0%

711

Mr. Andrews. I just have a couple of questions. Mr. Willi£unson.
Assume for a moment that the Congress and the President have
decided that there is going to be taxes in the deficit reduction pack-
age, and assume further that there is to be an energy component
in the package.

I understand your opposition to Btu tax. Is there another energy
tax that you would suggest that would make up the $70 billion loss
that would be taken away from the package if we don't have a Btu
tax?

Mr. Williamson. The difficulty with an energy tax is it is not
broad-based. There are not very many producers in the Nation. Un-
fortunately, Texas is the No. 1 producer of natural gas and the No.
1 producer of oil and about the fourth or fifth largest producer of
coal. That is not broad-based. So what you would need to do is to
touch the most people who use energy, and that is, obviously, not
through the production taxes.

Mr. Andrews. Well, would a gasoline excise tax be more pref-
erable?

Mr. Williamson. I am sorry?

Mr. Andrews. Would a gasoline excise tax be more preferable?

Mr. Williamson. It would be tremendously more fair, a more
broad-based tax.

Mr. Andrews. And how so?

Mr. Williamson. It hits the consumer of gasoline. If you are try-
ing to identify and to lower the consumption of energy in the Na-
tion, in addition to raising fiinds, then you must attack the trans-
portation problem. Two-thirds of all the oil used in this country
goes into gasoline, into motor fuels on our highways. That is more
oil than we produce in the country.

Mr. Andrews. Now, relative to the Btu tax, there is much dis-
agreement, as I know you are aware, of where the tax should be
collected. What are your thoughts about this? How do we achieve
the goal you just suggested of a broad-based tax? Where should the
tax be collected?

Mr. Williamson. Well, I think if you are going to tax natural
gas — one of the things that we are trying to do is promote natural
gas as a clean burning fuel, a fiiel of choice for the future — ^you
want to pass that tax as far along as you can to as many of the
taxpayers out there as possible.

Natural gas is currently selling about $1.70, $1.80. This time last
year it was at a $1. So the volatility — it is the most volatile price,
the most volatile commodity on the exchange over last year. The
price volatility is a problem. Twenty-seven cents an MCF is a big
chvmk out of that, and if you put that on the producer, you will
shut in natural gas. You will not see production of natural gas.

So I would encourage that if you have to tax, to put it on the
utility bill. Itemize it on the utility bill.

Mr. Andrews. Mr. Mitchell, you testified that you wanted to see
the consumer pay that tax; is that correct?

Mr. Mitchell. Yes, Mr. Chairman, that is the only way it can
happen.

Mr. Andrews. Mr. Nagel says that will create inequities in the
market place and will discourage fiiel efficiency. How do you re-
spond to that?

712

Mr. Mitchell. All right. I think if Mr. Nagel and I can agree
that what we are after is looking for the protection of the
consumer, and the customer — we both want in the regulatory proc-
ess.

The suggestion that if it were imposed as a line item, or other-
wise as an excise tax item, would impair the State's ability to regu-
late that item, I think it is probably not exactly the way we would
look at it.

Mr. Andrews. Excuse me, how do you mean it would impair the
State's ability to regulate?

Mr. Mitchell. The proposition, of course, is that if the Govern-
ment were to say impose the tax, a line item on the biU, the last
bill, that the local commissions would not have an opportunity to
consider the overall prudency of the total utiUt/s expenditures.

That, I don't think, is quite correct. I don't know any commission
in this Nation that can either of its own voUtion within 24 hours
begin a case against any utility to look at any of its cost, how it
is collected — and that would deal with taxes or anything else. So
that can be done.

In the event the commission were to decide not to do it at the
instant that the tax is imposed, they could surely pick it up rou-
tinely in any future rate case. So the State bodies would have an
opportunity to still continue the prudency review, which they have
now over all utility costs.

Mr. Andrews. Mr. Houghton.

Mr. Houghton. Thank you, Mr. Chairman. Let me try to sum-
marize in my own mind very quickly what you gentlemen have
said.

Mr. Mitchell has said we should not have an energy tax but a
value added tax. Mr. Kanner has said certainly we should not do
what we are proposing to do. Actually, the tax shoiild be lower. Mr.
Nagel has said no, but we would like to work with the administra-
tion. Mr. Williamson said no, but if done it should be a consumer-
based tax, and then Mr. Fry said, OIC, but only for deficit reduction
and with certain other provisions.

You see, the hard thing for somebody like myself is to sit and Us-
ten to you, gentlemen, and try to put this thing in proportion. I
happen to beUeve that, in general, you are right. We should not
have an energy tax, because we are trjdng to take money out of the
system which in theory will help grow us out of this recession.
However, at the same time, everyone says — and I guess I am to
blame a bit myself— we all support the President's goals but we
don't agree with the means. And so one of you gentlemen, I think
it was Mr. Williamson, said that we want to balance the budget in
Washington but not on the backs of the hardworking men and
women.

Well, you know, that is a wonderful statement to make, and I
used to sit down there where you are sitting and I used to say the
same things, but the problem is we have to fix this deficit because
it is increasing our debt to the point where we are going to be suf-
focated. So if we do not handle something like this extremely essen-
tial part of our economy, how do we go about this task and what
part does your industry play? Are we just going to put it on the

713

backs of the consumers? Are we going to say this is just a value-
added tax, an add-on, a substitute?

Specifically, what does your industry and your cUent tell you to
help us solve our combined problems?

Mr. Mitchell. Congressman, let me touch on that in one way.
The proposition of the Btu tax is fatally flawed when you look at
it in its conceptual state. What the attempt is, as I understand it,
is to impose on energy, which is only 8 percent of the gross domes-
tic product, about 27 percent of all the tax increases that has been
suggested is needed.

On the siuface of it, that raises a huge question of imfaimess.
Why not go to a broad-based consumption, spread it over as much
of the population, in all services as we can possibly do, lower the
hit on any single use, and help the country remain competitive?

As far as the VAT tax, I think, my own personal opinion, and in
the face of the experts, I understand I am being rather presump-
tuous here, but my own opinion is that the value added tax is a
thing whose time has come.

We are in a situation now where Boeing produces a 747, and we
are going to throw all these taxes on it, by the way, somewhere in
the process, and tries to sell it overseas, maybe in competition with
the Airbus or something. When it gets to Europe, the value added
tax is added onto that airplane. When Airbus sends a plane here,
the tax is taken off. And yet the system we are proposing here will
tax the American products and not put an3^hing on the import. It
simply is not the way to go, practically or logically.

In our business, we are spending a huge amount of money for ef-
ficiency in this country. My own little tiny company is spending
$250 miUion over 5 years strictly on conservation and efficiency.
That amount of money, it is huge. Furthermore, we face, as an in-
dustry, something like $5 bilhon a year to take care of the Clean
Air Act requirements. All of these things being imposed simulta-
neously is going to strangle and hurt, ultimately, the American
consumer, because they have to pay the rates.

Mr. Houghton. Let me interrupt a minute because I see the red
Ught is on and we don't have any more time. But, you know, you
say something which is very meaningful. You are saying it is un-
fairly loading a portion of the tax burden on you, and you are an
important segment of the whole economic uplift of this country.

But the consumer can also say the reason the economy increases
is because of consumer spending. And what you are doing is you
are unfairly loading an extra part of that tax burden on us. So that
is the question we are wrestling with.

Mr. Chairmsin, my time is up and I am sorry I have not been
able to get to the other gentlemen. I thank you very much for your
participation.

Mr. Andrews. Mr. Kleczka.

Mr. Kleczka. No questions, Mr. Chairman.

Mr. Andrews. Mr. Bunning.

Mr. Bunning. Thank you.

Mr. Nagel, in your testimony you talked about collection points
£uid where we should initiate these collection points. Can you tell
me that downstream is a better area to collect them than at the
place where they are produced? Is that your opinion?

714

Mr. Nagel. No, we favor upstream collection as opposed to down-
stream collection, and let me tell you why. There is only one tax
that I know that is collected on an excise tax basis and that is the
telephone excise tax, and you see that on yoiir telephone bill. But
energy and fiiel cost is simply one component of an overall cost of
producing electricity and natxu*al gas and delivering it to the ulti-
mate customer.

Those costs are rolled all together in a utility rate case and con-
sidered as a unit. We don't ta^ke out one item and say let us treat
that specially and put it as a line item on a utiKty bill. And that
is why we favor, in terms of energy efficiency and energy conserva-
tion opportunities, there are great opportunities available in the
production and generation of electricity, in the production and dis-
tribution of natural gas. By having taxes collected at the beginning
of the process, we encourage energy efficiency throughout the proc-
ess.

Mr. BUNNING. But that's in direct contrast to what Mr. Mitchell
said. That narrowly punishes or it narrowly defends who you col-
lect the tax from. In other words, if we thicJi taxing is the way we
can reduce the deficit, and I surely don't, the more people that we
can include in pajdng that tax, the better off we would be, the more
fair we would be in our Tax Code.

Mr. Nagel. If the assumption can be relied on that all producers
are treated alike, that all production units, that all generation
units are imposed the same tax, then assiiming an efficient market,
which I think we have to accept in this country, then all will be
treated in the same way and they will all have the same opportuni-
ties to flow it downstream.

Mr. BUNNING. I am not going to dispute that, but the fact of the
matter is that in Iowa, your rate and your pubhc service commis-
sion might differ from mine in Kentucky or Texas, or wherever it
might be, and in consideration of each individual rate case, there
may be different facts and figures brought in. So, therefore, it
would be more difficult to do it that way fairly.

Mr. Nagel. Keep in mind, as I said in my testimony, 38 of the
States have a separate mechanism for passing through these costs
automatically. Even in the 12 States that use general rate cases or
specific proceedings, there will be consideration.

There is an underl3dng concern I think that has to be acknowl-
edged and on the table. This is not the time when utilities want
to come in for rate cases. We have the lowest interest rates we
have had in 20 years right now. They don't want to have their
rates on the table. We have to acknowledge that fact, that this is
not a year they want to come in for a rate case.

Mr. BUNNESTG. Let me ask a basic question, and anybody can pick
it up. What effect will the energy tax have on job creation and eco-
nomic growth? Do you think it would depress the economy rather
than assist the economy? Generally, anybody who wants to take a
shot at that.

Mr. WiLLLVMSON. The energy tax will harm the people who
produce the energy and that will decrease jobs, lose jobs. These are
high paying jobs. In my State, I have indicated we have lost
170,000 jobs in 10 years. That is more than any other industry in

715

a particular State that I know of. This will increase that load and
it wiU hurt the marginal production of

Mr. BUNNING. Does everyone believe, as I do, that it will have
a major ripple effect into everything we produce in the United
States?

Mr. Williamson. We are competitive because we have quality
control. Houston Industries, as I mentioned, or Cooper Industries,
as I mentioned in my testimony, produces valves. I toured their
plant the other day. They had valves going to Russia and they were
painted red. They had valves going to Indonesia and they had
valves going to Ecuador. They showed me an instrument about this
big that measures that valve accuracy within one-millionth of an
inch.

We are very good at manufacturing and we are very good at com-
peting, but when we put a surcharge on that particular item that
no other country has, then we have to compete and we have to eat
that surcharge, and we will not be as competitive with our foreign
competitors. That is the way it works.

Mr. BuNNlNG. Thank you, Mr. Chairman.

Mr. Andrews, Mr. Payne.

Mr. Payne. Thank you very much, Mr. Chairman. And thank all
of you, gentlemen, for coming and testifying before us today. It has
been very, very helpful.

Mr. Nagel, I wanted to follow up on a question that Mr. Bunning
just asked to make sure I understand your response.

As you talked about upstreaming the tax, you stated that one of
the purposes of doing that was to optimize energy conservation.
However, it seems to me in a market economy, to optimize energy
conservation you want the tax where the energy decision is being
made, which is at the consumer level.

Coiild you explain that a Httle more so that I can understand it?

Mr. Nagel. There are two types of energy efficiency or energy
conservation; demand-side, which you have just addressed on the
customer side, where the higher the price of the fuel, they should
pursue more energy efficient options, and I iinderstand that com-
pletely.

But on the supply side, before it gets to the customer, there are
tremendous energy efficiency opportunities. Cutting your loss of
electric generation during the transmission of electricity. Tremen-
dous gains can be made there. In choosing your fuel mix and opti-
mizing your fuel mix, you will choose your ftiel better if some fuels
turn out to be more costly or less effective than others.

And in terms of pursuing renewable energy resources, if some of
those are exempted from this tax, such as solar or wind, we will
have a better effort there.

So in terms of both energy efficiency on the supply side and pur-
suing renewable energy resources, we believe upstream collection is
more preferable than downstream collection.

Mr. Payne. Preferable in that you will optimize conservation?

Mr. Nagel. A utiUty or a producer will be indifferent to pursuing
energy efficiency on the supply side if the tax is not collected there
because it will simply have no impact on them. It would solely be
on the customer side.

716

Mr. Payne. Mr. Mitchell, you mentioned at the conclusion of your
testimony, after you had stated all the concerns about this tax, that
if there were to be such a tax, it should be an excise tax. Do you
see that as being an ad valorem tax or a Btu-related excise tax?

Mr. Mitchell. It can be related back to Btu and then converted
into a cost per kilowatt hour without any difficulty at all. And that
would be imposed right at the tail end of the bill. Whether it is
spelled out or not is immaterial and irrelevant. If someone thinks
a customer will not know it, of course, they have their head in the
sand.

The reason for doing it there, another major reason, which
maybe I didn't make clear, if you put it on at the source, at the
Btu when the coal comes into the plant or is produced, you have
automatically added on to that end result the gross receipts tax. So
as the example I gave you, in our case, 76 million because of the
Btu tax, and by tihe time it rolls through the gross receipts tax,
takes it up to 80 million. So that is unavoidable and there is not
much we can do about that.

So that is another reason for putting it in the proper place and
that is where the decision is made for energy, for the selection of
energy use.

Mr. Payne. So you are saying that in terms of the purity of this
particular tax, if you correct it at the end without adding additional
taxation along the way, it is a better approach than adding it at
the production end?

Mr. Mitchell. Yes, sir, and much better for our customers.

Mr. Payne. Thank you very much. I will 5deld back the balance
of my time.

Mr. Andrews. Mr. McCrery.

Mr. McCrery. Thank you, Mr. Chairman.

Mr. Fry, you said one of your association's conditions for support
of an energy tax is that the increased revenue be appUed to the
deficit. Is there anjrthing in the President's proposal which makes
you think the increased revenues will, in fact, be appUed to the def-
icit?

Mr. Fry. Our concern is the revenues not be earmarked up fi*ont
for any purposes other than deficit reduction. We would propose
that any spending proposals, even including those which we sup-
port, go through the normal appropriations process and be judged
on their merits.

Mr. McCrery. So your only objection is that the increased reve-
nues not be earmarked for some specific new spending?

Mr. Fry. That is correct.

Mr. McCrery. You don't mind if there is increased spending gen-
erally, just don't earmark it?

Mr. Fry. If spending can be justified on its merits, and as you
will notice in our statement, we do support some increased spend-
ing. For example, increased appropriations for the LIHEAP pro-
gram. But we would not propose that those revenues come from
any earmarking of the Btu tax.

Mr. McCrery. Mr. Nagel, if you hide the tax from the consumer,
which is basically what you are proposing to do, are you not con-
cerned that it would be easier for the Congress to increase the tax,

717

and, at some point, doesn't that tax become burdensome on your
industry?

Mr. Nagel. Sir, I would tell you that taxes are but one compo-
nent of many components that go into the cost of a kilowatt hour.
And we do not attempt to break down for customers' knowledge all
of the components of a cost of a kilowatt hour or an MCF of gas.

The tax elements change routinely. We see chsinges in the cor-
porate tax rate proposed in the current package, and that will cer-
tainly flow through the process at some point in time. We see State
income taxes changed. We see property taxes changed. We do not
attempt to itemize those on the bills.

In fact, again, the only taxes I know that are itemized on bills
today is a Federal excise tax on the telephone and the State sales
tax which is foimd in most States. I would see no reason why we
wovild want to break this one out and bring it on to the bill specifi-
cally any more than any of the other tax items that are part of the
overall cost of fuel and electricity and gas.

Mr. McCrery. So you don't think that by not doing that that you
are hiding the tax from the consumer?

Mr. Nagel. I guess I would not accept that description of it any
more than we would be supposedly hiding property taxes, income
taxes, and any of those other sort of taxes.

Mr. McCrery. Well, except that, as Mr. WiUiamson has sug-
gested, this is a targeted tax; it is not a broad-based property tax
or income tax. It is an energy tax that relates specifically to yo\ir
industry, rather than when people pay their electric bill. I would
think they would want to know what part of that is due to taxes.

They know what their property taxes are and their income taxes
are, why should they not know what their energy taxes are?

Mr. Nagel. It goes back to the issue, sir, of the fact that, again,
it is simply one component of an overall package of costs that go
to produce a kilowatt hour of electricity.

If you were to review a general rate case proceeding and see the
elements that make up a revenue requirement for a utiUty, I think
you would be amazed at the complexity of those numbers. And
there would be a number of customers, if we attempted to describe
with specificity all the items that go into making up the cost of a
kilowatt hour, who I think would say, no thanks, we don't want to
hear those details.

Mr. McCrery. Does anyone on the panel disagree with Mr.
Nagel?

Mr. Williamson. Oh, yes, I disagree. Dennis has been after me
for 3 months to join NARUC, and I see I need to join that council
so we can have these discussions.

We had a rate case yesterday, Monday, and we were discussing
passing on a salary increase. A man was going to make $30,000,
and we were going to decide whether that was reasonable or not.
It was a 60-percent increase over last year. So we discussed that
issue. We do break these charges down and discuss them and talk
about them.

I think the bottom line, and the most important fact in this par-
ticular tax, if we are going to have it, is to make it broad-based;
That is what the President's proposal and goals were, to make it
as broad as we can over all the population. This does not do that.

718

But to decide whether or not we need to hide it from the
consumer, I don't know if putting the tax on the bill is hiding it
or not hiding it, but I do know people I talk to around tiie State
when we talk about the Btu, they thmk they are taxing the British.
So that is a concern.

Energy is a very complex issue, and if you put it on the producer,
then the consumer does not know about it. And that is what we
have regulators for to do our jobs. I am elected by the people to do
my job, and if I vote for increases, then I have to stand tiie heat.
If you think it is necessary, then you stand the heat. If you vote
for this tax, you are going to have to stand the heat and that is
why we are elected.

Mr. McCrery. Thank you very much.

Mr. Andrews. Mr. Brewster.

Mr. Brewster. Thank you.

As one who is from an energy State, I have many serious con-
cerns about an energy tax. As Mr. Williamson knows, our people
drive a heck of a lot more than they do in some parts.

You each made some statements that were interesting, and some
I concur with. Three of you mentioned the deficit should solely be
controlled by cuts. I wish that were possible. As one who is cer-
tainly supporting additional cuts, I wish we could get there. But if
you look at it, we only control about 16 percent of the budget today.
The other 84 percent are entitlements, defense, and interest.

When interest is consuming 14 percent of this year's budget, it
makes it rather difficult to get there strictly by cuts. If you elimi-
nate all the domestic spending, which is agriculture, education,
transportation, HUD, and veterans, et cetera, you reaUze you still
would not eUminate the deficit.

So it comes to the point that we have to make serious cuts and,
yes, we have to raise some revenue. I was interested, Barry, in
hearing you say that you felt an excise tax on gasoline was better
than the Btu tax. I certainly see that as narrow-based rather than
broad-based. And why not let some of the others have some of the
joys of helping pay for it, as far as the utiUty industry or chemical
industry or whatever?

I would hope, Mr. Nagel, if the collection point is somewhere
other than burner tip on natxiral gas, or say a refinery exit for oil,
that you and the regulating industry would figure a fiill pass-
through. I am curious how you would do that.

Mr. Nagel. As I mentioned, 38 of the States have automatic
passthrough systems for fuel cost. In Iowa, for instance, all ele-
ments of fiiel, including taxes, are adjusted monthly and there
would be an automatic pickup of these costs in our State imder
other current rules. So as Iowa utihty would not have the concerns
that were expressed earlier.

Twelve of the States do not have those systems. They rely on
some alternative method, either specific proceedings to address the
issues specifically, or wait for a general rate case. And that is the
question of regulatory lag that sometimes you hear about.

For those utiUties, they will either say we have to come in right
now and file a rate case proceeding to incorporate this tax into our
costs, or they may say, there are other factors affecting our cost,
such as lower interest rates, whatever, and we can stay out for a

719

while longer and simply absorb this cost because other costs are
going down while this cost is going up.

Mr. Brewster. How do you plug that in on nuclear, hydropower,
solar, wind, whatever?

Mr. Nagel. Again, in Iowa, in our fuel clause, it is indifferent as
to what type of ftiel it is. It is still automatically included. The util-
ity simply submits its fuel bills to us for review and that tax would
simply be incorporated as part of that calculation.

Mr. Brewster. So you would calculate a cost into the nuclear
cost?

Mr. Nagel. As I understand the administration's proposal, there
is a Btu equivalent or uranium and that is added to the cost and
that would be included in the bill paid by the utilities securing the
fuel.

Mr. Brewster. Another thing interesting to me, Mr. Fry men-
tioned there that they were very interested in economic develop-
ment, protecting consumers, et cetera. I would like you to explain
your suggestion to eliminate the $15 miUion private use restriction
on pubhc power. Short explanation, if possible.

Mr. Fry. This restriction was imposed by the 1986 Tax Reform
Act, and prior to 1986, up to 25 percent of facilities constructed
through the issuance of tax-exempt bonds could be used for the
benefit of private parties. For all Government bonds, this restric-
tion was reduced to 10 percent by the 1986 act. However, for pubhc
power and public natural gas systems, generation and transmission
facilities only, a further limitation was imposed. The private use
test was the lesser of 10 percent or $15 million.

There were neither fiscal nor pulDhc policy justifications for the
$15 million private use test imposed only on public power. While
limiting private use of public financed facilities fi-om 25 percent to
a somewhat lower amount was the subject of congressional debate,
the $15 miUion Hmitation was never expressly discussed and the
limitation was not imposed for fiscal reasons, and there was no rev-
enue estimate ever made of that hmitation.

We believe it discriminates against communities that elect to
provide their own electric and gas utihty services, and may force
local government developers of electric generating and transmitting
facilities to forego the most economic use of those facilities, particu-
larly in the early years of their service.

They tend to be long-lived capital-intensive facihties, and it is
customary in the business to construct facilities that have capacity
somewhat in excess of present needs so that you can grow into
them. And yet, because of declining unit costs of the output of
these facihties, you have the most economic scaled facility and can
provide the lowest cost to the ultimate consumers.

If you are artificially prohibited fi-om building a facility of the op-
timum size, that increases the cost to your consumers. So we don't
think there was any fiscal basis for this, no revenue estimate was
ever made, and we think it discriminates against pubhc power sys-
tems and should be repealed.

Mr. Brewster. Thank you.

Mr. Andrews. Mr. Archer.

Mr. Archer. Thank you, Mr. Chairman.

720

Gentlemen, I appreciate your testimony and the input you have
given us. When I first saw the Btu tax, I thought it was a proposal
whose time should never come. And you, gentlemen, have articu-
lated very, very well the points I have been making publicly ever
since I first heard about it.

I asked several of the administration witnesses the question, do
you know of any other country in the world that taxes its raw en-
ergy, and I would like to ask you the same question.

Mr. Mitchell. I don't, Mr. Archer. I do know that in some coun-
tries there is a rather heavy tax on gasoline.

Mr. Archer. That is very different. That is very different.

Mr. Mitchell. That is correct.

Mr. Archer. That just confirms what I beUeve to be the facts.
Is there not a good reason why no other country taxes its raw en-
ergy? And shouldn't we stop and pause for a moment and begin to
ask the question why don't they tax their raw energy?

And you have given us the answer to that. It is going to drive
our jobs overseas. It is a job creator — in other countries. No ques-
tion about it. But the Secretary of the Treasury sat here as a wit-
ness and said, well, it will only increase the aluminxim companies'
cost of product by 3 percent. Well, Alcoa says it would be 6 to 8
percent.

He also said there would be no exemption for aluminum on the
cost of electricity in their proposal. And I would submit that 3 per-
cent in a high volume, low-margin product that is almost a virtual
fungible commodity in the world marketplace is enough, even if it
is only 3 percent, to severely damage that industry.

So I thank you for your testimony, and it is very supportive of
the argimient that I have made.

Thank you, Mr. Chairman.

Mr. Andrews. Mr. Lewis.

Mr. Lewis. Thank you, Mr. Chairman.

We all said we support the President, that we are with the Presi-
dent, but not on this particular issue, Mr. President. As Members
of Congress, we have a mandate to reduce the deficit, raise reve-
nue, stimulate the economy.

Mr. Mitchell, do you have any particular revenue-raising propos-
als that you think are fair; that are just and right, in addition to
the VAT tax?

Mr. Mitchell. I think, Congressman, that the value-added tax
imposed properly with due regard for the low-income, with due re-
gard for those who are pressed, is the only tax that is needed in
this coimtry today to take care of its problems.

Mr. Lewis. Other members of the panel care to react?

Do you have something better to offer; something better to put
on the table in order to cut the deficit and get necessary revenue
to stimulate the economy?

Mr. Williamson. I think, Mr. Lewis, that in order to stimulate
the economy, that you would not tax. Because if you do tax, you
do just exactly the opposite of stimulating the economy. The way
to raise revenue is to grow the economy, and it is a broader base
and you can collect your tax that you already have in place.

I would encourage you to look strongly at some of the proposals
on the table. I know that Congress negotiated, 2 years ago, spend-

721

ing caps, and I would encourage you to look strongly at those. We
paid over $100 billion for those spending caps. I would encourage
you to look at those and come back in a year.

This economy is starting to grow. I know it is in Texas.

Mr. Fry. Mr. Lewis, our association has not attempted to crcift
the ideal tax. We are responding to the tax on the table and we
are willing to accept the Btu tax. We have some concerns about the
details of it, but we recognize the need that something be done; we
recognize our responsibiUty to participate in the solution, and
hence, we are open to the suggestion of an energy tax of some kind.

In my statement, I have detailed some of our concerns about the
particulars of the Btu tax. As I say, we have not — ^we don't suggest
that the Btu tax is the ideal tax but it is the one before us and
we think it could be made workable.

Mr. Lewis. Well, the President suggested in his statement to the
Congress and to the American people that we all are in this thing
together; that we are all in the same boat and we all must pay our
fair share. So I don't think any of us are going to escape without
paying something. We may not get all that we pay for, but we are
going to pay for a^i we get.

Thank you, Mr. Chairman.

Mr. Andrews. Ms. Johnson.

Mrs. Johnson. Thank you, Mr. Chairman.

It is interesting that in the President's budget, this tax will raise
$70 billion, but because it is going to have such a significant im-
pact on people by raising their costs, the President has increased
the EITC $25 bUhon specifically to offset the impact of this tax,
which tells you something about the impact it will have on small
business, too.

He has increased food stamp spending and the LIHEAP Fuel As-
sistance Program by $15 billion, for a total of $40 billion, all to off-
set the impact of this tax on low-income families in America; leav-
ing, therefore, a net increase in revenue to the Federal Government
of only $25 billion. For which, it appears to me we are going to pay,
fi*om your testimony, dearly in the competitiveness of American
manufacturing.

As my colleague fi'om Texas just pointed out, no other nation
taxes the energy that fuels manufacturing and the kind of produc-
tion that we have to be No. 1 in to compete internationally. I think
we should take that very, very seriously.

It is also true, is it not, that cogenerators, self-generators, could
easily evade this tax? Self-generators are often big businesses,
again putting httle businesses that compete with them at a com-
petitive disadvantage because they cannot circumvent the tax. I am
particularly concerned about the fact the tax would hit hydro
projects so heavily that the tax would be larger than their reve-
nues.

The very entrepreneurial efforts that this government has paid
to create in solar and hydro and renewable resources are going to
be devastated by this, at least that is my understanding. If it is not
yours, I would like to know it.

Now, specifically, because I would like to know your comments
on the impact on solar and those kinds of entrepreneurial projects,
but also what percent of America's homeowners depend on home

722

heating oil, which will be taxed twice as heavily as any other fuel
source; and what percentage of those homes have no access to an
alternate fuel, gas or any other?

What percentage of our industry relies on oil to drive its work;
what percentage of small business relies on oil; and what percent-
age of those businesses that rely on oil have no alternate so\n*ce?

I hope you are experts in the delivery of energy and have the
knowledge depth that we need to evaluate the impact of this tax
on both the small business community and the individual home-
owner in America, both of whom are important to the strength of
our society and the vitahty of our economy.

Mr. Nagel. Madam Congresswoman, let me suggest to you there
are, in response to your question about solar and hydro projects,
as I understand the administration's proposal, they would not be
taxed at all. They would be exempted to encourage the develop-
ment of renewable energy resources.

Second, in terms of the alternatives available to the users, espe-
cially the small residential customer in Iowa, and I can only speak
to the Iowa circumstance, I am not familiar with the nationwide
statistics, 12 percent of our residential homes do not have access
to natural gas. They are located primarily either in farms or out-
side communities where the natural gas lines do not reach. They
either use fuel oil or propane to heat their homes. Those are the
choices available to them.

Inside the communities, tj^ically, even though they have options
available to them, they do not have realistic options because their
homes are equipped for only one or the other. And it is unhke large
industrial customers, they do not have the capacity to switch back
and forth.

Mrs. Johnson. Do you know what percentage have no switch ca-
pacity?

Mr. Nagel. I would say, other than the large manufactxiring cus-
tomers in Iowa, virtually nobody has alternative fuel capacity. All
residential homes in many of the cities basically are hooked up to
the natural gas systems, and outside the cities, in the rural areas
and the farms, they are hooked up either to fuel oil or propane.

Mr. Williamson. Mrs. Johnson, my numbers are a couple years
old, but I remember that about 3 percent of electric generation
comes from petroleum; 60 percent of electric generation comes from
coal, natural gas makes up in the 20's, and solar, nuclear, wind
and hydro gamers the last part of that share. But the Northeast
uses about 50 percent of generated electricity from oil, and most of
that is imported oil.

Mrs. Johnson. Of course, one of the additional problems with
the Northeast is what we don't use from oil, we get from nuclear,
and nuclear is very heavily disadvantaged under this proposal.

But I would say, Mr. Nagel, that, apparently, the hydro industry
does not agree with you they are not being taxed in this proposal,
in fact, they believe they are being taxed as heavily as coal, and
that is why they say they will Uter^ly be put out of business.

Mr. Nagel. I want to distinguish solar and wind from hydro.
Solar and wind are exempted, hydro is not exempted. I would not
like to leave that impression with you.

Mr. Andrews. Mr. Kopetski.

723

Mr. KOPETSKI. Thank you, Mr. Chairman.

Grentlemen, welcome, and thank you for your very good testi-
mony.

I am new to the committee and what I have figured out in the
last couple of months is that really the best tax is the one where
we tax the other guy. And the best idea in that vein has been to
tax the British this morning. After all, they did bum down our
Capitol and the White House, and they have never paid us back,
so I guess the bill is due.

The President has said it is time to reduce the deficit and to gen-
erate jobs, and we have to work out the details on this. There is
great benefit, you must admit, in terms of reducing the deficit, just
in terms of reducing your cost of capital as well, and so you are
going to have a savings at that rate as well.

The Secretary of the Treasury came in here and testified about
the tax, energy tax, and said there are three reasons: Energy effi-
ciency, environmental concerns, revenue raising measure. I would
also say, in terms of the oil issue, for example, that in terms of our
national defense, we really ought to be encouraging policies to
move away fi*om our dependence on oil, particularly foreign oil.

I want to hit the issue on energy efficiency, and from the North-
west, of course, we believe that hydro does a very good job in this
area.

Mr. Kanner, do you happen to know, your testimony says hydro
is about 90 percent efficient, and do you happen to know the effi-
ciency ratings on gas and oil and nuclear?

Mr. Kanner. Most of the fossil fuel plants, and there are obvi-
ously different technologies, are in the 30- to 35-percent efficiency
range.

Mr. KOPETSKI. Anybody disagree with that?

So hydro is being taxed at the same rate as nuclear and higher
than natural gas, under the President's proposal?

Mr. Kanner. Under the proposal, the assimiption is a kilowatt
hoiir of electricity generated with hydro is as if it were generated
fi*om burning coal or natural gas.

Mr. KoPETSKl. So we can make the case, for those of us who rely
on hydro, and it is not just the Northwest, that under this criteria
we ought to change the policy, at least be to the natural gas level,
or if not lower in terms of energy efficiency?

Mr. Kanner. I think that is right. If you are saying let's tax fuels
based on their ability to create energy, then the numbers for hydro
need to be fixed. And as my testimony says, this can be done with-
out either doing damage to the objective of regional equity or with-
out substantially reducing the revenue that this tax would gen-
erate.

Mr. KOPETSKI. Let us talk about energy as a feedstock for pro-
duction. In the oil industry it is my understanding they don't have
an exemption under the President's plan. There is a strong move-
ment, and I think the Secretary has Tbeen open to gdlowing oil that
is used as a feedstock, for example in the plastics industry, to be
exempt fi-om the tax; is that correct?

Mr. Kanner. Yes.

Mr. Williamson. I don't have the proposal. I am not aware of
that. I know there are discussions going on. One of the questions

724

is whether or not the fuel used to run the refinery will be excluded
or included.

Mr. KOPETSKI. I think the Secretary was very open to that dis-
cussion, but when it came to the aluminum industries, though,
where it is the same policy question, the Secretary had a pretty
firmly shut door.

Mr. Kanner, can you talk a little more about the significance of
feedstock for the aluminum industry?

Mr. Kanner. Certainly.

The cost of electricity is about a third of the total cost of produc-
ing the finished product for the aluminum industry. The alimiinum
industry in the Northwest employs about 10,000 workers. Right
now the cost of electricity is about 20 percent higher than the
world average; and any increase in rates will increase that margin;
decrease their competitiveness.

I would note the reason the aluminum industry has stayed in the
Northwest was Bonneville adopted a variable rate in 1985. At the
same time, aluminum plants in the Tennessee Valley shutdown be-
cause of their competitive position worldwide.

I would also note that in the Northwest there are other indus-
tries with similar energy-intensive characteristics. Chemical prod-
ucts are in the 25- to 35-percent range. Paper is 7 to 20 percent.
Even Boeing, which is only about 1 percent, when you factor in the
fact that their costs are kept down by the fact that they are so close
to the source for alimiinum products, what happens to aluminum
ultimately affects Boeing which, as you know, recently laid off
27,000 workers.

Mr. KOPETSKI. Right. And let me jump in at this point, because
I am r unnin g out of time. I guess the I*resident about 3 or 4 weeks
ago criticized Europe in terms of their subsidies for Airbus in the
aerospace industry, and one of our competitive industries is Boeing,
which, obviously, uses a lot of the aluminum. Two weeks later what
the President is doing is imposing another tax on this industry he
is trying to protect here at home.

Finally, let me just point out what the Federsd Government is
doing imder Federal laws in the Endangered Species Act, whether
because of timber or fish stock issues, that we in the Northwest
have spent, I think it is about $1 billion addressing this issue just
through our rate base from Bonneville Power to fond these envi-
ronmental issues. Isn't that correct as well?

Mr. Kanner. We have already spent $1.3 billion on fish mitiga-
tion and enhancement, and we are going to spend at least $300
million a year for the foreseeable future.

Mr. KOPETSKI. That is in our electric rate base?

Mr. Kanner. That is right.

Mr. KOPETSKI. Thank you, Mr. Chairman.

Excellent testimony, Mr. Kanner.

Mr. Andrews. Mr. Hancock.

Mr. Hancock. Thank you, Mr. Chairman.

I wonder if one of you gentlemen can tell me whether there has
been any estimates on the cost to industry to comply with a
brandnew tax? In other words, we are talking about what, I think,
Congresswoman Johnson describes as a net to the Government of
someplace in the neighborhood of $25 milhon.

725

Now, how much money is it going to cost industry, that is going
to come off their bottom hne, to comply with this new tax?

Mr. Mitchell. The best estimate we have is that the total cost
that is going, or the total revenues that will be raised from energy
tax alone is going to be somewhere around $22 billion, something
on that order, and that is putting $22 billion of increased taxes on
8 percent of the gross domestic product, which energy is. That is
one of the fundamental problems.

As to the cost to the electric utilities, that will be somewhat dif-
ferent throughout the Nation. Parts of that $27 billion, we are look-
ing at about $8 billion to the electric utility customers; about $8
billion. That is about as easy a breakdown, I think, as I can give.

One thing for sure, we will never recover all the costs that are
imposed. That is just not doable.

Mr. Hancock. Actually, what I had reference to is primarily the
cost of additional employees; you know, keeping the books. How
many Government employees are we going to need to come around
and make an audit, and how much of your staff time, your em-
ployee time, is going to be spent keeping track?

In other words, the compliance cost of an awful lot of these taxes
actually ends up costing industry more than the amount of money
the Government ends up with in net revenues. That was the esti-
mate I was looking for.

Mr. Mitchell. That is true, sir, I don't think our industry has
ever attempted to make that calculation. It would be very signifi-
cant.

Mr. Hancock. You are probably afraid to. If those figures ever
came out, there would be a bunch of these taxes we would probably
get rid of because of the compliance cost.

You know, the statement was made earlier in this hearing about
Secretary Bentsen stating that the energy tax would create some-
place in the neighborhood of a 2- to 3-percent increase in the price
of aluminum, and he didn't think that was particularly severe.

What is yoxir opinion on a 2- to 3-percent increase in the price
of electricity or anything else?

Mr. Mitchell. Well, sir, if it were only 2 to 3 percent, that might
be one question. However, it is not going to be 2 or 3 percent. What
we are looking at on the residential customer throughout the Na-
tion, it is somewhere between 3.5 to 4 percent. By the time we im-
pose all of the taxes onto industry and commercial activities, we
are going to see rates in some industries in excess of 10 percent,
I thmk. Overall average, roughly, 5, 5.5 percent, before you throw
in all of the piggyback taxes that will likely hit all of the consum-
ers.

So the difficxilty in dealing with all of these proposals is all the
facts are hardly ever there that you can really pull them out and
add them up. That is part of the problem.

Mr. Hancock. Then there is really nothing inflationary about
this tax?

Mr. Mitchell. This tax is going to be the ultimate of inflation-
ary. Not only that, it is indexed, of course, into the future years,
and that is going to increase the disparity between the various re-
gions of the country and between the various industries.

726

Mr. Hancock. Well, in other words, I kind of get the idea you
think maybe there might be a better way than a Btu tax. It would
appear to me, even though I am not going to vote for any tax in-
crease, that maybe we should use the existing structure; and if we
have to, even though I will vote against it, raise an existing tax,
which does not increase the cost of compliance, rather than come
up with a brandnew tax, whether or not we call it a Btu tax.

Mr. Mitchell. I wouldn't know what existing tax would be pro-
posed to be raised. The income tax increase proposal is a source of
real concern. When you make that thing retroactive, that is the
same as the government putting its hands right strsdght into the
pockets of every shareholder of every utility in the country and tak-
ing money out that they will never get back. That is exactly what
that does. So whatever tax we would increase, I don't know.

Mr. Andrews. Mr. McDermott.

Mr. McDermott. Thank you, Mr. Chairman.

I want to go to part of your testimony, Mr. Mitchell. In your tes-
timony, you said that conservation was a cost being imposed on the
utilities. I would like you to explain to me why energy conservation
is a cost rather than an opportunity. In the Northwest we view it
as a way to reduce the cost of additional construction.

Mr. Mitchell. Certainly, that was not the intent to indicate that
conservation is something that the industry is opposed to, because
we are not. I think that, overall, it is to the benefit of every
consumer in this Nation that the utility industry push conservation
as much as it economically and reasonably can; where it is cost
beneficial and efficient to do so.

If we counter that in terms of efficiency, that really benefits ev-
erybody. That means powerplants we don't have to build. Unfortu-
nately, it is not fi-ee. Conservation costs money; it is not fi"ee. We
are going to spend $250 million for the next 5 years on conserva-
tion in this area right here, and we expect to save over 58 percent
of all of the growth that would otherwise be imposed on us to the
year 2002.

So we are spending huge sums of capital in order to help in the
conservation activities. And that is true aroimd the coxintry. There
are over 2,000 conservation programs in effect.

Mr. McDermott. I suspect you would be supportive of a bill we
put in directing the Internal Revenue Service to create that, or
treat that as an expense in a given year rather than to be amor-
tized over 30 years, that cost of conservation that you are going to
do?

Mr. Mitchell. I think that each State commission is reviewing
and making its own consideration of that. We have worked out in
our local agencies here, local commissions, an acceptable way of
amortizing the cost, including a return on the investment for con-
servation.

Now, each State, I think, will probably approach that a Uttle dif-
ferently.

Mr. McDermott. I want to move to Mr. Kanner for the whole
question of the Northwest, and I suppose we all get regional. I
think Tip O'Neill said all poUtics is local.

Everyone thinks of the Northwest as full of rain and so forth.
What are the conditions for this year in terms of water and what

727

that means in terms of our ability to sell power to southern Califor-
nia?

Mr. Kanner. As you know very well, we have been in, I believe
it is the fourth year of successive droughts. Water conditions are
at a historical low, and much of the water that there is is being
held for increased flows for fish migration, for threatened and en-
dangered species. So this has resulted in substantial rate increases.

The initial proposal of the Bonneville Power Administration for
a rate increase was, roughly, 15 percent. Actually, 11.4, and then
increased to 15 percent. Based on the most recent precipitation fig-
ures, they have increased that figure to 27 percent. So already
there is a 12-percent increase that is going to occur just because
of weather conditions. It is both because water needs to be held
back for fish, reduced short-term energy sales to CaHfomia, in-
creases to power purchase cost.

As you know, this condition is not going to stop with this year.
The estimates are that in 1994, there will be another 10 percent
rate increase, and in the 1995, during the next rate case, there will
be at least another 10 percent rate increase. You can add these up
all together and within 3 years we are looking at a 60-percent rate
increase in the region.

Mr. McDermott. Let me ask a question of Mr. Fiy, and that has
to do with this whole question of the double taxation over hydro-
electric pump storage; can you talk about that? Give us an under-
standing of what that double taxation really is.

Mr. "Fry. The pump storage projects produce about 3 percent of
our Nation's electricity, and the way they work is the base load
plant will be used in the off-peak hours to pump water uphill to
a storage reservoir. During the hours of peak dem£ind, that water
will be released to power turbines to generate electricity. This is a
very efficient use.

The base load plant is going to be spinning 24 hours a day, so
the cost of electricity used to pump the water uphill is really the
fuel cost of the base load plant. But by so doing, you get this very
flexible peaking unit that can provide cheap energy during the
hours of pe£ik use.

Our concern is that since hydroelectricity is taxed at the utility
level — and the fuel for many base load plants, and typically in a
pump storage plant it would be a nuclear plant or a coaJ-fired
plant; let us take coal because it is a clear-cut example — ^if the coal
has been taxed at the mine mouth, you have already paid the tax
for that; then you bum that coal to generate electricity to run your
pumps to get the water uphill so you can generate hydroelectricity
coming down, and then the hydropower is again taxed.

So the hydropower would be taxed twice, and we think that is
unwise. We would like to see the proposed modified so that it takes
into account the unique character of pump storage facilities and
imposes the tax only once.

Mr. McDermott. Where is that 3 percent of the pump storage
facilities?

Mr. Fry. I cannot give you the distribution of those plants off-
hand. Obviously, since it is such a smsdl proportion of the national
generating base, in some areas where there is a large pump storage

728

plant, the impact would be much greater than it would be nation-
ally.

Mr. McDermott. I would appreciate a copy if you could give us
a distribution of that.

Mr. Fry. Be happy to do that.

[The information follows:]

729

Reprinted from Hydro Review, July 1992, Volume 11, Number 4

Pumped Storage at its Peak:
A Status Report

With more than 40 new pumped-storage projects being planned in the U.S.,
existing capacity has the potential to double. To succeed, developers must
address technical, environmental, and power market issues.

By Christopher Hocker

I oday, interest in hydroelectric
pumped storage on the part of public
agencies, utilities, and private develop-
ers in the U.S. is higher than it has
been for 30 years. Major reasons for
the pumped-storage revival include
both its potential as an economical
source of peaking power and its
demonstrated capability as a tool for
managing and improving the efficiency
of utility system operations.

"We are highly optimistic about the
future prospects of pumped storage in
the U.S.," says Bjom Omreng, pres-
ident of Kvaemer Hydro Power. Inc.,
a leading manufacturer of pump-tur-
bine equipment used in pumped-stor-
age facilitjes. "An increasing number of
utilities have begun to express a
strong interest in the new generation
of pump-turbine technology, and how
its operating benefits can add to their
systems. The advancing technology
allows for a much wider range of
applications and benefits than merely
generation and energy storage."
Kvaemer is actively involved in sup-
porting several major pumped-storage
projects in the U.S., including the
proposed 2,000-MW Mt. Hope project
in New Jersey.

Analyzing current interest and fu-
ture prospects for U.S. pumped stor-
age reveals some apparent paradoxes:
— Pumped storage has been a viable
technology for more than 70 years, yet

Chris Hocker is vice president of
communications for Consolidated
Pumped Storage. Inc. and is a
frequent free-lance contributor to
Hydro Review.

The world's largest pumped-storage facility, Bath County, is owned by Virginia Electric and
Power Company and Allegheny Power System Its six pump-turbines can generate 2,100
MW of capacity Planning for the project began 20 years ago; the units began operating in
December 1985 (Courtesy Virginia Power)

the vast majority of operating projects
in the U.S. are less than 25 years old.
— Every operating pumped-storage
project in the U.S. is owned either by
a public agency or an investor-owned
utility, yet three-quarters of the pro-
jects currently being planned are
sponsored by private non-utility com-
panies.

— Pumped-storage development in the
U.S. has primarily emphasized its role
as a provider of peaking capacity, yet
the technology's "dynamic operating

benefits" (those benefits that enable
the utility's overall power system to
operate more reliably and efficiently)
may prove to be of equal or greater
value.

Reviewing the history of U.S.
pumped storage in its proper context
helps to resolve these apparent para-
doxes. Just as the nation's methods of
generating and delivering electric pow-_
er have evolved over time, so have
the technology and applications for
pumped storage.

- Copyright, HCI Publications, 1992 • 410 Archibald Street, Kansas City, MO 64111 • 816-931-1311

730

25,000

1 20,000

Indicates Total US Generating Capacity
** ot Pumped Storage Plants ^

ailed Generating Capacity

Projected /

aims

19(

>0 1965 1970 1975 1980 1985

1990 1995 2000

Years

Figure 1 ; This line graph shows the actual and projected growth in U.S. pumped-storage
capacity from 1960 through 2000 (Data courtesy of the Federal Energy Regulatory Conn-
mission, March 1992, and the Amehcan Society of Civil Engineers/Electric Power Research
Institute Civil Engineering Guidelines for Planning and Designing Hydroelectric Developments:
Volume 5.)

A Look at the History
Of Pumped Storage

Today's operating total of approxi-
mately 18,000 MW of pumped-storage
capacity in the U.S. started almost
literally with a drop in a bucket. The
first pumped-storage plant in the
U.S.— Rocky River in Connecticut—
as completed in 1929 with only 7 MW
of pumping capacity. The project,
owned by Connecticut Light and
Power, is still in operation.

Pumped storage had its boom period
in the 1960s and 1970s, with nearly 30
plants completed during these two
decades. These plants represent near-
ly three-quarters of the pumped-stor-
age capacity currently operating. They
included two of the largest piunped-
storage projects in the world: Luding-
ton in Michigan (1,979 MW). com-
pleted in 1973 by Consumers Power
Company and Detroit Edison; and
Raccoon Mountain in Tennessee
(1,530 MW), completed in 1979 by the
Tennessee Valley Authority.

The 1980s saw the completion of
three additional projects, including
Bath County in Virginia (2,100 MW).
completed in 1985 by Virginia Electric
and Power Company and Allegheny
Power System. The Bath County
Project is the world's largest operat-
ing pumped-storage project in terms

of capacity.

Thus far in the 1990s, one pumped-
storage project has been completed—
the 1,000-MW Bad Creek Project in
South Carolina, built by Duke Power
Company. The 675-MW Rocky
Mountain Project in Georgia, jointly
owned by Oglethorpe Power Corpo-
ration and Georgia Power Company,
is under construction and scheduled
for completion by the mid-1990s.

In addition, in April 1991, Summit
Energy Storage, Inc., a subsidiary of
Consolidated Hydro, Inc., received a
license from the Federal Energy
Regulatory Commission (FERC) for
its 1,500-MW Summit Project in Ohio.
Although construction has not yet
begun on this project, it is scheduled
for completion in the late 1990s. Sum-
mit is the first pumped-storage project
developed by a private, non-utility
company to hold a FERC license.

The U.S. Army Corps of Engineers
has begim mechanical testing of the
first of four pump-turbines installed at
Richard B. Russell Dam, in northeast
Georgia near Calhoun Falls, South
Carolina. A 1989 court ruling permit-
ted the Corps to install but not run the
reversible units pending resolution of a
lawsuit by fish and wildlife interests.
The Corps spent $8 million to study
potential effects of pumped storage on
fisheries and water quality and $1.5

million on research, development, and
installation of sound and light fish
deterrent systems. The new units,
which should all be commissioned by
mid-1992, wiU add 360 MW to the 300
MW of the project's four conventional
turbines. The testing period is to run
for one year after the last unit goes on
line.

Timely completion of the Rocky
Mountain and Summit projects and the
court approval to operate the Russell
pump-turbines would bring the num-
ber of pumped-storage projects built in
the U.S. to 38 by the end of the
century, with a total capacity of ap-
proximately 20,700 MW. Figure 1
depicts the increase both in number
and cumulative capacity of U.S.
pumped-storage projects from 1960
through 2000.

The average capacity of pumped
storage also has increased significantly
over time, from less than 300 MW in
the 1960s to nearly 870 MW sched-
uled for the 1990s. Figure 2 shows the
decade-by-decade trend in average
plant capacity.

Technology Changes

Important developments in pumped-
storage technology help to explain
both the increased number of pumped-
storage facilities and their larger
average size. Prior to World War II,
plants existed primarily in Europe and
South America. They involved rela-
tively small machines (under 100 MW
capacity, with most much smaller),
and frequently operated in conjunction
with a conventional hydroelectric plant.
The first U.S. project. Rocky River,
was a typical example. This 1929 plant
had two 3.5-MW reversible pump-tur-
bines operating together with 24 MW
of conventional capacity.

Pump-turbine manufacturers gained
valuable experience with larger, higher-
head European and South American
projects during the 1930s. This set the
stage for development of a reliable
single-stage reversible Francis-type
pump-turbine, which, in turn, allowed
larger, more economical installations.

During the 1950s and 1960s, U.S.
and Etoropean trends in pumped-stor-
age technology began to diverge based
on different operating philosophies.
European operators placed a high
value on the ability of pumped storage
to provide system stability and fre-
quency control, in addition to peak
power generation. To maintain fre-

HYDRO REVIEW/JULY 1992

731

Note 1 Indudes pnjtocts currenHy under constmction of scheduled (of cotnpletKxi by 1
2- Indudes proiects currefitly in licensing, pefmrtttng. Of pfe-permitting stages.

Figure 2: This bar graph shows the average capacity of U.S. pumped-storage facilities froni
pre-1960 through the year 2000 and Iseyond (Data courtesy Federal Energy Regulatory
Commission, March 1 992, and the American Society of Civil EnqineefS/Electric Power
Research Institute Civil Engineering Guidelines lor Planning and Designing Hydroelectnc
Devetopments: Volumes.)

quency control, the plant must be
capable of following load fluctuations
almost instantaneously and to change
from pumping to generating modes
very rapidly. To meet this need,
pumped-storage installations in Europe
frequently include separate pumps and
turbines combined with motor-gen-
erators. In this configuration, both the
pumps and turbines rotate in the same
direction.

Significant costs are incurred in ex-
change for the potential advantages of
separate pumps and turbines. These
costs have not been attractive to pro-
ject planners in the U.S. who, in
contrast to the Europeans, have
tended to place primary value on eco-
nomical generation to meet peaking
needs rather than frequency control.
Therefore, U.S. developers of pumped-
storage plants have continued to favor
single-stage reversible pump-turbine
installations, which have reduced con-
struction and equipment costs at the
sacrifice of some operating flexibiUty
and efficiency. Nonetheless, this type
of installation also offers substantial
benefits, such as frequency control,
voltage regulation, and a significant
source of reserve power to replace
unscheduled outages in other parts of
a utility's generating system.

Both in the U.S. and other coun-
tries, the historic trend has been

toward increasingly large projects in
terms of pumping and generating ca-
pacity. There is evidence, however,
that this trend may level off. Although
average pumped-storage project size
has increased to approximately 884
MW (see Figure 2), the average ca-
pacity of 42 U.S. plants now in the
planning or licensing stage is approxi-
mately 600 MW.

In addition, a consensus appears to
exist among engineers and operators
that pumped-storage installations with
two or more individual units each in
the 200 MW to 300 MW size range
provide optimum operating reliability
for a typical utility system.

Future Plans

Judging by FERC's list of pumped-
storage projects currendy in the li-
censing or permitting stages, overall
interest in the technology in the U.S.
may be at an all-time peak. If all of
these projects were actually to come
on line, they would approximately
double today's total both of projects
installed (42) and combined capacity
(25,709 MW).

FERC license applications are pend-
ing for three large projects, all of
which, like the Summit project, are
being developed by independent com-
panies. The 2.000-MW Mt. Hope
Project in New Jersey has been the

subject of a detailed Environmental
Impact Statement (EIS) prepared by
FERC staff, which recommended ti-
censing. The 1,000-MW Rocky Point
Project in Colorado recenUy began the
EIS process. And the 600-MW River
Mountain Project in Arkansas is await-
ing the commencement of the EIS
process.

A total of 25 projects representing
nearly 14,000 MW are currently being
studied imder FERC preliminary
permits, of which orjy five are spon-
sored by public agencies or utilities.
The largest of these is the 2,500-MW
Dominguez Project on the Gunnison
River in Colorado. Other sizeable
permitted projects include Abert Rim
(2,000 MW), RusseU Canyon (1,000
MW), and Lorella (1,000 MW), all in
Oregon; Dry Fork (1,000 MW) in
Wyoming; and Reed Hill (1,000 MW)
in New York.

Twelve pumped-storage projects
representing more than 4,800 MW
currentiy have preliminary permits
pending. Eight of the projects on this
list are sponsored by independent de-
velopers. The largest of this group are
two 1.000-MW projects in Oregon,
LangeU Valley and Bryant Mountain.

Western states dominate the geo-
graphic distribution of projects now
being studied, with only six of the 37
projects in the permitting or pre-per-
mitting stage located east of the Mis-
sissippi River. Of the western projects,
eight are in California, six in Oregon,
and five in Arizona.

Independents Dominate

Independent developers are directly
responsible for 31 of the 40 pumped-
storage projects in the planning (li-
censing, permitting, or pre-permitting)
stage. Several developers are involved
in more than one project:
— Consolidated Hydro, Inc., through
subsidiaries and affiliates, is planning
three pumped-storage projects that
are in various stages of the licensing
process;

— Independent Hydro Developers of
Scottsdale, Arizona, an owner of con-
ventional hydro projects, holds prelim-
inary permits or permit applications for
at least six projects;
— Gentry Resources Corporation, also
of Arizona, has applied for permits on
five projects; and

— Creamer and Noble Energy, Inc., an
engineering firm in St. George, Utah,
holds permits on three projects.

732

Table 1 : Pumped-Storage Plants Operating In the U.S.

Project Name and
FEHC License Number,
il applicable

Capacity
(MW)

Owner/Operator

Bad Creek, 2740

1,000.0

Balsam Meadow, 67

2000

Bath County. 2716

2,100.0

Bear Swamp, 2669

6000

Blenheim Gilboa, 2685

1,000

Cabin Creek, 2351

3000

Carters Dam (two reversible units)

2500

Castaic, 2426

1,275

Clarence Cannon (one reversitde unit)

310

DeGray (one reversible unit)
Edward G. Hyatt, 2100

280

2932

Fairfiekj, 1894

511 2

Flatiron 3

Grand Coulee Pump Generation

3140

Helms, 2735

1,053

Hiwassee (one reversible unit)

595

Horse Mesa

999

Jocassee, 2503

610

Lewiston, 2216

240

Ludington, 2680

1,978 8

Mormon Flat

486

Mt Elbert

2000

Muddy Run, 2355
Northfiekj Mountain, 2485

8800

1,080

ONeill

25.2

Raccoon Mountain

1,530

Rocky River, 2576

Salina, 2524

2598

San Luis

4240

Seneca (Kinzua), 2280

4257

Smith Mountain, 2210

2474

Taum Sauk. 2277

4080

Themialito, 2100

825

Wallace Dam (Laurens), 2413

216

Yards Creek, 2309

3860

Duke Power Company

Southem California Edison

Virainia Electric and Power Company/

Allegheny Power System
New England Power Company
New York Power Authority
Public Service Company ol Colorado
U.S. Army Corps of Engineers
California Department of Water Resources/

Los Angeles Department of Water and Power
U.S. Army Corps of Engineers
U.S. Army Corps of Engineers
Calilomia Department ol Water Resources
South Carolina Electnc arvj Gas Company
Bureau of Reclamation
Bureau of Reclamation
Pacific Gas and Electric Company
Tennessee Valley Authority
Salt River Project
Duke Power Company
New York Power Authority
Consumers Power Company/Detroit Edison
Salt River Project
Bureau of Reclamation
Philadelphia Electric Power Company
Northeast Utilities Service Company
Bureau of Reclamation
Tennessee Valley Authority
Connecticut Light and Power Company
Grand River Dam Authority
Bureau of Reclamation
Pennsylvania Electric Company/

Cleveland Electric Illuminating Company
Appalachian Power Company
Union Electric Company
California Department of Water Resources
Georgia Power Company
Jersey Central Power arxJ Light Company/

l^blic Sen/ice Electric and Gas

South Carolina

1991

California

1987

Virginia

1985

Massachusetts

1974

New Yort<

1973

Cokjrado

1967

Georgia

1975

California

1973

Missouri

1983

Arkansas

1969

California

1968

South Carolina

1976

Colorado

1954

Washington

1974

California

1984

North Carolina

1956

Arizona

1972

South Carolina

1973

New York

1961

Michigan

1973

Arizona

1971

Cotorado

1981

Pennsylvania

1967

Massachusetts

1973

California

1967

Tennessee

1979

Connecticut

1929

Oklahoma

1968

California

1968

Pennsylvania

1970

Virginia

1965

Missoun

1963

California

1968

Georgia

1978

New Jersey

1965

Another piivate company, Peak
Power Corporation of San Francisco,
California, holds a preliminary permit
on one project, the 100-MW Butte
project in Montana, and, as of March
1992, had applied for a permit on a
second. The company is developing
other 100-MW scale projects that
avoid using navigable waterways. Peak
Power's design, trademarked as
Modular Pumped Storage, uses
standardized components and man-
made reservoirs charged with ground
water or wastewater.

Perhaps surprisingly, investor-owned
utilities (lOUs), which operate 17 of
the existing pumped-storage projects
in the U.S., are involved in only two of
the projects currently being planned.
Of the 13 projects not sponsored by
independent developers listed in Table
2, eight are planned by municipal or
regional publicly ovmed utilities, two
by lOUs, two by federal agencies, and
one by a rural electric cooperative.

The rise of independent developers
in pumped storage and the decline of
lOU involvement appear to be related
phenomena. In many states, the regu-
latory environment discourages lOUs
from planning large new power plant
projects, especially those which, like
pumped storage, are capital-intensive
and require long lead times for devel-
opment. Many independents, how-
ever, perceive these circumstances as
an opportunity. They appear willing to
bear the development and construc-
tion risks of pumped storage— risks
that lOUs are unwilling or unable to
take— in the expectation that lOUs will
become a market when the power
from their projects becomes available
around the beginning of the next cen-
tury.

Issues in Development
Of Pumped Storage

Although the current wave of re-
newed interest in pumped storage is

encouraging, there are no guarantees
that projects now being planned will
actually be built. To be successful,
today's group of developers must ad-
dress significant issues, some of which
have become of far greater concern
than during the previous pumped-stor-
age boom of the 1960s and 1970s.

Technical Aspects

Assuring that a project is technicaUy
sound is always a key concern, par-
ticularly if technical problems increase
costs to an unacceptable level. Proper
siting, of course, is essential. Apart
from environmental concerns that may
exist, the site must provide sufficient
vertical distance between the upper
and lower reservoirs for economical
energy generation. It also must permit
a relatively short distance between the
generation equipment and the in-
take/outlet facility at the lower reser-
voir, to minimize costs of tunneling
and excavation. Subsurface rock must

HYDRO REVIEW/JULY 1992

733

This photograph of the NorthfieW Mountain pumped-storage project shows the upper reser-
voir in the foreground and the Connecticut River (used as tower reservoir) in the upper
middle of the picture Northeast Utilities Service Company built the 1.000-MW project in the
early 1970s, during pumped storages boom period The protect was uprated to 1.080 MW ir
1 989 (Courtesy Northeast Utilities)

be coinpetent for the conslniction of
underground powerhouse facilities,
tunnels, and shafts.

Transmission access is another im-
portant technical issue. An otherwise
ideal site may become unfeasible if
project development requires exten-
sive new transmission lines and re-
lated facilities.

Environmental Concerns

With the possible exception of some
off-stream plants, proposed pumpjed-
storage projects, like conventional hy-
dro projects, require a license from
FERC. Under rules made during the
1980s, FERC must give equal con-
sideration to environmental issues
and energy issues during its review
of a license application. Due to the
large size of most pumped-storage
projects, developers are likely to en-
counter many significant environ-
mental issues to be resolved in the
licensing process. These include such
potential effects as entrainment of fish
_in the intake; changes in water use and
quality resulting from fluctuations in
the lower reser\'oir; visual disturbance
resulting from creation of a large upper
reservou-; and construction-related ef-
fects such as dust, traffic, and noise.

Experienced developers have found
that careful early planning and a pro-

mt)RO REVIEW Jl'LV 1W2

active approach to the concerns of
resource agencies are essential in ad-
dressing and resolving environmental
issues." But even with a sound ap-
proach and a manageable level of en-
vironmental concerns, developers can
expect requirements for lengthy, de-
tailed environmental studies to pre-
cisely define environmental effects and
needed mitigation measures.

In an effort to avoid potential envi-
ronmental obstacles, some developers
are taking a close look at "off-stream"
pumped-storage configurations that do
not use natural streams or lakes as a
water supply source. The Summit and
Mt. Hope projects for example, are
designed to use deep underground
caverns as lower reservoirs. Upper
reservoirs will be constructed on the
ground surface, with water purchased
from municipal or other public sources
for initial fill-up and replenishment of
evaporation.

The off-stream concept need not
necessarily require an underground
cavern. Projects such as those planned
by Peak Power Corporation involve
small surface reservoirs constructed in
arid regions of the U.S.. with no
natural water supply. At least four
off-stream pumped-storage projects
are currently in the permitting or
pre-permitting stages.

Need for Power

Based on forecasts of additional
energy needs in the U.S. over the
next ten to 20 years, it appears rea-
sonable to expect an increasing de-
mand for peaking power and other
benefits of pumped storage. Indepen-
dent developers currently expect their
projects to help meet this new de-
mand, and intend to market power
from these projects to public and in-
vestor-owned utilities on a wholesale
basis.

Political and regulatory considera-
tions may disrupt this scenario, how-
ever. Environmental and consumer
advocacy groups recently have be-
come strong proponents of energy
conservation and other demand-side
management (DSM) measures as al-
ternatives to proposed new power
plants, regardless of their technical,
environmental, or economic merits. In
many states, agencies responsible for
regulating utilities also are encouraging
DSM and questioning the need for
large new projects. In this climate, a
developer may encounter difficulty in
justifying a pumped-storage project to
the public and state regulators, even if
it has obtained a FERC license.

Developers may be able to address
this issue by emphasizing the compat-
ibility of pumped storage with DSM
goals. In addition to generating peak
power, pumped storage improves the
overall efficiency of a utility system by
leveling out the "peaks and valleys" in
the utility's daily load demand curve.
Enhancing system efficiency in this
way can help meet major DSM goals
such as reducing energy consumption,
reducing air pollution from fossil-fueled
plants (especially older facilities), and
promoting opportunities for cost sav-
ings that can be passed along to rate-
payers.

Pumped-Storage Prospects

With interest in pumped storage at a
high point in the U.S.. those involved
in its planning, design, and promotion
are considering ways to enhance its
prospects for future success. One
such approach is to place greater
emphasis on pumped storage as a
management tool, rather than as
simply a source of peaking power.
"Storage helps utilities manage energy
in the same way that hub airports
manage passenger flow for airlines."
says Jim Birk, PhD, director of the
Storage and Renewables Department
of the Electric Power Research Insti-

734

Table 2: U.S. Pumped-Storage Plants under Construction or In the Planning Stages

Project Name and
FERC License Number,
if applicable

Proposed

Capacity

(MW)

Developer

State Status

Abert Rim, 10875

2,000

Blue Diamond North, 10758

100

Blue Diamond South, 10756

100

Bryant Mountain, 10982

1,000

Butle, 11201

100

Crystal Creek, 10847

500

CuHs Run, 10868

849

Davis, 2709

1,000

Dominguez, 11176

2,500

Dry Fork, 10725

1,000

Eagle Mountain, 11080

500

Garden Bar, 11164

290

Gregory County

2,360

Indian Spnng, 7825
Iowa Mill, 11092

250

400

Lake Pleasant, 10467

800

Langell Valley, 10971

1,000

Lorella, 11181

1,000

Mississippi Valley. 10941

500

Mt Hope, 9401

2.000

New Jones Font, 11092

400

Parkman, 10725

Pickens. 10436

900

Rattlesnake Hill, 11119

Red Rock, 11095

200

Reed Hill, 11152

1,000

Richard B. Russell

360

(four reversible units)

River Mountain, 10455

600

Rocky Mountain, 2725

675

Rocky Point, 7802

1,000

Russell Canyon, 10897

1.000

Saguara, 7826

250

Spring Creek, 10990

104

Stukel Mountain, 11136

750

Summit, 9423

1,500

Taftner, 10725

Tonto Pumped Storage, 7463

150

Tropicana, 11221

100

Upper Gunnison. 11038

Vineyard, 10889

West Pass, 10725

West Rutland. 11240

160

West Valley Pumped Storage, 10786

175

West Valley Pumped Storage, 10798

264

Willow Spring, 7824

250

Abort Rim Hydroelectric Company OR

Blue Diamorid North Pumped Storage Power NV
Blue Diamond South Pumped Storage Power NV
Bryant Mountain Hydroelectric Associates OR

Peak Power Corporation MT

Creamer and Noble Energy Inc
Mid Atlantic Energy Inc.
Monongaheta Power Company

CA
PA
WV

Dominguez Hydroelectric Associates
Little Horn Energy Wyoming Inc
Eagle Mountain Energy Company
South Sutter Water District
U.S. Army Corps of Engineers

Gentry Resources Corporation

Sacramento Municipal Utility District

Gentry Resources Corporation

Russell Canyon Corporation

Energy Storage Partners

Southem Minnesota Municipal Power Agency

Halecrest Company

Sacramento Municipal Utility District

Little Horn Energy Wyoming Inc.

Oglethorpe Power Corporation

Rattlesnake Hill Developers

Greenwood Pumped Storage Corporation

Clinton Pumped Storage Corporation

US Army Corps of Engineers

JDJ Energy Company

Georgia R)wer Company and Oglethorpe

Power Corporation
Natural Energy Resources Company
Russell Canyon Corporation
Gentry Resources Corporation
City of Redding. California
Russell Canyon Corporation
Summit Energy Storage, Inc.
Little Horn Energy Wyoming Inc.
Gentry Resources Corporatwn
Peak Power Corporation
County of Arapahoe, Colorado
Vineyard Road Association
Little Horn Energy Wyoming Inc.
Village of Swanton, Verrrront
Juniper Energy Company
South Forii Inngation District
Gentry Resources Corporation

HokJs FERC Preliminary Permit
Hokjs FERC Preliminary Permit
HokJs FERC Preliminary Permit
Awaitim FERC Preliminary Permit
HoWs FERC Preliminary f^ennit
HokJs FERC Preliminary Permit
Holds FERC Preliminary Permit
Hokfs FERC License/License
being appealed by Siena Club,
Corps denied Section 404 permit
Holds FERC Preliminary Pemiit
Holds FERC Preliminary Permit
HoWs FERC Preliminary Perniit
HokJs FERC Preliminary Permit
Corps continues feasibility studies/
diffk^ulties with upfront financing
Awaiting FERC Preliminary Permit
Awaiting FERC Preliminary Permit
Awaiting FERC Preliminary Permit
Awaiting FERC Preliminary Permit
Holds FERC Preliminary Permit
HoWs FERC Preliminary Permit
Awaiting FERC License
Awaiting FERC Preliminary Permit
HokJs FERC Preliminary Permit
HoWs FERC Preliminary Permit
Holds FERC Preliminary Permit
Holds FERC Preliminary Permit
Holds FERC Preliminaiy Permit
Mechanical Testing of 4 Pump-
Turbines
Awaitirig FERC License
Holds FERC License/Under

Construction
Awaitim FERC License
HokJs FERC Preliminary Permit
Awaiting FERC Preliminary Permit
Holds FERC Preliminary Permit
Holds FERC Preliminary Permit
Holds FERC License
HokJs FERC Preliminary Permit
Awaiting FERC Preliminary Permit
Awaiting FERC Preliminary Permit
Awaitirig FERC Preliminary Permit
HokJs FERC Preliminary Permit
Holds FERC Preliminary Permit
Awaiting FERC Preliminary Permit
HokJs FERC Preliminary Permit
Holds FERC Preliminary Permit
Awaiting FERC Preliminary Permit

Note: Data used in this table was provided by the Federal Energy Regulatory CorrimissJon. and Is current through March 6. 1992.

tute. "It should be evaluated on the
basis of its strategic value, not simply
on its generating capacity." Birk and
others believe that highlighting the
beneficial strategic and operating fea-
tures of pumped storage will con-
tribute to a greater understanding of
its compatibility with DSM and related
efforts to encourage conservation and
environmental protection.

Efforts to improve pubUc under-
standing of pumped storage were re-
cently boosted with the formation of
the National Hydropower Association's
Energy Storage Council (HESC). One
of the major purposes of this organi-
zation is to communicate the purposes
and benefits of pumped storage to

decision-makers on energy issues at
the national level.

HESC and other pumped-storage
advocates seek to combine this type of
communication with ongoing efforts to
better define and quantify the dynamic
operating benefits of the technology.
The hoped-for result will be to en-
hance its attractiveness to utilities,
regulators, and the pubbc as a whole,
and allow the cvirrent promise of
pumped storage to reach its full poten-
tial. D

For more information about this
article, contact The Editor, Hydro
Review, 410 Archibald St., Kansas
City, MO 64111; (816) 931-1311.

Note:

' Cunningham, Carol, "A 'Green' Plan
for Pumped-Storage Projects,"
Hydro Review, Voliune 10, No.
7, December 1991, pages 42-50.

Acknowledgment:

The author of this article and the
editor of Hydro Review gratefully
acknowledge Antonio Ferreira, PhD,
P.E., for his contributions to the por-
tions of this article addressing the
historical and technological develop-
ment of pumped storage. Dr. Ferreira
is a consulting hydroelectric engineer
in Holyoke, Massachusetts, with ex-
tensive escjjerience in pvimped-storage
planning, design, and operation.

735

Mr. McDermott. Thank you, Mr. Chairman.

Mr. Andrews. Thank you, Mr. McDermott.

I want to thank the panel, it has been excellent testimony. This
concludes this panel's testimony.

I would like to ask the second panel to please take your seats at
the witness table as quickly as possible and, let us proceed with
your testimony.

Mr. Andrews. If we could call the committee back to order. Our
second panel consists of Richard Terry, representing the American
Gas Association, Victor Beghini, representing the American Petro-
leum Institute; Douglas Woosnam, representing the Petroleum
Marketers Association of America; and Eugene Ames, representing
the Independent Petroleum Association of America.

I would Uke to ask that the witnesses start with Mr. Terry and
work across the witness table. And if you would please try to hold
your remarks to 5 minutes. When the red Ught comes on, please
try to conclude your testimony. Your formal written testimony will
be made a part of the record.

Mr. Terry, welcome to the committee.

STATEMENT OF RICHARD E. TERRY, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, PEOPLES ENERGY CORP., CHICAGO,
IL, ON BEHALF OF AMERICAN GAS ASSOCIATION

Mr. Terry. Thank you, Mr. Chairman, and distinguished mem-
bers of this committee. I am Richard Terry, chairman and CEO of
People's Energy Corp., the parent of People's Gas Light & Coke Co.
in Chicago and North Shore Gas Co.

I am pleased to be here today on behalf of the American Gas As-
sociation and its approximately 250 member distribution and trans-
mission companies in order to present our views concerning the ad-
ministration's proposed energy tax.

While AGA commends the President on his efforts to put forth
a plan for reducing the deficit and strengthening the economy, we
believe the broad-based energy tax is not the best way to get the
job done.

For a number of reasons, AGA is opposed to all broad-based en-
ergy taxes for purposes of reducing the deficit or raising additional
Federal revenue. We believe broad-based energy taxes are regres-
sive, regionally inequitable, difficult to implement, and harmfiil to
the domestic economy, job growth and the global competitiveness
of U.S. industry.

We believe it is shortsighted to permit the current need for addi-
tional revenue, or demands for deficit reduction to dictate energy
policy when a sound energy plan is central to promoting the na-
tional goals of reducing dependency on foreign oil, improving ex-
ports, developing investment infi-astructure, and creating jobs.

We urge Congress to work with the administration in cutting
Federal expenditures before any new taxes are enacted. However,
if it is determined that additional taxes are necessary to reduce the
deficit, we urge you to seriously consider implementing a national
consumption tax, rather than a tax exclusively on energy consump-
tion. This strategy would not harm selected industries, such as
manufacturing, that are heavily dependent on energy.

736

If a Btu tax on natural gas is inevitable, all segments of the in-
dustry are united in encouraging that it be structured as an excise
tax paid by the ultimate consumer or end user and collected by the
entity sellmg that gas to that consumer. The tax could be collected
by a utihty or other seller in the same manner as the current tele-
phone excise tax. This manner of collection would mitigate m£my
of the practical problems associated with implementing the Btu
tax.

There is some concern expressed whether this tax would show on
the bill. I suggest that it would show on the bill even if it is at the
city gate, just like other taxes are on our bill. Collecting the tax
at any other point than the end user, such as city gate, well head
or pipeline, would create serious market distortions and significant
burdens in the collection and administration of the tax.

Moreover, collecting the tax at the end user level avoids bviilding
the tax increase into the cost of energy where local jurisdictions im-
pose a gross receipts tax on utihty bills. In Chicago, this increases
the impact by 14 percent.

If it is determined that the Btu tax is to be imposed at the city
gate, many utihties might be hurt in trying to flow the cost of the
tax to the ratepayers. In most jiuisdictions, the utihty would have
to seek a fuel adjustment or go through a rate hearing to flow
through the tax. A rate case would not only be time consuming and
expensive, but the utihty could be forced to absorb the cost of the
tax while waiting for a rate approval, which might be denied.

The ability to flow through the tax is critical because, for many
companies, including our own, the amovmt of the tax will equal or
exceed our current net income. I have been advised that several
State commissioners have indicated their interest in examining the
flowthrough. The tax should not be apphed in a manner that un-
dermines the financial viability of LDC's or other segments of the
industry. We, therefore, urge Congress, if the collection point of the
Btu at the city gate is imavoidable, to add provisions in tax legisla-
tion that would effectively and immediately enable utihties to com-
pletely passthrough the cost of the tax to consumers.

The Btu-based energy tax will be, at a minimum, highly complex
and difficult to fashion in a manner that avoids serious administra-
tive, financial, economic, regulatory, and operational burdens. The
proposed Btu tax will hurt low-income households who spend a
much greater percentage of their income on energy than more af-
fluent households. For the average household, AGA estimates the
tax would eventually add $25 to the average annual bill. In Chi-
cago, that is closer to $44.

Let me conclude my comments by coming back to an issue that
is of highest concern to our industry, where the tax will be col-
lected. If a Btu tax is your choice, we encourage you to have it paid
by the ultimate consumer and collected by the seller for the follow-
ing reasons:

737

An excise tax could most easily avoid compounding caused by ex-
istence of State gross receipt and sales taxes; and, second, the end
user collection point would maximize the possibility of complete
flow-through of the tax and minimize the gas company's exposure
to regulatory lag.

This concludes my remarks. Thank you.

Mr. Andrews. Thank you, Mr. Terry.

[The prepared statement follows:]

738

STATEKENT OF

RICHARD E. TERRY

CHAIRMAN k CEO

PEOPLES ENERGY CORPORATION

ON BEHALF OF

THE AMERICAN GAS ASSOCIATION

BEFORE THE

COMMITTEE ON WAYS AND MEANS

UNITED STATES HOUSE OF REPRESENTATIVES

ON FEDERAL ENERGY TAXES

March 23, 1393

I. Introduction »"'< guminayY

Thank you Mr. Chairman and distinguished members of this
Committee. I am Richard Terry, chairman & ceo of Peoples Energy
Corporation, the holding company of The Peoples Gas Light & Coke
Company and North Shore Gas Company. I am pleased to be here today
on behalf of the American Gas Association (A.G.A.) in order to
present the views and position of the natural gas industry
concerning the Administration's proposed energy taxes.

A.G.A. is a national trade association comprising
approximately 250 natural gas distribution and transmission
companies located throughout the United States. Collectively, 90
percent of the gas consumers in this country are served by A.G.A. 's
members .

The Peoples Gas Light & Coke Company serves customers in
Chicago while North Shore Gas supplies users in 54 suburban
communities north of the city. Together, these utilities serve
nearly a million customers and are primarily engaged in the
purchase, storage, distribution, sale and transportation of natural
gas.

While A.G.A. commends the President in putting forth a plan
for reducing the deficit and strengthening the economy, we believe
a broad-based energy tax would not accomplish these objectives.
For a number of reasons, A.G.A. is forthrightly and unequivocally
opposed to all broad-based energy taxes for the purpose of reducing
the deficit or raising additional federal revenue for new programs.
We believe broad-based energy taxes are regressive, regionally
inequitable, difficult to implement, inflationary, harmful to the
domestic economy, job growth and the global competitiveness of U.S.
industries.

We urge Congress to work with the Administration in cutting
federal expenditures before any new taxes are enacted. However, if
it is determined that additional taxes are necessary to reduce the
deficit, we urge you to seriously consider implementing a national
consumption tax, rather than a tax exclusively on energy
consumption. This strategy would not harm selected industries such
as manufacturing that are heavily dependent on energy. If,
however, the Administration and Congress elect an energy tax,
A.G.A. believes that an increase in the federal excise tax on
gasoline and/or oil import fee are the most appropriate means for
raising revenue efficiently, improving the environment, encouraging
domestic production and promoting energy conservation.

If a Btu tax is enacted such as that proposed by the
Administration, its point of collection should accurately reflect
the current state of the industry. The natural gas industry has
endured a decade of radical restructuring towards a market-based
system at the production and wholesale levels. It still faces
extensive state regulation of retail operations. These two factors
make the collection point of the Administration's proposed Btu tax
extremely important.

739

-2-

If an energy tax on natural gas is inevitable, A.G.A. is
united with all segments of the natural gas industry in encouraging
that it be an excise tax paid by the ultimate consumer or end-user
and collected by the entity selling the gas to the consumer. Under
no circumstances should the collection point be at the citv-aate .

If Congress and Administration impose a Btu tax on natural
gas, we urge that its collection be at the end-user level to best
address a number of problems that could occur if the tax is imposed
at some other location, such as the wellhead, pipeline or city-
gate.

We are greatly concerned regarding the possibility that gross
receipts and state sales taxes could be levied upon the Btu tax, if
the collection point issue is not carefully addressed. This
compounding, or tax on a tax, will occur if the Btu tax is assessed
at the city-gate or anywhere else other than on the buyer in a
final sale. When energy taxes and other state taxes are piled on
top of each other, it could result in much higher out-of-pocket
costs. A.G.A. estimates that the magnitude of the compounding
problem could range from $350 to $400 million annually after the
tax is phased-in.

Another major problem that concerns us is that of
federal/state regulatory preemption — whether some state public
utility commissions (PUCs) will allow the full tax to be passed
through in consumer rates. This could create a problem of
"stranded costs" — pipelines and local distribution companies
(LDCs or utilities) being unable to pass these costs through to
ratepayers. A related concern in those jurisdictions that would
allow a flow through of costs is the regulatory lag in the time
between the imposition of the tax and reflection of the tax in the
customer's billed rates. Where the tax is paid by the local
distribution company (LOC or utility) and there is the usual
regulatory lag, the gas company's entire net income could be lost
for that period.

An additional problem in collecting the tax at a point other
than the end-user is that lost revenues could result from tax
avoidance as well as the fact that utilities prevented by their
state regulators from collecting the tax could deduct it as a
business expense.

Another concern is that transportation services could be shut
down. If the tax exceeds an LDCs transportation margin and the
LDC is prevented from passing the tax on to its large commercial or
industrial customers, it may be forced to cease transporting gas to
them.

Other concerns we have with an inappropriate collection point
include: 1) administrative difficulties in collection of the tax?
2) increased gas storage costs; 3) absorption of costs by
pipelines, producers and LDCs whose contracts have fixed prices
that prevent tax additions; 4) disputes over whom would bear the
costs of uncollectibles; and, 5) the potential to disadvantage
natural gas vis-a-vis competitors in the marketplace.

Several state commissioners have indicated that they are
interested in examining the flow through of tax costs to consumers.
An unnecessary major federal/state jurisdictional battle could
occur between the federal government, LOCs and state regulators.
Therefore, if it is determined that a Btu tax is imposed at the
city-gate. Congress should adopt legislation to allow utilities to
immediately recover the full costs of the tax in consumer rates.

II. AdMinistration'8 Proposal

The Administration's proposal to raise $71.4 billion over five
years by imposing an excise tax on fossil fuels (natural gas, coal
oil) at a basic rate of 25.7 cents per million Btu (MMBtu) , plus a

740

-3-

34.2 cents per MMBtu supplemental tax on oil. The tax would be
imposed on hydro-and nuclear-generated electricity and on imported
electricity according to the fuel Btu content of fossil fuels
burned in conventional power plants to produce equivalent power.
The tax would be phased in over three years beginning in July,
1994. The energy tax package includes an extension of an expiring
federal excise tax on gasoline.

The collection point for the tax as originally proposed by the
Administration would be the pipeline for natural gas, the refinery
for oil, the minemouth for coal, the production facility for
alcohol fuels, the utility for hydro-and nuclear-generated
electricity and the importation point for imported taxable
products.

III. Impact of the Tax

For the average household, A.G.A. estimates the tax would
eventually add $25 to the average annual bill of a natural gas-
heated home, roughly S2 3 to the electric bill. The average
household would also pay an additional $76 annually on gasoline
consumption. We estimate that the total average household energy
costs for a natural gas heated home would rise by $124 per year.

The national average numbers mask the higher impacts that will
hit particular regions, especially the northern states with colder
winters. According to the Department of Energy, cold weather
regions use as much as 55 percent more energy in homes than warm
regions. Consequently, the tax burden would be disproportionately
larger and unavoidable to the residents of the colder regions. In
Chicago, for example, the tax would add $38 to $44 to a typical gas
bill, rather than the $24 national average.

But the residential home energy cost is less than half the
total cost to U.S. consumers. Approximately $184 in increased
annual costs per household would be hidden in the costs of all
goods and services that rely on energy as they are made or
delivered. We estimate that the total average household cost would
be nearly $310 per year. The cost of the tax on the consumer would
rise as the tax rate rises with inflation.

The short-term retail price effects of the Btu tax after
phase-in are illustrated in the attached Appendix. That chart
shows the percentage increase in prices of the energy sources as a
result of the tax. For example, the chart illustrates that the
proposed tax raises the price in the residential sector by 4.7
percent for natural gas and 4.1 percent for electricity. The
proposed tax would raise the price of gas industrial customers by
11 percent while raising that of industrial electric customers by
6.9 percent and industrial coal customers by 15.3 percent. The
market effect is that the tax would have a greater impact on the
prices to natural gas industrial customers.

IV. The Problems of Broad-Based Energy Taxes

The Btu-based energy tax that is part of the proposed economic
package will be, at a minimum, highly complex and very difficult to
fashion in a manner that avoids serious administrative, financial,
economic, regulatory and operational burdens.

First, it is short-sighted to permit the current need for
additional revenues or demands for deficit reduction to dictate
energy policy when a sound energy plan is central to promoting
national goals of reducing dependency on foreign oil, improving
exports, developing domestic infrastructure and creating jobs. The
production, delivery and consumption of energy in our country is
essential to meeting these national goals and to stimulating
economic growth. The complexities of energy markets require

741

-4-

consistent strategies with respect to energy, environmental and
economic policies. The consideration of these issues must not be
held hostage to a budget crisis.

The proposed Btu tax is in general regressive. Low-income
households spend as much as four times the percentage of their
income on energy as more affluent households. Therefore, a broad-
based energy tax would have a disproportionate effect upon lower
income households.

The tax would be felt by consumers using household essentials,
such as heating, cooking and water heating. Unlike a proposed
"sin" tax on alcohol and tobacco, energy is a basic necessity.
Such tax would hit lower income households hard. Reducing energy
consumption can entail large expenditures (i.e., new furnace,
replacing windows) , which are often not affordable by lower income
households. These households might need a tax credit to reduce the
burden of a broad-based energy tax, or forego certain essentials.

In addition, some A.G.A. member companies have customers who
cannot pay their utility bills at current price levels. Some
jurisdictions have enacted programs for low-income customers which
allow them to defer payment of their gas bills. Where low-income
customers have been unable to pay under these programs, a broad-
based energy tax could exacerbate this already bad situation. For
example, the uncollectible bills in one state for one member
company have exceeded $120 million since 1983.

A Btu tax like that proposed could erode U.S. competitiveness
and increase inflation. An energy tax would raise the price of
U.S. products in relation to foreign products, resulting in fewer
exports and more imports.

By taxing energy used in the production of U.S. products,
domestic products would become far less competitive than foreign
products in world markets. The U.S. would import more finished
goods because these products would be made relatively cheaper since
the energy used in the foreign manufacture of the product escapes
the tax. Domestic companies could be forced to export jobs to
remain competitive. Moreover, a broad-based energy tax could
increase the cost of domestic manufacturers and reduce their
ability to compete with foreign manufacturers in the domestic and
world markets. This is hardly consistent with desirable trade
policy.

Basic manufacturing industries would be particularly hard hit
since they consume relatively large amounts of energy per unit of
production. These industries, concentrated in the Midwest, South
and Southwest, will already be faced with higher costs resulting
from implementing provisions of the "Clean Air Act Amendments." A
double cost of environmental compliance and new taxes could result
in significant relocation outside the U.S. Our economy can ill
afford the drag imposed by a tax which hits both consumers and
export products.

The broad-based energy tax can be inequitable on a regional
basis. Generally, energy consumption in colder climates is larger
than in warmer climates. Thus, taxes on energy consumption would
fall disproportionately on colder regions like the upper Midwest
and Northeast. Many of these areas have already been hit hard by
the loss of manufacturing jobs.

A Btu tax as that proposed can present various administrative
problems. Implementation could create a new layer of bureaucracy
at the IRS at a time when the President proposes that federal
government staffs be cut. In addition, utilities could face
different requirements in passing such taxes on to customers by the
various state and federal regulatory commissions.

742

It may be difficult for federal government auditors to verify
the amount of Btus consumed if the tax is collected upstream, since
fossil fuels are not uniform in their Btu content. When natural
gas is produced, it is either in a wet (containing liquid by-
products) or dry state (no liquid by-products) . The Btu level of
the gas will vary widely depending upon its Btu content. A cubic
foot of natural gas produced from the same well may have different
Btu contents on different days because deposits of natural gas can
vary considerably.

Under the proposed Btu tax formulation, taxpayers would be
required to pay the tax on an exact Btu content, requiring
extensive laboratory testing by the taxpayer. Serious compliance
problems could occur, as Service agents are ill-equipped to detect
noncompliance through misreporting of fuel quality.

A flat BTU tax, as that proposed, may favor the use of
electricity over natural gas in some applications. For instance,
in the generation of electricity, approximately two-thirds of the
input fuel BTU value is lost due to inefficiencies in generation
and transmission. A BTU tax at the retail level could, therefore,
penalize customers who heat directly with gas where efficiency
levels approaching 90 percent can be achieved.

The Btu on gas would be imposed on an industry whose prices
have been depressed. These low prices have affected the number of
new jobs created in the industry and a Btu tax added on gas will
not improve the future outlook for jobs. Natural gas prices have
fallen between 1984 and 1993 in the wake of deregulation and the
imposition of market forces. Since 1984, the average gas wellhead
price has declined from $2.66 per thousand cubic feet of gas (Mcf)
sold to $1.64/Mcf for 1991.^ D»iring the same period, the average
natural gas prices to residential customers expressed in dollars
adjusted for inflation declined from $6.12/Mcf to $5.82/Mcf.
Commercial and industrial sector prices have fallen by $.74 /Mcf and
$1.71/Mcf respectively from 1984 to 1993.^

Pipelines and gas utilities lowered the average delivered
prices by more than the decline in wellhead prices. While
beneficial for the consumer, these falling gas prices at the
wellhead and to end-users have made it more difficult for the
natural gas production sector to maintain activity levels needed to
fully replace production with new reserves of natural gas. These
depressed prices have stifled the creation of new jobs in the
exploration and production sectors of our industry.

V. Why aitimata Purchaser is Most Appropriate Collection Point
for Natural Gas

A. Criteria and Analysis in Selecting Collection Point

Of major concern to our industry is the point of collection
for any Btu tax which might be enacted. If a Btu tax is enacted,
we urge Congress to adopt provisions for collecting the tax from
the ultimate customer (last sale) via the entity that sells the
natural gas. The Administration's original proposal, however, is
that the tax be collected on natural gas entering the pipeline.
More recently, they have indicated the collection point is to be
"out of the pipeline," i.e., the point of delivery to the local
utility or the point of delivery to the end-user, where the end-
user does not receive deliveries through an LDC.

^ U.S. Department of Energy, Monthly Energy Review . Feb. 1993.
2 M.

743

1. Criteria

It is vital that if a Btu tax is adopted that the collection
point be logically and reasonably integrated with the industry's
structure, business arrangements and other practical
considerations. For example, the collection point should be one
that is least likely to produce uncertainties about private
contract rights. In addition, the collection point issue should be
evaluated in light of the following factors: 1) whether the tax is
easy to collect and discourages tax avoidance; 2) whether the tax
can be flowed through to consumers; 3) whether regulatory approval
is required in most cases which could expose gas companies to a
regulatory lag problem; and, 4) whether the government can
adequately collect revenues.

2. Changes in Gas Industry

First, the natural gas industry is undergoing a significant
transition — the result of decades of legislative, regulatory and
market-driven changes. Gas markets have been hampered by problems
left over from the era of wellhead price controls and extensive
regulation. During the 1970s, the industry saw a combination of
wellhead price controls, rising demand and concerns about gas
supply. During the decade between 1979 and 1988, the industry
grappled with such problems as high take-or-pay requirements in
contracts that were unresponsive to the market, a regulatory
process ill-suited for an increasingly competitive market and the
concern in some quarters regarding future gas supplies and markets.

Since 1984, the natural gas industry has undergone changes
from a structure of rigid regulation to a regulatory regime that
relies on market forces. During the regulatory change, the
wellhead market for the natural gas commodity was deregulated.
This was accomplished through a phased approach, whereby regulated
price ceilings were largely removed in 1985, although the last
vestiges of wellhead price regulation were not removed until
January, 1993.

Moreover, structural changes in the transmission and
distribution sectors of the natural gas industry have affected the
pricing of natural gas services and the industry. While both
sectors remain regulated, a series of regulatory actions —
including Federal Energy Regulatory Commission (FERC) orders for
open access transportation, changes in facility and service
certification, and rules to allow pipelines to sell gas at
negotiated rates, while providing gas buyers with greater access to
a competitive wellhead market — have resulted in market forces
replacing regulation as the principal factor affecting industry
pricing and operations. These regulatory changes have resulted in
a significant re-ordering of gas rates (prices) .

Of the collection point options, wellhead, pipeline, city-gate
and end-user, the latter option best facilitates the regulatory and
market changes occurring in the industry. This is because the end-
user collection point would disadvantage natural gas' competitive
position relative to competing energy sources the least.
Collection at the wellhead could depress natural gas prices and
discourage domestic exploration and production. If the incidence
of the tax is at the city-gate, competition could be thwarted by
encouraging sellers to by-pass the LDC and sell directly to the
industrial end-user, thus resulting in higher gas prices for native
load customers.

Imposing the tax on the pipeline creates difficulties in that
pipelines conducting business under the FERC open-access rules are
legally precluded from knowledge of the price and, in some
instances, the identity of the ultimate purchaser. Additionally,
since state gross receipts and sales taxes are collected on the
basis of total costs, collection at the pipeline could result in

744

state taxes being levied on top of the federal tax, making natural
gas somewhat less competitive in the marketplace.

3. Collection of Tax

Second, a broad-based energy tax should be evaluated in terms
of its ease of collection, simplicity and tax avoidance. A retail-
level tax on gas delivered to the ultimate consumer is the most
appropriate collection point option which meets these requirements.
Such a tax would be collected primarily by LDCs and added to the
bill of each customer. Because most gas LDCs have computerized
billing systems and are already structured to collect state sales
taxes, the tax could be implemented quickly and efficiently. Other
sellers to end-users (i.e. marketers, also have sophisticated
billing systems capable of collecting a Btu tax) . An excise tax on
gas would mirror what is currently done with the telephone excise
tax.

Choosing the city-gate as the collection point fails to meet
this criteria. An "out of the pipeline" scenario would place the
tax on gas LDCs at the city-gate for nearly 60 percent of natural
gas consumed in the U.S. The remaining 40 percent consists of
thousands of relatively small transactions involving primarily
custody but not title changes in gas. Thus, LDCs do not take title
to or administratively control 40 percent of the gas that goes
through their system.

As a result of industry restructuring, there is no longer a
clearly definable "city-gate" in the natural gas industry. More
importantly, given the number of pipeline to pipeline transfers
involved in transporting gas, including small diameter, short
distance pipe that delivers gas to many end-users, and the
difficulty of defining what the Administration means by the phrase
"out of the pipeline," there is the potential for some to avoid
paying the tax collected at the city-gate. Further, under FERC
Order ese-', pipelines own little or none of the gas they transport
to the LDC system. Thus, the city-gate collection point becomes
difficult because neither entity has title to the gas. Indeed, for
much of the gas delivered to the LDC, for which the LDC is just a
transporter, the pipeline and LDC do not even have contractual
privity. There is no basis for the pipeline to bill the LDC for
these quantities.

Collection of the tax at the wellhead creates problems as
well. Since there are thousands of independent and integrated oil
and gas exploration and production companies in the U.S., such a
large number of producers invites difficulties with collection and
administration of the tax and problems of tax avoidance.

While collecting the tax at the pipeline would reduce the
number of collection points for the Administration, that location
is complicated by considerations of gas placed in storage. The
Administration's proposal will require owners of natural gas
storage facilities to pay taxes on their inventories or "floor
stocks." For pipelines, and some LDCs, the Btu tax imposed on
storage gas would reach some gas which may be lost rather than
consumed. Taxing gas in storage creates a mismatching, where the

^ The Federal Energy Regulatory Commission issued Order Nos.
636, 636A and 636B that provide for a major restructuring of the
way interstate natural gas pipelines work. The impetus behind the
major restructuring rule is to allow pipelines for the first time
to sell gas at negotiated rates similar to the way non-regulated
companies sell gas and ensure that gas buyers have greater access
to the competitive wellhead market. The central feature of the
restructuring rule is the unbundling of interstate pipeline sales
and transportation services. However, pipelines are permitted to
offer sales and transportation services in a repackaged format if
the rate for each service is separately stated.

745

tax may be paid far in advance of ultimate sale and subsequent
collection.

Another problem with imposing the tax at the point gas is
injected into the pipeline is that the tax would be imposed on top
of a transportation charge instead of the gas cost. This might not
only create administrative and tax avoidance problems, it might
also subject the tax to regulatory review.

4 . Flow Through and Regulatory Lag

Third, the ccilscticn point should maximize the possibility of
complete flow through of the tax and not disadvantage gas versus
competitors in the marketplace. The tax should also minimize the
gas company's exposure to a regulatory lag problem. If history is
any guide, regulators will treat the flow through of taxes
differently in each jurisdiction. In some jurisdictions, the
entire amount of the tax will likely be passed on to customers
immediately. Collection of the tax in other jurisdictions might be
delayed by a cumbersome regulatory process that could take several
months or a year to complete. While this review process is on-
going, the utility might have to absorb the tax until the state PUC
acts.

In some jurisdictions, it is questionable whether utilities
would be allowed ':o pass the entire amount of the tax on to their
customers. Several states commissioners have indicated they are
not willing to allow utilities to pass through the tax in consumer
rates and the State of California has scheduled hearings on the
issue. An unnecessary major federal/state jurisdictional battle
could occur between the U.S. Treasury, LDCs and state PUCs.

Pass through can be approached in either of two ways: 1)
applying the tax directly on the ultimate consumer in the form of
a natural gas excise tax; or, 2) including the tax in the original
cost of the gas commodity.

If the tax is an excise tax collected from the end-user, the
LDC would not necessarily need to go through the state public
utility commission for purposes of flow through. Further, the
competitive position of natural gas could be improved through the
choice of the excise tax option since this tax could most easily
avoid other problems, such as compounding caused by the existence
of state gross receipt or sales taxes. In addition, this
formulation might avoid payment of the tax on the theft, loss and
unaccounted for gas, and possibly pipeline shrinkage. Together
these factors could increase the tax burden on natural gas by as
much as 10 percent.

If the tax is imposed at the wellhead, many LDCs might have a
good relatively chance of recovering the entire tax in rates since
the tax could be seen as an increase in the cost of gas.* While
collection of the tax at the wellhead might allow for flow-through
of the tax in gas costs and reduce the regulatory lag problem, that
point does not meet the other criteria discussed, such as tax
compounding, as well as the end-use point of collection.

Gas utility rates usually consist of two components,
purchased gas adjustment (PGA) and a base rate. The PGA is the
mechanism that enables a utility to recover the cost of the gas
itself. The base rate includes expenses, other than the actual
cost of the gas, required to deliver the gas to the end-user, and
a fair return on the utility's investment. Costs collected through
a base rate are generally subject to a formal rate case proceeding
and regulatory lag. If the tax is collected at the wellhead, with
respect to purchases of gas by LDCs, we are more comfortable that
state commissions will allow the collection of the tax in current
PGAs. This could decrease the regulatory lag substantially.

746

city-gate collection creates difficulties due to the different
points and allocation of transportation gas flowing through it.
For some companies, there would be no mechanism to allow a flow
through at the city-gate. In many cases, a rate case would have to
be filed. Some jurisdictions might not allow full pass through of
the costs of the tax and subject utilities to absorbing those
costs. In other jurisdictions, regulatory lag might become a
problem, and a persistent one, given that the tax rate will change
each year. Such problems could be critical because the amount of
the tax will often egual or exceed an LDC's annual net income. For
these reasons, collection at the city-gate is totally
unacceptable. If the incidence of the tax is at the pipeline,
there would be concerns of regulatory review where the tax is
imposed on top of the transportation charge rather than the gas
cost.

5. Revenue Considerations

Federal revenues could be affected depending on where the tax
is assessed. Collecting the tax at the wellhead or pipeline raises
questions pertaining to the treatment of gas placed in storage. If
the tax is imposed at the city-gate, some utilities are likely to
experience a larger volume of uncollectibles. If LDCs are able to
collect the Btu tax from their customers because of state
regulators, the tax would become an expense for federal income tax
purposes and 3 6 percent of the Btu tax would be lost. Also, a
collection point any where upstream of the final sale will almost
certainly touch off a flood of litigation over contractual
obligations to pay the tax.

B. Additional Concerns

1. City-gate

Collecting the tax at the city-gate builds the tax increase in
the cost of energy where the local jurisdiction imposes a gross
receipts tax on utility bills. For example, the State of Illinois
imposes gross receipts taxes over five percent and the City of
Chicago adds a municipal gross receipts tax of eight percent, while
the State of Texas imposes a two percent gross receipts tax on
residential users of gas and the City of Houston imposes a four
percent tax.

2. Pipeline

The tax could be avoided by locating an industrial facility
adjacent or close to a production field and avoiding pipeline
involvement. Another concern regards accounting for compressor
gas and shrinkage. Gas entering the pipeline is greater than the
amount actually delivered to the end-user because of gas used in
the utility's operation, such as compressor gas, and gas lost in
the pipeline.

Further, pipelines, and to a lesser extent LDCs, are by and
large transporting gas rather than selling it. Pipelines and
utilities may not know the identity of the owner or shipper of the
gas, the selling price of the gas or the final destination.
Federal regulations prohibit the transporter, primarily the
pipeline, from having access to some of this information in order
to encourage competition.

3. Wellhead

Imposition of the tax at the wellhead raises several
additional concerns. First, collection of the tax would impose an
administrative burden on producers, especially the large number of
independent producers with fixed price contracts. This
administrative burden could be a significant factor in their
continued viability. Many low volume stripper wells, which are

747

marginally economic, would feel the pinch of these additional
costs.

Because of the varying Btu content of natural gas, there would
be wide disparities in the tax from well to well. A tax imposed
further downstream, at the end-user level, after the tax has been
separated into its different Btu components, would result in a more
efficiently administered tax.

The Administration's proposal would allow for a natural gas
feedstock exemption (natural gas used by the buyer for non-fuel
purposes) from the Btu tax. Because of restructuring in the
natural gas industry, pipeline operators rarely know the end-use of
the gas they are transporting. If the tax is collected at the
wellhead, it would be difficult to administer the feedstock
exemption. The seller to the ultimate buyer is in the best
position to know whether the natural gas would have a non-fuel use
and thus qualify for this feedstock.

VI. Preemption

If a Btu tax is imposed on our industry and at the city-gate,
we urge Congress to enact preemption language that will allow local
utilities to flow through the tax costs to customers in their gas
bills. Many utilities operate on a small profit margin. If the
tax is collected at the city-gate, many utilities would have to
seek approval from their state PUCs to pass the costs through to
customers. Some jurisdictions may not allow flow through or
complete recovery of costs. If the utility has to absorb the 25.7
cents MMBtu tax because of a denial of flow through or while
waiting for approval to pass through costs, this could essentially
wipe out the utility's profit margin. The tax should not be
applied in a manner that undermines the financial viability of LDCs
or any other segment of the industry.

tte therefore urge Congress, if a Btu tax at the city-gate is
unavoidable, to add provisions in the tax legislation that would
effectively and immediately enable utilities to completely pass
through the costs of the tax to consumers. We would work with you
to develop necessary language in a bill.

VII. Conclusion

A.G.A. opposes all broad-based energy taxes because of their
impact on the economy, balance of trade, lower income households,
competitiveness and the natural gas industry. Before any new taxes
are adopted, we encourage Congress to work with the Administration
in finding additional spending cuts. A.G.A. urges Congress to
consider a national consumption tax as a long-term deficit
strategy .

If an energy tax is adopted, A.G.A. believes an increase in
the federal excise tax and/or oil import fee would foster
environmental, efficiency and domestic security goals. If Congress
chooses a Btu tax as proposed by the Administration, A.G.A. opposes
collection of the tax at the city-gate. A.G.A. is united with the
natural gas industry in urging that any Btu tax enacted be paid by
the ultimate consumer and collected by the entity making the sale
to that purchaser. Attempting to impose the tax at any point other
than the end-user will result in significant burdens in collection,
operations, administration and flow through of the costs of the tax
in consumer rates. It would also thwart the Administration's
stated goal of preventing serious economic distortions.

If a Btu tax is to be collected at the city-gate, strong
preemption language is needed to minimize the costs of absorption
upon utilities.

748

Mr. Andrews. Mr. Beghini.

STATEMENT OF VICTOR G. BEGHINI, MEMBER, BOARD OF DI-
RECTORS, AND AMERICAN PETROLEUM INSTITUTE, PRESI-
DENT, MARATHON OIL CO.

Mr. Beghini. Good morning, Mr. Chsdrman, and members of the
committee. My name is Victor Beghini. I am president of Marathon
Oil Co., and I am testifying on behalf of the membership of the
American Petroleimi Institute.

We endorse the President's goals of reducing the deficit, creating
jobs and enhancing long-term economic growth, and we applaud his
efforts to reduce spending, and we are gratified the Congress chose
to make additional cuts in this regard. We do, however, oppose the
Btu tax as part of the package.

A recent NBC News/Wall Street Journal poll found 62 percent
opposed the tax, with 35 percent favoring it. Clearly, many people
are concerned about the effects on jobs and income. The Btu tax
will distort energy markets, make U.S. products less competitive in
world markets, and retard job growth in the economy.

By taxing production, the tax will most seriously affect the com-
petitiveness of energy-intensive U.S. industries, such as refining,
steel, lumber, aluminum, airlines, and agricultiire. And that is a
small Ust.

The tax will create highlv inequitable results across income
groups and across regions of this country. It places the greatest
burden on lower-income and middle-income Americans, who spend
a greater proportion of their income on energy.

The tax will cripple the domestic refining industry, reduce do-
mestic energy production and narrow the field of competition in the
industry by driving some small- to medium-sized firms out of busi-
ness.

The most onerous aspect of this tax for our industry and its cus-
tomers is that the rate on petroleum is 2V3 times greater than the
tax on competing fuels. For an industry that has lost 450,000 jobs
over the past decade, and is spending billions of dollsu-s annually
to comply with new environmental mandates, this additional blow
is unconscionable.

The results of a recent DRI-McGraw Hill study show by 1998 the
Btu tax will result in a loss of GDP of nearly $34 bilHon annually,
resulting in the loss of 400,000 jobs.

For all of these reasons, Mr. Chairman, the API urges you and
this committee to reject the Btu tax. However, if Congress does de-
cide to move forward with this proposal, there are a number of de-
sign issues which must be addressed. Let me highhght three major
areas of concern.

Point of tax collection is a major issue. As you can see fi-om the
energy flowchart, the tax could be levied at any number of loca-
tions, each witli its own set of comphcations. Imposing the tax on
receipt at the refinery is particidarly onerous because it gives a
competitive advantage to imports over domestic products. This im-
pairs national security, since it would result in an increase in im-
ports of refined products.

For our business, imposing the tax on refined products further
downstream, where they bre^ bulk, or as we say "at the rack," al-

749

leviates some of the distortion problems and would simplify the ad-
ministration and collection of the tax.

A second mag or issue is the taxation of the fuel used to make
fuel. Large volumes of energy are consumed in producing and refin-
ing petroleum products. At production sites using conventional
technology, for example, fuel and related costs account for 25 to 40

gercent of oil and gas production cost. Marginal production, en-
anced oil recovery and production in hostile environment areas
are even more energy intensive. This tax will lead to a greater reU-
ance on foreign crude, further posing a threat to national security.

Petroleum refining, likewise, is an energy-intensive process. And
if domestically refined products are forced to carry the embedded
cost of the tax on the fuel used to produce them while imported
products do not, domestic refiners will be put at a fiirther dis-
advantage and the country will substitute refined product imports
for crude oil imports. In order to avoid this additional tax burden,
fuel consumed in extracting and refining taxable fuel should be ex-
empt from the tax.

A third problem is that the tax rate is indexed to inflation. Over
the last 10 years, the price of crude has fallen 44 percent while
measured inilation has increased by over 44 percent. At a mini-
mum, some provision must be made to Umit the effects of increas-
ing taxes during periods when product prices fail to keep up with
inflation.

In summary, Mr. Chairman, API supports the President's goals
but has strong reservations about the proposed Btu tax. If addi-
tional revenues are needed, we suggest that a broad-based con-
sumption tax would be better suited to improving U.S. competitive-
ness and enhancing long-term growth.

Nevertheless, if the committee moves forward with the Btu tax,
we would like to work with you and the administration to make it
less onerous and more manageable.

Thank you very much for mis opportunity to testify.

Mr. Andrews. Thank you.

[The prepared statement follows:]

750

TESTIMONY OF VICTOR G. BEGHINI
American Petroleum Institute

This statement regarding President Clinton's proposals for public
investment and deficit reduction is stibmitted on behalf of the
American Petroleum Institute (API) . API represents approximately
300 companies involved in all aspects of the oil and gas
industry, including exploration, production, trem.sportation,
refining and marketing.

API POLICY

API has long supported the notion that growing federal deficits
sap the vigor of the American economy by crowding out productive
private sector investment, and we applaud the President's efforts
to take serious steps to reverse this process, especially the
spending reductions that are included in the package. Spending
growth, not reduced revenues, is the primary cause of the current
deficit. Federal spending, at nearly 24% of national income, is
the largest drain on the private economy. Since the mid-1960 's,
federal revenue as a percent of GDP has remained relatively
constant at 18-19%. On the other hand, federal spending as a
percent of GDP has grown over the same period from 17.6% to 23.5%
in 1992.

We also agree that the individual elements of the President's
plan should not be assessed in isolation, but rather in terms of
their effects on achieving the goal of the overall pleui, namely
to enhance future prospects for U.S. economic growth. It is on
those grounds that we oppose inclusion of the Btu tax in the
plan. The Btu tax distorts energy markets; increases the costs
of all U.S. goods; makes D.S. products less competitive in world
markets; imposes the added burden of administrative complexity;
and, creates highly inequitable results across income groups and
across regions of this country. Moreover, it works at cross
purposes to other key elements of the President's program, and
substantially diminishes the prospects that the program will
enhance D.S. economic growth prospects.

If, after all appropriate spending reductions have been achieved,
additional revenues are required, we believe that a broad-based
credit invoice Value Added Tax is the preferable alternative. It
has few of the adverse effects of the Btu tax, and would,
instead, reinforce the elements of the President's package
intended to restore vigorous long term growth to the O.S.
economy.

THE BTU TAX
Economic Effects

If passed on fully to consumers, the Btu tax will raise the cost
of fuel consumed in the United States by about $31 billion per
year by the time it is fully phased in in 1997. Moreover,
because of the higher tax on oil, revenues derived from petroleum
products will constitute a disproportionate share of the total.
While petroleum consvimption is expected to account for only about
39% of Btus consumed in 1997, it will account for about 60% of
revenues from the tax .

The Btu tax will raise consumer prices of virtually all energy in
the United States. But, contrary to Administration goals, the
burden of these increases will not be spread fairly across income
classes, regions or industries. The tax will be borne
overwhelmingly by the middle class, with the burden especially
pronounced in the lowest income groups. CBO estimated that the
proposed Btu tax would consume 1.1% of the income of feuailies in
the lowest income (juintile, compared to about 0.3% of income in
the highest quintile.

Across regions, there are wide disparities in the patterns of
energy consumption. One of the principal factors affecting these
regional variations is the wide diversity of energy use patterns

751

by industry- Petrochemical, aluminum, and many other types of
manufacturing inherently recjuire substantial amounts of energy to
produce their products, while other industries such as services,
require less. The tax thus singles out U.S. manufacturing and
certain other sectors (such as transportation, e.g. airlines,
rail, etc.) to bear the heaviest burden of the tax.

These discriminatory impacts are particularly a problem for those
firms producing goods to compete in world markets.
Petrochemicals and aircraft manufacturing are two such
industries, but there are many others who will be unable to pass
through the tax on the world market . It has been argued by some
that U.S. energy costs are so low by world standards that this
tax won't affect our competitiveness. This is simply wrong. In
particular, if we look at our North American trading partners,
Mexico and Canada, industrial energy prices in the U.S. are
generally as high or higher already. Fuel oil for industrial
use, for instance, is about identical in price between the U.S.
and Canada, but currently 37% to 50% higher than Mexico. Natural
gas in industrial use is about a third more costly in the U.S.
than in Canada or Mexico. The Btu tax will exacerbate these
differences, conceding competitive advantage to these trading
partners .

API has asked DRI-Mc6raw Hill, a noted international economic
consulting group, to examine the effects of the President's
package, both on energy markets and on the U.S. economy. The DRI
results show that the Btu tax by 1998 (less than 1 year after its
full implementation) will result in a loss of GDP of nearly $34
billion annually in 1993 dollars, resulting in a loss of about
400,000 jobs. This will cause other government revenues tied to
economic activity to be lower, and expenditures tied to economic
activity (such as unemployment compensation) to be higher, than
they would be without the Btu tax. These effects offset over 40%
of the direct revenues raised by the tax. As a consequence,
while the tax raises over $31 billion annually by 1998, the
deficit falls by only $19 billion. These results are similar to
those reported by other studies.

Second, the DRI results suggest that the tax seriously increases
the inevitable short run costs that will need to be incurred to
secure the deficit reduction the President is seeking by 1998,
and in the process significantly compromises the President's goal
of enhancing the long run growth potential of the U.S. economy.

Over the 1993 to 1998 period covered by the President's program,
the DRI analysis shows that serious deficit reduction efforts
such as those proposed will actually dampen the level of U.S.
economic activity and cost jobs. Such costs are transitional,
and may be an unavoidable cost of reorienting the economy from
consumption to investment. DRI estimates that the program as a
whole will reduce the deficit by $117 billion, at a cost of
between 500 thousand and 800 thousand jobs by 1998. The benefits
of this deficit reduction lie beyond the horizon of the
President's proposal. This does not suggest that the President's
program is not worth pursuing, since a $117 billion deficit
reduction is a sizeable achievement with significant long term
benefits. It does suggest, however, that the short run cost of
this achievement is likely to be sizeable, and certainly that it
cannot be ignored. Particularly, we cannot afford to neglect
available revenue alternatives that could achieve the same
deficit reduction at substantially lower cost. Our opposition to
the Btu tax stems in part from the fact that other revenue
alternatives are available to achieve the same level of deficit
reduction at substantially lower short term cost than that
associated with the Btu tax. Of the 800 thousand jobs lost by
1998 in the DRI study, nearly 400 thousand, or about half, were
directly attributable to the effect of the Btu tax. Moreover,
the DRI results show that these short run losses could be
substantially reduced by the substitution of a broad based Value

752

Added Tax of equal yield. As a coiise<iuence , the Btu tax
unnecessarily raises the short run cost of achieving the
President's deficit reduction goals.

Perhaps even more importemtly, the Btu tax compromises the
effectiveness of any given level of deficit reduction in
enheuicing O.S. economic growth over the long term. The tax
permanently raises U.S. production costs, sacrificing U.S.
productivity 2uid making the U.S. less competitive in world
markets. By contrast, a VAT taxes only consxisvtion, not
production, preserving U.S. conq?etitiveness euad providing an
incentive to private savings which reinforces rather than offsets
the effect of deficit reduction.

The Administration argues that the tax will improve our energy
security by reducing our dependence on foreign oil. It will
reduce oil consvuqption, by Administration estimates, by about
350,000 barrels per day by the year 2000. If correct, this will
decrease U.S. insert dependence in the year 2000 by a trivial
eunount (from about 56% to about 55% of total consumption) .
However, the tax is also likely to decrease the supply of
domestic crude oil and products by an amount sufficient to offset
much, if not all, of the expected cons\imption decline. Fuel and
related costs accotint for between 25% and 40% of oil and gas
production costs even at sites using conventional production
technology. Btu tax cost increases could reduce oil and gas
production from conventional sources by from 20,000 to 100,000
barrels of oil e(iuivalent per day by the year 2000. Moreover,
marginal production and production using enhanced oil recovery
(EOR) , which accounts for more theui 10% of U.S. production, may
be more seriously affected. The shutdown of EOR projects in
California alone could amount to as much as 130,000 barrels per
day.

Finally, even if imports were to fall by the full 350,000 barrels
a day claimed by the Administration, the cost of $34 billion in
lost GDP is excessive relative to other alternatives for
improving energy security. Using the Administration's optimistic
predictions of import reductions, the cost of the Btu tax works
out to about $260 per barrel. By contrast, oil can be purchased
for the SPR at a cost of about $20 per barrel, which contributes
in a direct and tangible way to U.S. capabilities to respond to
any such future interruption. Taking steps to strengthen
domestic petroleum production such as opening federal land and
offshore areas would provide a means to increase energy security
that would enhance U.S. economic performance, not detract from
it. Given these alternatives, it is implausible that any small
reductions in oil imports attributable to the Btu tax represent a
cost effective way to address U.S. energy security concerns.

Second, the Administration argues that the tax represents a
desirable way to reduce emissions from the burning of fossil
fuels. Granted, the tax will reduce consumption of energy
slightly, but even the Environmental Protection Agency forecasts
these effects to be minimal, eunounting to about a 0.8% decline in
nitrogen oxides and a 0.25% decline in hydrocarbons and carbon
monoxide. Moreover, sulfur dioxide emissions, associated with
acid rain, could actually increase since the tax encourages a
shift from low sulfur western coal to high sulfur eastern coal .
In fact, there are far more effective ways to deal with these
various emissions than a broad based energy tax. The emissions
reductions expected under the Clean Air Act Amendments of 1990
require far more significant, and more targeted reductions. For
example, the CAA amendments of 1990 are expected to result in
reductions of 15% in hydrocarbon emissions in smog-prone areas,
about 17% in nitrogen oxides, and 45% in total sulfur dioxide
emissions by the year 2000. By comparison, any environmental
benefits associated with the Btu tax are at best small and
relatively expensive.

753

In summary/ the Btu tax as currently proposed represents poor tax
policy. It offsets rather than reinforces the beneficial effects
of deficit reduction. It raises O.S. production costs, making
all U.S. products less competitive in world markets. It costs
jobs, and reduces GDP by more thftn the revenues raised by the
tax. As a consecjuence, it seriously deunages the effectiveness of
the President's program in promoting economic growth.

Market Distortions

The Administration appears to have assumed that the crude oil tax
will flow through to refined products based on the products'
relative share of some average barrel of crude oil. Hence, their
numbers that gasoline will bear 7.5C;/gallon and home heating oil
8 . 3<:/gallon. That is incorrect. In practice, where fuel
substitution is possible, the degree to which the cost of the tax
on crude inputs will be passed through to refined products will
be limited by the price of alternatives to those products.

In the case of most fuel uses other them transportation fuels,
this passthrough will be limited to less than one half the
petroleum tax since conqpeting fuels (coal and natural gas) will
rise by less than one half that of petroleum. The basic
economics of a refinery operation are that lighter products, such
as gasoline and propeine, tend to be the more valuable in the
market place. The heavier products, such as number 2 fuel oil
and nvimber 6 fuel oil, contain higher Btu contents but they are
not as valuable as gasoline products in the market place. To the
extent domestic refiners attempt to recover the additional cost
of the tax on gasoline and other transportation fuels, their
ability to do so will be limited because imported gasoline will
bear only a fixed rate of tax that will be less than the tax
domestic gasoline will have to bear. Two things will occur:
Gasoline and other light end products imports will increase, and
domestic refiner margins will be squeezed even further in order
to compete with light end product imports. Both will drive more
refining capacity offshore, with consequent U.S. job loss and
greater product imports .

This detriment to the O.S. industry will be exacerbated by the
difference in transit time between foreign and domestic refined
products. Imported product will be taxed one to two days away
from its market. If crude for domestically refined product is
taxed at the refinery, it bears a tax carrying cost of as much as
20 some days between refinery outlet (tailgate) and market. The
added carrying cost for domestic refiners gives imported product
an additional advantage.

Point of Collection

Imposing the tax on the tailgate side of the refinery does not
resolve all of the distortions, nor does it address the problem
related to exemptions discussed below. Imposing the tax further
downstream when product breaks bulk at a terminal rack or
equivalent is crucial to alleviating many of the market
distortion problems.

Imposing the tax at the refinery poses major problems for
administering exemptions for petrochemical feedstocks and other
non-fuel uses, fuel exports, and the reduced rate for home
heating oil. This is because the end use of many petroleum
products is not known until very far down the distribution chain.

If the tax is generally imposed at the refinery gate, one of
three methods will have to be applied to exen^tions: 1) all
products would be sold tax-included with the final consiimer of
the exempt use applying for a refund. This would impose the
carrying cost of the tax and cash flow problems on those persons
entitled to the exemption and create massive refund claims for
the IRS to administer; 2) all dual use products (blendstocks,
feedstocks, e.g.) would leave the refinery untaxed with a use tax
imposed on the person using them for a taxable purpose; or, 3) a

754

complex and cximbersome system o£ exemption certificates would be
developed. Either of these latter two methods creates
opportvinities for tax evasion. Whichever exemption method were
chosen, an expensive audit system would be recjuired to ensure
proper compliance.

The terminal rack- -where most federal gasoline tax is currently
collected- -is the tax point that creates the least market
distortions, provides most easily for administration of
exemptions, and offers reduced implementation costs for both
taxpayers and the IRS because it can piggyback on an existing
collection system.

Energy Content of Manufactured Goods

A major problem with the tax is the increased energy cost
embedded in manufactured goods which makes them less competitive
with foreign manufactured goods in both domestic and foreign
markets. Retaining D.S. industries' conqpetitive position in
world markets re<iuires a method of imposing the energy tax on
imported products and rebating it on exports. The difficulty of
designing and administering such a system is mind boggling.
Also, we understand that the General Agreement on Tariff and
Trade (6ATT) prohibits inserts from being taxed at a higher rate
than like domestic products.

The problem of increased energy cost embedded in manufactured
goods is exacerbated when the energy used by manufacturers of
taxable energy is also taxed. For example, in the process of
producing and refining oil and natural gas that will ultimately
be subject to the BTD tax, the petroleum industry uses large
volumes of energy. Taxing energy used to produce oil or natural
gas, and other taxable energy, would unfairly impose an addition-
al increase in the embedded energy cost of manufactured products .

Coxopetition with Inported Knergy

The Btu tax also makes domestically manufactured energy less
competitive with imported energy. Petroleum production and
refining is one of the most energy intensive manufacturing
processes. If domestically produced petroleum and petroleum
products are forced to carry the embedded cost of the BTD tax
while imported products do not, domestic refiners will be at a
further disadvantage. This would jeopardize further refining
capacity in this country and promote the importation of petroleum
products--exactly the opposite of the President's stated
intention.

Exports - Bunker aoid Aviation Fuel

If fuel and lubricants supplies to ships do not continue to be
treated as exports, the D.S. shipping industry will become
disadvantaged vis-a-vis non D.S. shipping companies. With this
new tax the cost of fuel and lubricants at D.S. ports will
increase by at least $.599 per million Btu or approximately
$24.00 per metric ton, approximately a 33% increase for bunker
fuel. Fuel and lubricants represent over half the cost of the
operation of a ship and this tax will result in an increase in
ship operating costs from D.S. ports of approximately 15%. Many
D.S. ships (Jones Act vessels) may have little choice but to
continue to receive fuel and lubricants from D.S. ports despite
the increased costs from the Btu Tax. As a result, they will
become significantly disadvantaged to their non-D.S. based
competitors who will selectively receive bunker fuel/marine
lubricants from foreign ports. This increased cost burden for
D.S. shipping comes at a time when the D.S. shipping industry is
struggling for survival. Similar issues arise with regard to
fuel for planes in international flights.

Hidden Tax Increase - GDP Deflator

The Administration proposes to index the Btu tax to the Implicit
Price Deflator, a measure which bears no relationship whatsoever
to the value of the energy commodity.

755

Indexing the tax will lead to a substantial erosion of real
income in the oil and gas industry. Over the last ten years, the
price of crude oil has fallen over 44 percent while the general
price level, as measured by the loqplicit Price Deflator, has
increased by over 44 percent. If the Btu tax on crude oil were
in effect at the beginning of the period, tax collection from the
industry would have increased by $9.7 billion at a time when
industry profits were depressed euid 450,000 jobs were lost. Even
natural gas, if taxed at $0.26 per million Btus in 1987, would be
paying a $0,375 per million Btu tax in 1992. And this tax would
apply to a price that was 25 percent lower over the period. In
other words, the Btu tax would have amotinted to a tax increase of
$2 billion in the face of an $11.2 billion decline in revenue.

The Btu tax will lead to a substantial erosion of real income and
cause the loss of thouseuids of additional jobs in the oil euid gas
industry unless some provision is made to limit the effects of
increasing taxes during periods when product prices fail to keep
up with inflation.

NATDKAIi GAS ISSUES

The API's position is that the enercry tax should be imposed on
the natural gas constimer at the burner tip and collected by the
last seller to that consumer. This ensures a number of
administrative efficiencies that benefit taxpayers and the
government, does the best job of retaining fair competition
between U.S. and foreign natural gas producers and best supports
other important government policies, especially the policy
favoring the use of cleein-burning natural gas.

Administrative Burdens

A burner tip tax minimizes government administrative costs by:
restricting the scope of audits to the relatively small group of
gas marketers as opposed to the much larger number of producers
or consumers; and reducing complexity by minimizing the need for
exemption certificates or rebates. The burner tip tax minimizes
taxpayer burdens because a commercial billing practice is already
established at that point and gas metering is most precise at the
delivery point to the consumer.

The burner tip tax avoids the complexity of an upstream or
wellhead tax, e.g., non-fuel use exemption issues and the threat
of double taxation; unintended additional burdens on producers
such as higher severance tax, gross receipts tax and royalty
burdens, and fixed price contract sales; timing issues that arise
when gas is stored or when there are gas imbalances between
pipeline and shippers for long periods of time; and the fact that
gas volumes used as line pack will not be used as fuel, at least
vintil gas service is completely discontinued.

Inportation of Natural Gas

A burner tip tax eliminates market distortions which otherwise
arise in a way that favors imported natural gas. For exeunple,
natural gas consumed during processing or transportation might be
included in the tax base if imposed at the wellhead on U.S.
producers but would not be in the foreign producer's tax base.
Any effort to correct this distortion, e.g., by iii«)osing a higher
tax rate on imported natural gas, raises GATT issues. If the
distortions are not corrected, the result is likely to be reduced
sales of domestic natural gas leading to the loss of U.S. jobs
amd higher inserts - results that clearly conflict with other
in^orteuit goverru&ent objectives.

Ot:her Government Policies

In an effort to benefit consumers amd promote the use of clean-
burning natural gas, the government has sought to improve
efficiencies in the natural gas industry £uid ensure that long
term supplies of natural gas are available at stable prices.
A wellhead Btu tax will cause premature shut-in of marginal US
gas supplies and discourage exploration for new gas reserves.

756

Imposing the tax on pipelines or LDCs will result in costly rate
and tariff hearings at a time when this industry segment should
be concentrating on implementation of the sweeping changes
mandated by FERC Order 636. Imposing the tax either at the
wellhead or on pipelines will likely inhibit the development of
market centers and thereby conflict with government objectives to
encourage such development . Consumer demeuids for more and better
services are being satisfied by gas aggregation, increased use of
gas storage and exchanges, and open transportation. All these
techniques for satisfying growing cons\imer demands will be
impeded if the tax is imposed at any point except the burner tip.

Natural Gas Iii(iuids (NGIjS)

NGLs are generally extracted from a "wet" natural gas streeun
during processing either in the field or at a natural gas plant.
NGLs are primarily sold (1) to refiners either as part of a crude
oil stream or separately for blending in other refined products
(2) to petrochemical companies for use as feedstocks or (3) to
distributors for resale to retailers or consumers. The producer
or gas plant operator cannot always determine which purchases are
exempt non-fuel uses of NGLs and which are not.

NGLs for use in refined products should be exenqpt from the tax.
If the tax on refined products is imposed at the terminal rack or
ecjuivalent in accordance with API's position, the BTU content of
these NGLs would neither escape taxation nor be double taxed.
NGLs purchased as feedstocks by petrochemical companies would be
exempt from tax.

The NGLs sold for use as fuel by consumers should be taxed at the
gas tax rate at the point of purchase by the consumer euid
collected by the last seller. For reasons stated above with
respect to natural gas, this is the only point of imposition for
the tax on NGLs that avoids serious administrative complexities,
unintended additional tax burdens on producers, double taxation,
unfair foreign competitor advcintages and conflicts with
govenuaent policies favoring efficient, stable natural gas
supplies.

CREDIT- mVOICB VALUE ADDED TAX

The API's position is that, since the budget deficit is driven by
expenditure growth. Congress and the President should focus on
spending reductions. Taxes should not be increased first. If,
after all spending reductions are implemented. Congress
eventually concludes that there should be significant additional
taxes, any new taxes should: 1) avoid penalizing O.S.
manufacturing in domestic and foreign markets; 2) be neutral with
respect to economic decision-making by businesses and consumers;
3) not be overly regressive or progressive; and 4) avoid negative
impacts on incentives to save and invest. The API believes that
only a credit -invoice style value added tax (VAT) satisfies these
criteria, would have the least harmful effect on the economy, and
would be the fairest and most e<zuitable way to raise revenues .

Under a credit method VAT, each firm's tax liability would e<iual
the tax on its sales minus the tax that the firm paid on its
purchases of capital goods as well as raw materials. Thus, a VAT
does not discriminate against capital as does an income tax. A
VAT avoids the numerous distortions that an income tax produces
in decision-making throughout the economy: in choices of methods
of finance; in choices of form of doing business; in choices of
production and technology; and in choices eunong consumption
goods .

Furthermore, it is widely agreed that capital investment in the
U.S. should be increased. Thus, it is preferable that any new
tax should fall on consunqption rather than discourage savings and
investment. A VAT meets this objective.

757

A VAT does not harm U.S. competitiveness in world markets. D.S.
manufactured goods are not burdened with a VAT when they are
exported, and imports must bear the same tax as comparable
domestic goods for sale in this country. A VAT does not
interfere with the consumer's decisions about what goods or
services to consume since relative prices are not changed. And,
a VAT does not have the regional distortions that many energy
taxes (such as a Btu tax or a gasoline tax) have and does not
fall on but one industry or product .

The credit-invoice VAT--under which the tax is separately stated
on each invoice and each business gets a credit for the tax that
it paid on its purchases --encourages compliance, effectively
accommodates exemptions and a multi-rate tax, facilitates border
tax adjustments, does not become a cost of doing business,
potentially captures taxes from activities that currently avoid
the income tax and places the incidence of the tax on the non-
business consumer. Thus, the credit mechanism is superior to
other methods of calculating the VAT.

The major arguments against a VAT are that it is regressive,
would tempt Congress to expand federal spending, and would be
costly and burdensome to implement. The regressivity of a VAT
can be offset by changes in either the income tax (e.g., the
earned income tax credit) or government transfer programs.
Historical data show that VATs do not add to government spending
or to total tax burdens that would occur anyway. A study
published in the National Tax Journal found that the VAT did not
increase the share of GDP going to taxes aunong countries
belonging to the OECD. Growth rates in tax burdens did not
significantly differ between non-VAT and VAT countries. While
there will be start-up costs with a VAT--as with any new tax--the
European experience has shown it to be a more efficient revenue
collector than income taxes.

OTHER ISSUES

Corporate Rate Increase anA Investment Tax Credit

The Administration's revenue proposals include a 2% increase in
corporate tax rates for corporations with taxable income
exceeding $10,000,000. The rationale for this increase is that
corporate tax rates are low in comparison to historical averages.

Despite the fluctuations in marginal rates during the 1980 's, the
average effective federal, state and local tax rate on corporate
income in 1992 was 30.3 percent, about the same as it was in
1980. Since 1980, federal corporate income taxes as a share of
federal receipts have declined 26.5%. However, as a percentage
of national income, corporate profits before taxes declined 29%
during the same period. Conse<iuently, the reduction in the share
of federal receipts generated by corporate income taxes is less
than would be expected even if rates had remained constant during
this period of declining corporate profits. This highlights the
fundamental flaw in the Administration's rationale for raising
corporate tax rates, it focuses on marginal rates. The current
corporate tax burden is not low by historic standards. Rather,
the reduction in marginal rates made during the 1980 's was offset
by the significant broadening of the corporate tax base.

The Administration's rationale fails to take into account
increased tax and other burdens on corporations such as payroll
taxes, the loss in 1986 of many significant federal tax benefits,
e.g., the investment tax credit and accelerated depreciation, and
state and local taxes too numerous to mention. Moreover,
corporations are incurring higher administrative costs in efforts
to comply with increasingly complex federal and state regulations
in the areas of tax, environment, health and safety. For the
petroleum industry, particularly, a corporate rate increase would
come on top of the added burden of the Btu tax .

758

For these reasons API opposes increasing federal income tax
burdens on corporations at a time when many are reducing payroll
and other costs in anx effort to remain profitaible. While the
Administration has proposed a temporary incremental investment
tax credit, there are substantial restrictions limiting its
usefulness to the corporations that pay the vast majority of
corporate income taxes. The limited benefits of the credit will
not typically outweigh the investment disincentive resulting from
higher federal income tax rates.

R & B Credit Bxtexusion

The Administration proposes making permanent the R&E credit
retroactively from its expiration on June 30, 1992. The proposal
also adds a new rule for determining the fixed base percentage of
start-up companies.

The API agrees with the Administration that increasing investment
in research activities is important to foster economic growth and
technological development, as well as improving international
competitiveness, and fully supports making the R&E credit
permanent .

AMT Proposal

Included among President Clinton's proposals for stimulating
investment is a proposal that would significantly improve the
corporate alternative minimum tax (AMT) , which has had a negative
impact on many industries including the oil and gas industry.

The proposal would revise the AMT depreciation system for
property placed in service after December 31, 1993, by
eliminating the accumulated earnings (ACE) depreciation
adjustment and revising the AMT depreciation preference. Thus,
there would be one AMT depreciation calculation at which the
annual AMT depreciation would be determined using the 120 percent
declining balance method over regular tax depreciation lives.
The use of regular tax depreciation lives will be beneficial to
API's members as it will accelerate cost recovery for the
industry's AMT taxpayers.

As there would be only one depreciation calculation for AMT
purposes, the Administration's proposal would also simplify the
calculation and the recordkeeping associated with the AMT.

The President's proposal could be improved by changing the
effective date to January 1, 1993, thereby encouraging AMT
taxpayers to invest now rather than waiting until 1994. It could
also be improved by providing a faster write-off than the
proposed 120 percent declining balance method.

Increase in Inland Waterway Tax

The Administration's proposal would also increase the Inland
Waterway tax from 19 cents to $1.19 per gallon. (This is in
addition to a Btu tax of at least 8<:/gallon.) This proposed tax
increase conflicts with environmental objectives by shifting from
the most fuel efficient transport mode to less efficient
transporters. Barge transportation uses 270 Btus per ton mile;
rail uses 687 Btus per ton mile; and trucks use 2,343 Btus per
ton mile. It also conflicts with the goal of stimulating
economic growth by eliminating the ability of some businesses to
compete in markets served by water transportation. The use of
water transportation provides the only economical meeuis that some
businesses have of delivering their products to market. The
proposed increase in the fuel cost will eliminate the ability to
transport products economically and result in the closure of the
businesses in those markets. Costs from new or increased taxes
combined with recently enacted regulatory recjuirements will
severely erode the ability of the maritime industry to ensure the
long term viability of this lowest cost mode of transportation.

759

TAXATION OF FOREIQM SOORCB IKCOtlB

The President's proposals in the foreign area include a proposal to
treat as passive income interest income earned on temporary-
investments of working capital in connection with foreign oil and
gas extraction income (FOGEI) and foreign oil related income
(FORI). It is observed that this treatment is different in certain
respects from that of other industries. The Administration
concludes, at p. 53, that "...there is no sound policy reason for
this difference in treatment and that foreign oil and gas . . .
activities should be put on an equal footing with other
industries." In addition to the FOGEI/FORI working capital pro-
posal, changes are also proposed in the treatment of foreign source
intangible property royalties and the taxation of certain current
and accumulated earnings of controlled foreign corporations.

Working capital requirements and the income they generate are
integral parts of doing business anywhere, including outside the
Unites States. There is no "incentive" involved in holding working
capital. It is required to do business. It is held as part and
parcel of the business with which it is associated, and it is
inappropriate to attempt to divorce it from that business activity
where it happens to be conducted abroad.

The concepts of FOGEI and FORI grew out of Congressional efforts to
segregate taxes on FOGEI from other taxes and to treat FORI
differently from other types of income. See House Ways & Means
Report on H.R. 17488 [Energy Tax and Individual Relief Act of
1974], H.R. Rep. No. 93-1502, 93d Cong. 2d Sess . , 58-70. In the
context of the myriad of limitations imposed upon taxpayers earning
these types of income, it is neither surprising nor remarkable that
interest on working capital would be included within the ambit of
these concepts. They were broadly drawn in order to adequately
segregate FOGEI and FORI from other types of income . Given the
other burdens FOGEI/FORI concepts must shoulder, it is appropriate
to continue current law treatment of FOGEI/FORI working capital
income .

Alternatively, if the policy to put foreign oil and gas activities
on an equal footing with other industries is an appropriate one,
then a number of other adjustments to the treatment of FOGEI and
FORI follow. There is no sound basis itself of the continuation of
section 907 . The objective of limiting the taxes paid to foreign
governments has been supplanted by regulations promulgated in the
1980; s. See Treas . Reg. §§1.901-2 & 1.903-1 . There is no sound
basis for treating manufacturing operations from refining and
marketing differently than other manufacturing operations ( see
sections 907(b) and 954(a)(5)). In short, the API shares the
Administration view that there is no sound policy view for the
difference in treatment of foreign oil and gas activities and that
our industry should be put on an equal footing with other
industries. Repeal of section 907 would be a good start.

With respect to the proposal to treat active foreign source
intangible royalty income as passive income, API sees no coherent
rationale for reversing the policy judgments made in 1986 and
treating foreign intangible royalty income earned from active
business operations or from a CFC as passive income. The proposal
would place U.S. based taxpayers at a disadvantage relative to
their foreign competitors. It would inappropriately differentiate
repatriations via royalties relative to dividends and interest. In
any event, payments made by one affiliated group member to another
should continue to be effectively offset in consolidation.

Finally, the proposal to tax a portion of current and accumulated
earnings and profits of CFC ' s having a specified ratio of passive
to active assets unfairly subjects pre-enactment earnings to
subpart F taxation. At a minimum, this retroactive feature should
be avoided.

760

American Petroleum Institute

1220 L Street, Northwest
Wastiington, D.C. 20005
202-682-8000

THE ADMINISTRATION'S BTO TAX

Tax Design

The Administration's Btu tax as currently proposed would
cripple the domestic refining industry, reduce domestic energy
production, narrow the field of competition in the industry by
driving some small-to-medium size firms out of business, retard
if not negate job growth in the economy, and disadvantage U.S.
goods in foreign and domestic markets.

Specifically, the Btu tax is imposed on domestic and
imported crude oil received at a refinery, and imported product
at the point of importation. Domestic and imported crude will be
taxed at a rate based on average Btu content of crude. Imported
products will be taxed at rates "ecjual to the average tax imposed
on ecjuivalent domestic products."

Imposition of the tax on natural gas has been described as
"at the pipeline," but precisely what that means is unclear. It
has also been described by Administration spokesmen as "at the
wellhead or first sale."

Exemptions or downstrecun credits would be provided for
petrochemicals and other non-fuel uses as well as exported fossil
fuel products. In the case of home heating oil, there will be
"an appropriate delay in the phase-in" of the supplemental
petroleum tax.

This paper sets out some of the design problems. API
believes it would be extremely difficult, if not impossible, to
design a Btu tax that would not create inequities in the domestic
energy market, disadvantage D.S. products vis-a-vis international
competition, and/or be easily administered.

Tax Absorption v. Pass -through

As proposed, the Btu tax would be collected on all fuels as
far upstreeun as possible. In this context, a Btu tax must be
considered as a tax on production, not on consiimption. The market
for petroleum products is segmented and very competitive. There
are different considerations for success and failure at each
level of the market.

The Administration appears to have assumed that the crude
oil tax will flow through to refined products based on the

An equal opportunity employer

761

products' relative share of some average barrel of crude oil.
Hence, their estimates that gasoline will bear 7.5<:/gallon and
home heating oil 8.3C/gallon. That is not what will happen in
practice. In practice, where fuel substitution is possible, the
degree to which the cost of the tax on crude inputs will be
passed through to refined products will be limited by the
increase in the price of alternatives to those products.

As can be seen from the energy flow chart at Appendix A, the
tax could be levied at any of a number of locations, each with
its own set of complications. Collecting a Btu-type tax at the
wellhead or pipeline entry places the burden of the tax on the
producer. Low world oil and gas prices already make it difficult
economically for the domestic producer to develop and produce
crude oil or natural gas. At this stage of the market, a
producer can only pass along increased costs if a refiner is
willing to pay. As long as prices are relatively low and imports
are available, there is no reason for refiners to pay more than
necessary to obtain raw inputs for production. Domestic
producers will bear the brunt of any tax imposed at this level.

Imposing a tax at the refinery creates a more complex set of
distortions and undesirable effects which will lead to a shake-
out in the already struggling domestic refining business. This
will mean greater concentration in the industry, fewer American
jobs in the "high-end" of the international energy business, and
overall diminished refining capacity (a serious national security
consideration). The D.S. refining industry today is the most
sophisticated and competitive in the world from both a
technological and environmental basis, and, as such, adds value
to domestic wellhead prices. An important question is whether
this will still be true four years from now after the full impact
of the Btu tax is felt. The Clean Air Act amendments of 1990
have already required this industry to spend upwards of $30
billion on environmental capital projects just to meet
environmental goals. On top of these mandated expenditures, the
industry is now being asked to absorb another enormous tax in the
name of deficit reduction. Imposing the tax at the refinery
creates cin incentive for refined products to be imported. The
Btu content of crude oil is 5.8 million Btus per barrel. The Btu
content of gasoline is 5.3 million Btus per barrel. Since the
tax is levied on Btu content, it would be more advantageous to
import gasoline, pay a lower tax, and be able to recoup most of
that tax at the pximp, rather than pay tax on the entire barrel
(which contains 20-30 percent of low-value, high-Btu product on
which the tax simply will not be recovered in a competitive
market) .

In the case of most fuel uses other than transportation
fuels, passthrough will be limited to less than half the
petroleum tax, since competing fuels (coal and natural gas) will
rise by less than half that of petroleum. For example, in the
case of residual fuel oil, which is a high Btu content fuel, this

762

means that an additional $2.15 per barrel tax will be remitted to
the government but may not be recovered by the refiner. Domestic
refiners will attempt to recover the additional cost of the tax
on gasoline and other transportation fuels such as diesel and jet
fuel. But, their ability to do that will be limited because
imported gasoline will bear a fixed rate of tax. For example,
assume that the rate on imported gasoline is 7.5C per gallon.
But a domestic refiner, in order to recover the tax on the crude
he processes must increase his price for gasoline by IOC per
gallon. If the market will not bear the added cost of the tax
due to competition with imports, refineries and/or producers will
bear the added cost. Thus, some refineries will go out of
business and imports of refined products will increase to offset
the decline in U.S. refining capacity.

This detriment to the U.S. industry will be exacerbated by
the difference in transit time. Imported product will be taxed
one to two days away from its market. If crude for domestically
refined product is taxed on the inlet side of the refinery, it
adds another four days to what is already as much as 20 -plus days
between refinery outlet (tailgate) and market. The carrying cost
of the tax for domestic refiners would give imported product an
additional advantage.

To minimize the impact on domestic producers and refiners,
taxes should be collected as far downstream as possible. The
terminal rack- -where most federal gasoline tax is currently
collected- -is the tax point that creates the least petroleum
market distortions, provides most easily for administration of
exemptions, and offers reduced implementation costs for both
taxpayers and the IRS because it can piggyback on an existing
collection system. Collecting tax at the rack would still allow
enforcement authorities to monitor tax compliance without
creating financial hardship for small and mid-size companies.
However, even with these suggestions to ameliorate the tax
passthrough risk, the refiner is not assured of full passthrough.
Any deficiencies in passthrough will ultimately move back to the
producer through reduced crude prices. This will impose
additional hardships on domestic energy production and escalate
the abandonment of marginal wells.

Fuel Used to Produce Fuel

In the process of producing and refining the fuels that will
be subject to the Btu tax, the petroleum industry uses large
volumes of energy. Taxing this "fuel to make taxable fuel" would
unfairly impose an additional increase in the price of
domestically produced petroleum products.

Imposing the tax on fuel used in production means many
stripper wells will become uneconomical, royalty payments to
landowners and government will decline, and there will be less
incentive for the domestic producer. The added cost could

763

imperil as much as one (1) million out of a total of seven (7)
million barrels per day of U.S. crude oil production. This will
lead to even greater reliance on foreign crude.

Enhcuiced oil recovery (EOR) projects also consume large
quantities of fuel. Rnhemced oil recovery projects are designed
to produce either oil that is not recovered by primary depletion
methods or that is too heavy for conventional production methods .
Waterf lood/COj injection projects increase oil recovery aui
additional 15-20% while steeun injection recovers about 10-15% of
the heavy oil that otherwise would not have been produced. These
processes, particularly heavy oil, require fuel gas to either
generate electricity, compress CO, or generate steam for
injection. Fuel requirements for these processes signif iceuitly
exceed primary production fuel/energy requirements. Taxing these
energy requirements will penalize efficient recovery of domestic
petroleum reserves .

EOR accoTints for 10% of domestic production. When domestic
production becomes uneconomical, production will be replaced by
imports, further imdermining independents' as well as majors'
efforts to preserve exploration and production jobs in the U.S.

The tax burden on the energy sector would be lessened if
energy producers were allowed an exemption or rebate for the tax
on energy consumed to produce taxable fuels. This would include
the tax on electricity purchased by refineries as well as the tax
on any other purchased fuel consumed in the refining process such
as natural gas or NGLs .

Fossil Fuel Exports

The U.S. exports over 1 million barrels per day of petroleum
products during some winter months . These exports add
significant value to imported crude and help improve our trade
imbalance. The Btu tax ceui put all of these exports at risk if
they are not shielded from the indirect effects of the tax.

Ezenptions

The Administration's proposal would grant a Btu tax
exemption for non-fuel and feedstock uses and exports of fossil
fuels. It would also exempt home heating oil from the $2.00 per
barrel oil surcharge for some \indetermined period. Undoubtedly,
other exeiq>tions will be devised euid added to the tax as it moves
through the legislative process. As the tax base is whittled
away, however, the question arises whether the total revenue
"take" from the tax will remain at $90 billion over the next 5
years. If so, the rate of tax will necessarily have to be
raised, the burden shouldered by the remaining taxpayers will be
even greater, and the market will incur additional and
exacerbated distortions.

764

Imposing the tax at the refinery poses major problems £or
administration of the exen^tions. Refinery product slates vary
constantly, depending on type and (juality of crude, seasonal
demand, etc. How will the amount of the exemptions be
determined? Who is entitled to the exemption or credit?
Furthermore, how will the exemptions be administered? The end
use of many petroleum products is not known until very far down
the distribution chain.

If the tax is imposed at a point where the end use of the
product cannot be known, one of three methods will have to be
applied: 1) all products would be sold tax-included with the
final cons\imer of the exempt use applying for a refund (this
would impose the carrying cost of the tax and cash flow problems
on those persons entitled to the exemption and create massive
refund claims for the IRS to administer) 2) all dual use
products would leave the refinery untaxed with tax imposed
further downstream on the person using them for a taxable use;
or, 3) a complex and cumbersome system of exemption certificates
would be developed. Either of these latter two methods creates
the opportunity for massive tax evasion. Whichever exemption
method were chosen, an expensive audit system would be required
to ensure proper compliance.

The terminal rack- -where most federal gasoline tax is
currently collected--is the tax point which creates the least
market distortions, provides most easily for administration of
exemptions, and offers reduced implementation costs for both
taxpayers and the IRS because it can piggyback on an existing
collection system.

Coiopetitiveness of Energy- Intensive Manufactured Goods

A major problem with a tax such as this is the increased
energy cost embedded in manufactured goods, which makes them less
competitive with foreign manufactured goods in both domestic and
foreign markets. In 1990, API did an analysis of energy
intensive industries using the Commerce Department's input-output
tables.

We identified a total of 130 industries whose energy
coefficient was at least 5% of the value of their output. For
112 industries, the energy input cost accounted for 16 percent or
more of the total outlay. The majority of the firms allocated
between 10 to 20 percent of their total cost to energy used
directly and indirectly in their production process .

Unless the Btu tax is made border-adjustable to tax the full
Btu component embedded in all goods imported into the United
States, and rebated on all goods exported from the U.S., our
ability to compete in price on high value-added, manufactured
goods will be undermined. This will be true for both domestic
and international markets.

765

This is a critical point in supporting taxation of any type.
Such taxation policies should not by design disadvantage any
American manufacturer's competition with other countries. In
fact, such policies should impart an advantage in this regard.

The Indexation Problem

The administration proposes to index the Btu tax to the
Implicit Price Deflator. Since this index measure bears no
relationship whatsoever to the value of the energy commodity,
this tax will be an insidious source of future federal revenue
that conceivably will be an even greater threat to the industry's
future viability.

Indexing the tax will lead to a substantial erosion of real
income in the oil and gas industry. Over the last ten years, the
price of crude oil has fallen over 44 percent while inflation, as
measured by the Implicit Price Deflator, has increased by over 44
percent. If the Btu tax on crude oil were in effect at the
beginning of the period, tax collection from the industry would
have increased by $9.7 billion at a time when industry profits
were depressed and 450,000 jobs were lost. Even natural gas, if
taxed at $0.26 per million Btus in 1987, would be paying a $0,37 5
per million Btu tax in 1992. And this tax would apply to a price
that was 2 5 percent lower over the period. In other words, the
Btu tax would have amounted to a tax increase of $2 billion in
the face of an $11.2 billion decline in revenue.

In summary, this measure will lead to a substantial erosion
of real income and cause the loss of thousands of additional jobs
in the oil and gas industry unless some provision is made to
limit the effects of increasing taxes during periods when product
prices fail to keep up with inflation.

766

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767

Mr. Andrews. Mr. Woosnam.

STATEMENT OF DOUGLAS WOOSNAM, CHAIRMAN, HEATING
FUELS COMMITTEE, PETROLEUM MARKETERS ASSOCIATION
OF AMERICA, AND PRESIDENT AND CHAIRMAN OF THE
BOARD, SINKLER, INC., SOUTH HAMPTON, PA

Mr. Woosnam. Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, on behalf of the
Petroleiim Marketers Association of America, I welcome the oppor-
tunity to testify on the energy tax included in the President's eco-
nomic proposal. I am Douglas Woosnam, president of Sinkler Inc.,
a small business located outside Philadelphia engaged in the dis-
tribution of petroleum products. I am here today in my capacity as
chairman of the PMAA Heating Fuels Committee.

PMAA has traditionally opposed energy taxes as a means of defi-
cit reduction. However, faced with the mounting Federal budget
deficit, PMAA is willing to consider supporting a broad-based en-
ergy tax applicable in ^e same manner to all fuels provided that
it is coupled with significant cuts in Federal spending. Unfortu-
nately, the economic recovery package submitted Dy President Clin-
ton and specifically the proposed new energy tax failed to meet
those criteria.

I would like to make three main points about this energy tax in
my limited time this morning. First, the President proposes the tax
on oil be at more than twice the rate as on other mels. While this
supplemental tax unfairly impacts a number of petroleum users,
including farmers and truckers, the greatest injustice is that it
gives an unfair advantage to natural gas and electricity in the
highly competitive residential heating market.

Consider the situation of two identical households in the same
neighborhood. Why should the homeowner who heats with oil pay
more than twice the level of taxes as his neighbor who heats witn
a different fuel? As we discuss in our prepared testimony, such a
discriminatory poHcy of taxation does not serve our countiys eco-
nomic, environmental or energy security interests.

Sound energjr, environmental tax poUcy should be encouraging
conservation of all fiiels, not just oil. This is consistent with rec-
ommendations of groups hke the Consumer Energy Council of
America and Greenpeace.

Greenpeace even states that the cheapest, most sensible way to
avoid air pollution and global warming gas emissions from fossil
fuels is simply to use less of them. A differentisd tax does not en-
courage conservation, it encourages fuel switching. Converting fi*om
one fuel to another in the residential or small commercial sector
does not benefit the environment or the country.

Therefore, PMAA strongly recommends that the energy tax in its
final form be fuel neutral. If this committee does believe a differen-
tial tax is appropriate, we strongly urge that home heating oil and
off-road users, such as farmers, should be exempt fi*om the supple-
mental 0MB tax. We do not beUeve there are any sound economic
or environmental reasons for an additional tax levy on oil heat cus-
tomers or farmers.

My second point relates to the indexing of the tax. Indexing will
actually serve to increase the oil tax differential over time. For ex-

768

ample, had this tax been imposed 5 years ago, and the GDP
deflator been used in an indexing mechanism, a differentisd tax on
oil would have grown from 34.2 cents per million per Btu to 41.2,
a 7 cent increase. This worsens many of the inequities I referred
to earlier. PMAA urges indexing be ehminated but, at a minimum,
no indexing should be applied for petroleum.

A final concern relates to how the tax is collected. PMAA has
been pleased to note that the Treasury Department has indicated
in its testimony to the various congressional committees that the
Btu tax be imposed on petroleum products leaving the refinery
rather than on crude oil entering the refinery. This is clearly a su-
perior approach for a number of reasons, including trade policy and
overall industry competitiveness.

We remain concerned, however, over the specific details of the
collection process, particularly since our industry has been and re-
mains concerned with the enforcement of existing excise tax collec-
tion laws. The supplemental tax gives enough of a competitive ad-
vantage to other fiiels that legitimate marketers should not be
faced with the prospect of competing with individuals who have
somehow avoided the payment of the supplemental tax.

We would encourage the committee to consider how existing ex-
cise tax collection laws may be tightened, then used to collect a
new energy tax that might be imposed rather than developing a
new tax system for these products.

I thank you for providing PMAA the opportunity to testify on
this important tax proposed and would gladly respond to any ques-
tions you may have. Thank you.

Mr. AhfDREWS. Thank you.

[The prepared statement follows:!

769

TESTIMONY OF DOUGLAS WOOSNAM
Petroleum Marketers Association of America

Mr. Chairman, on behalf of the Petroleum Marketers Association
of America (PMAA) , I welcome the opportunity to testify on the
proposed energy tax included in the President's economic proposal.
PMAA represents more than 10,000 small, independent, family owned
petroleum marketing companies. I am Douglas Woosnam, and I am
President and Chairman of Sinkler, Inc., a small business located
outside Philadelphia engaged in the distribution of petroleum
products. I am serving this year as the chairman of the PMAA
Heating Fuels Committee.

My primary business is the distribution of heating oil to
residential customers, however, I also distribute heating oil to
other retailers, and to many manufacturing businesses. I also sell
diesel fuel to trucking and construction companies as well as to
farmers.

PMAA has historically believed that the best way to reduce
the federal deficit is to cut federal spending. As small business
men and women we have had to streamline our businesses and become
more efficient in the delivery of our products to our customers.
We believe the federal government should do likewise and we are
disappointed that the President's economic recovery package fails
to include greater levels of cuts.

However, we also recognize that even with steep budget cuts,
additional revenue may be needed in order to bring the deficit back
in line. To this end we believe the most appropriate tax increases
are those that are applied across our entire economic system so
that everyone shares in the additional tax burden. Historically
we have opposed energy taxes targeted at deficit reduction because
we saw no correlation between the amount of energy one consumed
and that individual's contribution to the deficit. We still
believe no such correlation exists.

However, this year, in recognition of pressing deficit
concerns, the association agreed to consider a broad based energy
tax that was applicable to all fuels at the same rate. In fact,
prior to the State of the Union address, the association was taking
the necessary policy steps to support the President's economic
recovery package on the assumption that such a broad base energy
tax would be part of that package.

Unfortunately, the Btu tax actually proposed by the President
contains a supplemental tax on oil which is more than twice the
rate of tax imposed on any other fuel. While this supplemental tax
raises general concerns over the fairness and equity of taxing oil
at twice the rate of other fuels, it also presents very specific
and very substantial problems for our members in the following
several areas.

First, the supplemental tax gives an unfair advantage to
natural gas and electricity in the highly competitive residential
heating market. PMAA represents thousands of oil heat dealers

770

throughout the country who will be devastated if this tax is
enacted. PMAA does not believe that providing natural gas an
advantage particularly in residential heating is appropriate.

Obviously, providing a differential tax for home heating oil
penalizes persons who heat with oil. It is patently unfair to make
someone who heats with oil pay more taxes merely because of the
type of heating system that they have. Further, oil heat is not
a luxury, it is a necessity in the extremely cold areas where oil
heat is predominant. Finally, this tax will be unavoidable for
many homeowners with fuel oil heating systems, and a substantial
body of evidence developed by consumer groups, environmental groups
and the Brookhaven National Laboratory indicates that it is not
economically or environmentally wise to switch to a different fuel
to avoid this tax. This information is detailed below.

Before proceeding, it should be noted that home heating oil
consumption throughout the country has fallen in recent years and
that conservation has been a goal of the businesses that I
represent as well as a goal of our customers. The Consumer Energy
Council of America (CECA) in a recent report noted that between
1978 and 1987, the average oil heated home reduced consumption by
25 percent. These reductions resulted from improvements in the
heating system, better insulation and consumer choice (turning the
thermostat down) . Thus, the record for oil heat customers and
their drive to reduce consumption is one that should set the
example for how the nation can conserve fuel.

The President's proposal in establishing a tax differential
between oil and other fuels used for heating, such as electricity
or natural gas, creates substantial inequities and unfairness.
This tax will result in similarly situated neighbors paying
substantially different amounts of taxes to reduce the deficit.
A homeowner who has been weathering the recession, who may have
children entering college, or who is barely making ends meet will
not understand why he must pay more than his neighbor to reduce the
deficit. His use of oil did not make the budget deficit worse, he
has not received more government benefits because he heats with
oil, and if he were to convert to natural gas or electricity, the
budget deficit would not be improved. It seems clear that this
person should not be forced to pay more than his fair share.

We understand that some see the differential tax as an
incentive to spur consumers to switch from heating oil to natural
gas. This is an ill-advised and misguided rationale. In many
areas of the country, such a conversion is not possible, and is
certainly not desirable. Switching from one heating fuel to
another does nothing to improve this nation's energy security. In
fact, a switch from heating oil to natural gas may actually
increase the amount of energy consumed, since, according to the
Department of Energy, natural gas furnaces in use are generally
less efficient than heating oil furnaces.

771

If this supplemental tax on oil does encourage consumers to
spend $3,000 to switch fuels, the actual conversion cost may be a
total waste. If the gas furnace is as efficient as their oil
system, and if the prices for the two fuels differ only to the
extent of the tax, the consumer may save $40 to $50 in federal
taxes. As a result of the $3000 expenditure, total fuels
consumption is not altered and the actual heating bill will fall
only slightly. If instead, the homeowner was encouraged to invest
in better insulation, he might spend between $1,000 and $3,000, but
he would then reduce his consumption of fuel by 15 percent of more.
Thus, actually saving oil or gas, and thereby increasing energy
security.

We have also heard that the supplemental tax on oil may be
designed to accomplish environmental goals. Again, we feel that
a differential tax on home heating oil may actually contravene
those goals. Greenpeace in a study released in April 1992,
"Natural Gas: Bridging Fuel? or Road Block to Clean Energy?" has
indicated that:

"* Natural gas is not clean. It is in itself a
global warming producing gas more than 60 times
as powerful as carbon dioxide. It produces
acid-rain and urban smog causing emissions.

* It is not easy to produce. It inflicts
environmental degradation equivalent to that
of oil production, ..."

Like CECA, Greenpeace believes that conservation is the answer and
they state that "The cheapest, most sensible way to avoid air
pollution and global warming gas emissions from fossil fuels is to
simply use less of them. Conservation and improved efficiency
provide an enormous well of energy that now flows unused through
our windows, tailpipes and walls".

A differential tax does not encourage conservation, it
encourages fuel switching. If a partial objective of the energy
tax is to improve the environment, each of the fossil fuels should
bear an equal and fair tax that encourages conservation and helps
to reduce the deficit.

The best way to improve energy security and the environment
is to reduce consumption, and the best way to reduce consumption
is through conservation. Applying an equivalent Btu tax on all
fuels is likely to spur conservation of all fuels, and would not
encourage wasteful expenditures to switch fuels. Therefore, PMAA
believes an equivalent Btu tax not only will assist in the
reduction of the budget deficit, but will also encourage
conservation and thereby benefit the environment.

Another source of strong concern to PMAA members is the impact
that such a tax will have on farmers. PMAA members are primary
suppliers of fuel for many agricultural communities throughout the

772

country. The standard Btu tax will increase the cost of fuel three
and a half cents per gallon, and the supplemental tax will increase
the cost four and a half cents per gallon for a total increase of
eight cents per gallon.

The American Farm Bureau estimates that for a typical corn
farmer raising 430 acres of corn, the direct impact of these fuel
costs will be $550 per year. For the farmer, this may be a
significant burden. Like every part of this country and nearly
every citizen, the farm belt and its farmers have been harmed by
the recession. Imposing another cost on this industry, above and
beyond what other fuel users will have to pay, may slow the
recovery in this important and vital industry and may affect their
ability to compete in the international marketplace.

For the petroleum marketer who supplies the farmer, such a
tax may substantially increase his accounts receivable, since in
many cases the marketer may not collect the revenue from fuel sales
during the planting season until after the harvest. This will
place substantial new credit demands on both the farmer and the
marketer.

If the supplemental tax is an environmental tax or is designed
to reduce air pollution from automobiles and trucks, farmers should
certainly not be responsible for paying for it. There is very
little farming in Los Angeles, Chicago, New York and the other
cities with severe air pollution problems. Most farmers are
operating in areas defined by EPA as being in attainment of Clean
Air standards, and their use of diesel fuel or gasoline does not
create the type of air pollution problem that Congress addressed
in the Clean Air Act. If a gasoline tax or an energy tax is an
effective way of reducing air pollution, then the cities or regions
with unhealthy air should levy the tax. A uniform federal tax
makes too many people who live and work in rural areas pay for an
urban problem.

The third major part of our customer base are truckstops and
trucking companies. This tax will substantially increase fuel
costs for these customers. Since, 1991, this industry has
contributed two and a half cents per gallon for deficit reduction,
a contribution unmatched by most industries. The proposed tax will
increase the contribution by approximately eight cents per gallon.
PMAA would note that the "just in time" delivery system has
improved America's ability to compete, and that this system is
largely based on the ability of trucking companies to deliver
inventory needs on a very tight schedule at reasonable prices. We
do not think that this industry should be singled out and required
to again pay a bigger share to reduce the budget deficit.

Finally, our biggest and perhaps most important customers are
those who purchase gasoline for their own motor vehicles.
Everywhere in the country, gasoline is used by private motorists.
We are deeply concerned that a tax of eight cents per gallons will
substantially constrain their budgets, and believe that the more

773

moderate tax which would result from a uniform Btu tax would be
fairer to these customers.

PMAA strongly believes that the Btu tax should be levied
equally on all fuels, and if the tax is modified to that end, PMAA
is likely to support such a tax. Deficit reduction is critical and
is clearly in the national interest. However, differential tax
rates on fuels are likely to result in substantial monies being
wasted in the private sector as industries make investments to
switch fuels to avoid a tax, rather than making the important
investments which would reduce fuel use. These expenditures are
non-productive, do not enhance productivity, and may in fact lessen
our international competitiveness. We therefore strongly encourage
the Committee to adopt a fuel neutral Btu tax.

PMAA also does not believe it is appropriate for the tax to
be indexed. The Constitution vests the Congress with the taxation
power, and even specifies that revenue raising bill should
originate in the House. An indexation approach would vest within
the Executive Branch the ability to determine what the actual tax
rate will be, which we believe is an inappropriate delegation of
authority.

From a policy standpoint, indexing is also unwise since it
would allow the differential tax of oil, and all the problems
associated with that differential tax, to grow. For example, had
the tax been imposed five years ago and been indexed to the GDP
deflator, the differential tax on oil today would be 41.2 cents per
million Btu's, 7 cents higher than the current differential.
Indexing not only locks in the differential, it exacerbates it.

Further, we are concerned that this tax may have many
unintended consequences which will not be obvious until the tax is
fully implemented. Allowing the tax to increase without
Congressional oversight is therefore inappropriate. If the tax
needs to be adjusted in three years, we believe that Congress
should make the decision then as to how it should be adjusted.

At a minimum, if the differential remains in the final
package, petroleum should not be subject to the indexing provisions
thus allowing the competing fuels to gradually "catch up" with the
tax rate on oil.

If this Committee does believe a differential tax on petroleum
is appropriate, we strongly believe that heating oil and off-road
users such as farmers should be exempt from the oil supplement.
We do not believe that there are any sound economic or
environmental reasons for an additional tax levy on oil heat
customers or farmers. While providing an exemption for oil heat
and off-road users may complicate the administration of the tax,
it is necessary to provide equity between consumers and between
regions of the country. PMAA is confident that a tax system can
be designed which can effectuate these exemptions without

774

compromising the integrity of the tax and which may also improve
the collection of the existing tax on motor fuels.

A final concern relates to how the tax is collected, and who
should be responsible for paying the Btu tax. PMAA has been
pleased to note that Treasury in its testimony to the various
Congressional committees has indicated that the Btu tax will be
imposed on petroleum products leaving the refinery. PMAA believes
that this approach is superior to taxing the crude oil entering the
refinery for a number of reasons, including trade policy and
overall industry competitiveness.

However, we believe that there continues to be a number of
issues that must be resolved and that should be considered by the
Committee. As you know, the lighter petroleum products distributed
by our members are subject to many federal and state excise taxes.
For gasoline, the point of collection is generally the point where
gasoline breaks bulk and leaves the terminal. For diesel, the
point of collection is the producer level, and generally is the
point where the product is identified as being for a taxable
purpose or not.

The Committee is well aware that the collection of diesel and
gasoline taxes has been plagued by fraud and evasion for many
years. As a result. Congress has had to continuously revise the
tax laws to stem these problems. Each change has solved some
problems, and often created new problems. Unfortunately, we
continue to receive reports that problems with taxation of motor
fuels still exists, and we therefore would encourage the Committee
to examine whether it might be appropriate to piggyback a Btu tax
system onto an improved motor fuels tax system, rather than develop
a new tax system for these products.

We thank you for providing us the opportunity to testify on
this important tax proposal, and would gladly respond to any
questions that you may have.

775

Mr. Andrews. Mr. Ames,

STATEMENT OF EUGENE L. AMES, JR., CHAIRMAN OF THE
BOARD, INDEPENDENT PETROLEUM ASSOCIATION OF
AMERICA AND PRESIDENT, VENUS OIL CO., SAN ANTONIO,
TX

Mr. Ames. Thank you, Mr. Chairman. My name is Eugene L.
Ames, Jr. I am a petroleum geologist and president of Venus Oil
Co., a small natural gas exploration company in San Antonio, TX,
and I serve also as chairman of the Independent Petroleum Asso-
ciation of America.

Natural gas and crude oil provides 65 percent of our Nation's en-
ergy, yet today we have a collapsing domestic natural gas and oil
industry. Did you realize that the Department of Energy projects
that, with current depressed conditions in the domestic energy in-
dustry, foreign oil imports would rise to the point where we can ex-
pect 34 supertankers a day sailing into America's harbors loaded
with foreign oil in a few short years with a huge risk of major oil
spills and an intolerable burden on our economy?

Drilling for natural gas and oil hit all time lows last year in this
country, and this year looks no better. Let me remind everyone
that lest we forget there was an historic collapse in the world price
of oil in 1986 when prices fell more than 60 percent. American do-
mestic producers were devastated. A record nimiber of bank-
ruptcies resulted and over 450,000 jobs were lost in 33 oil produc-
ing States.

Investment capital has deserted independent producers. The
major oil companies are moving their exploration activities over-
seas, and moving jobs overseas, where governments provide sup-
port of their activities and access to lands favorable for oil and gas.

The tragedy of these unfortunate consequences is the United
States possesses a recognized vast undeveloped resource of natiiral
gas and large remaining reserves of crude oil. But this disastrous
course does not need to continue. If our domestic oil industry could
be turned loose and put back to work, the situation could be turned
around, but the Btu tax will not do this. The Btu tax will subsidize
foreign oil imports and will reduce domestic oil production.

We are, however, pleased that Secretary of the Treasury Lloyd
Bentsen and others in the administration have been willing to
meet with the industry and consider our concerns. If the collection
point is on the producer, most oil and gas weUs in this country
would Kkely be uneconomical. We are hopeful the collection point
issue and other serious problems involving the tax on energy used
to produce energy will be resolved if, in fact, there is to be a Btu
tax.

In the meantime, much of the domestic industry has come to a
halt. WeUs are not being drilled, long-term gas sales contracts are
not being signed. And at risk are the surviving independent pro-
ducers who produce 60 percent of our natural gas and 40 percent
of our oil. And let me state that most independents are small, fam-
ily-owned sole proprietorships like my own.

My family has been an independent producer since 1913, when
my grandfather, who was a wheat farmer in Oklahoma, moved to
Drumright and drilled an oil well. I have two sons and a son-in-

776

law in business with me, a geologist, a lawyer and a land man. If
we had outside capital, we could expsmd oxir business and could
continue in this business, for several generations, possibly.

The collective strength of the thousands of independents like me
could make a substantial contribution to our Nation's future energy
needs and we could create himdreds of thousands of jobs in the
process.

Our domestic natural gas and oil wells constitute a national
treasure. Contrary to popular opinion, most of our lower 48 gas and
oil wells are high cost, barely economical wells. The average oil pro-
duction from oil wells located in the lower 48 States is only 9.84
barrels per day. Marginal oil wells, however, collectively, produce
more oil than we import from Saudi Arabia.

Please, Mr. Chairman and committee members, as you debate
steps which will expedite the rebuilding of America's economy,
please remember the devastated American petroleum industry. I
ask that you consider adopting fiscal poHcies which will preserve
the important resource which is our domestic oil and gas wells.

When President Clinton spoke to the Nation in mid-February, he
told the American people that the real engine of economic growth
in this country is the private sector. We agree and we want to add
that the domestic oil and natural gas industry provides the fuel for
that engine.

Thank you very much.

[The prepared statement follows:]

777

statement by

Eugene L. Ames, Jr.

Chairman of the Board

Independent Petroleum Association of America

Before the

Committee on Ways and Means

United States House of Representatives

March 23, 1993

MR. CHAIRMAN AND MEMBERS OF THE WAYS AND MEANS COMMITTEE:

The United States economy is fueled by energy. Certainly
without the energy provided by our domestic energy industry our
nation would have never grown to be the greatest nation in the
world.

Natural gas and crude oil provides 65% of our nation's
energy. Yet today we face the collapse of the domestic natural
gas and oil industry.

Our nation's appetite for natural gas and crude oil will
continue to increase in the future. In 1992, our demand for oil
was almost 18 million barrels per day and 46% of this demand was
supplied by foreign oil imports. If current trends continue we
could be importing the 17 million barrels of petroleum each day
by the year 2010.

We have the natural gas resources and plenty of oil
resources to significantly reduce future foreign oil imports.
Independent producers who currently produce about 60 percent of
domestic natural gas and about 40 percent of domestic oil are
eager for economic conditions which would allow us to increase
domestically produced supplies of natural gas and oil. Yet
drilling for natural gas and oil hit all time lows last year and
this year looks no better.

Lest we forget, let us recall that because of Saudi Arabia's
desire to regain control of world oil markets in 1986, there was
a collapse in the world price of oil of more than 60 percent.
American domestic producers were devastated. A record number of
bankruptcies resulted and over 450,000 jobs were lost in 33 oil
producing states.

Since this collapse, extremely volatile swings in price and
the threat of future price collapses has blocked investment
capital from independent producers. The major oil companies are
understandably moving their exploration activities overseas,
where governments provide support and access to favorable oil and
gas lands.

The tragedy of these unfortunate consequences is that the
United States possesses a recognized vast undeveloped resource of
natural gas as well as large remaining oil resources. But, the
Energy Information Agency predicts that U.S. oil demand could
rise from 17 million barrels per day in 1990 to 23 million
barrels per day in 2010, and that if low oil price trends and the
current economic conditions persist. Domestic oil wells would
decrease their production from over 7 million barrels per day in
1990 to only 3 1/2 million barrels per day in 2010, and imports
would increase from 8 million barrels per day to over 17 million
barrels per day by 2010.

This disastrous course would mean more than 30 supertankers
a day sailing into America's harbors in a few short years... a
huge risk of major oil spills, and an intolerable burden on our
balance of payments.

This situation can be reversed if our domestic oil industry
is turned loose and put back to work. The BTU tax will not do
this. The BTU tax, as proposed, will subsidize foreign oil
imports and will reduce domestic oil production further. If
there must be an energy tax, the collection point must be moved
because collection at the wellhead would bankrupt the remaining
core of a beleaguered industry.

We are pleased that Secretary Lloyd Bentsen and others in
the Administration have been willing to meet with us and consider
our concerns. It has been a very constructive dialogue. And we
are hopeful that "collection point" issues have been reexamined,
and that the Administration is now focused on downstream

778

collection of the BTU tax. But, while the dialogue and
consideration of the details of the tax are underway, much of the
domestic industry has come to a screeching halt — wells are not
being drilled, long-term sales contracts are not being signed,
plans for energy consuming plants and businesses have been put on
hold.

Now, the collection point is not the only problem we have
the proposed BTU tax. Clearly, there is no justification for a
double tax on oil. It falls equally on domestic and imported oil
and will not decrease our nation's oil import dependence one
iota. Furthermore, to the extent that the BTU tax is levied on
the energy used to produce energy, it will increase the costs of
incremental and advanced oil and gas recovery and thus decrease
domestic energy production.

Most independent are small, family-owned sole
proprietorships. My family have been independents since 1913
when my grandfather was a wheat farmer in Oklahoma and he drilled
an oil well in Drumright, Oklahoma. I have two sons and a son-
in-law in business with me. A geologist, a lawyer and a landman.
If we had outside capital we could expand our business, and my
family could continue in this business for future generations.
With the collective strength of thousands of independents like
me, we could make a substantial reduction in out nation's future
foreign oil imports and we could create hundreds of thousands of
jobs. However, because of the volatility of our markets and the
uncertainty of the financial effects of the proposed BTU tax,
there is little capital available from the financial markets.

If this situation continues, the energy production industry
in the United States will be history in a few short years. Small
companies like mine will disappear and the large independents and
major oil companies will be forced to go overseas to drill.

Our domestic natural gas and oil wells constitute a national
treasure. Most of our lower 48 gas and oil wells are high cost
marginal wells which collectively produce more oil than we import
from Saudi Arabia. Congress must consider ways to save this
vital segment of our domestic energy supplies.

When President Clinton spoke to the nation before a joint
session of Congress in mid-February, he told the American people
that the real engine of economic growth in this country is the
private sector. We agree, and we want to add that the domestic
oil and natural gas industry provides the fuel for that engine.

President Clinton said his priority is to create jobs... that
there's no recovery worth its salt that doesn't put the American
people back to work. We agree. We want to put back to work many
of the nearly 450,000 people who have lost their oil and natural
gas hobs in the past decade. That's nearly as many jobs as the
President hoped to gain in his initial economic stimulus package.

I applaud this committee, Mr. Chairman, which last year
recognized the need to provide tax policy changes to shore up the
domestic industry in last year's Energy Policy Act. The AMT
reforms were sorely needed and greatly appreciated. However, I
must point out that much of the benefit of those changes has been
wiped out by the fall in oil prices. Further erosion is
inevitable under the higher AMT rates proposed in the
Administration's economic plan. More must be done.

That brings me to the critically important issue of our
nation's marginal well production. Marginal wells -- those that
daily produce less than 15 barrels of oil and 90 thousand cubic
feet of gas -- are essential to our domestic energy supply.
Marginal wells provide at least and probably considerably more
than 20 percent of domestic oil production and 13 percent of our
gas production. Congress must consider ways to improve the
economics of investment in this vital segment of our domestic
energy supplies.

Please, Mr. Chairman and committee members, take the steps
necessary to promote rebuilding of our economy, and don't forget
the depressed and devastated American domestic petroleum industry
as you execute your critical share of the responsibilities of our
government. Thank you.

779

Mr. Andrews. The point I would like you to address in the first
5 minutes here is this issue of the collection point that Mr. Ames
just mentioned.

Vic, we have talked about this several times. Give us your
thoughts about why that is significant, why it is important. As-
sume for the sake of this discussion, that there is going to be a Btu
tax. In your judgment how can we best encourage production and
preserve the energy by setting a correct collection point?

Mr. Beghini. Mr. Chairman, if you will look at the flow chart up
here, you can see we have a very complex system in the oil and
gas industry as we move from place to place to get to the ultimate
consumer.

If we put it back at the producer, this tax, as structured, is a pro-
duction tax. It is not a consumption tax. There is a great chance
that most of this tax will not be passed through to the ultimate
consumer, because of global competitiveness fi-om refined products
and other crudes fi*om aroxind the world.

As you move this tax closer to the rack, for example, two things
happen: First, is you are getting closer to the ultimate consumer.

Mr. Andrews. You will have to tell us all what the rack is.

Mr. Beghini. That would be at the product terminal, or where
you break bulk, and that is where the excise tax is currently col-
lected, I might add.

As you move it closer, you escalate your chances of recovering
this tax if you are in this business. The other thing that you do
that is very important, is that at that point you know what the
final disposition of those products are going to be; whether they are
going to go to a petrochemical plant for exempt use, or whether
they are going to some other utility service for a particular exemp-
tion, and you will be able to more easily define and audit the collec-
tion of the tax at that point.

Beyond that, at every step of this flow chart you will notice it
takes energy; energy to produce, energy to compress, energy to
transport, and energy to make individual products. The imported
product that comes in to this country, which the domestic refiner
must face as competition, bears none of those costs. So, as a result,
the domestic refining industry will be placed in a very, very imten-
able position as we try to compete for refined product markets.

If it fails to collect these taxes fi-om the consumer, it has two
choices: Either the industry must eat those taxes, that industry
being the refiner, or it must look to the producer to collect those
costs, which means it reduces the posted price of crude oil. And
that, Mr. Chairman, is why the collection point is so very, very crit-
ical in this tax, in both the Hquid and the natural gas side.

Mr. Andrews. Mr. Terry, do you want to add something to that?

Mr. Terry. Yes. The point of collection is, obviously, crucial, and
you might think that as a representative of an LDC, I would like
to see it back at the wellhead. We have thought this through and
that is not the case.

The best place to put it is on the ultimate consimier and collect
it by the one selling the gas to the consumer. If it is our customer,
we would collect the tax from that purchaser; if it is somebody else
selling that gas to the ultimate buyers that we are transporting,
they would collect the tax.

780

If you go back to the wellhead, you have thousands and thou-
sands of producers, many of them very small. There would be real
administrative problems for these people.

Second, the other problem is it gets into this question of, all
along the line who might end up absorbing the tax. Would it be the
producer at the wellheads or the LDC?

Now, absorb is a term that people are using but it is very decep-
tive because it sounds like somehow somebody is absorbing the tax
and people are not paying it. Let us put the tax in our situation
as an LDC. Let's say for some reason we ended up having to absorb
some of that tax. What does that mean? These are big, big dollars.
We cut capital programs. What does that mean? People lose jobs.
We have to cut emplo5nnent. People lose jobs.

Ultimately, people are going to end up paying, and it is much
better to simply put the tax on the consumer and have the party
selling that natural gas to the consumer coUect the tax.

Also, you have the compounding problems that I mentioned. In
a situation hke Chicago, where you have energy taxes already im-
posed, if the Btu tax is collected at the city gate or further up-
stream, there would be a 14-percent additional tax due to
compounding.

Mr. Andrews. If the Btu tax is eliminated and yet there is an
energy component in the deficit reduction bill, is there a consensus
among the four of you on what that should be?

Mr. Beghini. I guess I can start, Mr. Chairman. I beUeve a
broad-based consumption tax, a VAT, is a logical place to try to get
these revenues, if it is determined they are needed to fund the defi-
cit.

Mr. Andrews. Excuse me just a second. Not any tax, an energy
tax. If there is an energy component in the fined package.

Mr. Beghini. I beheve, though, that with a broad-based VAT, the
energy industry is going to participate in that tax.

The energy industry will not escape a value-added tax. A credit
invoice VAT will have all industries participate in that tax. All con-
sumers will participate. But the one major thing it does is it keeps
the plajdng field between domestic manufacturers £uid inter-
national manufacturers level. And the Btu tax would make us the
only coimtry in the world that disadvantages our own domestic
manufacturing processes at the expense of international energy.

Mr. Andrews. I wonder if anyone else would like to contribute
a suggestion of an energy component to replace the Btu?

Mr. Terry. Again, AGA favors a national consumption tax before
we get to an energy tax. But if we have to have a separate identifi-
able energy component, we would prefer, then, to see a tax on im-
ported oil or gasoline.

Mr. Andrews. Mr. Ames.

Mr. Ames. We don't want any energy tax.

Mr. Andrews. I understand that. I understand that the

Mr. Ames. It makes it very difficult to

Mr. Andrews. That is fairly clear. We understand that part.

But just assimie for a moment that the administration and the
Congress have mandated that the Ways and Means Committee and
the Senate Finance Committee have an energy component in the

781

deficit reduction package. Would you prefer or would you tell us
what other energy tax you would prefer to a Btu tax?

Mr. Ames. Well, I can't say I would prefer any other consiunption
tax to a Btu tax because they are all just about as bad. But I think
that I would have to say that I would prefer the value-added tax.
A broad comprehensive value-added tax. IPAA, of course, supports
an oil import fee.

Mr. Al«roREWS. Mr. Woosnam.

Mr. Woosnam. We can support the Btu tax, but it must be equal
taxation on all fuels without preferential treatment.

Mr. Andrews. Mr. Archer.

Mr. Archer. Thank you, Mr. Chairman.

Grentlemen, I appreciate your testimony and I think it has been
very helpful to the committee. Following up a httle bit on the point
of collection, Mr. Beghini, I expect there will be a number of ex-
emptions to this Btu tax that will be authored in amendment form
if not presented by the administration. One of the difficulties we
have is we haven't seen any details at this point. So, it is difficult
to even ask you any questions until we have seen the details. But
we know that the Secretary has said that chemical feed stocks will
be exempt.

Now, considering that there may be other exemptions, does that
make it even more important as to the point of collection as far as
administering this particular tax?

Mr. Beghini. Absolutely, Mr. Archer. As I say, you need to make
sure that if you are going to exempt at the point of collection, it
has that exemption very well defined so you don't have an audit
problem. As you move this tax collection point downstream to
where this becomes more definite and definable, then these exemp-
tions will be able to be looked at more openly and we will have a
better chance from an administrative and auditing standpoint of
being able to be tracked.

Mr. Archer. You mentioned in your testimony that this would
be a tax on fuel used to produce fuel. Can you tell the committee
any differentiation between an industry, say, alimiinum or paper,
which has got to bear the tax and the refiners who also have to
bear the tax?

Mr. Beghini. In fact, we do beUeve that this is an onerous tax
on all manufacturing processes. The imbedded fuel costs will have
a negative effect on all manufacturing in this country. The one sin-
gle difference we beUeve that sets the oil industry apart is that we
are being taxed on a fuel component that is used to make fuel.

For example, in California, in heavy crude oil production that
uses steam as the recovery process, they are burning a barrel of
that oU or buying natural gas to basically get three barrels of oil
out of the groiuid. That effectively would add $3.50 a barrel to the
cost of a product which cxirrently in California is in the $10 range.

In that environment, you basically would shut in a major part of
the steam flood operations in California. That also would apply in
areas where you nave gas injection projects, where you are inject-
ing gas into the reservoir. It would apply in areas where a lot of
the independents and majors have wells that are very high water
cut and take a lot of electricity and energy to get the oil out of the
ground. We beUeve that is a tax on a tax, and double taxation.

782

Mr, Archer. It seems to me from your answer that that would
particularly increase the importation of foreign oil by reducing the
amount of oil and gas we produce domestically.

Mr. Beghini. Yes, sir, it would. In fact, I think this country
would be a lot better off if it devoted more energy, if you will ex-
cuse the pun, to making domestic energy and less in trying to see
what we can do to domestic energy.

Mr. Archer. Let me ask each of you a question as to what you
beUeve the impact will be on the economy from this Btu tax insofar
as we understand it today. What particularly will be the impact on
jobs over the next 5 years?

I am talking about domestic jobs; I am not tedking about the jobs
that are exported overseas by forcing industries to move their
plants overseas. I am talking about jobs in the United States of
America.

Mr. Beghini. Well, the models we have run at the API have sug-
gested that tiiis tax by 1998 will reduce the GDP by $34 billion on
an annual basis, and will cost the country 400,000 jobs.

Mr. Archer. Do any of the rest of you have an analysis on the
projected impact of this tsix?

Mr. Ames. If the tax as originally proposed at the oil wellhead
and upstream for gas, if that were to happen, I mean, you would
see severed hundred thousand jobs in the oU and gas production in-
dustry lost, in my opinion.

Mr. WOOSNAM. In our industry, because of the way the tax is
currently being proposed, there would be tremendous loss of jobs
in the retail home-heating oil business through conversions to other
fuels because of their preferential treatment.

Mr. Terry. AGA has not come up with a specific number, and
it is going to vary somewhat depending on how this tax ends up
getting imposed and the point of collection. For instance, if it ends
up being on LDC's and we are forced to absorb some of the costs,
that would mean we would have to cut capital expenditures. I just
went through that scenario in our case and we would have to ab-
sorb $20 or $30 miUion. We estimate that $60 to $70 milUon would
be paid by consumers in Chicago for this tax. That amount is just
in the city of Chicago. These dolleirs would be coming out of that
local economy. This is going to cost some jobs someplace along the
line. I cannot give you a number, but that is just a microcosm of
the whole economy.

Mr. Archer. Does this not seem counterproductive to the goal
that we are striving to reach in this count^ for deficit reduction
and helping this country to be more competitive in the world mar-
ketplace?

Mr. T^RRY. I would certainly agree with that. The AGA's first po-
sition is focused on cutting expenditures before you go to taxes.

Mr. Archer. Gentlemen, thank you very much.

Mr. Andrews. Thank you, Mr. Archer.

Mr. Brewster will inauire.

Mr. Brewster. Thank you, Mr. Chairman.

I think some significant points were made by this panel. Mr.
Ames, you mentioned that your family started in the oil business
in 1913 in Oklahoma. I don't know if you are aware, but in 1992,
Oklahoma produced less oil than any years since 1919. We have

783

lost somewhere between 60,000 and 80,000 jobs in Oklahoma
alone, and are certainly not the significant producer that we once
were. So I think you made some valid points.

Mr. Terry, you mentioned that certainly you would like to see a
tax on imported oil. Mr. Terry, I would like to see that, too, but
I think that has been tried around the track a few times and I sus-
pect that that is not a possibility at this particular point.

My fi^end, Mr. Archer, mentioned in several— or asked several of
our witnesses today, in the past, if there is any other manufactur-
ing coimtry in the world that taxes energy to their manufacturers.

Is there any other manufacturing, significant manufacturing
country in the world that is a significant producer? Germany and
Japan are certainly not significant producers of energy. Korea?

Mr. Beghini. No.

Mr. Brewster. So really, all these people operate principally on
imported oil. Do their manufacturers sustain any taxation or what
on the imported oil coming into their countries?

Mr. Beghini. Most of those have a value-added tax such that
those manufacturers on any exports are kept whole through the
ability to deduct those taxes.

Mr. Brewster. Mr. Woosnam, I know, too, the industry that you
are in has had significant problems in the past with collections, es-
pecially on diesel fuel for off road, those types of things. Assuming
there is an energy component to this particular tax program, is this
an opportunity to clear up some of the collection points in your cur-
rent problem in that regard?

Mr. Woosnam. We believe that we can work with the committee
to come up with a system that helps protect the collection process
and enhance the revenues that would be derived fi*om it.

Mr. Brewster. So the terminal rack is the proper collection
point, in your opinion?

Mr. Woosnam. We believe so.

Mr. Brewster. Mr. Beghini, you are familiar I guess with the re-
cent announcements in the United Kingdom of a value-added tax
just on energy.

Mr. Beghini. Yes, sir, I am. As a matter of fact, the United King-
dom did just recently extend the VAT to energy consumption which
heretofore had been excluded.

The other interesting thing that the United Kingdom did at the
same time was this: They have a tax called the petroleum revenue
tax, which basically says that you will pay a tax rate of 75 percent
on your income after you have recovered 130 percent of your cap-
ital investment. It is interesting to note that the United Kingdom's
new tax rules have decreased that tax from 75 percent to 50 per-
cent for all existing fields and completely eliminated that tax for
all new fields.

So it appears to me that the United Kingdom is working very
hard to husband and grow their energy industry and those people
employed in that industry while taxing the utility of fuels at the
consuming level, not at the production level such as the Btu tax.

Mr. Brewster. Very good. Thank you.

Mr. Andrews. Thank you, Mr. Brewster.

Are there other members that would like to inquire?

Mrs. Johnson. No questions.

784

Mr. Andrews. I would like to thank the panel for the valuable
contribution you have made. We will certainly take all of this infor-
mation into consideration as we continue our deUberations.

The next next panel is made up of Gerald Alderson, who is with
the Business Coimcil for a Sustainable Energy Future; Robert
Hauptfuhrer with the Natxiral Gas Supply Association; Ellen Roy,
with the National Independent Energy Producers; Dennis
Sabourin, with Wellman, Inc.; and Daniel Lashof, with the Natural
Resources Defense Council.

I want to welcome this panel and thank you very much for being
here with us this morning, and we will enter your testimony into
the record, your written testimony, and you may proceed with your
oral testimony. I would ask Mr. Alderson to begin, if you would.

STATEMENT OF GERALD ALDERSON, VICE CHAIRMAN, BUSI-
NESS COUNCIL FOR A SUSTAINABLE ENERGY FUTURE, AND
PRESIDENT AND CHIEF EXECUTIVE OFFICER, KENETECH
CORP., SAN FRANCISCO, CA

Mr. Alderson. Thank you and good morning, or good afternoon.
I appreciate the opportunity to be here today.

I am the president and chief executive officer of Kenetech Corp.,
which is a fiilly integrated energy service company based in San
Francisco. We design, finance, operate, and maintain a variety of
powerplants which typically utiUze environmentally preferred tech-
nologies, namely wind, biomass and natural gas, in virtually all of
our activities.

We also provide conservation and energy management services to
our customers. It is also the case that our windpower subsidiary is
far and away the largest such entity in the world.

In my capacity here today, I am speaking as vice chairman of the
Business Council for a Sustainable Energy Future. This is an orga-
nization comprised of business leaders from the energy efficiency,
renewable energy, natural gas, and utiUty industries who share a
common commitment to the view that a new energy strategy for
the 1990*s and beyond is possible.

Essentiallv, that strategy contemplates the rapid deployment of
efficient and low or nonpoUuting energy technologies, expanded re-
hance on energy efficiency, and renewable energy and natural gas
as the three bases upon which to implement that system.

To achieve this end, the busmess council supports related policies
and programs at the Federal and State level which are consistent
with those articulated objectives; that is, improve energy efficiency;
accelerate the commercialization of renewable energy sources; and
promote the use of natural gas.

We are pleased with the prominent role that President Clinton
has given to these three pillars of energy poUcy in fashioning his
economic policies. Although we have interests in many of the provi-
sions of the administration's proposed package, my testimony will
focus on the revenue portion of that package and, in particular, the
broad-based energy tax.

In addition, I will also briefly address a concern we have about
the implications for the proposed investment tax credit, something
which I haven't heard mentioned much here this morning, as to
how it would be implemented under current law. We believe that

785

that current tax policy may inadvertently reduce or eliminate many
of the benefits that are proposed in President Clinton's package.

As part of the deficit reduction portion of his economic package,
President Clinton has proposed a broad-based energy tsix designed
to raise approximately $20 bQUon annually when nilly phased in.
According to the administration, in addition to raising revenues,
such taxes will encourage conservation by making energy more ex-
pensive, reduce pollution and decrease the coiuitiys dependence on
foreign energy suppUers.

We clearly support these goals. However, there are many types
of taxes that offer the opportunity to raise revenue while also serv-
ing the energy and environmental policies noted above.

while several of our members may have preferred other formula-
tions, we recognize that no approach is without criticism, and
therefore, we are prepared to support a broad-based Btu energy tax
in recognition that it is an important step in the direction of a sus-
tainable energy future. In particular, we applaud the exclusion of
renewable energy resources from the tax.

The council's support for this tax is not without reservations,
however. First, when the tax is phased in, it will result in only
modest improvements in encouraging energy conservation. In this
reg£ird, it may be appropriate to provide energy tax credits. And
second, we beUeve that it should be structured such that it is col-
lected closer to the end use of the energy sources.

Finally, the business council is particularly concerned with the
proposed collection point for natural gas. We think that it is best
to collect that gas at the end-use point rather than the inlet to the
pipeline.

I think in general in our comments as they relate to the invest-
ment tax credit, many of our points are specific and detailed, and
we would propose to work with the committee's staff in their imple-
mentation.

With that, I would again like to thank you for the opportunity
to define this position this morning, and will look forward to ques-
tions later.

[The prepared statement follows:]

786

THE BUSINESS COUNCIL'S

VIEWS ON THE PRESIDENTS

ECONOMIC PACKAGE

REMARKS BY GERALD ALDERSON

VICE-CHAIRMAN

BUSINESS COUNCIL FOR A

SUSTAINABLE ENERGY FUTURE

BEFORE THE

COMMITTEE ON WAYS AND MEANS

US HOUSE OF REPRESENTATIVES

MARCH 23, 1993

L INTRODUCTION

GOOD MORNING. I APPRECL\TE THE OPPORTUNITY TO APPEAR BEFORE
YOU TODAY. I AM GERALD ALDERSON, PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF KENETECH CORPORATION. KENETECH
CORPORATION IS A FULLY-INTEGRATED ENERGY SERVICE COMPANY
BASED IN SAN FRANCISCO, CALIFORNL\. KENETECHS SUBSIDL^UES
DESIGN, BUILD, FINANCE, OPERATE AND MAINTAIN POWERPLANTS WHICH
UTILIZE ENVIRONMENTALLY PREFERRED TECHNOLOGIES-PRINCIPALLY
WIND, BIOMASS, AND NATURAL GAS. THE CORPORATION ALSO PROVIDES
ENERGY CONSERVATION AND MANAGEMENT SERVICES TO CUSTOMERS.
KENETECHS WINDPOWER SUBSIDIARY IS THE LARGEST DESIGNER,
CONSTRUCTOR, AND OPERATOR OF WINDPLANTS IN THE WORLD. I AM
HERE TODAY DSf MY CAPACITY AS VICE-CHAIRMAN OF THE BUSINESS
COUNCIL FOR A SUSTAINABLE ENERGY FUTURE.

THE BUSINESS COUNCIL FOR A SUSTAINABLE ENERGY FUTURE IS A
NEWLY CHARTERED ORGANIZATION COMPRISED OF BUSINESS LEADERS
FROM THE ENERGY EFFICIENCY, RENEWABLE ENERGY, NATURAL GAS
AND UTILITY INDUSTRIES THAT SHARE A COMMITMENT TO PURSUE A
NEW ENERGY STRATEGY FOR THE 1990S AND BEYOND. THIS NEW
STRATEGY IS DESIGNED TO REALIZE THE NATION'S ECONOMIC,
ENVIRONMENTAL AND NATIONAL SECURITY GOALS THROUGH THE RAPID
DEPLOYMENT OF EFFICIENT, NON- AND LOW-POLLUTING ENERGY
TECHNOLOGIES. THE EXPANDED RELIANCE ON ENERGY EFFICIENCY,
RENEWABLE ENERGY AND NATURAL GAS AS THE THREE PILLARS OF AN
ENERGY STRATEGY WILL STRENGTHEN THE ECONOMY AND ENHANCE
THE ENVIRONMENT.

TO ACHIEVE THIS END, THE BUSINESS COUNCIL SUPPORTS ENERGY
RELATED POLICIES AND PROGRAMS AT THE FEDERAL AND STATE LEVELS
THAT: (1) IMPROVE ENERGY EFFICIENCY IN ALL SECTORS OF THE
ECONOMY; (2) ACCELERATE THE COMMERCIALIZATION OF RENEWABLE
ENERGY RESOURCES; AND (3) PROMOTE THE USE OF NATURAL GAS IN
ENERGY PRODUCTION AND END USE.

THE BUSINESS COUNCIL IS PLEASED WITH THE PROMINENT ROLE
PRESIDENT CLINTON HAS GIVEN TO ENERGY EFFICIENCY, RENEW ABLES,
NATURAL GAS AND THE REDUCTION OF OIL IMPORTS IN FASHIONING HIS
ECONOMIC PACKAGE. WE BELIEVE THAT THIS PACKAGE SIGNALS A
MAJOR CHANGE IN NATIONAL ENERGY POLICY-THE RECOGNITION OF
THE NEED TO TRANSITION TO CLEAN, EFFICIENT ENERGY SOURCES. THE
BUSINESS COUNCIL WELCOMES THIS CHANGE IN DIRECTION.

787

ALTHOUGH WE HAVE INTERESTS IN MANY PROVISIONS OF THE
ADMINISTRATION'S PROPOSED ECONOMIC PACKAGE, MY TESTIMONY
TODAY WILL FOCUS ON THE REVENUE PORTION OF THE PACKAGE AND. IN
PARTICULAR, THE BROAD-BASED ENERGY TAX

IN ADDITION, I WILL ALSO ADDRESS BRIEFLY A CONCERN WE HAVE
ABOUT THE IMPLICATIONS OF THE PROPOSED INVESTMENT TAX CREDIT
AS IT WOULD BE IMPLEMENTED UNDER CURRENT TAX LAW. WE BELIEVE
THAT CURRENT TAX POLICY MAY INADVERTENTLY REDUCE THE
BENEFITS OF THE INVESTMENT TAX CREDIT FOR CERTAIN INDUSTRIES
THAT NEED IT THE MOST.

n. E^fERGY TAXES:

AS A PART OF THE DEHCIT REDUCTION PORTION OF HIS ECONOMIC
PACKAGE, PRESIDENT CLINTON HAS PROPOSED A BROAD-BASED ENERGY
TAX DESIGNED TO RAISE MORE THAN $20 BILLION ANNUALLY WHEN
FULLY PHASED-IN. ACCORDING TO THE ADMINISTRATION, IN ADDITION
TO RAISING REVENUE, "ENERGY TAXES WILL ENCOURAGE
CONSERVATION BY MAKING ENERGY MORE EXPENSIVE, REDUCING
POLLUTION, AND DECREASING THE COUNTRYS DEPENDENCE ON FOREIGN
ENERGY SUPPLIERS " THE BUSINESS COUNCIL CLEARLY SUPPORTS THESE
GOALS.

THERE ARE MANY TYPES OF TAXES THAT OFFER THE OPPORTUNITY TO
RAISE REVENUES WHILE ALSO SERVING TO SUPPORT ENERGY AND
ENVIRONMENTAL POLICY OBJECTIVES. WHILE MEMBERS OF THE
BUSINESS COUNCIL MAY HAVE PREFERRED OTHER FORMULATIONS, WE
RECOGNIZE THAT NO APPROACH IS WITHOUT CRITICISM. THE BUSINESS
COUNCIL IS READY TO SUPPORT PRESIDENT CLINTON'S BROAD-BASED
ENERGY TAX PROPOSAL IN RECOGNITION THAT THE TAX IS AN
IMPORTANT STEP IN THE DIRECTION OF A SUSTAINABLE ENERGY FUTURE.
IN PARTICULAR, WE APPLAUD THE EXCLUSION OF RENEWABLE ENERGY
RESOURCES FROM THE TAX.

THE BUSINESS COUNCIL'S SUPPORT FOR THIS TAX IS NOT WITHOUT
RESERVATIONS, HOWEVER. FIRST, THE TAX, WHEN FULLY PHASED IN,
WILL RESULT IN ONLY MODEST IMPROVEMENTS IN ENCOURAGING
ENERGY CONSERVATION IN THIS REGARD, IT MAY BE APPROPRIATE TO
PROVIDE ENERGY TAX CREDITS TO CONSUMERS TO FURTHER
ENCOURAGE ENERGY CONSERVATION SECOND, WE BELIEVE THE
ENERGY TAX COULD BE STRUCTURED TO MORE APPROPRIATELY REFLECT
THE DIFFERENTIAL ENVIRONMENTAL AND ENERGY SECURITY IMPACTS
OF VARIOUS ENERGY SOURCES IN THIS REGARD, WE RECOMMEND THAT
SERIOUS CONSIDERATION BE GIVEN TO ADJUSTING THIS TAX OVER TIME
TO BETTER SUPPORT THE ADMINISTRATION'S OVERALL ENERGY AND
ENVIRONMENTAL GOALS.

THIRD, THE BUSINESS COUNCIL HAS CONCERNS WFTH THE PROPOSED
COLLECTION POINT FOR THE TAX ON NATURAL GAS THE
ADMINISTRATION ORIGINALLY PROPOSED TO COLLECT THE TAX ON
NATURAL GAS AT THE INLET TO THE PIPELINE SYSTEM. HOWEVER,
APPLYING THE TAX AT THIS POINT WOULD EXPOSE THE NATURAL GAS
INDUSTRY TO UNWARRANTED FINANCIAL RISKS ASSOCIATED WITH
COLLECTING THE TAX, DUE TO CONTRACT AND REGULATORY
CONSTRAINTS ON PASSING THE TAX ON TO THE ULTIMATE CONSUMER.

788

SIMILARLY, INDEPENDENT POWER PRODUCERS THAT USE NATURAL GAS
TO GENERATE ELECTRICITY, IN SOME CASES, HAVE LONG-TERM POWER
PURCHASE AGREEMENTS WITH PUBLIC UTILITIES THAT WOULD PREVENT
THEM FROM PASSING ON THE INCREASED COST OF THE TAX WHILE THE
BUSWJESS COUNCIL DOES NOT ADVOCATE A SPECIFIC SOLUTION TO
THE INDEPENDENT POWER PRODUCER ISSUE, WE BELIEVE THAT
ENERGY TAXES SHOULD BE IMPOSED IN SUCH A WAY SO AS TO MAXIMIZE
THEIR ENERGY CONSERVATION AND ENVIRONMENTAL BENEFITS.

TO THE EXTENT THAT ENERGY TAXES ARE IMPOSED ON THOSE WHO ARE
NOT THE USERS OF THE RESOURCE, THERE IS NO INCENTIVE TO INCREASE
EFFICIENCY OR SUBSTITUTE CLEANER FUELS. THUS, THE ENERGY
EFFICIENCY AND ENVIRONMENTAL BENEFITS OF THE TAX ARE
DIMINISHED.

THE NATURAL GAS INDUSTRY HAS PROPOSED A SOLUTION TO THE
COLLECTION POINT PROBLEM ON GAS WHICH THE BUSINESS COUNCIL
SUPPORTS--THE TAX SHOULD BE ASSESSED ON THE END USER OF THE GAS
AND COLLECTED BY THE SELLER THIS APPROACH ENSURES THE
REALIZATION OF THE FULL EFFICIENCY AND ENVIRONMENTAL BENEFITS
OF THE TAX AND MINIMIZES UNINTENDED EFFECTS.

m. INVESTMENT TAX CREDIT

TURNING NOW TO THE INVESTMENT TAX CREDIT ISSUE, THE BUSINESS
COUNCIL SUPPORTS THE INCENTIVES AND EXCLUSIONS PROPOSED AND
ALREADY IN THE LAW FOR RENEWABLE ENERGY INVESTMENTS.
HOWEVER, WE BELIEVE THAT SEVERAL ADDITIONAL TECHNICAL
REVISIONS IN THE MANNER IN WHICH THE INVESTMENT TAX CREDIT
OPERATES COULD FURTHER THE ADMINISTRATION'S OBJECTIVES IN
PROVIDING AN INVESTMENT TAX CREDIT.

FIRST, WE URGE THAT THE AMOUNT OF THE ITC THAT CAN BE USED
AGAINST THE ALTERNATIVE MINIMUM TAX BE INCREASED. EXISTING
LAW LIMITS INVESTMENT TAX CREDIT UTILIZATION TO ONLY 25 PERCENT
OF A COMPANY'S ALTERNATIVE MINIMUM TAX LIABILITY, REDUCING
SUBSTANTIALLY THE VALUE OF THESE NEW CREDITS FOR MANY SMALL,
START-UP COMPANIES AS WELL AS THE MAJORITY OF CAPITAL INTENSIVE
INDUSTRIES THAT HAVE BEEN IN THE AMT TAX POSITION THROUGHOUT
MOST OF THE RECESSION

SECOND, MANY COMPANIES AND INDUSTRIES WILL RECEIVE A
CONSIDERABLY REDUCED BENEFIT FROM A NEW INVESTMENT TAX
CREDIT EITHER BECAUSE THEY ARE CURRENTLY SUBJECT TO THE
ALTERNATIVE MINIMUM TAX, THEY HAVE UNUSED ITCS, OR THEY
ANTICIPATE CONSIDERABLE ECONOMIC LOSSES ASSOCIATED WITH
DEVELOPING NEW TECHNOLOGIES OR STARTING UP NEW HIGH-RISK
BUSINESS VENTURES FOR THESE COMPANIES, WE RECOMMEND THAT
ANY INVESTMENT TAX CREDITS THAT WOULD OTHERWISE EXPIRE
BEFORE USE DUE TO THE INTERACTION OF THE ALTERNATIVE MINIMUM
TAX SYSTEM AND THE REGULAR TAX SYSTEM BE CONVERTED INTO
ALTERNATIVE MINIMUM TAX CREDITS RATHER THAN BE LOST
COMPLETELY

THIRD, THE COUNCIL URGES THAT THERE BE NO REDUCTION IN THE
PRODUCTION TAX CREDIT FOR WIND AND CLOSED-LOOP BIOMASS
INVESTMENTS PROVIDED IN THE NATIONAL ENERGY POLICY ACT OF 1992
THAT WOULD OTHERWISE QUALIFY FOR THE INVESTMENT TAX CREDIT.
CLEARLY, THESE INVESTMENTS REQUIRE THE FULL TAX BENEFITS TO

789

BRING THESE VALUABLE NEW ENERGY TECHNOLOGffiS TO MARKET AND
TO TREAT THEM SIMILARLY TO THE OTHER RENEWABLE TECHNOLOGIES.
WE RECOMMEND EITHER THAT THE RESTRICTIVE LANGUAGE CONTAINED
IN THE EXISTING PRODUCTION TAX CREDIT BE DELETED OR THAT THE
IMPLEMENTING LEGISLATION OF THE INVESTMENT TAX CREDIT PROVIDE
THAT THE PRODUCTION CREDIT NOT BE REDUCED FOR RENEWABLE
ENERGY INVESTMENTS THAT OTHERWISE QUALIFY FOR THE INVESTMENT
TAX CREDIT.

WE WOULD BE PLEASED TO WORK WITH COMMITTEE STAFF ON THESE
ISSUES AND TO SUBMIT WRITTEN RESPONSES TO ANY TECHNICAL
QUESTIONS THE COMMITTEE MAY HAVE.

IV. CONCLUSION:

THE BUSINESS COUNCIL APPRECIATES THE OPPORTUNITY TO ADDRESS
YOUR COMMITTEE ON THE REVENUE MEASURES CONTAINED IN THE
PRESIDENT'S ECONOMIC PACKAGE. WE SUPPORT THE PRESIDENT'S
EFFORT TO TACKLE THE COUNTRY'S DEBILITATING BUDGET DEFICIT
WHILE IMPROVING ENVIRONMENTAL QUALITY. AS BUSINESS LEADERS
CONCERNED ABOUT THE HEALTH OF THE U.S. ECONOMY, WE BELIEVE
THAT THE COUNTRY NEEDS TO FOLLOW A NEW ENERGY PATH- FOR
ECONOMIC, ENVIRONMENTAL AND SECURITY REASONS.

THE BUSINESS COUNCIL VIEWS THE PROPOSED BROAD-BASED ENERGY
TAX AS A GOOD FIRST STEP IN ADDRESSING THE DUAL CHALLENGES
FACING OUR COUNTRY-ECONOMIC REVITALIZATION AND
ENVIRONMENTAL ENHANCEMENT. WE STAND READY TO WORK WITH
BOTH THE ADMINISTRATION AND CONGRESS IN SUPPORT OF THESE
EFFORTS.

THANK YOU.

790

Mr. Andrews. Thank you very much, Mr. Alderson.
Mr. Hauptftihrer.

STATEMENT OF ROBERT P. HAUPTFUHRER, CHAIRMAN, NATU-
RAL GAS SUPPLY ASSOCL^TION, AND CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, ORYX ENERGY CO., DALLAS, TX

Mr. HAUPTFUHRER. Good morning, Mr. Chairman. I am Robert P.
Hauptfuhrer, and I am chairman and chief executive officer of Oryx
Energy Co. and chairman of the Natural Gas Supply Association.

Oryx is a Dallas-based natural gas and oil-producing company
that is among the largest independents in the world.

The Natural Gas Supply Association is a Washington-based trade
organization that represents domestic producers who market near-
ly 90 percent of the Nation's natural gas. Consistent with the ad-
ministration's objective, NGSA's membership is commited to en-
hancing the country's use of natural gas.

We appreciate this opportunity to comment upon President Clin-
ton's proposed economic package, and in particxilar upon the sug-
gested Btu energy tax.

I will summarize my remarks but would ask that my entire
statement be entered into the record.

Mr. Andrews. Without objection.

Mr. HAUPTFUHRER. Mr. Chairman, I would like to make three
points.

First, we support President Clinton's goals of less Federal spend-
ing, meaningful deficit reduction and economic growth.

Second, the most constructive approach toward reducing the defi-
cit would be larger cuts in Federal spending.

In 1969, when the Federal Government last had a balanced
budget, tax revenues and Federal expenditures were about 19 per-
cent of the gross national product. Last year, tax revenues were
still 19 percent of the gross national product, but Federal spending
absorbed about 25 percent.

Cutting expenditures is difficult and painful. I know. I know
from firsthand experience.

Over the past several years. Oryx Energy has reaUgned,
refocused and reduced costs to the extent that our work force is 40
percent smaller than just a few years ago.

My company and most American businesses have had no choice.
To compete in today's increasingly aggressive international market-
place, companies must be more efficient than ever at providing
goods and services, and I respectfully suggest the same is true for
the Government.

We therefore applaud the efforts of the President and the House
leadership to increase the spending cuts in the original proposal,
but we would encourage you to do even more.

Finally, if policymakers decide the controls on Federal spending
are insufficient, a broad-based consumption tax is preferable.

If such a tax is unacceptable, care must be taken in structuring
the proposed energy Btu tax to ensure that is a consimiption tax.

President Clinton and senior administration officials have stated
their intent that the Btu tax be fully passed through to consumers.

791

Given the size of the energy tax and the President's proposal, it
is essentisd that it not inadvertently become through faulty struc-
turing a tax on production.

Specifically with respect to natural gas, the primary issue is
where the tax is to be imposed, and as a result, who is the tax-
payer and who serves as the collection agent.

To achieve the objective of the administration and ensure that
the tax is levied on consumption, the tax should be imposed on the
ultimate consumer. The last seller of that fuel should collect the
tax. The members of the Natural Gas Coimcil, an association which
includes members of the American Gas Association, the Interstate
Natural Gas Association of America, the Independent Petrolexim
Association of America and the Natural Gas Supply Association,
agree that this is the proper point of collection if the tax is im-
posed.

Doing so minimizes the administrative burden, puts domestic
and imported gas on an equal footing and avoids potential conflicts
with other important government policies.

The imposition of the tax at any other collection point will result
at a minimum in higher administrative costs, greater risk of tax
avoidance and market distortions. There would sdso be considerable
risk that not all of the tax would be passed through to consumers.

If portions of this tax fell to the natural gas industry, the dam-
age could be significant. The economic health of the gas and oil pro-
ducing industry is under severe stress. We have lost more tn£ui
400,000 jobs during the past decade. Our accumvdative revenues
fi-om 1984 have dropped by more than $130 billion.

President Clinton and many in Congress have stressed their sup-
port for greater use of clean burning natural gas.

It would be tragic if the Btu tax were imposed in such a way that
domestic gas supplies are reduced or the industr^s abiUty to trans-
port and distribute this clean burning fiiel is impaired.

Mr. Chairman, we urge you and tiie members of the committee
to ensure that if an energy Btu tax is enacted, it be structured in
a manner that is the most practical and least disruptive for all
those providing natural gas to consumers.

I would be happy to answer questions. Thank you.

[Attachments to the prepared statement follow:]

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796

NCSA COBIMENTS

ON PRESIDENT CLINTON'S

ENERGY TAX PROPOSAL

On February 19, 1993, the CUnton Administration publicly disclosed details of its
proposed broad based energy tax (Tax). The Tax would be based on the BTU
content of certain fuels including oil and natural gas . The Tax would be higher per
MMBTU on oil than gas and would phase in over three years beginning in July, 1994 ,
in one-third annual increments . Non-fuel uses of fossil fuels and exported fossil
fuels would be exempt from the Tax. The collection point for domestic crude would
be at the "refinery" and for domestic gas at the "pipeline".

The NCSA does not support energy taxes. The Association believes that a more
constructive approach toward reducing the deficit would be to further reduce federal
spending. If a BTU energy tax is imposed, however, the NCSA offers the following
comments for consideration by the Administration and Congress .

The focus of NCSA's comments is on structuring the Tax on natural gas in a manner
that is the most practical and least disruptive for all segments of the natural gas
industry. It is believed that such an approach would best achieve the federal
government's net revenue, conservation and environmental objectives.

The primary issues for both taxpayers and the government revolve around the
related concepts of (1) who is the taxpayer, (2) where is the point of taxation, and
(3) who serves as the collection agent for the government. The effort to resolve
these issues must take into account a host of sub-issues such as (1) minimizing the
administrative burdens on both taxpayers and the government, (2) ensuring that
domestic natural gas suppliers , marketers and transporters can fairly compete with
their foreign competitors, and (3) preventing conflicts with other important
government policies.

Based on these considerations , and for reasons specified below , the only practical
approach to structuring the Tax on natural gas is by imposing it on the end user of
the fuel (taxpayer) , at the burner tip (point of taxation) , with collection by the last
seller (i.e. , the local distribution company (LDC), pipeline or other supplier). In
general, NCSA believes that fuel used to produce taxable fuel should be exempt from
such taxes.

ADMINISTRATIVE BURDENS

• Administrative costs are minimized by imposing the Tax at the burner tip with

the last seller as collection agent .

Minimizes government audit costs by restricting the size of the
audit universe that otherwise expands substantially in the case
of upstream tax /collection points due to large number of
producers and complexities surrounding exempt non-taxable gas ,
measurement and other factors .

Page 1 of 4

797

Consumer billing system is already in place for residential
customers by LDCs and for others due to existing commercial
billing practices .

Avoids the administrative complexities of an upstream tax , e.g.,
(1) solving nonfuel use exemption issues, (2) avoiding
unintended additional tax burdens (occasioned by increased
production , gross receipts and other state and local taxes ) and
royalty burdens under certain lease provisions, (3) solving
tiining problems associated with gas storage and gas imbalances,
and (4) avoiding the costs of pipeline/LDC rate and tariff
hearings .

IMPORTATION OF NATURAL GAS

• U.S. natural gas suppliers compete head to head in key U.S. markets with
Canadian natural gas suppliers.

A burner tip Tax eliminates distortions between domestically
produced and foreign imported natural gas which otherwise will
arise if the points and time of taxation are not the same for both
fuels .

If a use tax is imposed on domestic gas used in the transportation
and processing phases , but not imposed in a similar fashion on
imported gas , distortions will arise . The consequence will be to
competitively favor foreign gas which conflicts with the
Administration's goals of creating more jobs for U.S. workers
and reducing imports for balance of payments and other
purposes .

Imposing a higher tax rate on imported gas to correct these
domestic /foreign imbedded cost distortions raises GATT issues.
Further complications arise with regard to gas produced in the
Western U.S. that is transported on Canadian pipelines to reach
East Coast markets. Without an import credit equal to the Tax,
domestic gas will again be disadvantaged.

PREVENTING CONFLICT WITH OTHER GOVERNMENT POLICIES

• The Administration has stressed its support of the use of clean burning fuels
such as natural gas . The stability and availability of natural gas supplies is
not possible without a strong natural gas industry. Imposition of the Tax in
a manner that disrupts the gas industry (which is already undergoing
enormous change such as the restructuring of the natural gas transportation
industry) would clearly conflict with the Administration's policy favoring
increased use of natural gas .

Fixed price contracts, which serve government policies and
consumers by providing long-term gas supplies at stable prices ,
would be adversely affected by imposing the Tax on suppliers.

Page 2 of 4

798

Suppliers locked Into such contracts cannot increase prices to
reflect the Tax burden.

The ability of natural gas industry to meet government
objectives, such as the development of market centers, will be
adversely affected unless the Tax is imposed at the burner tip .

The ability of the natural gas industry to satisfy consumer
demands for a growing array of services, such as gas
aggregation, storage and efficient transportation, will be
adversely affected unless the Tax is imposed at the burner tip .

IMPOSITION OF THE TAX ON NATURAL GAS UQUIDS (NGLs)

The Clinton Administration has not yet indicated how to impose or collect the Tax on
NGLs.

• NGLs are generally extracted from a natural gas streeim in
processing at gas plants and then (1) sold to refiners or
petrochemical companies either as part of a crude oil stream, or
for blending in refined products or as petrochemical feedstocks ,
or (2) sold to nonrefiners primarily for use as fuel.

• It cannot generally be determined by the gas plant operator
which NGLs are sold for use as fuels and which are sold for
nonfuel uses .

• If NGLs are taxed by taxing the stream prior to separating out
the NGLs or at the gas plant tailgate a complicated exemption
certificate or rebate /refund mechanism must be devised to (1)
exempt nonfuel uses of NGLs and (2) avoid double taxing NGLs
used by refiners in making other taxable fuels, e.g. , gasoline.

• NGLs sold for use as fuel (other than to a refiner) should be
taxed at the burner tip and collected by the seller from the end
user. For reasons discussed with respect to natural gas, this is
the only structure that effectively avoids administrative
burdens, and unfair competition from imports and promotes
government policy favoring natural gas use.

• NGLs generally should be taxed at the same point as natural gas
if treated as natural gas.

Page 3 of 4

799

OTHER ISSUES

While the point of imposition of the Tax (and the closely related question of who is
the taxpayer) is the primary concern of NCSA, an exemption for fuel use to create
other taxable fuel is necessary to ameliorate some of the burden the Tax itself
imposes on the energy industry. The energy industry is being singled out for
imposition of a new federal tax on its primary products. This burden, in the form
of reduced product demand and increased administrative costs is not shared by any
other industry group. Accordingly, while it is true that the energy consumption
costs of all industries (not just the energy industry) will increase as a result of the
Tax, granting an exemption for that portion of the energy industry's consumption
costs directly related to providing taxable fuels to the market is reasonable given
that the Tax burden itself is imposed solely on that industry's products .

Page 4 of 4

800

Mr. Payne [presiding] . Thank you, Mr. Hauptfuhrer.
Ms. Roy.

STATEMENT OF ELLEN S. ROY, CHAIR, ENERGY TAX TASK
FORCE, NATIONAL INDEPENDENT ENERGY PRODUCERS,
AND VICE PRESIDENT, BUSINESS DEVELOPMENT, INTER-
CONTINENTAL ENERGY CORP., BOSTON, MA

Ms. Roy. Good afternoon. My name is Ellen Roy. I am vice presi-
dent, business development, of Intercontinental Energy Corp., and
the chairperson of the Energy Tax Task Force of the National Inde-
pendent Energy Producers. I thank you for allowing us to testify
on this very important issue.

I am here today to talk about three things. One is to tell you a
little bit about the independent power industry and what we do.
The second is to explain how the energy tax harms our industry
given its current upstream collection point. And the third is to sug-
gest alternatives that would preserve our industry.

Intercontinental Energy Corp. is an independent power producer,
or IPP as we say for short, with cogeneration facilities in New Jer-
sey, Massachusetts, and Pennsylvania. The National Independent
Energy Producers, or NIEP, as we also say for short, is an associa-
tion of companies, like ours, that generate electricity for sale to
utilities and steam for sale to industry.

NIEP members use highly reliable fossil fuels and renewable
technologies, including hydro, pumped storage, geothermal, bio-
mass, wood, waste to energy, as well as natural gas, oil, and coal.

Our companies t3T)ically sell power wholesale to electric utiUties
on the basis of long-term contracts. Since 1989, the independent
power industry has supplied over 50 percent of all new electric ca-
pacity in the United States.

The key to a fair and efficient energy tax is its collection point.
In the administration's February proposal for upstream collection
of the tax, the seller of gas, coal, or oil would collect the tax at the
point of sale before the fuel is used to produce electricity.

NIEP is concerned that a tax in this form will have the unin-
tended consequence of damaging the independent power industry.
IPPs are not like regulated utilities which can, in most cases, pass
costs on to ratepayers. Instead, IPPs sell electricity to utilities
under long term, firm contracts that do not permit the seller to
pass through an energy tax.

The unintended consequence is this: IPPs may have to absorb
100 percent of the tax. And if they absorb the tax in its entirety
with no ability to pass it along, the tax could well jeopardize our
ability to repay our bank loans or even to keep operating.

To meet the administration's goals, NIEP recommends the fol-
lowing alternative to an upstream energy tax. The energy tax
should be imposed downstream at the burner tip for natural gas or
at the retail electric meter. This collection point would eliminate
the passthrough problems for utilities and IPPs alike.

If a retail t£ix is not acceptable, the tax should be imposed on the
utiUty which purchases power from an IPP and collected at the
point where the IPP-generated electricity goes into the grid.

The tax would be based on the Btu content and the tax rate of
the fiiel used to produce the electricity sold by the IPP to the util-

801

ity. NIEP believes this approach to the energy tax better serves the
national policy objectives.

For example, the NIEP proposal meets the revenues goals of the
administration. We are not asking for an exemption but rather a
change on where the tax is imposed.

With respect to conservation, the NIEP proposal aims to levy the
tax at the point where the level of fuel consumption is decided. A
tax on IPP's will not reduce fuel consumption because IPPs are by
contract obligated to dehver power. In turn, utilities have an obli-
gation to serve their ratepayers and therefore must meet retail de-
mand for power.

For this reason, utilities and IPP's both should be assured of the
right to pass taxes through to the retail customer who controls de-
mand.

And finally, regarding the goal of administrative ease, NIEPs
proposal that utilities collect the tax at the retail meter or pass it
through places the tax administration burden on sophisticated tax
collectors accustomed to playing this role for State and local gov-
ernments.

In summary, the proposed downstream tax collection point will
result in a more efficient and fair tax. It ensures that fossil fuels
used to produce electricity will be taxed, does not jeopardize the
economic survival of the IPP industry, and it reduces the number
of taxpayers and gives the responsibility for tax collection to the
most sophisticated member of the industry.

Thank you.

[The prepared statement follows:]

802

TESTIMONY OF ELLEN S. ROY
National Independent Energy Producers

I. THE NATIONAL INDEPENDENT ENERGY PRODUCERS

The National Independent Energy Producers ("NIEP") is pleased to submit this
testimony on proposals for a broad-based energy tax as part of the President's deficit reduction
package. NIEP is an association of companies that generate electricity for sale to utilities and
develop cogeneration projects for a variety of users. NIEP membership is comprised of both
publicly-traded and privately-held corporations which represent a broad spectrum of fossil fuel-
fired and renewable technologies, including hydro, biomass, pumped storage, geothermal, wood
and waste-to-energy plants, as well as oil, gas and coal-fired generation and wholesale
generation facilities. Our members sell power at wholesale to utilities on the basis of long-term
contracts. We do not have captive ratepayers and do not build ratc-ba.scd, cost-of-service,
powerplants.

NIEP is committed to increasing competition in electric power generation markets.
Independent energy has grown out of the entrepreneurial and competitive climate fostered by
the Public Utility Regulatory Policies Act of 1978 (PURPA). This competition brings efficiently
priced power to the nation's consumers.

Since this 1978 legislation opened the door for competitive power, independent electric
producers have expanded non-utility capacity to more than 43,000 megawatts of capacity -
equivalent to over 40 large power plants. In addition, this new industry has supplied over 50
percent of all new electric capacity since 1989. This industry relics on stale-of-thc-art, highly
fuel efficient and clean power production technologies. To date, more than $40 billion has been
invested in the independent power industry, producing approximately $10 billion in power sales
revenue annually.

II. THE IMPACT OF THE PROPOSED ENERGY TAX ON INDEPENDENT
ELECTRICITY PRODUCERS

Independent power producers are concerned that the energy tax, as originally proposed
by the Administration in February, may unfairly disadvantage the cleanest, most efficient, and
most competitive sector of the electric generating industry. Unlike regulated electric utilities
which can, in most cases, pass costs on to captive ratepayers, many electric generators, such as
independent power producers and utilities who engage in long-term firm wholesale electricity
sales, do so under contracts that do not permit the seller to pass through increases in taxes to
the ultimate consumer. Under the Administration's proposed upstream energy tax, these
contract suppliers may have to absorb the tax, jeopardizing their financing and the economic
viability of their plants. Equally important is the effect which this tax design would have on
competition in electric power markets. Wholesale generators of electricity, such as independent
power producers, compete with traditional cost-of-service plants for the right to build new
electric capacity. If independent power producers with long-term contracts are placed at a
disadvantage relative to their utility competitors by virtue of the independents' inability to pass
through the tax to the ultimate consumer, competition will be tilted in favor of utilities.
Consumers may then be denied some of the benefits of competition in electric power markets.-'

The contracts between wholesale electric generators and their utility customers often
have terms of 20 years or longer and cover both fixed costs (capacity payments) and variable
costs (energy and operations and maintenance). A 1992 survey by NIEP of existing power sales
agreements between independent generators and utilities found that none of these contracts
contained provisions permitting the independent generator to pass through to the utility
increased costs due to changes in law, including taxes.^ The ability of a wholesale electric
supplier to pass through a fuel tax depends on the nature of the contract energy payment

In enacting the electricity provisions of the National [energy Policy Act of 1992. Congress strongly endor^d
the Ixneflts of competition in electric power maiiccls tjy removing barriers to entry caused by the Put>lic
Utility Holding Company Act and opening access for wholesale suppliers to electric transmission facilities.

By contrast, electric utOities are entitled to recover from their ratepayers all prudent costs related to
changes in law or regulation. In many states, utilities have automatic fuel adjustment clauses which allow
price increases attributed to taxes to be passed through and, in the remaining states, can routinely seek
regulatory approval for reimbursement from their ratepayers.

803

provision.* In cases where the energy payment is based on fuel market indices which may be
affected by the tax, some limited pass through may occur, but full recovery of taxes paid is
unlikely.

III. NIEP'S PROPOSAL FOR A FAIR AND EFFICIENT ENERGY TAX

NIEP believes the key to developing a fair energy tax is its collection point, the place in
the stream of commerce the tax is imposed. In the Administration's February proposal, the tax
is to be collected upstream at the minemouth for coal, the entry into the refinery for oil, the
pipeline for natural gas, the production facility for alcohol fuels, point of importation for
imported power and petroleum products, and the utility for hydro and nuclear-generated
electricity. Under this design, the seller of gas, coal, oil and other non-exempt fuels would
collect the tax from the wholesale generators at the point of sale before the fuel is used to
produce electricity. As noted above, NIEP believes that a tax in this form will have the
unintended consequences of damaging the economic viability and competitive position of the
independent power industry.

NIEP recommends that the tax be imposed downstream at the burner tip (retail
consumption point for natural gas) or retail electric meter. TTiis collection point would eliminate
pass-through problems for utilities and wholesale generators alike.

Alternatively, the tax should be imposed on the utility purchasing electricity at wholesale
either at the busbar (where electricity goes from the generation station to the grid, after the
point of sale to the utility) or the substation (where the high voltage transmission lines deliver
energy which is stepped down to distribution voltages for retail sale). The tax would be based
on the Btu content of the fuel mix in the utility purchase.

NIEP believes that this downstream collection proposal better serves the stated
objectives of the Administration in proposing the tax. The following objectives have been cited
by Administration offlcials as guiding the design of the energy tax:

1. The tax must increase revenues by $71.4 billion over the 1994-1998
period, or about $22 billion per year by 1998.

2. The tax should have a reasonably balanced impact on different regions of the
country.

3. The tax should be easy to administer.

4. The tax should reduce dependence on foreign sources of energy.

5. The tax should reduce environmental damage and promote energy conservation.

NIEP suggests that the design of the tax should reflect three additional principles:
1. The tax should keep interference with energy markets to a minimum;

Energy payments may be:

fixed over the lemi of the contract based on administralive dclcraiinalion of long range
avoided costs (no pass-through permitted);

adjusted from a t>ase to reflect a general economic index, such as inflation (partial pass-through
only to the limited extent that a lax related rise in fuel costs alTecls the Consumer Price Index, a
general measure of inflation):

adjusted from a t>asc to reflect energy market conditions and/or purchasing utililys cost of fuel
(pass-through occun to the extent that fuel indices and ulUily's o«m cost of fuel reflect tax; it is
unlikely that wholesale generators would recover one hundred percent of taxes paid); and

in ceruin contracts, such as California Standard ofTer contracls. indexed to reflect market
conditions by a mechanism established by stale regulatory commission rule or policy (pass-through
contmgent on obuining commission approval for recovery of lax related costs: even if approval
given, major delay may be invohwd).

804

2. The tax should not create winners and losers within the electricity industry; and

3. The tax should not create disincentives for energy efficiency.

IV. NlEP's PROPOSAL COMPORTS WITH THE GOALS OF THE ENERGY TAX

NIEP's proposal for a downstream collection point either at the burner tip/retail meter
or busbar/substation would better serve these objectives than the Administration's upstream
proposal:

A. Ease of Administration

There are approximately 3000 electric utilities with retail distribution franchises in the
United States. Most of these regulated utilities already collect taxes for state and local
governments. They are also accustomed to being regulated on a cost accounting basis. The
most efficient way to collect the tax is to have it imposed on the retail ratepayer at his electric
meter and collected by the utility. If instead, the tax is be to imposed on the purchasing utility
at the busbar or substation, steps should be taken to insure that utilities can pass the tax
through to ratepayers. Utility fuel adjustment clauses allow regulated utilities, but not
independents and other wholesale generators, to pass Btu taxes through to ratepayers. Because
of their obligation to serve, regulated utilities are entitled, under state law, to recover from their
customers all prudently incurred costs, including taxes. All but six states have fuel adjustment
clauses. These clauses, introduced in the 1970s during the period of highly volatile fuel prices,
allow utilities to quickly adjust rates to assure fuel cost recovery rather than wait for a periodic
rate proceeding. However, many of the fuel adjustment clauses have caps on the amount of
adjustment permitted annually. Some utilities may, therefore, not be able to recover all tax
payments unless normalization rules or other measures are adopted by the Congress to assure
full pass-through. We endorse efforts to assure that utilities can recover the tax from their
ratepayers.

B. Conservation

If one goal of the tax is to create incentives to conserve energy, the entity which pays the
tax should also be the one that controls the consumption of fuel. A tax imposed on wholesale
generators will not reduce consumption because they arc required by contract to deliver power
on demand from their utility purchasers. It is the purchasing utility which determines which
generating unit on their system will be dispatched. The utility also has an obligation to serve its
ratepayers by meeting their demand for electricity. A retail tax or a tax on the utility with
assured pass-through to retail customers is more likely to change retail consumption patterns to
promote energy conservation.

Policymakers are usually strongly opposed to placing any tax at the retail level for
several reasons:

• Visibility. Consumers will be upset if a new tax item is added to their electricity
bill; and,

• Ease of administration, both the ability to enforce collection and the desire to
minimize the number of people paying the tax. Although, utilities generally are
efficient tax and bill collectors.

However, the energy tax is hardly the stealth bomber of the President's comprehensive
deficit reduction plan. Moreover, utilities generally do not, or need not, break-out specific cost
items, including taxes, on retail customer bills. In announcing the tax. President Clinton called
on all sectors of society to sacrifice. In addition, Secretary Bcntscn has been explicit in his
public statements about the consumer impact of the energy tax.

C. Minimize Interference in Markets

The downstream collection point for the tax on electricity fuels would minimize
disruption of competition by avoiding the creation of winners and losers in the electric
generation market. Since wholesale generators and traditional cost-of-service facilities will be
treated the same with regard to pass-through of the tax, the tax will not interfere with

805

competition between independent power producers and traditional utilities over the right to
build new facilities.

D. Revenue Impact

We note that the downstream collection point may result in a loss of projected revenues
from the tax because of losses of energy as collection moves down the stream of commerce. We
recognize that it may be necessary to adjust the Btu tax rate to make up significant losses in
revenue, consistent with the goal of deficit reduction.

V. OTHER PASS-THROUGH OPTIONS

Several other options for dealing with the pass-through problem have been considered:

* "Grandfather" existing contracts of wholesale producers with terms greater than
one year by exempting fuel used in such facilities from the tax. While this
proposal would prevent flnancial hardship to existing facilities and likely have
minimal revenue impacts, it may give new utility cost-of-scrvice plants with
automatic tax pass-through a competitive advantage over contract suppliers who
compete with them for the right to build new capacity but must bargain for the
right to pass-through fuel taxes.

* Give wholesale generators a tax credit or rebate for taxes paid on fuel. This
proposal exempts such fuel from tax all together, is expensive to administer, and
sets a bad precedent for other industries which could "snowball" into substantial
revenue impacts.

* Defer collection of the lax on fuel used for generation of electricity subject to
long-term contracts - have the tax collected by the purchasing utility at the
busbar or substation. If the decision is made to have an upstream imposition of
the tax, this is NIEP's preferred solution to the pass-through problem. It has the
disadvantage of somewhat cumbersome tax deferral certificates or rebates. It
also does not deal with the problem of fuel lost, in tran.sp<irtation or otherwise,
between the point of imposition and point of combustion, or los.scs of electricity
resulting from transmission from the generating plant to the substation.

VI. WHY PASS-THROUGH FOR FUTURE PROJECTS IS IMPORTANT

Pass-through of energy taxes for future as well as existing IPP projects is important to
the future of the independent power industry. At first glance, this may not appear necessary.
Unlike existing facilities locked into long term contracts, developers of future projects may
negotiate new contracts which theoretically could take the possibility of future tax increases into
account. In short, it would appear that IPPs should be able to negotiate an agreement with
utility buyers to include the cost of the fuel tax in the contractual payments. However, that is
not always the case, and the inability to pass the tax through for new contracts could undermine
competition in electric power markets.

Because fuel costs are 80-90 percent of a fossil fucl-fired cogcncration facility's variable
costs, IPPs may have difficulty financing their plants if they must bear the risk of future tax
increases on fuel. This will be especially true in the future if the precedent for energy taxes is
established in 1993. At the same time, contractual mechanisms to recover the tax may not be
available. Utilities which purchase electricity from IPPs may be very reluctant to assume the tax
risks through some form of contract pass-through provision without assurance in advance that
their regulatory commissions will allow them to recover the costs of tax payments. State
regulators, on the other hand, have typically resisted any advance approval of contract terms
which bind future commissions.

This uncertainty may create an artificial incentive for utilities to build rather than buy
new capacity, thereby undermining the competitive market for wholesale power. If a utility
builds its own facility on a cost-of-service basis, it has a high probability of being able to pass
energy taxes through to ratepayers along with other "prudently incurred" co.sts cither through a
fuel adjustment clause or in a rate proceeding. Of course it is possible that state regulatory

commissions will insist that fuel taxes be treated the same, whether ineurred by IPPs or utilities,
but there is no guarantee that will happen.

For this reason, one cannot simply say that the tax risk is just another negotiating point
and that utilities will agree to pass-through if they get enough in return for carrying this risk.
This would be true in a perfectly competitive market but that is not real world for IPPs. Even
in states with commission-sanctioned competitive bidding, electric utilities compete with IPPs for
the right to build new capacity. If the ability to pa.ss-through taxes is greater for electric utilities
than for IPPs, competition may be tilted against IPPs in favor of the cost-of-scrvice facilities.

The best solution for this problem is either to have the tax imposed on electricity fuels
at the retail level or to include in the tax legislation a federal mandate that utilities be allowed
to pass through such taxes in their fuel adjustment clauses or other cost recovery mechanism.
In any case, it makes .sense for the IPP pass-through provision now being considered by the
Treasury to apply to future as well as existing facilities.

Allowing the tax pa.ss-through provision to apply to future as well as existing facilities
does not add to IRS's administrative burden. Utilities could continue to collect the tax at the
recommended collection point in the future under the system already established for existing
facilities.

Finally, we should pwint out that there is precedent in the Clean Air Act Amendments
of 1990 for giving IPPs prospective as well as retrospective relief in order to ensure fair
competition between utilities and IPPs. In the original acid rain proposal submitted to
Congress, IPPs were not allocated sulfur dioxide (SO,) emission allowances, but were required
to hold allowances equal to their emissions. By contrast, utilities were allocated sufficient
emission allowances to comply with new standards. Congress recognized that this created an
inequity which would harm the emerging competitive electricity markets. To ensure
retrospective relief. Congress "grandfathered" existing IPP contracts. In addition, to put new
IPPs and new utility plants on a equal footing. Congress created sources of allowances for IPPs
to enable them to compete fairly with utilities.

VII. TREATMENT OF FUEL USED TO GENERATE STEAM

Cogcneration facilities produce energy in the form of electricity and steam. Since
passage of the Public Utility Regulatory Policies Act of 1978 (PURPA), Congress has favored
cogcneration as a means of capturing waste heat from combustion of fossil fuels, converting It to
steam, and using it to provide heating and cooling to adjoining Industrial customer and/or to
generate additional electricity through steam turbines. The thermal efficiency of such facilities
is much greater than would be the case if the waste heat from the production of cither steam or
electricity were simply vented into the air. As Vice President Gore noted in Eauli in the
Balance, "Laws encouraging and even requiring the efficient use of cogcneration technology
have an important role to play in reducing the consumption of fossil fuels." (p. 329).

The impact of the proposed energy tax on steam sales by cogcneration facilities was not
specifically addressed in the Treasury proposal of February 17th. However, we believe that not
only should the tax be neutral with respect to the economic Incentives to cogencrate, but in
keeping with the Administration's policy goals in designing the tax, encourage cogcneration.

The Treasury proposal would tax the Btu content of fossil fuels, not electricity or steam
per se. If IPPs, as purchasers of fuel, cannot pass through the ta.xes levied on these fuels
upstream to the buyers of their electricity and steam, the financial viability of some projects may
be impaired. In cogcneration facilities where steam is produced only to the extent necessary to
qualify under PURPA, the lack of ability to pass tax related fuel costs through to the steam
purchaser may not pose a problem if the IPP can pass through such costs to its electricity
purchaser. On the other hand, if the steam produced by the ci)gcncra(or exceeds the minimum
waste heat threshold, the utility purcha.ser of the IPP's electricity would nol be willing to pay_^
taxes on fuel used to produce steam rather than electricity. ^T-^*

807

With respect to the tax treatment of the fuel used to generate steam in a cogeneration
facility, we propose the following:

• In keeping with existing federal incentives for energy efficient cogeneration, the
fuel attributed to steam output for a qualified cogeneration facility should not be
taxed. If that alternative is unacceptable, at a minimum, the tax should apply
only to fuel used to produce steam above the PURPA-minimum five percent of
total energy output.

• For purpose of measurement and allocation of the tax between fuel used to
produce steam and electricity in a qualifying cogeneration facility, the tax should
be calculated assuming a one-hundred percent conversion efficiency for steam.
Therefore, under our proposal, the total Btu value of the steam produced would
be subtracted from the total Btu of fuel consumed at the facility. The electricity
purchaser would pay the tax based on the remaining Btus.

VIII. EXEMPTIONS FOR NON-CONVENTIONAL FUELS

The Administration proposes to exclude certain "non-conventional" fuels from the Btu
tax, including solar, geothermal, biomass, wind or other fuels. It has been suggested that certain
other fuels should be considered "non-conventional" fuels, including waste fossil fuels used for
the generation of electricity, such as waste coal and petroleum coke. While NIEP takes no
position on tax exemption for individual fuels, the following data may be helpful.

A. Exemptions for Waste Fuels

In its regulation of qualifying facilities under PURPA, the Federal Energy Regulatory
Commission ("FERC") defines waste as "an energy source that has essentially no commercial
value." Because the Btu content of waste coal is low compared to gas, oil and even
conventional coal, a greater volume of it is required to produce a kwh of electricity. A Btu tax,
when imposed on a low Btu, low value fuel, has a dispropwrtionate impact on the price of
electricity produced from such fuel. This raises the question whether taxing such sources at the
same rate as conventional coal or oil puts an unfair burden on the user.

By including waste fuels in the definition of qualifying small power production facilities
under PURPA, Congress sought to encourage the use of these resources for many of the same
public policy reasons that the Administration proposed to exempt "non-conventional" fuels ~
that is, promoting energy efficiency, reducing dependence on foreign energy sources and
improving the environment. In 1990, Congress reinforced its preference for such fuels by
removing size limits on these technologies originally imposed by PURPA.

For example, recent developments in technology over the past few decades have made it
possible to use waste coal as a fuel to generate electricity and steam. About three billion tons
of waste coal sit on land adjacent to current and former coal mines. These piles, many of which
have been abandoned for decades, pose environmental hazards because they leach acid into
groundwater, blow dust into the air, catch on fire or slide down into roads. Despite these
hazards, the companies which own them and are still in business cannot afford to clean up these
areas. Rather than eventually forcing a state or local government to foot the bill for clean-up,
waste coal can be used as a fuel for electricity and steam generation.

Other waste technologies, such petroleum coke, a by-product of petroleum refining,
when used as generating fuels, may provide additional economic benefits to a region and result
in the more efficient use of domestic oil. Also, these combustion technologies must meet the
strictest new source standards for their emissions.

The decision whether to provide an exemption of waste fuels from the proposed Btu tax
or other relief for low Btu waste fuels will depend on an assessment of the net societal
environmental and economic benefits from using waste coal or petroleum coke to generate
electricity.

808

B. Elimination of Double Taxation of Energy Storaee Techniiliiiiies

Energy storage technologies, such as hydroelectric pumped storage and compressed air
energy storage, represent a unique resource by consuming low-value surplus power during
fjeriods of low demand to store energy for use during periods of high demand. More than
20,000 MWs of energy storage are now in various stages of planning and development by
independent power producers, utilities and public agencies. Under the current Administration
proposal, electricity generated from energy storage would be subject to a direct double-level tax.

A tax would be imposed on the fuel used to generate the electricity used to store energy.
An additional tax would be imposed on the hydropowcr used to generate electricity from the
energy storage facility.

Energy storage facilities compete directly to produce peaking pt)wer with technologies
such as gas turbines. In the case of gas turbines, the natural gas burned to generate electricity
would be taxed, but not the electricity produced. To double tax energy storage would place it at
a comf>etitive disadvantage relative to other peaking resources. In addition, in some cases, the
tax could disadvantage independent energy storage facilities relative to utility-owned facilities.

Therefore, we believe it would be appropriate to exclude the electricity generated from
energy storage facilities from the Btu tax. The tax would continue to be imposed on the fuel
used to produce the electricity used for storage.

IX. CONCLUSION

The proposed downstream tax collection point best serves the Administration's stated
objectives for the energy tax. It ensures that all fossil fuels used to produce electricity will be
taxed. It docs not give eost-of-serviee facilities with pass-through capability a competitive
advantage over contract suppliers. It reduces the number of taxpayers and gives the
responsibility for tax collection to the most .sophisticated entity in the electricity stream of
commerce. And further, it advances energy conservation by ensuring that those entities with the
discretion to control energy consumption - utilities which control dispatch of contract
generators and ratepayers who control demand for power -- eillier collect or pay the tax.

809

Mr. Payne. Thank you very much.
Mr. Sabourin.

STATEMENT OF DENNIS M. SABOURIN, VICE PRESIDENT,
POSTCONSUMER PROCUREMENT AND RECYCLING INDUS-
TRY AFFAIRS, WELLMAN, INC., SHREWSBURY, NJ, AND
CHAIRMAN OF THE BOARD, ASSOCIATION OF
POSTCONSUMER PLASTICS RECYCLERS

Mr, Sabourin. Good afternoon, Mr. Chairman. I would like to
thank you for the opportunity to be with you today.

I am a corporate vice president with Wellman, Inc., and I am
also a chgdrman of the board of the Association of Postconsumer
Plastics Recyclers, which is an industry organization formed in
1992.

My purpose in speaking with you this afternoon is to offer
Wellman's thoughts about the President's economic plan and spe-
cifically on the advantage of and necessity for investment tax cred-
its for the recycling industry.

Additionally, I would like to comment on energy taxes and how
energy taxes affect those experiencing off-shore competitive threats.

Wellman is a Fortune 500 company with sales in excess of $820
million in 1992. We employ about 3,500 people both in the United
States and Europe, and we are the largest recycler of PET soda
bottles in the United States. In fact, in 1991 Wellman recycled
more than 1.5 billion soda bottles and this material was utilized to
make textile, fiber, and extruded sheet film which is used in a
number of consumer products.

An investment tax credit for green companies that would divert
recyclable materials from expensive and disappearing landfills is
necessary and needed in order to expand the recycling industry.

This expansion will do three important things for the U.S. econ-
omy: First, conserve energy and natural resources; second, develop
much needed solid waste and recycling infi*astructure; and third,
create jobs.

As chairman of the Association of Postconsumer Plastic Recy-
clers, I am able to interface with a wide range of entrepreneurs and
entrepreneurial businesses involved with the recycling of
postconsumer plastics. The APR is made up of 66 members, all of
whom have dedicated assets in the recycling of postconsumer plas-
tics. This industry is faced with difficult and challenging competi-
tive factors.

An investment tax credit for the reclamation industry would pro-
mote the expenditure of necessary funds to purchase sorting and
reclamation equipment and make this industry more price competi-
tive.

Waste management programs have traditionally been locally and
State managed. Because of limited municipal budgets, ownership of
MRFs, Municipal Recycling Facihties, have been transitioning
from publicly financed to privately financed enterprises. An invest-
ment tax credit for green companies would give a boost to private-
sector ownership and development of a soUd waste management in-
fi-astructure.

An important element of the recycling infi-astructure industry is
job creation. MRF's, municipal recycling facilities, are normally

810

built in high population areas where there is a preponderance of
municipal solid waste. It is in those same areas that there is usu-
ally an acute job shortage.

The unskilled laborers that are used in MRFs, who work in a
safe, clean environment, are often an opportunity for individuad
rapid upward mobihty. Wellman owns MRFs through its CRInc. fa-
cility and we have several examples of unskilled labor who we have
hired who have transitioned into management positions.

Now, initial reports indicate that the new administration direc-
tion for investment tax credits appear to favor small industry. We
feel that this concept should be expanded to include green indus-
tries as well. This is particularly true where green industries work
with municipalities who require guarantees, bonding, and reference
plants not available to or possessed by small businesses. The devel-
opment of green industries which could be affected by fostering an
ITC should be allowed for both small industries and large as well.

Wellman understands the need for an energy tax as a deficit re-
duction measure. We feel, however, that an energy tax placed only
on domestic industry would result in an luilevel playing field. We
feel that imported materials which compete with domestically man-
ufactured products should cetrry the same financial burden.

We suggest that an assessment be placed on imported materials
that woiSd be equivalent to the energy imposed on domestically
manufactured materials. This levy would be considered an environ-
mental tax or environmental levy, if you will, and this assessment
coiild either be used as a deficit reduction measure or could be used
to fiind programs for world ecological initiatives.

In conclusion, I would like to agEun thank you for your time and
inspiration. We strongly support the implementation of an invest-
ment tax credit for green companies as well as an energy tax that
would not be discriminatory to domestic manufactured businesss.

[The prepared statement follows:]

811

TESTIMONY OF DENNIS M. SABOURIN
Association of Postconsumer Plastics Recyclers

Mr. Chairman, Members of the Committee, thanl< you for the opportunity to
discuss the President's economic plan, investment tax credits, and the proposed
energy tax. My name is Dennis Sabourin; I am a Corporate Vice President with
Wellman, Inc. Wellman is the largest recycler of PET soda bottles in the United
States. My specific area of responsibility is the procurement of postconsumer plastic
recyclables and recycling industry affairs. I am also Chairman of the Board of the
Association of Postconsumer Plastics Recyclers (APR). This organization was formed
in 1992. In order to be a member of the APR, a company must have dedicated
assets in the reclamation of postconsumer plastic materials.

My purpose in speaking to you this moming is to offer Wellman's thoughts
eibout the President's economic plan, and specifically on the advantage of and
necessity for investment tax credits for the recycling industry. Additionally, I will
comment on energy taxes and how energy taxes affect those experiencing offshore
competitive threats. The plan encompasses the overall theme of increasing public
emd private investment in order to provide more productive, higher-paying jobs and
greater economic opportunities. A plan of this nature which devotes itself to
modernizing factories and equipment, developing sl<ills, and accelerating the
advancement of technology is imperative in today's environment. The need to
increase investment motivates all three elements of the Clinton economic plan:
stimulus, investment, and deficit reduction.

Wellman is a Fortune 500 company with sales in excess of $828 million in
1992. Wellman employs more than 3,500 people in the United States and Europe.
Wellman's divisions are involved in the manufacture of polyester and nylon fiber both
from recycled and chemical-based products, the processing of wool fleece, the
manufacture of non-woven polyester products, the manufacture of engineering resins,
the manufacture of polyester sheet extruded film which is used in the thermoforming
industry, and the CRInc. Division which designs, builds, and operates Material
Recovery Facilities (MRFs). Wellman is both a user of industrial recyclables and
postconsumer plastic recyclables.

In 1992, Wellman recycled more than 1.5 billion soda bottles. The PET
recycled from these bottles was used in the manufacture of fiber products and PET
sheet. Wellman markets this high-queility polyester staple fiber under the brand name
Fortrel Ecospun. Examples of some of the products manufactured with Wellman fiber
are carpeting; fiberfill for pillows, comforters, fumiture; fleece fabric for outerwear and
sports eippeU'el; geotextile products for highway construction projects and leindfill
liners; and many other needed products. You know our thermoformed products as
the scoop in the laundry detergent box. Every pound of PET bottle that was recycled
displaced a pound of virgin chemical material. Wellman wishes to expand its
reclamation facility to enable it to recycle more postconsumer plastics.

SUPPORT FOR INVESTMENT TAX CREDIT

The President's plan proposes major additions to ongoing activities that
expand America's capacity to produce and provide more opportunities for current
and future workers. Its intent is to help shape and expand the nation's infrastructure
and the recycling infrastructure must be a key element.

An investment tax credit for "green" compeinies that would divert recyclable
malerials from expensive and disappearing landfills is necessary and needed in order
to expand the recycling industry. This expansion will do three important things for
the U.S. economy. It will 1) conserve energy/natural resources, 2) develop much
needed solid waste/recycling infrastructure, and 3) create jobs.

812

CONSERVE ENERGY/NATURAL RESOURCES

As Wellman recycles more pleistic bottles, it will displace more and more virgin
chemically-derived materials. We must not lose sight of the fact that energy
independence is important to the future of our nation. Reclamation of postconsumer
products is an importemt part of energy conservation and self-sufficiency.

SOUP WASTE/RECYCUNG INFRASTRUCTURE DEVELOPMENT

As Chairman of the Association of Postconsumer Plastics Recyclers, I am able
to interface with a wide rewnge of entrepreneurs and entrepreneurial businesses
involved in the recycling of postconsumer plastics. The APR is made up of 66
members, all of whom have dedicated eissets in the recycling of postconsumer
plastics. This industry is faced with difficult and challenging competitive factors.

Postconsumer plastics are most usually available in the waste stream in mixed
form (i.e., a number of different kinds of plastics being collected at the same time).
In order to separate these plastics into their component types eind ready them for use
as industrial feedstocks, it is necessary to employ expensive sorting technology. An
investment tax credit for the reclamation industry would promote the expenditure of
the necessary funds to purchase sorting and reclamation equipment and make this
industry more price competitive.

Waste management programs have traditionally been locally or state managed.
In the past, municipal material recovery facilities (or MRFs) and construction and
demolition waste recovery facilities have been publicly owned. Because of limited
municipetl budgets, ownership of MRP's and construction and demolition waste
recovery facilities has been transitioning from publicly financed to privately financed
facilities. Local and state governments continue to look to the private sector for
expansion of waste meinagement facilities. An ITC for "green" companies would give
a tjoost to private sector ownership and development of the solid waste management
infrastructure. Additionally, an investment tax credit for municipal solid waste facilities
would encourage the investment in technologically advanced safe work environment.

JOB CREATION

An important element of the recycling infrastructure industry is its job creation.
The building of MRFs not only helps to solve the ever-present municipal solid waste
problem but it also creates jobs, professional jobs and unskilled labor positions in
inner-city, hard-core unemployment areas. As an example, MRFs that have been
built by CRInc, a Wellman environmental company, have created more than 300 jobs
over the leist four years. MRFs are normally built in high population areas where
there is a preponderance of municipal solid waste. It is in those same areas that
there is usually an acute job shortage. The unskilled laborers used in MRFs work in
a safe, clean environment and are offered opportunities for individual rapid upward
mobility. There are several examples within the CRInc. organization where individuals
were hired as unskilled labor eind have transitioned to management positions.

ITC. NOT JUST FOR SMALL BUSINESS

Initial reports on the new administration's direction for investment tax credits
appear to favor only small industry. We feel that this concept should be expanded
to include "green" industries as well. This is particularly true where "green" industries
work with municipalities who require guarantees, bonding, and reference plants not
avEiilcible to or possessed by small businesses. The development of "green"
industries, which can be effectively fostered by an ITC. requires large and small
businesses eUike.

(2)

813

COMMENTS ON ENERGY TAX

Wellman understands the need for an energy tax as a deficit reduction
measure. We feel, however, that an energy tax placed only on domestic industry
would result in an 'unlevel playing field." We feel that imported materials that will
compete with domestically manufactured products in the United States should carry
the same financial burden. We suggest that an assessment be placed on imported
material that would be equivalent to the energy tax imposed on domestically
manufactured materials. This levy would be considered an "environmental tax" or an
"environmental assessment." This assessment could be used to fund programs for
world ecological initiatives. This initiative could either be a stand-alone organization
funded by the United States or the funds tunneled to one of the existing global
environmental organizations.

CONCLUSION

1 would again like to thank you for your time and inspiration. We strongly
support the implementation of investment tax credits for "green" companies. We feel
that this will advance the U.S. economy through energy conservation, solid
waste/recycling infrastructure development, and job creation as well as an energy tax
that would not be discriminatory to U.S. domestic manufacturing businesses.

(3)

814

Mr. Payne. Thank you very much.
Dr. Lashof.

STATEMENT OF DANIEL A. LASHOF, PH.D., SENIOR SCIENTIST,
NATURAL RESOURCES DEFENSE COUNCIL

Mr. Lashof. Thank you very much, Mr. Chedrman. My name is
Daniel Lashof, and I am a senior scientist with the Natural Re-
sources Defense Council.

NRDC, as well as many other major natural and environmental
organizations, strongly supports the Btu energy tax as part of the
President's economic package. Collectively, a number of organiza-
tions wrote to Chairman Rostenkowski a few weeks ago represent-
ing more than 6 miUion members expressing our support for that
tax as part of the package.

I think it is important even as this hearing focuses specifically
on the energy tax that we keep the energy tax in the context of the
package as a whole. It is only one component of it. It is a very im-
portant component, but in assessing the impacts on particular re-
gions, on industry, on consumers, it is essential to look at the pack-
age as a whole and not to pick it apart. The President made tiiat
very clear in his presentation to the coimtry and I think it is im-
portant to remember that point as we discuss the energy tax.

That having been said, we do think that the energy tax as part
of the package is very helpfiil. It makes the package a credible way
to address the deficit and restore the economic vitality of this coun-
try. And, in fact, only an energy tax designed to do double duty
fighting pollution could actually gain the support of at least some
constituents in the country.

Nobody likes to pa