On November 21, 2003, the senatorial leadership fell two votes short of gaining the required 60 votes to end a filibuster on the final comprehensive energy bill that was crafted by a House-Senate conference committee during the previous several months.

A bipartisan group of senators balked at the bill's $31.1 billion price tag and a controversial provision giving liability protection from defective-product lawsuits to producers of the fuel additive methyl tertiary butyl ether (MTBE). Although the two issues also hotly were debated in the House, that chamber passed the bill three days earlier in a 246-to-180 vote. The tax credit provisions in the pending energy bill have been, of course, the primary focus of the landfill gas (LFG) industry.

Senate Majority Leader Bill Frist (R-TN) announced that the Senate would take up the energy bill again in February 2004, by which it was expected to have cleared the Fiscal Year 2004 Omnibus Appropriations bill. That bill, which would fund the bulk of federal agencies during the current fiscal year, which began on October 1, 2003, also is controversial and could get bogged down in the Senate, delaying action on the energy bill. Apparently, during the holiday recess, the Republican leadership in both the House and the Senate began trying to muster up the two additional senatorial votes needed to overcome the filibuster of the energy bill. This is no easy task, as every promise made to change a provision in the bill to gain votes undoubtedly will result in a loss of votes.

Importantly, House Majority Leader Tom Delay (R-TX) and some senators representing oil-refining states are adamantly opposed to removing the MTBE liability provision from the bill, to the chagrin of several Republican senators from northeastern states with communities that have suffered from MTBE contamination. Democratic senators, many of whom also are opposed to the MTBE provision, have additional issues with the bill; prominent among them are the lack of a renewable portfolio standard for electric utilities and the absence of a greenhouse-gas reduction program. A rumor floating around Capitol Hill, however, suggests that the senatorial leadership has secured the additional two votes needed for cloture. But this is only a rumor.

Even more critical is the opposition to the energy bill's price tag. The bill costs almost four times more than the Bush administration originally proposed. It is possible that the senatorial leadership will be able to pressure some of the senators who voted against the bill because of its cost to switch their votes and end the filibuster. This would be a short-lived victory, however, as other senators who oppose the cost of the bill still are committed to raising a point of order that the bill violates the Budget Act. To overcome a budget point of order and allow the bill to be adopted by the Senate also requires 60 votes. It will be much harder, and perhaps impossible, for the senatorial leadership to convince Republican budget hawks to vote against the point of order.

Although the administration urged the Senate to pass the energy bill in November 2003, as of January 2004 its position on passing the bill was unclear. The administration, already facing criticism in this election year for the huge and long-term federal budget deficit facing the country, likely will avoid the risk of getting into a squabble with senatorial Republican budget hawks over the cost of the bill. Still, it appears that the administration could get the Senate to pass the energy bill if it wants it enough.

So what is the bottom line on the fate of the energy bill? As of January 2004, it simply is this: No one knows, and no one really will be able to tell until at least another month has passed. And if it provides any solace, know that whatever happens to this energy bill now is beyond the control of you and me.

If the Senate fails to pass the energy bill, the bill dies unless both the House and the Senate adopt a concurrent resolution to recommit the bill to the House-Senate conference committee. If no such resolution is adopted, there still are some actions Congress can take to save most of the text of the bill and get it enacted. The House could try to fashion a new energy bill that would be modified sufficiently to secure 60 positive votes in the Senate. Once passed by the House, the bill would be sent to the Senate for concurrence and, if approved by that chamber, to the White House for the president's signature. An alternative course of action - albeit a less-likely scenario since House Speaker Dennis Hastert (R-IL) has indicated opposition to it - is for the House to attempt to pass sections of the energy bill as separate pieces of legislation and seek concurrence from the Senate on each.

The tax provisions of the current energy bill also could be modified to reduce their overall cost and gain acceptance in the Senate. The modified tax provisions then could be attached to a final Fiscal Year 2005 Omnibus Appropriation bill that Congress likely will be forced to pass at the end of 2004. Or the tax provisions could be attached to another legislative vehicle that likely will or must be enacted this year, such as a continuing resolution to keep the federal government funded if the congressional appropriations process falters. On the other hand, these options are not limited to the tax provisions but could be utilized for any other sections in the current bill.

Energy Credit for Combined Heat and Power (CHP) System Property
The provision provides a 10% credit for the purchase of CHP property that has an electrical capacity of less than 15 MW, a mechanical energy capacity of less than 2,000 hp, or an equivalent combination of electrical and mechanical energy capacities; that produces at least 20% of its total useful energy in the form of thermal energy and at least 20% in the form of electrical or mechanical power (or a combination thereof); and the energy-efficiency percentage of which exceeds 60%. CHP property does not include that used to transport the energy source to the generating facility or that used to distribute energy produced by the facility.

Business-Related Energy Credits Allowed Against Regular and Minimum Tax
The tentative minimum tax (which, if it exceeds the regular tax, subjects the taxpayer to the alternative minimum tax) is treated as zero for purposes of determining the tax liability limitation with respect to the Section 45 credit for electricity produced from a facility (placed in service after the date of enactment) during the first four years of production, beginning on the date the facility is placed in service.

Natural-Gas Gathering Lines Treated as Seven-Year Property
A statutory seven-year recovery period and a class life of 14 years are established for natural-gas gathering lines, and there is no adjustment to the allowable amount of depreciation for purposes of computing a taxpayer's alternative minimum taxable income with respect to such property. A natural-gas gathering line is defined as any pipe, equipment, or appurtenance that is (1) determined to be a gathering line by the Federal Energy Regulatory Commission (FERC) or (2) used to deliver natural gas from the wellhead or a common point to the place where such gas first reaches a gas processing plant, an interconnection with an interstate transmission line, an interconnection with an intrastate transmission line, or a direct interconnection with a local distribution company, a gas storage facility, or an industrial consumer.

Natural-Gas Distribution Lines Treated as 15-Year Property
A statutory 15-year recovery period and a class life of 35 years are established for natural-gas distribution lines. There is no adjustment to the allowable amount of depreciation for purposes of computing a taxpayer's alternative minimum taxable income with respect to such property.

Alternative Motor-Vehicle Credit
A credit is provided for the purchase of a new alternative-fuel vehicle equal to 40% of the incremental cost of such a vehicle, plus an additional 30% if the vehicle meets certain emissions standards. The credit must not exceed $5,000-$40,000, depending on the weight of the vehicle. Alternative fuels comprise compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid fuel that is at least 85% methanol. Qualifying alternative-fuel motor vehicles operate only on qualifying alternative fuels and are incapable of operating on gasoline or diesel.

Amendments to IRC Section 45
New tax credits are given to owners of facilities that produce electricity from the combustion of municipal solid waste (MSW) or LFG. The tax credit would apply to both types of facilities if placed in service after the bill's enactment date and before January 1, 2007. The tax credit is equal to $0.01/kWh, indexed for inflation from 1992 (the value in 2003 would be $0.012/kWh) of electricity produced. The tax credits would be provided for a five-year period beginning on the date the facility first is placed in service. Any reduction in the credit by reason of grants, tax-exempt bonds, subsidized energy financing, and other credits cannot exceed 50%.

Amendments to IRC Section 29
This tax credit is renumbered as IRC Section 45K and has been extended and modified significantly for facilities producing LFG as a fuel. The extension applies to facilities placed in service after June 30, 1998, and before January 1, 2007. The tax credit would be equal to $3.00/Btu of oil-barrel equivalent sold (indexed for inflation from 2002) and is provided for a four-year period starting on January 1, 2004, or the date the facility first is placed in service, but no tax credits will be provided after December 31, 2009. The value of the tax credit is reduced by a third for facilities located at landfills that are required under the Clean Air Act to install LFG collection and control systems. In addition, the bill imposes an annual, average-daily-volume limit of 200,000 ft.³ of natural gas equivalent to the amount of LFG that can qualify for the tax credit. A qualified facility that produces LFG and uses it to generate electricity can either take the Section 45 tax credit on the electricity produced or the Section 29 tax credit on the LFG produced, but not both. The tax credit is added to the list of general business credits under IRC Section 38.

Congress clearly indicated its preference for the simplicity of providing such credits for generating electricity rather than developing LFG as a fuel. Several other tax provisions in the bill warrant attention of the LFG industry.

Unfortunately the provision allowing state and local government entities to take tax credits for producing electricity from renewable resources and trade or sell them to tax-paying entities was not adopted by the conference committee because of opposition voiced by the administration and key members of the House Committee on Ways and Means. The provision originally was contained in the senatorial version of HR 6 and was intended to provide incentives commensurate with the private sector in light of the chronic underfunding of the Renewable Energy Production Incentive (REPI) program. The REPI program provides direct payments to state and local government entities for producing electricity from renewable resources. In exchange for dropping the provision, its sponsor Senator Chuck Grassley (R-IA), chairman of the Senate Finance Committee, obtained a commitment from Senator Pete Dominici (R-NM), chairman of the conference committee and the Senate Appropriations Subcommittee for Energy and Water Development, that he will agree to provide increased funding for the REPI program in fiscal year 2005.

Several other nontax provisions in HR 6 are relevant to developers of energy projects utilizing renewable resources. The following provides a brief description of those provisions.

Renewable Energy Production Incentive
The existing federal REPI program is modified to prohibit the United States Department of Energy (DOE) from assigning more than 60% of appropriated funds in a given year to facilities that use solar, wind, geothermal, or closed-loop (dedicated energy crops) biomass technologies to generate electricity, to allow the remaining 40% to be assigned to other projects, such as LFG ones. The REPI program is extended through 2023.

Federal Purchase Requirement
A market for renewable energy is created by a requirement that the federal government use electricity produced from renewable energy in an amount not less than 3% of the total amount of electric energy it consumes in 2005-2007, not less than 5% in 2008-2010, and not less than 7.5% in 2011 and each year thereafter. The amount of renewable energy is doubled if it is produced and used on-site at a federal facility or is produced on federal lands and used at a federal facility.

Renewable Content of Motor-Vehicle Fuel
Total motor-vehicle fuel sold in the US by refiners, blenders, and importers on an annual average basis must contain specific volumes of renewable fuel: 3.1 billion gal. in 2005, increasing each year to 5.0 billion gal. in 2012. Ethanol derived from MSW or other waste materials and liquid natural gas from a biogas source, including landfills, are defined as renewable fuels. One gallon of ethanol derived from MSW is considered the equivalent of 1.5 gal. of renewable fuel. Production of motor-vehicle fuel containing renewable fuels beyond the mandated amounts allows the producer to obtain credits that may be sold and traded to entities required to meet the mandate.

The Public Utility Regulatory Policy Act of 1978's Mandatory Purchase Obligation
No electric utility will be required to enter into a new contract to purchase electric energy from small power-production facilities, such as waste-to-energy plants or LFG electric-power production facilities, if FERC finds that the facility has access to a competitive wholesale market for the sale of electricity. Existing purchase contracts are grandfathered. No electric utility will be required to purchase from a new qualifying cogeneration facility unless the facility meets the criteria for such facilities to be established by FERC. FERC also is authorized to modify the ownership limitations for qualifying small power-production and cogeneration facilities.

Pricing of Generator Interconnections to Transmission Lines
Any transmission provider may submit to FERC a plan containing the criteria for determining the entity that will be required to pay for any construction of a new generator interconnection. No costs related to the interconnection may be allocated to an electric utility if the native load customers of that utility would not have required the new generator interconnection.

Net Metering
A commercial electric consumer being served by a local utility that develops an onsite generating facility fueled by LFG or another renewable fuel is allowed to deliver electric energy generated in excess of its own needs to the utility. The utility in return must provide the consumer with a credit for each kilowatt-hour of electricity so delivered on the consumer's next electric-power bill.

Open Access by Unregulated Transmission Utilities
FERC is given authority to regulate rates, terms, and conditions for transmission service, including generator interconnections, by state or local government-owned transmission systems.

Standard Market Design
FERC's proposed Standard Electricity Market Design (SMD) rule-making is remanded to the commission for reconsideration. No final rule mandating an SMD may be issued before October 31, 2006, or take effect before December 31, 2006. Any final SMD rule issued by the commission is to be preceded by a second notice of proposed rule-making issued after the date of enactment of this act and an opportunity for public comment.

Commercial Byproducts From MSW
DOE is to establish a program to provide guarantees of loans, with maturities of 20 years or less, by private institutions for the construction of facilities for the processing and conversion of MSW into ethanol fuel and other commercial byproducts. The full faith and credit of the US is pledged to the payment of all guarantees made under the provision.

Waste-Derived-Ethanol Conversion Aid
DOE is authorized to provide grants for the building facilities that will produce MSW-derived ethanol. One hundred million dollars are authorized for appropriation for such grants in fiscal year 2004, $250 million in fiscal year 2005, and $400 million in fiscal year 2006.

Greenhouse-Gas Controls
A federal program that either mandates or seeks voluntary but robust reductions of greenhouse gases is expected to create an active market for the trading of such reductions. Reductions in methane emissions, a greenhouse gas, from LFG projects, either through flaring or beneficial use of the gas, could be sold and purchased if the federal program allows reductions of carbon dioxide or carbon dioxide-equivalent emissions from sources other than the targeted ones, most likely electric power plants, to be part of the trading scheme. Importantly, each ton of methane controlled would be equivalent to controlling 21 tons of carbon dioxide. To date, however, very little has occurred at the federal level to spur creation of such a market.

Congressional Efforts
On October 30, 2003, the Senate rejected bill S.139, the Climate Stewardship Act of 2003, by a narrow margin of 55 to 43. If passed, it would have imposed the first federally mandated limits on emissions of carbon dioxide. The legislation would have required a reduction in the nation's carbon dioxide emissions to 2000 levels by 2010 from the electricity generation, transportation fuels, industrial, and commercial economic sectors (as those terms are defined in the Inventory of US Greenhouse Gas Emissions and Sinks, prepared in compliance with the United Nations Framework Convention on Climate Change Decision 3/CP.5). The bill also would have created a market for covered companies to trade and sell pollution credits modeled after the successful acid rain trading program of the 1990 Clean Air Act. LFG projects would have benefited from a provision in the bill that allows a covered entity to meet up to 20% of its mandated reduction by submitting greenhouse-gas-emissions reductions achieved by a noncovered entity as long as that entity had registered its reductions in the National Greenhouse Gas Database. The last time the full Senate addressed greenhouse-gas emissions was in 1997 when it voted 95 to zero not to support the international Kyoto Protocol on slowing climate change.

The White House had urged senators to oppose the bill, arguing that it would increase household energy bills, increase gasoline prices, reduce the number of jobs, increase unemployment, and increase the federal deficit. During the floor debate, Senators Joe Lieberman (D-CT) and John McCain (R-AZ), the two sponsors of the bill, cited a recent study by the Massachusetts Institute of Technology that estimated the bill would cost less than $20/yr. per household and would reduce the US gross national product by a maximum of 0.01%.

Litigation Against EPA
The Environmental Protection Agency (EPA) was sued after it denied a petition on August 28, 2003, filed by plaintiff environmental groups and others in 1999, in which they sought action by EPA to control greenhouse-gas - primarily carbon dioxide - emissions from motor vehicles. The groups cited the environmental and human health effects of global warming. The environmental groups argue that Section 202 of the Clean Air Act requires EPA to regulate air pollutants from mobile sources that cause or contribute to Òair pollution that may reasonably be anticipated to endanger public health and welfare.Ó Vehicle emissions of carbon dioxide, methane, nitrous oxide, and hydrofluorocarbons account for one-third of the nation's manmade greenhouse-gas emissions. The groups contend that these emissions should be treated as pollutants under the Clean Air Act.

The agency's reason for denying the petition was that congress has not granted it clear legal authority under the act to regulate greenhouse gases for climate-change purposes. The Bush administration formally has taken the position that greenhouse-gas emissions are not the type of emissions covered by the Clean Air Act, and therefore EPA has no authority to regulate greenhouse-gas emissions.

The attorney generals of Connecticut, Massachusetts, and Maine also are committed to challenging EPA's denial of the petition and its determination that it lacks the requisite authority. Meanwhile seven other state attorneys general, led by New York's, might file a legal challenge similar to the one filed in a federal district court in California where the Sierra Club is seeking to force EPA to establish new source performance standards under the Clean Air Act that restrict carbon dioxide emissions from power plants and other industrial facilities.

The administration currently is hard at work trying to get the nation's industries to commit to concrete steps under its voluntary program to reduce the nation's greenhouse-gas emissions. The administration soon hopes to announce that memoranda of agreements (MOAs) have been reached with various sectors of industry and agriculture under which the respective sectors will agree to monitor and reduce their greenhouse-gas emissions to specific levels by target dates. The administration's voluntary program was announced by President Bush in February 2002 and is intended to cut greenhouse-gas emissions by 4.5% before 2012 and reduce the growth rate of carbon dioxide emissions by 18% within 10 years. The carbon dioxide emissions-reduction targets would be indexed periodically to the gross domestic product, increasing in times of economic growth and decreasing when the economy declines. It is hoped that the program will spur creation of a market for trading voluntary reductions in carbon dioxide and perhaps other greenhouse gases on a carbon dioxide-equivalence basis.

The current effort to forge MOAs with industry resulted from the half-hearted response by the nation's companies to EPA's latest voluntary efforts to curb greenhouse-gas emissions. Those efforts include Climate Leaders, a voluntary industry/government partnership under which companies work with EPA to evaluate their emissions and set aggressive reduction goals, and SmartWay, a partnership with the trucking and railroad industry to develop and deploy fuel-efficient technologies and practices, such as idling strategies, to achieve substantial fuel savings and emissions reductions.

Representatives of several key energy and electric utility companies, large manufacturing companies, and their respective national associations presently are negotiating with DOE on the contents of an MOA. Similar discussions are taking place between the US Department of Agriculture and the farming community that focuses on voluntary measures that would sequester carbon dioxide. It is hoped that the national trade associations will take on some of the responsibility of educating and encouraging their members to participate in the program. In addition to possible federal funding and technical assistance, if real emissions reductions were achieved, under the MOA the participating businesses would be assured that they will not be penalized for their reductions under any future mandatory greenhouse-gas regulatory scheme.

Interestingly, when it first was announced, the president's program proposed to provide $4.6 billion in tax credits over five years for development of renewable sources of energy and for private investments in new technologies that reduce greenhouse-gas emissions. That amount included $439 million for development of LFG-to-energy projects. These commitments will be eclipsed by the value of the tax credits for renewables in HR 6 if the bill becomes law.

FERC continues to pursue an independent transmission grid and independent power market operation in order to create a level playing field on which all renewable resources, such as LFG projects, distributed generation, and supply and demand resources, can compete. Recently FERC issued significant regulatory proposals that, if adopted, should facilitate development and utilization of electric power generated by LFG projects.

Standard Market Design
On July 31, 2002, FERC issued proposed rules on a standard market design for wholesale electric-energy markets, including a comprehensive plan for mitigating market power and market manipulation, Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design: Wholesale Power Market White Paper (Docket No. RM01-12-000). The proposed rules are intended to provide certainty to all market participants, encourage new infrastructure investment, promote fair competition, and prevent a repeat of the mistakes previously made in California. The proposed rules would remedy remaining undue discrimination in the use of the nation's interstate transmission grid and also provide a solid platform to ensure that wholesale markets produce just and reasonable rates for customers. Of particular importance is that the proposed SMD will complete the nationwide transition to independent transmission system operators (ISOs) and the formation of regional transmission organizations (RTOs) that would plan and arrange construction and maintenance of transmission infrastructure.

The proposed SMD rules were received with mixed reactions by the electric power industry. In particular, there is much resistance by some large, vertically integrated utilities to the requirement that they hand over control of their transmission systems to an ISO or an RTO. Those utilities played a significant role in having Congress add a provision to the pending energy bill prohibiting FERC from adopting final SMD rules before 2007.

Incentives for Efficient Operation of the Transmission Grid
On January 15, 2003, the commission sought to give guidance on transmission incentives to help encourage needed investment in transmission infrastructure and improve grid performance.

FERC's Pricing Policy for Efficient Operation and Expansion of the Transmission Grid (Docket No. PL03-1-000) includes an incentive adder for all public utilities equal to an additional 50 basis points on its return on equity for transfer of operational control of transmission assets to an RTO, an additional 150 basis points for sale of transmission assets to an entity independent of any market participant, and an additional 100 basis points for investments in new transmission facilities.

Small-Generator Interconnection Standards
FERC issued a proposed rule that sets forth standard procedures and a standard agreement for the interconnection of generators of 20 MW and smaller intended to facilitate development of needed infrastructure for the nation's electric power system (68 FR 49973, August 19, 2003). The expedited procedures for small generators will reduce interconnection time and cost, help preserve reliability, increase energy supply, and increase the number and variety of independent generators that can compete in the wholesale electricity markets. The interconnection procedures must be followed by the public utility transmission provider and an interconnection customer throughout the interconnection process. The proposed rule is one that state regulators also could use for generator interconnections under their authority.

The proposed rule includes superexpedited procedures for interconnecting precertified generators 2 MW or less to a low-voltage electric system, expedited procedures for interconnecting generators between 2 and 10 MW to a low-voltage electric system, and expedited procedures for interconnecting small generators to a high-voltage electric system - 69 kV and above - and for generators larger than 10 MW to a low-voltage electric system. The standard small-generator interconnection agreement sets out the legal rights and obligations of the parties, including cost responsibility, milestones for the project's completion, and a process for resolving disputes. The rule does not require changes to individual interconnection agreements filed with the commission prior to the effective date of a final rule.

Author ERIC P. BOCK, P.E., is a principal in the Washington, DC, law firm of Shaffer, Bock & Antonoplos.

DE - March/April 2004