[lit-ideas] backdating the price of oil (synfuel)
- From: JimKandJulieB@xxxxxxx
- To: lit-ideas@xxxxxxxxxxxxx
- Date: Wed, 1 Mar 2006 10:27:48 EST
Well, this is interesting....
Sunday, Feb. 26, 2006
A Magic Way to Make Billions
EXCLUSIVE HOW LOBBYISTS ARE PULLING OFF A SYNFUEL SCHEME WITH HELP FROM KEY
LAWMAKERS--AND YOU'LL PAY
By DONALD L. BARLETT, JAMES B. STEELE
The wording is so bland and buried so deep within a 324-page budget document
that almost no one would notice that a multibillion-dollar scam is going on.
Not the members of Congress voting for it and certainly not the taxpayers who
will get fleeced by it. And that is exactly the idea.
With Washington reeling from the Abramoff lobbying scandal and Republicans
and Democrats alike pledging to crack down on influence peddling, with one
lawmaker already gone from Capitol Hill because he traded favors for cash,
you're probably guessing this isn't the best time for members of Congress to
dispense a fortune in favors to their friends.
Guess again.
Buried in the huge budget-reconciliation bill, on which House and Senate
conferees are putting the final touches right now, are a few paragraphs that
accomplish an extraordinary feat. They roll back the price of a barrel of crude
oil to what it sold for two years ago. They create this pretend price for the
benefit of a small group of the politically well connected. You still won't
be able to buy gasoline for $1.73 per gal. as you did then, instead of today's
$2.28. You still won't be able to buy home heating oil for $1.60 per gal.,
in place of today's $2.39. But a select group of investors and companies will
walk away with billions of dollars in tax subsidies, not from oil but from
the marketing of a dubious concoction of synthetic fuel produced from coal and
dependent on government tax credits tied to the price of oil.
From 2003 through 2005, TIME estimates, the synfuel industry raked in $9
billion in tax credits. That means the lucky few collectively cut their tax
bills by that amount, which would be enough to cover a year's worth of federal
taxes for 20 million Americans who make less than $20,000 a year and pay income
taxes. How important is the tax credit to synfuel producers? In its latest
annual report, Headwaters Inc., a Utah-based purveyor of synfuel processes and
substances, says flatly, "Headwaters does not believe that production of
synthetic fuel will be profitable absent the tax credits."
To understand why Washington wants to backdate the price of oil for its
friends, it's necessary to return to the oil shocks of the 1970s, when long
lines
formed at gas stations and people dialed down the thermostats in homes and
apartments so they could afford to pay their utility bills. In 1980, Congress
enacted tax incentives that were designed to spur the development of a
synthetic-fuel industry. The goal was to build huge plants using new
technologies
that would transform raw coal, which the U.S. has in abundance, into synthetic
natural gas and oil to heat homes and factories, power cars and--here comes
the ever popular bromide--reduce U.S. dependence on foreign oil. As then
House majority leader Jim Wright, a Texas Democrat, put it at the time,
"[This]
will show Americans the nation is moving ahead. We are going to declare our
energy independence."
When oil prices fell, Washington lost interest in creating a real synfuel
industry, and the grand projects to promote energy independence came to
nothing.
But the synfuel credit remained on the books, dormant, until a group of
enterprising entrepreneurs came across it in the 1990s and saw a way to
transform coal into gold.
The coal can look and burn like regular coal. The IRS rule for transforming
coal into synfuel--and getting the tax credit--requires only that the
substance be chemically altered in some way. The alchemy that satisfies the
IRS is a
simple process: some plants spray newly mined coal with diesel fuel, pine-tar
resin, limestone, acid or other substances--a practice that industry critics
call "spray and pray." Other operators mix coal-mining waste with chemicals,
coat it with latex and blend it with untreated coal to form briquettes. (For
an earlier story on the scheme, see "The Great Energy Scam," TIME, Oct. 13,
2003.)
Once a few pioneers started reaping the tax credits, it wasn't long before
plants using various techniques sprouted next to coal-burning power plants,
which buy the so-called synfuel and use it as they would any other coal. Those
synfuel operations were a far cry from the state-of-the-art plants that
Congress had envisioned as performing a more radical transformation. Instead,
they
were flimsy facilities that could be easily dismantled and moved to other
locations.
Today about 55 such plants around the U.S. process 125 million tons of coal
or, in many cases, coal waste from an earlier mining era. For owners and
operators, the whole point isn't creating a profitable new energy resource for
the U.S.; it's about collecting the tax subsidy. Progress Energy Inc. of
Raleigh, N.C., which owns electric utilities that serve portions of the
Carolinas
and Florida, reported in a filing with the Securities and Exchange Commission
that in 2002-04 its synfuel-production losses added up to $400 million. No
problem: the company claimed $852 million in tax credits, magically
transforming a money-losing operation into a money-making business with $452
million in
profits--courtesy of the American taxpayer. And that's not all. Like other
synfuel producers, Progress Energy can't immediately use all the tax credits
it
mines because of tax-law limitations. As of Dec. 31, 2004, it was sitting on
$745 million in deferred credits that it can write off against future
earnings for years to come. And Progress Energy is not alone. Plants run by DTE
Energy Co. of Detroit generated $1.2 billion in tax credits during the same
years.
This was not what Congress had in mind in 1980 when it enacted the subsidy.
The idea was to stimulate the birth of a new industry that would make
synthetic fuel competitive with the price of conventional oil and gas. To
achieve
that end, lawmakers pegged the value of the credit to the price of crude oil.
If
oil prices were to rise above a certain level, the synfuel industry would no
longer need the credit to make a profit and the subsidy would be phased out.
As long as oil prices were below $50 per bbl., synfuel producers could claim
the full value of the credit. But in the past year, as prices have risen to
as much as $66 per bbl., anxiety has spread through the synfuel ranks that
their boondoggle is imperiled.
Tax experts differ on how high oil prices would have to go to wipe out the
full value of the credit, but most agree that if oil were to remain at recent
peak levels, or climb even higher, few synfuel operators could claim the full
credit. Citing that uncertainty, the Marriott Corp., which has invested in
four synfuel plants, temporarily suspended production in January. Before the
shutdown, Marriott had racked up $370 million in synfuel profits.
With so much at stake, the synfuelers have pumped money into a campaign to
preserve their tax break. At the center of the synfuel lobby in Washington is a
consortium called the Council for Energy Independence. It's a name worthy of
the most successful Washington lobbies, in which private interests
camouflage their mission under the banner of a worthy-sounding cause. The
council is
directed by one of Washington's premier tax lobbyists, Kenneth J. Kies,
managing director of the Clark Consulting Federal Policy Group. A former chief
of
staff of the Joint Committee on Taxation, the congressional panel that
oversees the drafting of tax laws, Kies is well situated to guide legislation
that
could be worth hundreds of millions of dollars a word.
Since 2002, the Council for Energy Independence has spent $2 million lobbying
Congress to preserve the tax credit, according to reports filed with the
Senate Office of Public Records. Overall, TIME estimates, the synfuel lobby
has
spent more than $5 million during that same period. The effort has got
results. In recent years, the lobby has successfully turned aside efforts to
revoke
the IRS rulings on which the tax credits are calculated. It beat back an
effort in the House Ways and Means Committee last year to send a bill to the
House floor that would have virtually eliminated the tax credit. The bill's
sponsor, Lloyd Doggett, a Texas Democrat, called the tax credit "one of the
worst
tax loopholes on the books" and described the synfuel industry as "basically
a sham." Nevertheless, because of industry lobbying, Doggett's bill has
never made it out of committee.
Last November the lobby scored a remarkable coup. Buried deep in a bill
called the Tax Relief Act of 2005, passed by the Senate on Nov. 18, was Section
559, titled "Modification of Credit for Producing Fuel from a Nonconventional
Source."
Section 559 begins on page 317 of the bill and is written in the obscure
jargon of all special-interest tax breaks--almost impossible to decipher, so
bewildering is its language. At first glance, it looks like nothing more than a
technical amendment to clarify some arcane section of tax law. But one clause
offers a clue. It says the synfuel credit will be based not on current oil
prices--the yardstick used in the past--but on "the amount which was in effect
for sales in calendar year 2004."
In 2004 oil prices were safely below the line to allow synfuel producers to
claim the maximum credit. The stealth amendment would roll back the calendar.
(Sort of like your missing the deadline for your mortgage payment, then
backdating your check to avoid a late charge. But much more lucrative.) The
backdating clause was in a larger bill introduced in the Senate by Charles
Grassley, the Iowa Republican who heads the Senate Finance Committee. It was
inserted in the Tax Relief Act, which provides aid for Hurricane Katrina
victims and
sets new policies for tax-exempt groups. With so many higher profile issues
at stake, the clause on synfuels sailed right through with no discussion. Many
lawmakers, if not most, don't even know it's there.
When asked about the provision's origins, Senate Finance Committee aides at
first said they did not know, only that it did not "originate" with Grassley.
One aide noted that the Senator "ultimately is responsible for everything in
[the bill], but routinely with such bills, other committee members propose
certain ideas, and he accepts them or rejects them as he sees fit."
Asked again by TIME to identify the author, the Senate Finance aide later
wrote in an e-mail, "the provision originated as an amendment from Sen. [Rick]
Santorum [a Pennsylvania Republican]. Sen. [Gordon] Smith [an Oregon
Republican] had a similar amendment co-sponsored by several other Senators,
Republicans and Democrats. Chairman Grassley accepted the Santorum amendment
... It's
routine for him to accept non-controversial provisions that way rather than
have the committee vote on each amendment ... So now the Santorum amendment is
in the bill." When contacted by TIME, Santorum's staff had no comment.
The bill is now part of Congress's budget-reconciliation process. But there
is no synfuel amendment in the House bill, meaning that it cannot become law
unless the House conferees agree to the Senate provision. Bill Thomas, the
California Republican who heads the House Ways and Means Committee, by some
accounts is not in favor of the synfuel provision, but whether he will actively
oppose it remains to be seen. There are already major differences between the
House and Senate reconciliation bills on much larger issues like Medicare, so
the odds are that synfuel may slip through again.
Another Senate supporter of the credit is Orrin Hatch of Utah, the ranking
Republican on the Finance Committee. An aide said Hatch believes the new
provision in the Senate bill "helps make the current credit work better."
Utah-based Headwaters Inc., one of the synfuel industry's most active
companies,
licenses its technology as well as sells materials to synfuel producers. "If
the
tax credits under Section 29 of the Internal Revenue Code are repealed or
adversely modified," the company said in its latest annual report, "Headwaters
Energy Services' profitability will be severely affected."
The synfuel lobby contends that the exemption from the run-up in oil prices
is necessary to create stability in the industry. "We think it is very fair
legislation," Gordon Gillette, chief financial officer of Teco Energy Inc., a
utility based in Tampa, Fla., told investment analysts last month. "It
eliminates the uncertainty that we have right now and are dealing with right
now on
oil prices."
And the synfuel lobby expects to carry the day too, largely because Congress
has bigger issues to deal with. Kirk Benson, the chairman and CEO of
Headwaters, told analysts that "in the world of Washington, D.C., what we want
to do
isn't material ... It's an afterthought."
Whatever the outcome, the battle over the provision is little more than a
warm-up for the legislative fight that will take place in 2007. That's when the
tax credit is set to expire and the industry will seek to make it permanent.
As Headwaters' Benson has told analysts, with a touch of understatement: "It
will become an intense topic in '07."With reporting by With reporting by
Jeremy Caplan, Research by Joan Levinstein
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