US energy bill faces tough sledding amid federal budget woes, scandals

Senate Minority Leader Tom Daschle, on Halliburton Co.'s recent disclosures
"The disclosure is the first firm indication of corruption involving US-funded projects in Iraq and raises new questions about Halliburton's dealings there. The company's work is already being scrutinized because of accusations that the US government was overcharged for gasoline under another controversial contract."

Halliburton Co. 's KBR unit has been roundly criticized by Democratic lawmakers for the way it managed a sole-source reconstruction contract in the days following US-led military action in Iraq. The company still is performing a wide range of services, including upgrading oil infrastructure. But the noncompetitive contract since has been replaced.

Daschle said Halliburton's recent disclosure that two of its employees were involved in a kickback scheme involving a Kuwaiti contractor is just one example of how the administration is favoring politically connected companies.

Vice Pres. Dick Cheney headed Halliburton before takng office.

"The disclosure is the first firm indication of corruption involving US-funded projects in Iraq and raises new questions about Halliburton's dealings there. The company's work is already being scrutinized because of accusations that the US government was overcharged for gasoline under another controversial contract," Daschle said.

He called the situation with Halliburton "terribly disturbing" and said it shows there are serious concerns "about the lack of scrutiny, auditing, and transparency with regard to the billions of dollars that are now being committed in Iraq."

Halliburton has defended its contract management in Iraq. And so far, no hearings have been scheduled by the Republican-led Congress in either the House or Senate.

Bush's supporters are hoping that the controversy fades by midsummer, given that the US is scheduled to hand over power in Iraq July 1. But at present, the Bush administration's Iraq policies are proving to be a liability among voters, according to recent media polls.

Energy Bill update

Congressional hearings on Halliburton may not be the only thing lawmakers are stalling on. Congressional sources and analysts are pessimistic the Senate will pass the comprehensive energy bill that cleared the House last November. Senate sponsors later fell two votes short of cloture, a parliamentary action that essentially prevents a senator from trying to talk a bill to death through a filibuster.

There is now speculation that Republican Senate leaders may have won over those two votes, but limiting debate does not necessarily mean that a bill actually can get out of the chamber.

The bill's $31 billion price tag is too expensive for both the White House and fiscal conservatives. Yet without at least some tax benefits, the political impetus to pass legislation is not as attractive to many lawmakers.

Industry, meanwhile, continues to strongly lobby lawmakers to pass some kind of bill; one version or another has been on Capitol Hill for more than 3 years.

Senate Energy and Natural Resources Committee Chairman Pete Domenici
"...Trimming the energy bill will be a simple, straightforward process. I plan to trim the cost of this bill while keeping its core provisions intact. I remain committed to passing comprehensive energy legislation through the Senate. No single provision in this bill solves our energy challenges. We need a comprehensive approach that helps us conserve energy, increase production, and diversify our fuel supplies. Anything less falls far short of the national energy policy this country urgently needs."

Seeking to address the tax issue, Senate Energy and Natural Resources Committee Chairman Pete Domenici (R-NM) cited the White House's Feb. 2 budget proposal as a reason why he would "significantly reduce" the energy bill's cost and return a leaner bill to the floor later this month.

"The budget the president sent to the Hill today is a tough one, but it reflects economic realities. It is necessary, in light of current deficit numbers, to trim spending every way that we can," Domenici said.

"After nearly 30 years on the Senate Budget Committee and my successful passage of the Balanced Budget Act, trimming the energy bill will be a simple, straightforward process. I plan to trim the cost of this bill while keeping its core provisions intact," he said. "I remain committed to passing comprehensive energy legislation through the Senate. No single provision in this bill solves our energy challenges. We need a comprehensive approach that helps us conserve energy, increase production, and diversify our fuel supplies. Anything less falls far short of the national energy policy this country urgently needs."

Domenici has not said yet where the cuts will come from. And it is unclear whether the senator's House counterparts will accept a slimmer package.

"The safe bet is to assume anything can happen," said Christine Tezak, an energy analyst with Schwab Washington Research Group in Washington, DC.

"There could be a streamlined bill, but many Republican legislators oppose pulling out the low-hanging fruit at the expense of what they feel are toughly brokered compromises on hard issues," she said in a note to clients Feb. 2.

There is also a feeling by some congressional Republicans that waiting until after the election is over makes more sense.

Their strategy makes the assumption that Republicans will gain enough seats in the Senate to later pass a bill more to the GOP leadership's liking. That could mean legislation in 2005 that includes industry-supported provisions that extend liability protection to methyl tertiary butyl ether (MTBE) producers and conditional leasing in portions of the Arctic National Wildlife Refuge coastal plain.

There is also the fear that passing a smaller bill may work in the Democrats favor, especially if it contains the ethanol-mandate provisions aimed at that traditional presidential political juggernaut, the Midwest.

Bush, already in full campaign mode, has endorsed expanding ethanol fuel use; so has every serious Democratic presidential contender.

Other options

What energy tax breaks remain in the bill could make or break a comprehensive energy bill this session. Another key issue is how Congress deals with ethanol fuels. The pending bill currently includes a clean-fuels title designed to update federal reformulated-gasoline (RFG) laws.

It removes the 2 wt % oxygen mandate for RFG so refiners would not be forced to add either MTBE or fuel ethanol to meet clean-fuel rules. It also has a key provision that includes a "renewable fuels" mandate designed to add 5 billion gal/year of ethanol to the US gasoline pool by 2012 (OGJ, Jan. 12, 2004, p. 59).

House lawmakers also want MTBE producers protected from what industry views as frivolous product liability lawsuits; an earlier Senate bill included the so-called "safe harbor" provision for just ethanol.

So far, House Republican leaders have refused to strip the MTBE provision out of pending energy legislation. Yet it is less clear if those House lawmakers, led by House Majority Leader Tom DeLay (R-Tex.), will continue to fight for the MTBE liability provision if the clean-fuels package is moved on to another bill.

At a Philadelphia strategy meeting for GOP lawmakers last month, Senate Majority Leader Bill Frist (R-Tenn.) said he would consider breaking off key provisions, such as the clean-fuels title, and attaching them to other legislation, industry lobbyists said.

One possible legislative vehicle for the ethanol title is a highway bill pending before Congress. That legislation already includes an elaborate compromise between farm interests and highway-user groups designed to protect gasoline excise tax money used for road projects.

Fuel marketers pay less taxes on ethanol-blended fuels under current law; the proposed change revises the way the federal government accounts for the lower taxes so that money earmarked for transportation is preserved.

The measure is expected to add an additional $600 million to the excise tax-supported Highway Trust Fund.

But some prominent Republican leaders say they don't want to add on an ethanol mandate to the highway proposal because it may make the measure more difficult to pass.

Another school of thought holds that the White House, through the Environmental Protection Agency, may try to be more aggressive updating clean-fuel rules without Congress's help.

In recent days EPA took steps to allow New Hampshire and Arizona marketers to sell RFG without oxygenates. Both states voluntarily opted to sell federal-specification RFG as a way to control smog.

The agency also will be revisiting a decision it made in 2001 not to allow California to waive the oxygenate requirement from RFG. Several states, including California, have decided or plan to eliminate MTBE from their gasoline supplies because of concerns over groundwater contamination. New York officials are also pressing EPA to allow a waiver.

Unlike New Hampshire and Arizona, New York and California are required to sell RFG because their smog problems are greater.

Industry views

Some industry trade groups say it is impossible to predict at this point in the congressional session what shape energy legislation may take.

"It would appear to be too close to call at this point," said John B. Walker, president and CEO of EnerVest Management Partners Ltd. Walker is the new chairman of the Independent Petroleum Association of America. "Clearly, the current focus remains on finalizing action on HR 6, and we will continue to work with congressional leadership and the administration to press for final action on the bill."

"It's difficult to say when and in what form an energy bill will pass Congress this year," a spokesperson for the American Gas Association said. "Making any change to the tax code during a time of financial belt-tightening is not an easy task; however, it seems clear to AGA that the tax-relief measures utilities are seeking ultimately will stimulate economic growth and benefit consumers."

AGA officials pointed to a tax provision that reduces the period for tax depreciation of natural gas distribution systems to 15 years from 20 years as an example of good public policy that should stay in the bill.

The provision, at an estimated value of $1.28 billion, will improve natural gas utility cash flow and accelerate construction of the new infrastructure needed to meet natural gas demand, AGA said.

"It is AGA's hope that members of Congress will strive to do what's best for consumers and the economy by passing an energy bill that includes accelerated depreciation and other measures that AGA supports to encourage domestic production of natural gas."

Other groups are more optimistic that the pending bill will pass Congress.

"We support the final House-Senate Conference Committee energy bill as a compromise package, with expressed reservations about the lack of incentives for increasing natural gas supplies and about the national mandate for ethanol use in transportation fuels," said a spokesperson for the National Petrochemical & Refiners Association. "NPRA strongly supports the bill's language providing limited liability protection for MTBE against defective product claims. We believe that there is a good chance that the pending energy bill (without changes) will obtain the additional votes needed and pass the Senate this year."

The American Petroleum Institute, meanwhile, said that while it would prefer to see Congress pass a comprehensive energy bill similar to the one that languished in the Senate last November, it will support other legislative vehicles that move an energy bill forward.

"At this point, any vehicle makes sense, and we're working hard to get a bill," said Red Cavaney, API president. "Clearly, with the current version there is a sensitivity with deficits and a feeling that the price tag of the bill may be too high."

Cavaney said there are a number of legislative options available to move energy legislation forward. But one thing industry does not want to accept is a clean-fuels title without the safe-harbor MTBE provision.

Similarly, Cavaney's counterpart in the electric utility business, Tom Kuhn of the Edison Electric Institute, said there is strong support in the energy industry to pass comprehensive national energy legislation.

"We expect the Senate to take up energy legislation again in the coming months," Kuhn said. "We are working with a broad coalition to get it across the finish line."

Kuhn said that, along with energy efficiency measures, the bill "includes extremely important measures to enhance reliability and facilitate badly needed investment in our infrastructure." He made the remarks at his annual "state of the industry" address given to the Wall Street financial community in New York City Jan. 28.

Kuhn said the bill creates a national electric reliability organization with Federal Energy Regulatory Commission oversight to enforce mandatory standards.

The measure also offers enhanced accelerated tax depreciation for transmission lines to bring the tax treatment of those investments in line with the tax treatment of other major capital expenditures.

American Petroleum Institute Pres. Red Cavaney, on US energy bill legislation
"At this point, any vehicle makes sense, and we're working hard to get a bill. Clearly, with the current version there is a sensitivity with deficits and a feeling that the price tag of the bill may be too high."

Additionally, the legislation provides federal backstop authority for siting of new transmission lines, and the repeal of the Public Utility Holding Company Act (PUHCA). Kuhn said PUHCA "is anachronistic in today's electricity markets and stands as a barrier to investment."

Beyond HR 6

Industry lobbyists spent much but not all of their time the past year on comprehensive energy legislation.

On the regulatory front, trade groups say they enjoyed some major victories, although more work needs to be done.

NPRA told OGJ that EPA rules to reform the New Source Review program and clarify its routine maintenance exclusion was an important regulatory win, although a federal court temporarily blocked EPA from moving forward with some of the changes.

NPRA said that EPA's plan "will help maintain the production of critical fuels in domestic refineries, while encouraging installation of the latest pollution control technology."

To help break future judicial logjams, NPRA called on help from federal policymakers "to explain the strong national interest in maintaining a secure supply of domestically produced transportation fuels and facility fuels such as natural gas and gas liquids. It is also very helpful to have the Bush administration or congressional support for permitting facility changes that are needed to produce cleaner fuels, which often bring significant environmental benefits to a wide-ranging area."

In the upstream arena, both API and IPAA praised the White House for pushing forward an agenda that streamlines federal permitting in resource-rich public lands.

IPAA's Walker said his members applauded actions resulting from the recommendations of the National Energy Policy effort—in particular the efforts by the administration to improve the energy permitting process in the Intermountain West. "These are actions that can be taken without new legislation and where the administration has directed considerable effort to address," he said.

Looking ahead, Walker and Cavaney again stressed that energy legislation is needed to help stop the rising tide of what they view as unnecessary lawsuits that block environmentally responsible development from taking place.

"Without new legislation, there are many routes to litigate over administration actions—challenging Resource Management Plans, challenging NEPA [National Environmental Policy Act] environmental documents, challenging leasing stipulations, challenging permit provisions," Walker said.

"To address these types of issues, the administration needs to make its decision documents current and robust as it makes decisions. Congress needs to assure that adequate funds are available; the administration needs to continue its efforts to assure that the Bureau of Land Management and other agencies are working together to address these land-management issues.

"IPAA would also suggest that Congress consider legislation that would provide the president with the authority to determine if the nation has reached an energy peril point. If such a determination were made, energy project permitting would be streamlined to assure that all substantive environmental analyses would be conducted, but most procedural requirements would be limited. This would assure that environmentally sound permits would be developed, but opportunities to litigate over procedural processes would be curtailed," Walker said.

In 2004, some of the biggest regulatory hurdles for both large and small producers likely will continue to be the federal leasing and permitting process, according to API and IPAA.

"Most federal actions will likely be litigated—in some cases antidevelopment groups are even challenging meetings between industry and government agencies if they aren't included," Walker said.

"Consequently, despite industry's best efforts to provide timely permitting information and the government's best efforts to conduct well-structured lease offerings and to process permits, the likelihood of delay remains an unrelenting threat," he said.

Other emerging regulatory issues include new requirements for Spill Prevention, Control, and Countermeasure Plans and Clean Water Act permitting requirements for the construction of oil and gas exploration and production facilities with regard to stormwater discharges.

Both provisions are currently suspended while EPA conducts further analysis, and both are being litigated.

Industry officials said the current measures present significant burdens to onshore producers unless EPA changes them significantly.

For refiners, the biggest regulatory challenge facing them in the coming year is implementing low-sulfur gasoline rules and complying with MTBE-free RFG in various markets.

Right now that includes California, Connecticut, and New York. RFG provisions will change in Baton Rouge, La., this summer and by yearend in Atlanta.

For natural gas utilities, their biggest regulatory challenge will be implementation of new regulations on pipeline integrity management.

"Those regulations established new standards for the inspection and maintenance of natural gas transmission pipelines," AGA said. "Natural gas utilities operate 55,000 miles of transmission line. A preliminary estimate by AGA places about 22,000 miles of those pipelines under the new rule. The good news for utilities and their customers is that the rule provides a variety of effective ways to achieve those standards."

AGA said that probably the largest nonoperational challenge for its member companies in 2004 will not be at the federal level but instead will be communicating at the state and local level with utility commissioners and their customers about natural gas price volatility and what measures can be adopted to dampen the impact of price spikes.