Testimony Before the Subcommittee on Select Revenue Measures
of the House Committee on Ways and Means
Hearing on the Effect of Federal Tax Laws on the Production, Supply and Conservation of Energy
June 13, 2001
Mr. Chairman, my name is Robert E. Murray. I am President and Chief Executive Officer of the Murray Energy Corporation. It is a privilege to appear here on behalf of the National Mining Association (NMA) to talk about changes that can be made in the Federal tax laws to encourage the more efficient use of coal to provide reliable and affordable electric energy for America with reduced environmental impact.
Coal comprises over 90 percent of our domestic energy reserve. It is the fuel for approximately 52 percent of the electricity that our citizens use to run our businesses and support our everyday lives. Coal is electricity. As stated in the President's May 17th report,(1) National Energy Policy: "If rising electricity demand is to be met, then coal must play a significant part." Coal, is and must continue to be, one of the cornerstones of our Nation's energy strategy.
The Murray Energy Corporation is the largest independent, family held, coal producer in the United States. The coal companies operating under Murray Energy Corporation's ownership produced over 20 million tons of coal in 2000 in five states: Ohio, Pennsylvania, Kentucky, Illinois and West Virginia. We are expanding our operations in these states and in Utah, and expect to be produce at least 30 million tons annually within the next three years.
The National Mining Association represents the producers of over 80 percent of America's coal and all of the uranium mined and processed in the United States. NMA also represents companies that produce metals and non-metals - large industrial energy consumers - as well as manufacturers of processing equipment and mining machinery and supplies, transporters, and engineering, consulting and financial institutions serving the mining industry.
Mr. Chairman my statement today will focus on three areas in which we believe changes in the Federal tax laws could enhance energy production and use: 1) the use of investment and production tax credits to accelerate commercialization of clean coal technologies both in existing and new electric power generating facilities; 2) the elimination of the alternative minimum tax; and, 3) changes in the tax code needed to encourage domestic uranium production and processing.
Accelerating the Use of Clean Coal Technologies for the Generation of Electricity.
As so well described in the National Energy Plan that President Bush released on May 17th the American economy in the 21st century will require reliable, clean and affordable electricity to keep the engine running, the lights on, and the computers humming. The Department of Energy forecasts that, by the year 2020, U.S. electricity consumption will be over 40 percent higher than today. The current electric generating fleet is not capable of meeting these new demands. As a result, a large number of new base load electric generating plants will be required to meet expanded electricity demand reliably, and at affordable prices.(2)
Today, more than one-half of U.S. electricity is generated from abundant, low cost, domestic coal. Coal can play a greater role in meeting future demands, as it constitutes more than 90 percent of United States' fossil fuel resources, enough to last more than 250 years at current consumption rates.
However, new coal based generating plants that would be capable of using this great resource are not being built. To illustrate, over 43,000 megawatts (MW) of coal capacity came on line between 1980 and the end of 1984. In the past five years, only 3,500 MW of new coal capacity have been brought on line. This is largely due to uncertainty about new environmental requirements from the U.S. Environmental Protection Agency, coupled with the risks associated with large investments as the utility industry becomes more diverse and more competitive.
The development and commercialization of more efficient and lower emitting clean coal technologies is required to meet new electricity demands while continuing to improve the environment. In the short term the challenges are two. The first challenge is to expand the use of newer, more advanced NOx and SO2 control technologies in existing plants through retrofits. While such investments are extremely costly, technologies are available to do this while improving the efficiency of fuel combustion and increasing output. The second challenge is to move new advanced clean coal technologies that have been proven at the demonstration stage to, and through, placement in the commercial marketplace.
Legislation the "National Electricity and Environmental Technology Act" (NEET) has been developed to meet this dual challenge. It is important to note that this legislation, which is pending in the Senate as S. 60, and, we expect will shortly be introduced in the House, is strongly supported by coal producers, coal based electric generators, and coal hauling railroads, along with the NMA, the Edison Electric Institute, the Association of American Railroads The National Rural Electric Cooperative Association and the American Public Power Association.
The NEET legislation has three important programs:
Not only would implementing the NEET Act result in reduced environmental impact and greater efficiencies in converting coal to electricity, it would assure that our Nation has the affordable electricity we need for continued economic growth. NEET will result in significant reductions in emissions. NOx emissions would be reduced by 741,000 tons, SO2 emissions would be reduced by over 2.5 million tons, and CO2 emissions would be reduced by nearly 12 million tons. NEET is complementary to the United States' climate change strategy outlined by President Bush on Monday. NEET is a win for the economy, a win for the environment and for the lower income Americans who pay a far higher percentage of their income for electricity then others in society.
As the subject of this hearing is specifically on changes to Federal tax code, we will limit our comments to the relevant portions of the NEET proposal. Tax changes proposed are:
1) For existing coal-fired generating units: NEET proposes to amend the Internal Revenue Code to provide a 10 percent investment tax credit on the first $100 million investment in a qualifying system of continuous emission control retrofitted on an existing coal-based generating unit. If an existing unit is repowered with a qualifying clean coal technology, NEET proposes that units under 300MW be eligible for a $0.0034/Kwhr production tax credit for the first 10 years of operation. All units must meet improved efficiency targets to qualify for any tax credit.
2) For advanced clean coal technologies installed on new generating plants: NEET proposes to amend the Internal Revenue Code to provide a 10 percent tax credit and a variable, efficiency based 10 year production tax credit for investments in advanced clean coal technologies for use in new or repowered units. Again, these technologies must meet increasingly improved design efficiency standards. The "bar" to qualify for tax credits gets higher in the out years of the program. NEET limits the amount of capacity for each technology that would qualify for credits with the understanding that, once a technology is proven commercially, tax credits are not needed to make that technology competitive.
Tradable tax credits are available for electric cooperatives and publicly owned utilities so they may also utilize the financial benefits of NEET.
It is expected that the revenue impact of the NEET proposal would be between $1.7 - $2.2 billion for the first five years and between $3.2 - $4.5 billion for the second five years. Over a 24 year period, the total revenue impact is projected to be from $8.3 - $11.2 billion.
Why are aforementioned incentives necessary? Uncertainty about new environmental requirements and electricity deregulation, coupled with the fact that only expensive retrofit technologies can achieve the more stringent emissions limits being considered for existing coal based generating facilities, have caused electric generators to delay investments in new technologies. Additionally, initial commercial deployment of new technologies entails significant technical and financial risk. These risks can be offset in part, and needed investments can be encouraged, through the tax-based incentives outlined above. Coal based generation must and will continue to play an important role in meeting new energy demands and it is important that coal generators use the most efficient and environmentally sound technologies available.
The fact that incentives are needed to encourage the use of advanced clean coal technologies is clearly seen by analyzing recently announced additions to the coal based generating fleet. Since the first of this year, companies have announced intentions to build nearly 34,000 MW of new coal fired capacity.(3)
According to the referenced RDI study, 23,000 MW will be at new sites, 9,800 MW will be in the form of expansion at existing sites and 851 MW will involve repowering at existing sites. A full 12,000 MW, or one-third of the new capacity planned, will use existing PC technologies. Only 4,000 MW will use the most advanced gasification technologies. Another 9,000 MW will use fluidized bed, and the technologies at the remaining units are unknown. This illustrates the reluctance of electric generators to take either the financial or the technical risks associated with the most advanced clean coal technologies and illustrates clearly the need for incentives to put "first and second" of a kind technologies on line. The incentives included in NEET will provide the impetus to increase the supply of electricity, improve the environment through reductions of pollutants regulated under the Clean Air Act, and reduce the amount of carbon dioxide emitted per unit of energy produced through significant increases in the efficiency of converting coal to electricity.
Tax Changes to Encourage Increases in Coal Production.
Tax policy can be a major component of energy policy as taxes affect the development and production of energy, including electricity. Several provisions of the Internal Revenue Code should be modified to address counterproductive policies previously put into place. These issues are also of significant importance to the oil and gas industry.
The corporate alternative minimum tax (AMT) should be repealed or modified. Mining is a capital-intensive business, and the AMT works a hardship on such businesses. As measured by generally accepted accounting principles, most mining companies are not profitable. In recent years, most companies have been consistently unprofitable. The fact that mining companies are required to pay the AMT, even if they have no profit, has added to the difficulty of attracting capital to maintain, expand, or construct new mines. If elimination of the AMT as provided in legislation introduced by Rep. English and other members of the Committee, is not politically or fiscally achievable in the near term, at a minimum, provisions similar to legislation advanced by Rep. Hayworth and many other members of the committee in the previous Congress should be supported to allow historical corporate AMT taxpayers, such as mining, to utilize accumulated AMT tax credits to offset prospective AMT tax liability. Legislation to effect such a change was enacted by the previous Congress, but was vetoed as part of a larger tax package by former President Clinton.
Further, mining companies should be provided the opportunity to fully expense exploration and development costs as does the oil and gas industry. The current limitations on expensing result in mining companies being forced to capitalize a percentage of their exploration and developments costs. This tax treatment serves as a disincentive to the development of new mines to meet our Nation's needs.
Modifications in the Tax Code to Assist Domestic Uranium Producers.
The United States uranium recovery industry has long been recognized as vital to United States energy independence and essential to National security. The domestic uranium industry has been found to be "not viable" by the Secretary of Energy under provisions of the Atomic Energy Act of 1954, as amended. Transfers and sale of government uranium inventories, including those related to the United States/Russian HEU Agreement and the privatization of the United States Enrichment Corporation, have had material adverse impacts on the United States uranium industry to the extent that the current spot market price of uranium is at an all time low. The unfettered introduction of government inventories has caused domestic uranium producers to either cease or curtail production.
At such time as the price of natural uranium recovers to approach a reasonable cost of production, the United States uranium industry can be competitive with foreign producers due to advances in technology. Providing assistance to the domestic uranium industry is essential to mitigate the impacts on a private industry from government disarmament policies and government transfers of excess uranium reserves. This will assure an adequate long-term supply of domestic uranium for the Nation's nuclear power program and will preclude any threat from foreign supply disruptions or price controls.
The National Mining Association supports modification of the tax code to allow domestic users of uranium products a credit for the purchase of domestic uranium products. Suggested changes are appended to my statement.
Mr. Chairman, this concludes our statement. We will be pleased to answer any questions either now or for the record.
1. "National Energy Policy,"
Report of the National Energy Policy Development Group.
2.The Energy Information Administration forecasts show that nearly 400 GW of new and replacement capacity will be required by 2020, the equivalent of 1,300 plants at 300 MW each. Some 378 MW of the needed capacity is still in the "unplanned" stage.
3. Source for this and all data in this paragraph: "New Coal-Fired Generation, A summary of Developments and Impacts to the US Coal Industry," Mark Morey, Principal Coal Group, RDI Consulting, presentation to the Western Coal Council Spring Pacific Forum, June 6, 2001.