COMMITTEE ON WAYS AND MEANS BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois E. CLAY SHAW, Jr., Florida NANCY L. JOHNSON, Connecticut AMO HOUGHTON, New York WALLY HERGER, California JIM MCCRERY, Louisiana DAVE CAMP, Michigan JIM RAMSTAD, Minnesota JIM NUSSLE, Iowa SAM JOHNSON, Texas JENNIFER DUNN, Washington MAC COLLINS, Georgia ROB PORTMAN, Ohio PHIL ENGLISH, Pennsylvania WES WATKINS, Oklahoma J. D. HAYWORTH, Arizona JERRY WELLER, Illinois KENNY C. HULSHOF, Missouri SCOTT MCINNIS, Colorado RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	CHARLES B. RANGEL, New York FORTNEY PETE STARK, California ROBERT T. MATSUI, California WILLIAM J. COYNE, Pennsylvania SANDER M. LEVIN, Michigan BENJAMIN L. CARDIN, Maryland JIM MCDERMOTT, Washington GERALD D. KLECZKA, Wisconsin JOHN LEWIS, Georgia RICHARD E. NEAL, Massachusetts MICHAEL R. MCNULTY, New York WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee XAVIER BECERRA, California KAREN L. THURMAN, Florida LLOYD DOGGETT, Texas EARL POMEROY, North Dakota
Allison Giles, Chief of Staff Janice Mays, Minority Chief Counsel  SUBCOMMITTEE ON SELECT REVENUE MEASURES JIM MCCRERY, Louisiana, Chairman
J.D. HAYWORTH, Arizona JERRY WELLER, Illinois RON LEWIS, Kentucky MARK FOLEY, Florida KEVIN BRADY, Texas PAUL RYAN, Wisconsin	MICHAEL R. MCNULTY, New York RICHARD E. NEAL, Massachusetts WILLIAM J. JEFFERSON, Louisiana JOHN S. TANNER, Tennessee
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records of the Committee on Ways and Means are also published in electronic form. The printed hearing record remains the official version. Because electronic submissions are used to prepare both printed and electronic versions of the hearing record, the process of converting between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process is further refined.

Columbus Oil Company, Dan Wallace

FPL Energy, LLC, Robert Morrison

Petroleum Development Corporation, Steven R. Williams

USA Biomass Power Producers Alliance, and Wheelabrator Environmental Systems, Inc., William H. Carlson

American Gas Association, Charles Fritts, statement

FIRST IN SERIES ON EFFECT OF FEDERAL TAX LAWS ON THE 
PRODUCTION, SUPPLY, AND CONSERVATION OF ENERGY

House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:04 a.m., in room 1100 Longworth House Office Building, Hon. Jim McCrery, (Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]

Chairman MCCRERY. The hearing will come to order.

Good morning, everyone. This is the first hearing conducted by the newly reconstituted Select Revenue Measures Subcommittee of the Ways and Means Committee. We will begin our first hearing shortly.

However, we have just been advised that we have one vote on the floor, so I believe before we get into opening statements and into the witnesses, I will recess this morning's hearing just for a few minutes so that the members may go across the street and vote. I would ask the members to vote as quickly as possible and get back to the hearing room, so that we may being.

The Committee is in recess.

[Recess.]

Chairman MCCRERY. The Committee will come to order.

This morning, since it is our first Subcommittee hearing, I'm going to allow any member of the Subcommittee to make an opening statement. However, after today, I will ask that all members, except for the chairman and ranking member, submit any opening statements in writing for the record.

This morning will be the first in a series of hearings by the Subcommittee, examining how our Tax Code can contribute to a safe and stable supply of energy. Our country continues to struggle with the fact that our domestic energy production does not meet our demand.

The fragile nature of our energy supply is easy to see. We can see it in the rolling blackouts in California and in the spikes in natural gas prices during the winter. Today, as summer approaches and families begin planning vacations, we are becoming increasingly focused and concerned about soaring gasoline prices.

In an effort to avoid the mistakes of the past, it is important we examine all angles of America's energy policy. Today, I hope we will be able to learn more about how the Tax Code affects energy production, exploration, and supply. The focus will be mostly on a review of current law, though I hope our witness, Mr. Mikrut from the Treasury Department, will also discuss the energy-related tax provisions in President Bush's budget.

We will then hear from Miss Mary Hutzler from the Energy Information Administration, who will discuss our current and future energy needs, as well as give us greater insights into how energy is produced and consumed in this country. Her insights will serve the Committee well as we go forward with this inquiry, and I thank her for being with us this morning.

Finally, we will hear from the private sector, the people actually working to secure our energy supply, about three time limit provisions in the Tax Code. First, we will hear testimony about section 29's credit for the production of energy from non-conventional sources, and we will learn more about the section 45 tax credit for wind energy. Also on the subject of section 45, we will hear testimony on how the credit works, or does not work, to encourage the production of electricity from biomass. Finally, we will hear testimony on the expiring Tax Code provision which allows small oil and gas producers to recover their capital costs in excess of their income from a particular property.

Supporters argue that the provision is important in encouraging independent producers to try their luck with marginal wells. It is my hope that this hearing will shed some light on our economy's complex energy problems and begin to explore solutions available to us.

As I stated at the outset, this is only the first in a series of hearings on this important issue. I look forward to working with my colleagues as we wrestle with it.

At this time I am pleased to yield to my ranking member, Michael McNulty from New York. Welcome, Michael. It's good to be with you. The floor is yours.

[The opening statement of Chairman McCrery follows:]

Mr. MCNULTY. Thank you, Mr. Chairman.

Today we discuss an issue of great importance to Americans all over the country: the effect of Federal tax laws on the production, supply and conservation of energy. Before we begin the hearing, I want to officially congratulate our new Subcommittee chairman, Congressman Jim McCrery, for the important role he is assuming on the Committee on Ways and Means during the 107th Congress. It is my pleasure to serve with him on the Select Revenue Measures Subcommittee as the ranking member.

I may also interject at this point that Jim and I share a special relationship. Many years ago I accompanied him and his wife, Jonna, on their honeymoon. Beyond that, I will have no further comment.

[Laughter.]

I was a member of this Subcommittee in earlier years, and I appreciate the role that this Subcommittee can play in evaluating specific tax provisions and in developing appropriate legislative reforms. I know we will be a good team and I look forward to working with Subcommittee chairman McCrery and each of the Subcommittee members as we proceed to address tax issues of concern to us all.

My constituents in the 21st District of New York know first hand the impact of rising energy costs and how that affects our lives. Many have faced major increases in their monthly heating bills and they are sure to face similarly high utility costs in the coming months, particularly this summer. Businesses are directly impacted by high energy costs in the production of consumer goods and services, and in competing nationally and internationally.

As this Subcommittee considers the role the Tax Code plays in providing adequate incentives for fuel production and conservation, we should keep a focus on the impact the current law has on consumers and businesses. Also, as the Subcommittee continues its series of energy hearings, I would hope that soon we can consider specific legislative proposals to promote energy production and conservation.

I have introduced legislation to provide tax incentives for a cutting-edge technology involving the use of fuel cells in creating electricity. This space age technology is ready to come to market as a clean, chemical-free way to increase the supply of electricity on the commercial market.

Mr. Chairman, I look forward to working with you and all of the members of the Subcommittee, and I thank you for the time.

[The opening statement of Mr. McNulty follows:]

Chairman MCCRERY. Thank you, Mr. McNulty.

I would now ask any other member who wishes to make an opening statement at this time, to raise your hand. Mr. Foley.

Mr. FOLEY. Thank you, Mr. Chairman. I am delighted to be part of the Subcommittee and I'm delighted that our first order of business is, in fact, to undertake a pertinent discussion relative to the energy policy and opportunities where this Committee may weigh in on options that are available.

I am also delighted that one of my hometown constituents is here, Florida Power and Light, who is going to be testifying on a panel today relative to wind energy. We have supplied every member of the panel with a tape from ABC News that I think you will find informative.

I also want to take a moment to reiterate Florida's strong opposition to any offshore oil drilling. I know that's not the subject of today's hearing, but the Governor of Florida and I met on Monday, and since we are talking about energy resources, I did want to at least underline his opposition and that of the entire Delegation as we proceed to look for alternative opportunities for energy.

I think again that today presents a unique opportunity to explore the full range of options. I am particularly pleased with Mr. McNulty's comments because I think, as we do further research on fuel cells and those opportunities, we will see a tremendous way in which to reduce our dependency on fossil fuels, finding ways to produce energy in a more efficient and cost-effective manner, and I think that will do a great deal for us in not looking necessarily at always drilling but finding sources that are nonpolluting, nonthreatening, and contribute to the economic and electrical diversification plans of our country.

Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Foley.  Mr. Brady.

Mr. BRADY. Thank you, Mr. Chairman.

I, too, want to thank you for your leadership on this issue. I'm excited about this new Subcommittee. As a new member of Ways and Means, I am hopeful that ultimately we can replace this Tax Code with one much better for our children than the one we've had to live with.

But while we have the "stinker" that we do, it is important that we look at ways to improve it. This issue of energy independence is so important. I think we all know that America has paid an awfully steep price for not having an energy game plan. I know, just within the energy community that I represent in Texas, we have lost 100,000 jobs over the last decade because of this "boom or bust" mentality. That is ten times more jobs than steel, and that's as many jobs as agriculture. We have paid a steep price. In the economy and in our individual homes, we have all paid a price because of the volatility of the market.

The problem is that we're addicted to foreign oil. The approach so far has been to try to convince the dealers to sell us a better street price for this, but the answer is to kick the habit. We can start doing that by encouraging production and encouraging supply, and encouraging conservation as well.

As America starts taking responsibility for our own energy needs, and although last year we saw a number of Members of Congress and the White House releasing a great deal of natural gas, about the price of oil, blaming energy companies for it, I was pleased that, while that was front page news, buried in the pages of the media recently have been the results of two Federal investigations that showed, in fact, the energy companies acted appropriately, that it was supply and demand and environmental regulations that added to the volatility of our prices. So I am real hopeful that we can move on past some of the political issues and start "folksing" together, Republicans and Democrats, on energy independence.

Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Brady.  Mr. Ryan.

Mr. RYAN. Thank you, Mr. Chairman.

I, too, want to join my colleagues in thanking you for holding this hearing, and for the first hearing of the Select Revenue Measures Subcommittee. It's very exciting to be here.

As a new member of the Committee, a new member of the Subcommittee, I come from an oil-consuming State, Wisconsin. We don't do a lot of oil producing. We consume a lot of oil. Our prices are going through the roof right now.

We have 45 different boutique fuels roaming this country. We have a supply chain that is constrained. We haven't had new refineries built in about 20 years. So I am looking forward to hearing from the administration about different ideas that we can explore to improve our capacity, to steady the supply, and I would like to hear about different ways of spreading out the number, regionalizing the fuels, perhaps. Those are the kinds of answers that we're looking for in Wisconsin, in addition to longer term solutions for renewable cleaner fuels.

I just wanted to thank you for having this hearing. I look forward to the number of energy hearings we're going to have. It's a very important and timely topic affecting all of us, and I want to thank you for that.

Chairman MCCRERY. Thank you, Mr. Ryan.

We have one "interloper" with us today. Mr. Watkins is not a member of the Subcommittee. However, he is a member of the full Committee and has, of course, a strong interest in the subject of energy. I recognize Mr. Watkins for any statement he would like to make at this time.

Mr. WATKINS. Thank you, Mr. Chairman. To you and the other members, thank you for allowing me to come down and join you for this very special Subcommittee and this panel and this subject. It is very timely and is probably in the minds of everyone's pocketbooks throughout this country.

At the appropriate time, Mr. Chairman, I have a special friend who will be on the panel and I would like to introduce him at that time. But thank you for letting me come and be here today.

Chairman MCCRERY. Thank you, Mr. Watkins.

Now, our first witness is Mr. Joseph Mikrut, Tax Legislative Counsel, with the United States Department of the Treasury. Mr. Mikrut, your full written testimony will be submitted for the record. If you would summarize that in five minutes, we would appreciate it. You may proceed.

STATEMENT OF JOSEPH MIKRUT, TAX LEGISLATIVE COUNSEL, U.S. DEPARTMENT OF THE TREASURY

Mr. MIKRUT. Thank you, Mr. Chairman, Mr. McNulty, members of the Subcommittee. Good morning. It is a pleasure to be here for your inaugural hearing, and I appreciate the opportunity to discuss with you today tax incentives for the production, supply and conservation of energy.

As you noted in your opening remarks, there has been a renewed interest in the role of tax incentives in our national energy policy. The Subcommittee should be commended for taking on this issue at this time.

I would like to begin my testimony with a brief discussion of the general principles that may be relevant in analyzing any energy tax proposal. I will conclude, as you mentioned, Mr. Chairman, with a description of the energy-related tax proposals in the administration's fiscal year 2002 budget.

I would also like to remind the members of the Subcommittee that an interagency task force, headed by Vice President Cheney, will submit to Congress later this month a plan for a comprehensive national energy policy. This task force is considering additional tax and nontax provisions not contained in the budget proposal. We would be happy to come back and brief you later to the extent there are any additional tax proposals.

The fundamental principle underlying a sound energy policy is that the market should be allowed to function freely and market intervention should be avoided, unless justified by compelling energy security, economic, environmental, or other concerns.

In some instances, markets do not properly value the benefits of certain investments. For example, a market rate of return for investments that increase domestic oil and gas reserves may not reflect the contribution of those investments to ensuring stability in supply and price, thereby reducing U.S. vulnerability to oil supply disruptions. Similarly, market prices may not reflect the benefits of energy produced from clean and renewable energy sources. Individuals and businesses may not invest in energy saving and alternative energy technologies at a level that reflects the benefits provided to society as a whole from such technologies.

For example, if a new technology reduces pollution, this external benefit should be included in decisions on whether to undertake an investment or not. However, private investors only look to private returns and may not invest in such technologies. Thus, they avoid nonprofitable ventures that may benefit society as a whole.

Tax incentives, on the other hand, can and do offset the failure of market prices to signal the desirable level of investment in energy saving technologies because they increase the private return by reducing the after-tax cost of the taxpayer. The increase in private return encourages additional investments in energy saving and environmentally preferable technologies.

The Federal Government has many tools for advancing energy policy goals. One of these is the Internal Revenue Code. Beyond the fundamental issue of whether a tax incentive is justified at all, a number of other, often contradictory considerations must be taken into account. For example, incentives should be appropriately targeted to induce desired activities in a cost-effective manner. Thus, incentives should be designed to minimize windfalls for investments that would have been made in any event and strive to encourage investment upon the margin.

At the same time, however, incentives that are targeted too narrowly may reduce the cost of only some technologies and leave other technologies behind. This can result in economic inefficiency and will contribute to perceptions that the tax system is unfair and targeted only towards certain taxpayers.

Finally, incentives should also be designed to minimize complexity and avoid unnecessary increases in taxpayer compliance burdens and IRS administrative costs.

The importance of maintaining a strong domestic energy industry has been long recognized and policymakers have balanced the concerns I have just described so that the Internal Revenue Code currently includes a variety of measures to stimulate energy exploration, production, and conservation. Similarly, the administration's budget proposals for fiscal year 2002 contain four tax incentives to extend and modify these present law provisions. I would like to briefly describe these two proposals.

First, under present law, a 1.7 cents per kilowatt hour production credit is provided for electricity produced from certain renewable sources. The administration proposes to extend the credit for electricity produced from wind and biomass for three years for properties placed in service before 2005. Moreover, the eligible biomass sources would be expanded from the current law closed-loop biomass to additional open-loop biomass sources. Special rules would apply to biomass facilities placed in service before 2002.

Electricity produced at such facilities from newly-eligible sources would be eligible for the credit through 2004, at a 60 percent rate, and electricity produced from newly-eligible sources at coal-fired plants would be eligible for the credit through 2004 at a 30 percent rate.

Our second proposal would supplement the present law investment tax credit available for businesses investing in certain energy property. The administration proposes a new tax credit for individuals that purchase solar energy equipment used to generate electricity or heat water. The proposed credit would be equal to 15 percent of the cost of the equipment and its installation, and would be capped at $2,000 per individual, per residence. The credit would apply for water heating equipment placed in service before 2006, and to electric generating systems placed in service before 2008.

Our third proposal deals with nuclear decommissioning funds. Present law provides an accelerated deduction and a favorable tax rate with respect to funds set aside for public utilities for decommissioning nuclear power plants. In recognition of the deregulation of the electricity generating industry, the administration proposes to modify these underlying rules. Specifically, we would eliminate the cost of service requirement; we would clarify that transfers of funds from one taxpayer to another would be nontaxable transactions; we would allow funding up for pre-1984 liabilities; and we would clarify that nuclear decommissioning expenditures are deductible when incurred.

Finally, the last proposal in the administration's fiscal year 2002 budget concerns the 100 percent of net income limitation for percentage depletion, which is scheduled to expire at the end of the year. The administration proposes a one-year extension of the provision suspending this limitation for marginal oil and gas wells. Under the administration's proposal, marginal wells would be continued to be exempt from the limitation during years beginning in 2002. Without such a provision, the percentage depletion limitation for marginal wells will be limited to the income from the property and may discourage development of such properties.

Mr. Chairman, this concludes my prepared testimony. I would be happy to answer any questions you or the members may have.

[The prepared statement of Mr. Mikrut follows:]

Chairman MCCRERY. Thank you, Mr. Mikrut.

One of the goals of our energy policy, obviously, is to secure and increase domestic production to try to add to the supply here at home. In the administration's opinion, are the incentives which are currently in the Tax Code helping us to achieve that goal?

Mr. MIKRUT. Well, the administration hasn't proposed to repeal any of the incentives, so implicitly, yes, Mr. Mccrery. In addition, through the budget proposals, we believe that some of these incentives must be supplemented. Those are the four items that I mentioned previously. Vice President Cheney's task force is considering additional supplements, and those will come out later in the month.

We do believe it is important to continue to analyze the current law incentives that are in the Code. Many of these are expiring provisions, so Congress and other policymakers can take this analysis up on a routine basis as the provisions begin to expire and can evaluate to what extent the provisions have provided the desired incentives and to what extent the provisions have to be modified. This is an ongoing process and we welcome the ability to express our views with respect to these provisions, both in hearings like this and at proposed markups.

Chairman MCCRERY. Do you know if Vice President Cheney's task force is going to include any tax proposals in their report?

Mr. MIKRUT. There are several tax proposals that are being considered, but developing a comprehensive national energy policy is very much like a jigsaw puzzle. You have to put in some of the bigger pieces first, dealing directly with energy policy, and then see what's missing. Then you have to determine whether tax incentives can fill in those missing holes.

As such, the analysis isn't done until it's all done, and the extent tax policy needs to supplement some of the basic energy policies is the question that is being considered currently.

Chairman MCCRERY. Do you know when we should expect a report from the task force?

Mr. MIKRUT. I believe the task force hopes to finish by the end of the month, and perhaps by mid-month. So it's very soon, Mr. Chairman.

Chairman MCCRERY. How about the conservation subsidies that you mentioned in your testimony. Can you give us some idea of the impact those have had on conservation?

Mr. MIKRUT. Under current law, Mr. Chairman, there is a conservation subsidy that allows public utilities to give to their residential customers tax-free benefits for certain equipment or weatherization or other benefits for energy conservation. We understand that those have been effective with respect to residential properties.

We have also found that some of the renewable fuels provisions have also been effective and, as modified in the President's proposal, we think we should increase production of energy from these renewable sources.

Chairman MCCRERY. Two years ago, we were hearing, from our independent producers particularly, that the low prices were driving them out of business, essentially. Now prices are up and the independent producers who are still in business are doing better.

My question is, do we need, even in times of high prices, the incentives in the tax laws that we have?

Mr. MIKRUT. As I recall, Mr. Chairman, it was almost two years ago that the Treasury was testifying before Mr. Houghton's Oversight Subcommittee on this very issue. What came out of the testimony then is that during a period of low prices -- and price probably being the major incentive for someone to produce from oil and gas properties -- that in a period of low prices, producers will cap marginal wells, and that once a marginal well is capped, it is almost permanently out of service. If it is prohibitively expensive to regenerate that production, that production is permanently lost.

I believe your suggestion that, even in a period of relatively high prices, one should consider whether incentives are necessary to keep such properties producing during a period of low prices, is appropriate. I think the administration proposal to further extend the marginal well net income limitation is a step in that direction.

Chairman MCCRERY. Well, thank you, Mr. Mikrut. In fact, my last question was going to be concerning that provision, which suspends the 100 percent net income limitation. I gather from your response to that question that the administration is convinced that this suspension should continue.

My only question, I guess, would be, if it's so important to encourage continued production from marginal wells, why does the administration only propose a one-year extension? Why don't we make it permanent?

Mr. MIKRUT. That is one of the issues that will be taken up by the task force. The provisions that will expire this year, including the 100 percent limitation, have been proposed to be extended for one year in order to again evaluate whether it is necessary to provide further extensions. But I think the case you're making is something that has to be taken into account, whether a permanent extension is warranted or not.

Chairman MCCRERY. Thank you, Mr. Mikrut. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. Thank you, Mr. Mikrut, for your testimony.

Mr. Mikrut, given the fact that energy conservation incentives have the potential for a more immediate impact than building new power plants, which we also need to do, why isn't there more of an emphasis on the conservation tax incentives, or do you think there will be in the task force report?

Mr. MIKRUT. I think the task force is taking very seriously conservation measures as well as production measures. I think under current projections--and the representative from EIA can tell you better--that currently it appears that energy demand will be increasing, so we have to address that immediately. Over time, I believe energy conservation will become more and more important. So I think the immediate concern is what's facing us on the short-term horizon, which is increased demand, making sure there's an adequate supply and, over time, to look at the conservation measures.

Mr. MCNULTY. What is your analysis of why energy costs have skyrocketed in recent months? Who's to blame for that?

Mr. MIKRUT. I don't believe it's the result of the tax system, Mr. McNulty, so I'm probably not the right person to answer your question.

Mr. MCNULTY. Do you have any analysis of what to expect over the next year--not assuming anything new is done with regard to the issues we're discussing--but an analysis of what we should look forward to in terms of prices over the next year?

Mr. MIKRUT. Again, Mr. McNulty, I will have to defer to the experts at EIA, who can probably give you a more informed analysis of that question.

Mr. MCNULTY. I have no further questions, Mr. Chairman.

Chairman MCCRERY. Mr. Hayworth.

Mr. HAYWORTH. Mr. Chairman, congratulations on this opening hearing. It's an honor to serve with you on this Subcommittee. Mr. Mikrut, thank you for stopping by.

One of the advantages of seating arrangements, the gentleman from Illinois, Mr. Weller, is a seat-mate of mine on the full Committee as well. We have topics of common interest. In fact, to presage his questioning, he will probably get into the whole area of nuclear decommissioning.

I just wanted to articulate to you, Mr. Mikrut, that I have been working with my colleague from Illinois, as well as Congressmen English, Matsui and Neal, on a legislative package that is designed to address some of the Federal tax consequences of electricity restructuring. Our legislation, the Electric Power Industry Tax Modernization Act, or H.R. 1459, includes the nuclear decommissioning bill that my friend, Mr. Weller, has introduced. My private use bill, tax relief for contributions in aid of construction, had a provision that addresses the use of tax-exempt bonds for transmission facilities.

I forwarded a copy of H.R. 1459 to the Treasury Department, and I hope I can work with Secretary O'Neill and you on these important issues in the days ahead. So I just wanted to let you know that it's down there.

Turning to questions, so many different things have been done, and so many alternative forms of energy have been encouraged. I think when I drive into the neighboring State of California, where there are certainly challenges, to put it euphemistically, about electricity, and I see the windmills there. I'm interested in the wind energy credit. That section 45 tax credit was enacted in 1992.

Could you give us an assessment of the impact that credit has had on the production of energy since that point in time?

Mr. MIKRUT. I think, Mr. Hayworth, in order to analyze the section 45 credit, one has to look not only at how much electricity is being produced from alternative sources but, as well, what sort of additional activity is going on because of the credit.

One of the things that we found is that new production facilities have come on line. Although clearly they are not the predominant sources of production in the United States--predominant production still comes from fossil fuels --there have been alternative sources of energy developed because of the credit.

In addition, not only have new sources come on line, I believe there is more research being done and that the section 45credit would stimulate research beyond that stimulated by the research (R&E) credit. This research was undertaken because perhaps taxpayers or entrepreneurs thought they could develop a technology that could qualify for the section 45 credit. What we have been able to determine in talking to taxpayers is that they continue, because of these tax incentives, to try to discover new sources of energy.

Mr. HAYWORTH. I thank you, Mr. Mikrut. Mr. Chairman, I have no further questions.

Chairman MCCRERY. Thank you, Mr. Hayworth.  Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman. Let me again commend you for kicking off the first hearing of the Select Revenue Subcommittee on an important issue that we're all facing, particularly back home where we now have gasoline prices well over two dollars in the Chicago area and, of course, inching higher. It certainly tells us what the result is when our Nation fails to have an energy policy over the last decade and why we need one. Of course, the Tax Code does have an impact.

I have been working with my friend, Mr. Foley, on extension of the wind energy tax credit, which is a key part, I believe, in reducing our dependence on imported oil and, of course, looking for alternative sources of energy, particularly in the area of "green power". I am pleased that the administration has included an extension of the wind energy credit in your budget.

Mr. Mikrut, I would like to focus my first question on the area of nuclear decommissioning, an issue in which Representative Cardin and I introduced legislation which was basically included in legislation sent to President Clinton and, unfortunately, vetoed as part of a much larger tax package. Mr. Cardin and I are reintroducing that legislation this week.

Clearly, there is a need for modernizing the tax treatment of nuclear decommissioning funds, particularly on the restructuring in electricity that's going on around the country. We are now having nuclear power plants changing hands and, of course, we need to modernize the tax treatment of those nuclear decommissioning funds. Again, I want to note that the President has included provisions regarding modernizing the treatment of nuclear decommissioning funds in his budget. I believe it's quite similar to what Representative Cardin and I have introduced in the past, and similar to the legislation that will we will be reintroducing this week, which is identical to what President Clinton vetoed.

But there are several questions I would like to ask, Mr. Mikrut, in relation to the proposal that the administration included in your budget.

You know, many nuclear power plants were constructed prior to 1984, when the tax laws were changed to allow contributions into qualified funds. The administration's proposal differs from the legislation that Mr. Cardin and I have introduced with respect to how to treat pre-1984 costs.

I was wondering, can you explain why you prefer the administration's approach versus the approach that this Committee has taken in the past?

Mr. MIKRUT. Certainly, Mr. Weller, although I would like to point out where the proposals are very much the same. We think it is very important that amounts that were incurred for decommissioning, or anticipated to be incurred for decommissioning, prior to 1984, should be fully funded. That is the thrust of your bill, Mr. Hayworth's bill, and several other congressional proposals that have come forward. We think it's very important that amounts that have been collected to decommission a nuclear plant in the future, even though that decommissioning relates to pre-1984 periods, should be placed in the funds and get the beneficial treatment that the funds provide.

Clearly, in 1984, when Congress put these rules in, there were certain budget deficit costs that probably prohibited expansion of the provision at that time. But current surpluses allow us to free up some of those tax dollars and put them toward the funds.

I think it is clear, though, that you do not want a one-time hit, so that a large amount of money goes into the fund at one time and becomes deductible all at once. I believe both your bill, H.R. 1459, as well as the administration's proposal, lengthens or stretches out those deductions over a period of years.

I think the only difference is the methodology that we use versus the methodology that you use in computing the deduction. We would like to work with you to see if one is better than the other. Ours is very simple, it's straightforward, it spreads the cost straight line over a ten-year period. Your method, I believe, goes through the former costs of service type calculation, a level funding calculation, that is aplicable to the post-'83 amounts.

Again, I think the difference is not that significant. The significant part is that both proposals allow for the pre-1984 amounts to be fully funded.

Mr. WELLER. Again, we're very anxious to work with you. We appreciate the fact that the administration recognizes the importance of this issue. Nuclear power is a clean way to generate energy and, of course, is a key part of our energy source. It must be part of any new, modern energy policy.

Let me just ask, from a policy standpoint, why you feel that, in facilitating the transfer of nuclear power plant ownership from one entity to another, why a tax-free transfer is so important?

Mr. MIKRUT. We have talked with several taxpayers who were contemplating transfers of nuclear plants, and those types of transfers took all forms. Some were tax free mergers, some were contributions to joint ventures, some were just outright sales of the plants.

But the issue that has come up is what to do with the amounts that are in these funds and what to do with the contingency liability that decommissioning represents in the future. It seems that, especially with respect to some of the taxable transfers, where there is a taxable sale of the plant, such a sale could trigger the inside build up in the funds, and that was prohibitive for the transaction and probably stopped the transaction in its tracks.

One can almost view the transfer of the nuclear decommissioning fund and the assumption of that liability as a separate transaction, separate from the plant sale itself. We think it's appropriate to try to match, as present law tries to match, the fund with the contingent liability. Essentially, what is happening is that the transferee is stepping in the shoes of the transferor and to that extend there is no taxable event, because the moneys are still in the fund and they can't be reached except for the decommissioning that will happen several years in the future.

So we thought, in order to facilitate various forms of transfers of generating properties that deregulation will be forcing, that the major stumbling block to transferring the funds should be clarified. The Service has ruled in the past, with respect to certain transactions, that it is a tax-free event. We propose to further effectuate that policy for other types of transactions.

Mr. WELLER. Thank you, Mr. Mikrut.

Mr. Chairman, I have a few more questions. Are we going to have a second chance if we hang around, or is time going to allow for that, or should I just submit my questions and ask him to respond in writing? I have additional questions.

Chairman MCCRERY. Why don't you and I discuss it after Mr. Lewis is recognized.

Mr. WELLER. All right. Thank you, Mr. Chairman.

Chairman MCCRERY. Mr. Lewis.

Mr. LEWIS. Thank you, Mr. Chairman.

I guess my question deals with the ag community and the particular need that we have for biodiesel, ethanol. Will the President, through the report that Mr. Cheney is going to be providing us, will that continue to support the tax credit for the use of those renewable fuels?

Mr. MIKRUT. Mr. Lewis, I clearly can't get ahead of the Vice President and provide what will be in the final plan. As I mentioned before, all the proposals have to be taken in context, and the analysis is not over until it's over.

I can assure you that all the proposals that have been considered in the public forum, in the Congress and by the administration over the last several years are being considered and taken into account and evaluated.

Mr. LEWIS. Thank you.

Chairman MCCRERY. Mr. Foley.

Mr. FOLEY. Thank you very much, Mr. Chairman.

I just wanted to commend the gentleman from Illinois, Mr. Weller, on coauthoring with me the wind energy extension. I think it's a very important public policy area and I appreciate his work on this in years past, and obviously welcome our joint cooperation on this very important bill.

Let me ask you a question relative to section 29 credits, particularly dealing with the size of crushed coal. How do you reconcile the new requirement, or at least the ruling, of one-eighth inch or smaller in size of coal, based on IRS's prior rulings, particularly the many which have provided that taxpayers will use coal fines, run of mine coals, run of mine coal fines, feedstock from a wide variety of sources, or simply coal without stating a specific coal size?

Mr. MIKRUT. Before I answer directly your question, Mr. Foley, for the benefit of the members who are not as familiar with the section 29 issue as I know you are, let me give you a bit of background.

Present law provides a tax credit for synthetic fuels produced from coal. The credit is approximately $25 a ton, I believe, under current prices. Late last summer and fall, the Treasury and the IRS received significant correspondence from Members of Congress, governors of States, and several of our trading partners, that some taxpayers were producing synfuels that may or may not have met former IRS ruling policies and asked us to look into this issue.

Last October, the IRS and Treasury suspended the ruling policy and requested comments before we reinstituted the rulings. Several taxpayers came in and talked to us. We had a frank discussion with them, an open and frank discussion. We studied the matter in great detail and two weeks ago we renewed our ruling program.

What we decided is that the policy that we would go forward with was to be consistent with the prior rulings and the standards established by the IRS in 1986, in Revenue Ruling 86-100, requiring a significant chemical change in order to determine whether coal production produces synfuels. We believe this standard was an appropriate interpretation of congressional intent. We also clarified some of the placed in service rules for certain properties that had to be met in 1998.

In evaluating comments, we looked at prior rulings. It seemed to us that the bulk of the rulings dealt with coals that were in a very small state, one-eighth of an inch or less. Since two weeks ago, when we issued our ruling, we have received significant comments from many taxpayers that perhaps three-eighths of an inch is a better industry standard. We have asked the industry to come back to us with an additional study. They were very responsive and came back, I think, with it yesterday, so it was within a week.

We do think that they made a point and we're looking to modify the ruling policy that we put forth two weeks ago to accommodate what we believe the industry standards are. To be more specific as to your question, we are looking at adopting the three-eighths inch standard.

Mr. FOLEY. That is welcome news, because I understand there is a deadline of May 7th for permanency on this policy. Do you feel we'll be able to capture it by then?

Mr. MIKRUT. We would hope to move very quickly on this, yes, Mr. Foley.

Mr. FOLEY. I think Mr. Hayworth mentioned wind energy. I would like you to elaborate because I, too, was delighted that the President chose to include it in his proposal. Obviously, we feel it is a significant alternative to fossil fuels.

You would anticipate strong support from the administration if, in fact, we extended it in Congress?

Mr. MIKRUT. The administration, in its fiscal year 2002 budget, does have an extension of the wind energy credit through 2004, so yes, Mr. Foley.

Mr. FOLEY. Thank you.

Chairman MCCRERY. Mr. Jefferson.

Mr. JEFFERSON. Thank you, Mr. Chairman.

I'm coming in late, so I hope I don't cover territory that others have already covered, but I want to ask this general question.

To what extent do you think tax incentives are themselves effective and efficient in promoting production, conservation, or whatever the energy policy is directed towards, to what extent do you think tax incentives are effective and efficient in getting that done?

Mr. MIKRUT. Mr. Jefferson, this is a question that's the major focus of this hearing. Clearly, I think the most important incentive for energy production is price, and fossil fuels are generally priced on a world market so there is very little that can be done to affect that price. There is very little that can be done through the Internal Revenue Code to affect the world market price. So many of the policies that you can put forth through the Internal Revenue Code work on the edges and work on the margin.

Where they seem to be the most effective is not in dealing necessarily with fossil fuel production, or exploration for those items, but with respect to energy that would otherwise not be tapped into. For example, marginal well production is one area where the Congress has traditionally provided tax incentives, and the administration, in its fiscal year 2002 budget, would provide additional incentives.

In addition, alternative fuels, whether they be wind energy, section 29 qualified energy sources, or section 45 qualified energy sources, is another area that the Internal Revenue Code can be, in certain instances, effective in providing incentives.

Finally, the last thing you mentioned is, of course, conservation. Conservation is another area greatly influenced by price. The higher the price for energy, the more the incentive to conserve without any tax incentives.

But on the margin one can provide incentives for increased conservation. The Congress has done that through the provision of section 136 and exclusion for residential homeowners for conservation measures provided by utilities, as well as other provisions that Congress has considered over the years.

Mr. JEFFERSON. I think I have your answer. It's around the edges, as you say, around the margins. You would leave a program of tax incentives for exploration that wouldn't otherwise take place, in the judgment of the Congress, or alternative fuels, and maybe in conservation in times when prices aren't high; that's kind of how you would generally summarize what you just said, right?

Mr. MIKRUT. Yes, Mr. Jefferson.

Mr. JEFFERSON. So we ought to be looking in areas like that if we're going to try to do something that's effective and efficient with the Tax Code.

I'm sorry I haven't been able to compare them myself, but to what extent do the proposals by the current administration differ from that which the prior administration took in this area?

Mr. MIKRUT. Some of the proposals are very similar. The prior administration also proposed extension of some of the expiring provisions, and also would have allowed the open-loop biomass to qualify for the section 45 credit. They would have also allowed the credit for plants placed in service in prior years at a reduced rate.

The nuclear decommissioning proposal in the Clinton administration was somewhat more limited than to the one currently in the administration's proposal, and was more limited than H.R. 1459, or Mr. Weller's proposal.

There are other areas with respect to hybrid vehicles that the prior administration proposed that were not in the current budget but are being considered by the task force, so you may be seeing those when Vice President Cheney produces his recommendations later this month. The tax credit for residential solar energy was something that was in the prior administration's proposal and has moved forward into the current budget proposal as well.

So, in general, I think many of the proposals that are currently in the administration's budget did have analogues to the prior administration proposals. In addition, there will be further proposals coming forth through the Vice President's task force that may go well beyond those.

Mr. JEFFERSON. Would you characterize the differences as rather small?

Mr. MIKRUT. In some proposals, yes. I mean, there were other--

Mr. JEFFERSON. I mean, any big, new ideas. That's what I'm trying to get at, I guess. Any new, big, blockbuster ideas here that the prior administration did not pursue?

Mr. MIKRUT. There are no major new blockbuster proposals in the fiscal year 2002 budget. However, I think the comprehensive energy policy that the task force is putting together will subsume a lot of the things that were in the budget, and when you see it, you may think they're blockbuster proposals.

Mr. JEFFERSON. One last thing, Mr. Chairman, if I might. The proposals are mostly on the production side, or are there any on the conservation side? Or is it both?

Mr. MIKRUT. I think they're on both.

Mr. JEFFERSON. I'm done. Go ahead. I'm telling the Chairman I'm done. I didn't want to stop you from talking.

Mr. MIKRUT. I think the proposals with respect to the expansion of section 45 and the residential solar systems can be treated as conservation because they conserve the production of fossil fuels. They are alternatives to fossil fuels. Therefore, because you are encouraging production from renewable sources, they're conservation type measures.

Mr. JEFFERSON. I might say that Wes Watkins and I have had some luck over the last several years in getting incentives in stripper wells and marginal wells production that we're very proud of. We continue to support expanding production.

Obviously, with what we know now about how to protect the environment at the same time in doing that, we can introduce these technologies into the expanded production capacity. But we have worked on trying to make sure we have more industry security within our own control than we've had and I think that's very important. I am real proud to have worked with Wes on these things.

Chairman MCCRERY. Mr. Watkins.

Mr. WATKINS. Mr. Chairman, just one comment. It's kind of a big umbrella statement, if I might.

You know, our Nation has not had an energy policy, and it's for a lot of reasons. We can point fingers. And we're at fault. I guess we can take part of the blame here in the United States Congress. Past administrations, both Democrat and Republican, have to take part of the blame.

Today, we have two of the most knowledgeable men concerning energy in the White House, George W. Bush and Dick Cheney. I have a lot of faith, that they have a lot of the answers. I know they have an understanding of the energy industry.

It would be a simple mistake and a great failure on our part if we cannot come together and make sure we at least put tax provisions in there that will allow us to develop a quality and quantity of energy, from a variety of sources, throughout this country.

I notice that Dick Cheney said we need 120 to 150 power generating plants. I don't question that at all. It has to be fired by natural gas, coal, or other fossil fuels, and we need to move and we need to make it our utmost priority during this administration, to get a policy to move our country forward.

So, Mr. Chairman, I think this is a very important and timely topic, and we want you to take the message back to the administration, that we hope and pray they will not fail, and that we will be there to try to help them.

Mr. MIKRUT. Thank you, Mr. Watkins.

Chairman MCCRERY. Thank you, Mr. Watkins. I hope you and Mr. Jefferson will continue to work very well together for the interests of energy policy in the United States.

Mr. Weller has one more question, Mr. Mikrut, and then we'll let you go.

Mr. WELLER. Thank you, Mr. Chairman. Mr. Mikrut, thank you for participating in what is a very important hearing today.

I do want to also thank you on the issue that my friend, Mr. Foley, raised regarding crushed coal and your review of those standards. That's good news and it has a positive impact. I believe we can address that issue in an environmentally responsible way. I am glad to hear the good news and look forward to working with you on that issue as well.

The last area of questioning I would like to raise with you is regarding the section 29 tax credit, which was designed to provide incentives for the production of non-conventional fuels. Have you seen an increase in the production of non-conventional fuels over the past ten years, and what has been the result?

Mr. MIKRUT. I believe there has been an increase in the production of some non-conventional fuels. I believe that our estimate of the current tax expenditure costs -- that is, what an outlay cost would be -- is about $1.2 billion a year, which is rather significant.

We have seen, again in our study of the section 29 credit, with respect to coal production, that there seems to be an increase in activity in that area. It is not necessarily true that it comes at a decrease in other areas, so I would think, in general, the production of section 29 qualified synfuels has increased over time.

Mr. WELLER. So you believe it has had a positive impact then, from the standpoint of increased production of non-conventional fuels?

Mr. MIKRUT. I believe there has been more credit-qualified production over time.

Mr. WELLER. Do you believe that an extension of this credit could help then, as we look for ways of finding more affordable energy for Americans?

Mr. MIKRUT. Well, with respect to the synfuels from coal, that provision is not scheduled to expire until 2008, so we have a great deal of time to do further analysis to see where we are at that point, what new technologies have come on line, whether we want to reshift the credit toward new technologies rather than paying for old technologies, which may or may not need the credit. There may be some technologies that qualify for the credit that you may no longer want to support at all. You may want to put those resources to a better use.

Again, I think we have some time to do an analysis with respect to that portion of the section 29 credit -- until 2008. Another portion of the credit does not expire until 2003, so again, you have some time there. Through hearings like this, and developments of further budgets, we can analyze those portions of the credit as well.

Mr. WELLER. You know, Mr. Mikrut, my experience with various tax credits and other incentives, when they're in a temporary nature, when they sunset over a short period of time, many times, once they're made permanent, or there's a very lengthy extension, there is a greater investment as a result of that because of the tax consequences and business decision makers trying to decide on whether to invest their capital look at that long-term consequence. When they know a tax provision is going to be there permanently, or for a long period of time, they are more inclined to use it. That's why extension of the wind energy credit is so important and, of course, why this issue is important.

Let me just ask this. As we look at the energy policy, which we're all anxiously awaiting to come forward from the administration in the next two weeks, do you feel that we have an adequate supply of non-conventional fuels to meet the demand we're looking at? What's your point of view?

Mr. MIKRUT. I think, through the budget proposals, where we're suggesting an extension of alternative fuels, and through the discussions that we've had in looking at some of the proposals that have come forth before the task force, there is a renewed interest in trying to develop fuel production to meet demand in non-conventional ways, or alternative ways. And I think this is an important component.

However, as the Vice President said, it is hard to imagine alternative fuels being the major source of energy production in the near term, but it is something where investments in research and incentives through tax credits may provide a stimulus for the longer term.

Mr. WELLER. Thank you, Mr. Mikrut. Mr. Chairman, thanks for the courtesy of the opportunity to have a second turn. I appreciate it very much, Mr. Chairman. It's a good hearing.

Chairman MCCRERY. Mr. Mikrut, thank you very much for appearing before us today. We will probably be seeing you some more.

Mr. MIKRUT. Thank you, Mr. Chairman.

Chairman MCCRERY. Miss Hutzler is next. Miss Hutzler is Director of the Office of Integrated Analysis and Forecasting, Energy Information Administration, with the United States Department of Energy.

Miss Hutzler, welcome. Your written testimony will be submitted for the record in its entirety, and if you could summarize within about five minutes, we would appreciate it. You may proceed.

STATEMENT OF MARY J. HUTZLER, DIRECTOR, OFFICE OF INTEGRATED ANALYSIS AND FORECASTING, ENERGY INFORMATION ADMINISTRATION, U.S. DEPARTMENT OF ENERGY

Ms. HUTZLER. Thank you, Mr. Chairman, and members of the Subcommittee. I appreciate the opportunity to appear before you today to discuss energy consumption, supply, and efficiency in the United States.

The Energy Information Administration (EIA) is an autonomous statistical and analytical agency within the Department of Energy. We are charged with providing objective, timely and relevant data analysis and projections for the use of the Department, other government agencies, the U.S. Congress as well as the public.

The projections in this testimony are from the Annual Energy Outlook 2001, which provides analysis of domestic energy consumption, supply and prices. These baseline projections are widely used by government agencies, the private sector, and academia for their own analyses. They are not meant to be exact predictions. They represent a likely energy future, giving technological and demographic trends, current laws and regulations, and consumer behavior.

We expect total energy consumption to increase from an estimated 97 quadrillion Btu in 1999 to 127 quadrillion Btu in 2020, an average annual increase of 1.3 percent. This is lower than the growth we have experienced since 1983, when energy consumption grew at a rate of 1.7 percent per year. We have seen energy consumption decline twice in the past 30 years, in the mid-1970s and the early 1980s, with both occurring during oil price increases.

Today, petroleum, natural gas, and coal make up about 85 percent of the total energy consumed in the United States. We project that these fossil fuels will increase their share slightly over the next 20 years. Petroleum represents about 40 percent of today's consumption, and is mainly used for transportation fuels and in the industrial sector for petro-chemical feedstocks, plastics, asphalt, and areas where little substitution potential exists.

Coal and natural gas each represent about 23 percent of our current energy consumption. Ninety percent of our coal is used for electricity generation. Natural gas is consumed in the residential and commercial sectors, mainly for space heating, and in the industrial and electricity generation sectors as a boiler and generating fuel. We are expecting a 52 percent increase in natural gas total consumption by 2020.

In this next chart, the inset box shows the expected increase in electricity demand over the next 20 years. To meet that demand, natural gas consumption for electricity generation is projected to triple between now and 2020. We expect natural gas generating technologies to supply 92 percent of our new capacity over the next 20 years because of their lower capital costs, higher efficiencies, better load following, and shorter construction lead times relative to the other technologies.

Natural gas is expected to increase its share of total generation from 16 percent today to 36 percent in 2020. And coal is expected to decrease its current share of generation from 52 percent to 44 percent.

Nuclear generating capacity is projected to decline through 2020 due to retirements of some existing facilities, for which continued operation is not economical compared to the cost of building a new generating facility. Of the 97 gigawatts of nuclear capacity available in 1999, 26 gigawatts is projected to be retired by 2020, and no new plants are expected to be constructed. As a result, nuclear generation decreases its share from 20 percent today to 11 percent in 2020.

The use of renewable technologies for electricity generation, including cogeneration, is projected to increase slowly, primarily due to moderate expected fossil fuel prices. Most of the growth in renewable electricity generation is expected from biomass, landfill gas, geothermal energy, and wind power. State mandates and other incentives, including the Federal production tax credit for wind generation, encourage most of the growth in renewables in the earlier part of the forecast.

The next chart shows our domestic supply of fuels. Coal is our Nation's most abundant fossil fuel resource, providing 32 percent of our current domestic production. We expect domestic natural gas production to surpass coal by 2015, increasing its share of production from 27 percent today to 35 percent in 2020.

Our domestic petroleum supply is projected to remain roughly flat for the next 20 years, resulting from decreasing crude production and increasing production from natural gas plant liquids and refinery gains. However, because of our increasing demand for petroleum, net imports are expected to increase from their 52 percent share today to 64 percent in 2020.

The lower energy growth rate that we are forecasting for the future is partly a result of improved energy intensity, which is the bottom line on this graph. Energy intensity has declined since 1970, most notably when energy prices have increased rapidly. Between 1970 and 1986, energy intensity declined at an average rate of 2.3 percent per year, as the economy shifted to less energy intensive industries and more efficient technologies.

Without significant price increases, and with the growth of more energy intensive industries, the intensity decline slowed to an average of 1.3 percent per year between 1986 and 1999. Through 2020, we project energy intensity to decline at an average annual rate of 1.6 percent, as efficiency gains and structural shifts in the economy offset growth and demand for energy services.

In conclusion, through 2020, continuing growth in the U.S. economy is expected to stimulate more energy demand, with fossil fuels remaining the dominant source of energy. Renewables are expected to supply seven percent of our total consumption in 2020, the same share as today. Nuclear is expected to supply a declining share due to retirements of existing capacity.

Thank you, Mr. Chairman, and members of the Subcommittee. I will be happy to answer any questions you have.

[The prepared statement of Ms. Hutzler follows:]

Chairman MCCRERY. Thank you, Miss Hutzler.

Before I begin my questioning, I want to say that I read your resume. It's a very impressive resume, and I dare say that you're an expert on energy. So we are pleased to have such a distinguished witness before us to discuss the Nation's energy concerns.

You raise some interesting questions with your charts. Maybe I misunderstood you, so I want you to clarify it. I think you said that renewable sources of energy over the next 20 years will remain relatively flat and that one reason for that is moderate prices for fossil fuels. Is that what you said?

Ms. HUTZLER. Yes, I did. Let me first clarify what I said about renewables. I said their share would stay flat. We do see a slight growth in renewable energy over that period, but its share will remain at seven percent.

In terms of our fuel prices, we are actually forecasting in the future that the current higher prices that you're seeing today will be coming down. We are seeing actually a declining trend for coal prices in real dollars. In nominal dollars, they will stay about flat.

For natural gas prices, we see them coming down in real dollars to about $2.50 per thousand cubic feet in the year 2004-2005, and then increasing again as demand increases and as we have to drill more difficult wells. Essentially, we're seeing pretty moderate prices in the future, not the high prices that we're seeing at this moment.

Chairman MCCRERY. That's interesting in light of your projections of a fairly steep increase in consumption of petroleum and natural gas, combined with your projection that imported petroleum will grow from 52 percent of consumption to 64 percent of consumption.

What assumptions are you making on our foreign suppliers of petroleum in terms of price?

Ms. HUTZLER. We look at a world oil price in our Reference Case (the projections I have showed you are for the Reference Case) of about $22.40 per barrel in real 1999 dollars for 2020. In nominal dollars, that's about $36 a barrel in the year 2020.

It turns out that there are parts of the world, particularly the OPEC area, where you can get oil out of the ground at a very low cost -- two to five dollars a barrel. We see that OPEC's role in the future and the amount of production that it will be having in the future will increase substantially to deal with worldwide demand. We look at this on a worldwide basis, and we see world demand growing from about 77 million barrels per day in 1999 to about 117 million barrels per day in 2020. It is not just us that will be increasing our demand on the oil sector, but it will be other parts of the world as well.

Chairman MCCRERY. That's very interesting. We'll see.

On energy intensity, your chart shows that energy use per dollar of GDP is projected to continue to decline over the next 20 years. Looking at the history from 1970 to 2000, it declined at a fairly steep rate, and you gave us some of the reasons for that.

Do the reasons include conservation as well?

Ms. HUTZLER. When you get higher energy prices--and we saw higher energy prices in that period between 1970 and 1986--that does mean that consumers will turn down their thermostats and turn to more efficient technology. So that is embedded in the energy intensity measure.

But it also means that there is a movement to structural shifts in the economy, where the economy changes over time, moving from more energy intensive industries to less energy intensive industries in that period.

Chairman MCCRERY. Getting back to the question of supply, do your projections assume, for example, production in ANWR?

Ms. HUTZLER. No. We only assume current laws and regulations, and since that production is not permitted at this point in time, we do not assume ANWR in these projections.

Chairman MCCRERY. I hesitate to ask this, because I don't know the answer, and I don't know what answer you're going to give me. But what is your opinion of the efficacy of our efforts to increase domestic supply in terms of price, in terms of dependency on other sources? Are we fighting a losing battle here? Are we wasting taxpayer dollars in providing incentives for increased exploration, development and so forth? What's your opinion?

Ms. HUTZLER. Our forecasts looked at the most economical way of achieving the demands that we forecast. We forecast both the demands and the supply of energy. In these forecasts, we don't have a shortfall. There is an equilibrium solution based on where we can get our sources of supply and where it's most economical to get those sources of supply.

The United States really doesn't have a comparative advantage in oil today, because we're essentially depleting our oil reserves and resources. As a result, we need to deal with foreign sources in order to meet our demands for oil, unless we do something else in the sectors where we get that demand, which is, for instance, the transportation sector.

It turns out that, certainly in our forecasts, the alternative fuel vehicles do not penetrate, that they're certainly not economic compared to the other vehicles, and they are not the vehicle of choice for consumers today. Consumers in this country look at horsepower rather than looking at efficiency, and they prefer their large automobiles with the higher horsepower. As a result, we put a large strain on demand for oil. With our current resources of oil, we're not going to be able to keep pace with that level.

Chairman MCCRERY. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman, and thank you, Miss Hutzler, for your testimony.

If you had to reverse roles with me or the chairman or any other Member of Congress, going home this weekend and facing constituents, and they ask you the question "why were my heating bills so high this winter, and why do the gasoline prices seem to be spiking up as we go into the summer months", what would your answer be?

Ms. HUTZLER. We're going to need to deal with that on a fuel basis, so let me talk about it by fuel type.

In terms of natural gas--and that's part of the larger heating bills that you saw this past winter--we had very low natural gas prices in 1998 and 1999. As a result of those low prices, the producing companies downsized and they didn't do the investments needed when demand spurred. They were not investing in the amount of drilling that was necessary to meet future demand.

We had relatively cold winters compared to the warmer-than-normal winters of the '98 and '99 time period. That demand, plus the extra demand for natural gas that we're seeing because of the generating plants, caused a huge demand for natural gas that wasn't readily available in terms of production.

As a result, we had to take from our storage areas the additional supplies needed to meet that demand which then made the storage go down. That produces a very tight market, and under a tight market situation, prices go up.

What is happening today is that those higher prices mean that we're drilling a whole lot more, and the companies are investing very heavily in drilling. We've seen close to record highs for the amount of drilling that's going on right now. So that's the reason why we anticipate, in the longer run, that the natural gas prices will be coming down.

We are forecasting the year 2001 to be the highest price for natural gas, over five dollars per thousand cubic foot at the wellhead. But then we expect it to come down a bit in 2001, and as I said, in the longer term, come down even further.

Mr. MCNULTY. What about the gasoline prices?

Ms. HUTZLER. The current situation with gasoline prices is that when refineries transition from the heating oil to the gasoline market, they realize that summer is their peak period and they have to run full-out during the summer period. Thus, they try to do some of their maintenance now in order to get ready for that peak period.

There are other issues, too, with refineries. We have this boutique of fuels, which means refineries have to gear up to be producing quite a few varieties of gasoline to meet the different environmental restrictions in different areas of the country. As a result, there were high spot prices and wholesale prices that have now gone into the retail market.

Another situation that we didn't foresee was that demand was actually higher than we had thought it was. We have gotten revised data in, showing that higher demand. Therefore, our demand forecast for the summer is probably going to be higher than we anticipated earlier, which will mean the price is going to probably be slightly higher, when we put out our next Short-Term Energy Outlook, which will come out on Monday.

Mr. MCNULTY. Now, looking toward the future, do you see the same moderation in the future with regard to gasoline prices as you do for the home heating fuel prices?

Ms. HUTZLER. Yes, we do. But most of the moderation is in the situation that we think world oil prices will be lower in the long term than we see them right now. Also, we do see expansion at existing refineries to give us the additional capacity that's needed.

Mr. MCNULTY. Do you see the entire reason for these price spikes the reasons you just gave, or do you see any evidence at all of price gouging?

Ms. HUTZLER. We do not have data to actually be able to investigate that question in detail. What we do see is that the productive capacity is not there for instance, natural gas right now. Therefore, it brings on the tight markets.

With the increased productive capacity that we will be getting from more drilling, we should be able to bring these prices down in the future.

Mr. MCNULTY. Is it correct that, outside of the West, the greatest potential for blackouts and brownouts would be in the New York region?

Ms. HUTZLER. We see New York as being probably the next area to watch, particularly because the New York City area has problems with transmission, getting electricity into that particular area. The city is trying to bring on more capacity by bringing on distributed gas-fired technologies within the area so they don't have to rely on the grid as much. But that doesn't necessarily mean, if they get a very hot peak day this summer, that there might not be some potential for a brownout.

Mr. MCNULTY. And what is your specific view again on the specific subject of today's hearing, which is with regard to energy conservation and production, the role that tax incentives can play?

Ms. HUTZLER. We have looked at tax incentives in a couple of different ways, one of which was that we were asked by two Congressional Committees to take a look at President Clinton's climate change technology initiative, and we did examine that to see what the impact would be on energy use based on those tax incentives.

Essentially, what our analysis indicated is that, for tax incentives to be successful, they need to be of the appropriate size--that is, amount, in terms of reduction. They must be of a certain length of time to make it reasonable for whatever they're trying to spur to have happen, and also that their timing has to be right. In other words, if the tax incentive is there but the technology for which they're directed at is not there, it is not going to give you what you want, which is to try to bring these technologies on so they can stand on their own two feet.

Now, in terms of what we have seen historically, one area that the tax credits have helped significantly is coalbed methane. Back in 1989, we were getting very little production from coalbed methane. Today, coalbed methane is providing about a seven percent market share in terms of natural gas production. So the tax incentive has seemed to do quite well with that particular technology.

In terms of wind, if you take a look at the amount of wind capacity that has come on line between 1994 and 1999, we got just over 900 megawatts of capacity. Between '94 and '97, only about 12 percent of that amount came on time. Eighty-eight percent came on after '97, in '98 and '99, and that was due to the fact that States enacted mandates that required that renewable technologies to come on time. Wind was a choice technology because it also had the tax credit.

We are seeing that, in the next two years, wind should double its capacity. It's about 2.6 gigawatts at the end of '99, and we see it doubling to about 5.2. That increase is being spurred by renewable portfolio standards that the States have enacted. The States tell us that they see the renewable mandate as a partnership with the Federal Government's tax credits. The two programs are working together to try to promote these technologies.

But prior to the 1997 period, when the States did not have program to push renewables, tax incentives didn't add much renewable capacity.

Mr. MCNULTY. Mr. Chairman, I see my time is up, but could I ask one more quick question?

Chairman MCCRERY. If you like, we can do a second round.

Mr. MCNULTY. Okay.

Chairman MCCRERY. Mr. Ryan.

Mr. RYAN. Thank you, Mr. Chairman.

Miss Hutzler, it is nice to have you here. I represent southeastern Wisconsin, which is facing a very unique problem today. That is, in the Milwaukee/Chicago region, which is an ozone nonattainment area, we have reformulated gas, phase two. We have a unique blend of reformulated gas, phase two, so we're experiencing a tremendous price spike at this time. So I wanted to direct my questions to you on reformulated gas and refinery supply and capacity.

Last year, we experienced a similar price spike, and the EIA produced a study analyzing reformulated gas, and it attributed--and correct me if I'm wrong--I think it attributed the range of the price increase of about 12 to 15 cents of the price per gallon of gas, to the reformulated gas switch over from phase one to phase two.

One of the things I wanted to ask you about is the transformation between the winter blend to the summer blend of gasoline. It had been our understanding, after consulting with the EIA, the EPA and the refineries themselves, that when you switch your tanks from winter to summer blend, on sort of a "cold turkey" basis--May 1st is actually the wholesale date that that takes place--that that injects into the system, which is already in tight supply, a huge supply crunch which causes a spike in price.

What is your opinion on that, and number two, this year we had hoped that we would receive the kind of regulatory relief from a different agency, not DOE, to allow the co-blending of winter and summer fuels to take place between May 1 and June 1, which is when the retail date for reformulated gas has to actually hit the pump. Do you believe that co-blending winter and summer blends during that transition period would have been able to ease the supplies and, therefore, reduce the price?

Ms. HUTZLER. Unfortunately, I'm not a refinery expert. I would prefer to submit the answer to your question for the record.

[The following was subsequently received:]

Transitioning from winter to summer gasoline is one of many factors that could lead to higher gasoline prices in the spring. Since refiners do not want an excess of winter gasoline that they can not sell at the end of the winter season, they wait until the last moment to transition from winter gasoline to summer gasoline. In most parts of the country, the transition could start in April without affecting engine performance. However, it is not economical to make summer gasoline earlier than necessary due to its increased cost. Thus, many refiners wait until the May 1 deadline to make the transition. Allowing refiners to mix seasonal grades during the month of May would probably not make that much difference, since it would most likely still result in refiners waiting to produce summer gasoline with the transition occurring two to four weeks later.

Mr. RYAN. Okay. Let me move to refineries then. At this time, we have six refineries that feed--this is an example that I think can be applied across the country--we have six refineries feeding the Milwaukee region with its gasoline. That's down from seven last year, where the Prime Core refinery shut down. We had a fire this last week in one refinery and that shut down. We have another refinery, the LaMont refinery, that shut down. So now we're at about four refineries, maybe five, if we're lucky to get something back up and running.

Do you believe that these are sufficient problems that need to be addressed on an emergency basis, more or less, and what are the solutions? The problem we're faced with is this: we know we can't pass a bill tomorrow to reduce the price of gas. We know we can't do something tomorrow to flip a switch and improve the supply going into the regions.

But what are some of the short-term solutions that can be achieved in giving flexibility to have different fuels, perhaps ethanol-based RFG fuels, coming into the region? Is that an alternative? Can the EPA and the DOE give the flexibility to do that?

Number two, what can we do through the incentive area tax policies to incentivize the improved and increased capacity in the construction of new refineries, and is the new source review regulatory scheme a big player in making it much more difficult to produce new refineries?

Ms. HUTZLER. Well, whatever we can do to increase the flexibility to produce these fuels, and to get them into the area, of course, is going to help alleviate the problems. As you indicated, the fire was one problem and that caused a situation with one refinery, and then there have been other issues.

Mr. RYAN. It ripples through, doesn't it?

Ms. HUTZLER. Yes, it certainly does. Of course, that does mean that the markets get tight and you're going to have a higher price spike due to that particular situation. You need to do whatever one is able to do in the short term in order to be able to produce flexibility.

Now, some of the things that you mentioned are areas of producing that flexibility. However, EIA is not a policy organization, so when you bring up what EPA should do, EIA cannot answer.

Mr. RYAN. Sure.

Ms. HUTZLER. That's not our place to answer.

Mr. RYAN. Let me just ask you from an analytical point of view. Do you believe that allowing different fuels into the region at this time, this summer, would help reduce the price?

Ms. HUTZLER. If you provide more flexibility, that generally is the direction it goes in.

Mr. RYAN. How about the ability to improve capacity and construct new refineries? Are there tax incentives that are options that would lead to that? When was the last time a new refinery was built in this country, and is the new source review regulatory structure such that it has been very difficult? Has it led to complications that have dis-incentivized the construction of new refineries?

Ms. HUTZLER. Well, the last large new refinery was built a good 20 years ago. We also saw in the seventies a lot of the small refineries essentially going out of business because it was difficult for them to compete.

We have seen the existing refineries, though, add more capacity, so it's not like we've been totally stagnant. We have had more capacity being added at existing refineries.

It turns out, though, that the environmental situation is a situation that causes problems with bringing new refineries. It is also the situation with the public, where it's the "not in my backyard" syndrome. People just don't want these kinds of refineries or plants in their back yard.

Mr. RYAN. It's fine if we could put them in Illinois. We would be okay with that, I think.

[Laughter.]

Ms. HUTZLER. Of course, those issues are certainly holding back the development, or the building or construction of new refineries.

Mr. RYAN. Do you think specifically the new source review has really been a disincentive in constructing new refineries?

Ms. HUTZLER. I can't answer that question directly because I haven't done an analysis of it, but I will try to get back to you for the record.

[The following was subsequently received:]

There are a number of reasons why a new refinery has not been built in a long time, chief among them is that in the first half of the 1990s, return on investment for major refiners averaged 2.4 percent, improving to 7.2 percent in 1998 and 1999. In addition, it is generally more economic to add capacity at existing refineries than to attempt "green field" construction of a new refinery.

Tighter environmental standards (for air emissions as well as water pollution control) also have added to the cost of building new facilities and may be a factor in encouraging capacity expansion in existing refineries rather than the construction of new ones. None the less, NSR can have an effect on capacity expansion at existing facilities. Some major refining companies have indicated to EIA that New Source Review interpretations have affected capacity expansion at their existing refineries. For example, one company that was considering replacing an old air compressor unit on its catalytic cracker wanted to use a new air compressor unit that would have increased the overall refinery capacity by 5 percent. Because EPA decided that this would fall under NSR, the replacement was not made. This company stated that NSR has caused them to defer investments in replacement equipment and refinery improvements. While EIA has not fully analyzed this issue, it does appear that NSR has had some impact on reducing refinery capacity expansion.

Mr. RYAN. I would appreciate that. Thank you. Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Ryan. Mr. Jefferson.

Mr. JEFFERSON. Good morning. It's still barely morning.

I'm looking at these projections you have on domestic production, which essentially says there may be some variations, with some going up and some going down, but largely it remains flat, right?

Ms. HUTZLER. Domestic production of what fuel?

Mr. JEFFERSON. Domestic production of energy in this country, everything--coal, natural gas, petroleum. When you add them all together, unless I missed it here, it is projected to remain flat, although natural gas and coal production will increase, domestic crude oil production is expected to decrease by seven percent a year. As a result, net petroleum imports are expected to increase from 51 to 64 percent to meet domestic petroleum demand.

In other words, what you're telling us is that, down the road, we're going to get worse off with respect to dependency on foreign sources of energy rather than better off, if the assumptions which you're using remain in place. Of course, these projections are based on certain assumptions.

Now, my question is, what assumptions do we have to change, if you will, if domestic production is going to increase, and how can we in the Congress work to support some changes that might bring about different factors for your assuming what will happen in the future with respect to domestic production? How can we increase domestic production, because most of us here are concerned about that. We hope we can do it through the Tax Code or through some energy policy or whatever. But it's a pretty bleak picture if down the road we're going to have more dependency on foreign sources.

So what are the assumptions that have to be in place so that you can say, based on these assumptions, there will be an increase in production on the domestic side rather than a flat projection?

Ms. HUTZLER. First of all, we are saying that only oil is a flat projection. We are showing increased production of coal, and increased production of natural gas.

One could perhaps increase these even more than we forecast. In terms of coal, we have a huge amount of resources in this country of coal. The real question for coal is its demand. Currently, coal is thought of as being not as environmentally clean as its major competitor in the electric utility sector, which is natural gas.

If you're going to build a new generating plant, coal and natural gas are fairly close to being competitors in terms of the cost of a new plant. Their average generation cost is about four cents per kilowatt hour. That's a lot less than renewable technologies.

Mr. JEFFERSON. May I interrupt you there. I understood you said coal production would increase and natural gas production would increase and oil production would decrease--petroleum production would decrease. Nonetheless, we end up with a 64 percent dependency on foreign products. In the end, we simply are depending more on foreign.

So now my question is this and what I want to have you clarify for me. Coal is not a choice source of energy here, because you say the demand isn't there because of the concern of pollutants, I guess, and so on. So let's say that's a problem.

Natural gas now is a cleaner burning fuel. Can increased production in that area make us less dependent on some sources of foreign energy or not?

Ms. HUTZLER. In terms of natural gas, we do expect a large increase in its production and its demand in these particular forecasts. However, we also see more imports of natural gas coming into this country. The percentage share only goes up by one percent from now to 2020, from 16 percent to 17 percent. But most of that comes from Canada. It is within the North American continent that we are importing most of the gas.

Mr. JEFFERSON. Is that because we don't have the capacity to produce the amount of natural gas we need or what, or don't have the resources to do it?

Ms. HUTZLER. We expect the production of natural gas to go up a lot in this country to 29 trillion cubic feet, from just under 20 right now. That's a huge increase, but it is all dependent on economics and resources.

We do have a vast resource base of natural gas, at 1200 trillion cubic feet, so that's fairly immense. But the Canadian area is able to produce it cheaper than we are, so we're going to import some of that here. So it is based on relative economics, on what our resource base is, and what it costs to produce it in different areas of the country and of the world, of course, depending on what particular supply source you're looking at.

Mr. JEFFERSON. So a lot of these assumptions that you use to come up with these projections is based on what you expect to happen in the cost of producing this energy in different parts of the world, and how we will respond to those economic issues out there because we want to pay less, if we can, for the fuel that's consumed here.

So that's a thing which we don't have control over, but if it were controlled in some way or other--I don't mean controlled by the government, but if the price were controlled for purposes of our analysis, you will never match the ones in Saudi Arabia, but of course, in Canada, that's quite a different picture.

But one of the reasons why we are projecting, even though we have these huge resources of natural gas, we can't meet the requirements with our own production because of the economics of getting it out of the ground into commerce, as opposed to what we can do in other places, right?

Ms. HUTZLER. Again, it depends on the fuel, yes.

Mr. JEFFERSON. So if we do something here to shorten the cost of it, to make the cost less, then perhaps it would be effective in spurring more domestic production of natural gas to meet the demand, which is going to far outstrip what we do now with respect to meeting the demand of the public, right? So that's one area.

Now, with respect--one last little thing. With respect to oil production, are you saying that we have depleted the resources in the ones we now know about? Is that why we don't expect increases there, or is it also related to the economies of price?

Ms. HUTZLER. We look at a resource base that the USGS and the Mineral Management Service develop. The resource base is quite large for natural gas. The only area where we're seeing depletion effects is in the oil area, for the most part, and that's why we have declining crude oil production.

Mr. JEFFERSON. That's what I'm asking, though. This will be the last thing.

Does it mean that--Let's say we're off the Louisiana coast and you were looking at, let's just say, god forbid, the California coast, or the Florida coast, or the Atlantic coast. When you talk about limitations on oil production, does it mean the universe of oil that we now know to be available to us in reserves in these areas is included in your analysis?

Ms. HUTZLER. Yes.

Mr. JEFFERSON. You include everything. California, this and that, Florida and all the rest of it?

Ms. HUTZLER. Absolutely.

Mr. JEFFERSON. And even then, your analysis is that there's not enough oil around this country to increase our oil production significantly to alter the factors here, even if we open up those areas to production?

Ms. HUTZLER. All non-restricted areas we include right now. We don't include the restricted areas, such as in ANWR. If we included them, we would get more oil production, though I don't think we would be able to meet the demand. It's going to take time to open those areas and to get them at their max production. You might think of seven to ten years as the time needed to get them to be at their peak production levels.

Chairman MCCRERY. Mr. Jefferson, I had pursued a similar line of questioning earlier. I think the answer that I got was that all the charts that we've been looking at, which project supply of the various sources of energy, are based on current law, which includes current law restrictions on production like in ANWR or off-shore Florida, California and so forth. So Miss Hutzler's projections are based on only the currently available sources for legally producing petroleum.

Ms. HUTZLER. That's correct.

Chairman MCCRERY. So her projections do not include those areas that you were referring to, which may or may not come into play in future generations.

Mr. Watkins, did you want to ask some--

Mr. WATKINS. I have no questions. I would make some comments, but I know we've got another panel and, for the sake of time, I will wait until then. I think you will hear some real live discussion about how incentives can really be of help.

Chairman MCCRERY. Miss Hutzler, two quick questions. How important are independent oil producers, independent oil and gas producers, to our energy supply in this country?

Ms. HUTZLER. Quite important.

Chairman MCCRERY. Could you speak up, please. She said "quite important". Okay.

Ms. HUTZLER. They 44 percent of the oil that was produced in 1997, and they produced about 60 percent of the on-shore oil in that particular year.

Chairman MCCRERY. And how about exploration and new wells being drilled on-shore? Is that a fairly high percentage being done by independent producers?

Ms. HUTZLER. I would say so. I don't have the exact figure, though.

Chairman MCCRERY. Vice President Cheney announced that the administration hopes to triple the use of renewable fuels--solar, biomass, and wind power--from filling basically two percent of our needs to six percent within 20 years.

Do you think, based on your analysis, that this is feasible?

Ms. HUTZLER. Our analysis shows them not growing that far, so they cannot do that without some other help. It would not be economic to do that without some other help.

Chairman MCCRERY. In other words, if we're going to achieve that goal, in your opinion, we're going to need additional incentives to achieve that?

Ms. HUTZLER. That's correct.

Chairman MCCRERY. Thank you. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. Miss Hutzler, thank you again for your testimony today. It is quite helpful. I had one more question.

Have you at all taken a look at the fuel cell technology that companies like Plug Power are working on, and if you have, what is your analysis of their potential for helping us to address our energy shortages?

Ms. HUTZLER. We do have the fuel cell within our forecast. Now, the fuel cell technology we look at is fueled by natural gas. Its capital costs are much higher than the competitive natural gas technologies, i.e., the combined cycle or turbine technology. We get very little penetration of fuel cells. I think by 2020 we get 300 megawatts and that's about it. So right now it is not economical against the competition.

Mr. MCNULTY. Thank you.

Chairman MCCRERY. Miss Hutzler, thank you very much for appearing before us today. We appreciate the good information you brought us.

I will now call our final panel, Mr. Williams, Mr. Morrison, Mr. Carlson and Mr. Wallace, if you will come forward. This panel is composed of Steven R. Williams, President, Petroleum Development Corporation, from Bridgeport, WVA, and Bill Carlson, Vice President, Wheelabrator Environmental Systems, Inc., Anderson, CA.

To introduce our two other panelists, I will refer first to my colleague from Florida, Mr. Foley.

Mr. FOLEY. Thank you very much, Mr. Chairman. Briefly, I wanted to introduce Bob Morrison, who is Vice President of FPL Energy, which is headquartered in my district, one of the largest employers in my congressional district.

They have been in wind energy production since the first farm was created in Altamont Pass, CA in '93. FPL Energy is the largest developer and operator of wind energy facilities in the Nation, with more than 1,500 megawatts out of a total of 2,500 megawatts produced in the United States. They have plants, or at least wind energy facilities, in California, Iowa, Minnesota, Oregon, Texas, Washington and Wisconsin.

We are delighted that he took time away from Jupiter, which some days I would rather be than in Washington, to visit with us today and obviously inform us of not only the productivity of wind energy, but the importance as we approach a balanced energy policy.

Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Foley. Mr. Watkins.

Mr. WATKINS. Thank you, Mr. Chairman, and members of the Committee.

I am really honored. I just want to say to all of you that it is a real privilege today to have a fellow that I've known for a long, long time. He hails from Seminole, OK. Dan Wallace is the owner of Columbus Oil Company from Seminole.

To put some importance on it, Mr. Chairman, in Seminole County, at one time, I think the early twenties, they produced one-third of the oil in the world. I say in the world. Dan Wallace, as we speak right now, as he's here testifying, he is drilling a 4,400 foot well--I think you're down to about 3,600 feet, somewhere close to that. So he's a live, wildcatter, risk taker, who is a domestic producer out there. He knows that tax incentives are things that help make the production go out there, and people like him. So I am glad that Dan Wallace has come from Seminole, OK to be here today.

Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Watkins. Mr. Williams, we will begin with you.

STATEMENT OF STEVEN R. WILLIAMS, PRESIDENT, PETROLEUM DEVELOPMENT CORPORATION, BRIDGEPORT, WEST VIRGINIA

Mr. WILLIAMS. Thank you very much.

Mr. Chairman, members of the Subcommittee, my name is Steve Williams and I'm the President of Petroleum Development Corporation of Bridgeport, West Virginia. I appreciate the opportunity to be here today to talk to you about the possibility of an extension of the section 29 tax credit for producing fuel from non-conventional resources.

I can speak from personal experience about section 29, which was created in 1980 in a situation not too different from what we find ourselves in right now, with shortages of natural gas and concern over imported oil levels. I have been in the business of producing non-conventional gas since 1982, when I joined Petroleum Development Corporation. We currently operate over 2,000 oil and gas wells in seven States--in the Appalachian Basin, Michigan, and in the Rocky Mountain region--and virtually all of our production is, in fact, from non-conventional sources.

When congress created the section 29 credit in 1980, the goal was to encourage U.S. production from deposits which were difficult and expensive to produce. In fact, much of our remaining on-shore resource fits just exactly that description. Congress then felt that non-conventional resources were needed to provide consumers with the energy that they wanted at a reasonable price.

I think one of the really attractive features of the credit, from the standpoint of the taxpayer and consumer, is that it's awarded only for success. It is a production credit that you earn by producing gas from non-conventional sources, and if we don't produce gas, then we get nothing for the risks we take in drilling the wells.

In fact, I think the question was asked earlier whether section 29 was successful in generating the desired result. I think the evidence is very clear that it has been. It has resulted in a significant increase in the amount of production from these difficult-to-produce sources. In addition, it has driven the development of new technologies which have made more resources economic, more resources available, throughout the country. But the section 29 credit is expiring. In fact, it expired for new wells back in 1992, but the credit for the wells that did qualify before that will be expiring or is scheduled to expire at the end of 2002.

I can't speak for every producer, but I do know some of the impacts that expiration will have on my company. First of all, there are wells with remaining reserves that are too expensive to produce absent the credit. Maybe with five dollar gas prices they would be profitable, but I suspect that price won't be around for too long, and maybe we'll be back in a two dollar gas price scenario again.

Once we plug those wells, as has been pointed out, it is really uneconomical to go back and reopen them and put them back into production, so we will lose whatever remaining resource is in those wells when we plug them.

In the case of my company, we plan no further wells in the Appalachian Basin, where we started from and where we drilled exclusively for almost the first 30 years of our existence. We just can't justify the economic return given the uncertainty of the results of those wells, so we're not drilling there. Many others aren't as well, and we are losing the ability to drill wells in that area as the infrastructure dries up and goes away.

Finally, our availability of capital for drilling wells, whether from non-conventional sources or conventional sources, will be reduced with the loss of the credit.

We know that section 29 has worked historically, and the question also should be asked as to whether it will continue to work in the future. You don't have to take my word for that. Attached to my testimony today is a summary of a study that was prepared by the Gas Technology Institute, which has been analyzing non-conventional fuel issues for 20 years, and Energy and Environmental Analysis, Inc., which was the lead contractor in the 1999 National Petroleum Council study of natural gas supply.

The conclusion of that study is that an extension of section 29 could have a significant impact on consumer prices in the short term as well as in the long term. The study used the NPC study as a base case and examined the impact of a section 29 extension and allowing new wells to qualify for the credit. Several of the key results of that study:

First of all, over the next 15 years, production of non-conventional gas resources must double again if the United States is to meet its demand needs. Also, if we fail to do that, it will result in further increases in the import of oil to fill in that gap, or imports of natural gas from other places to fill that gap.

The study projects that the extension of the section 29 credit could result in an increase in the annual supply of natural gas from non-conventional sources of two trillion cubic feet by 2015, and a total increase in supply of over 15 trillion cubic feet over the same period. And, I think perhaps most importantly, the study projects that the extension of section 29 could result in savings to consumers of more than $100 billion for the cost of the gas that they buy for their needs.

Finally, the study concludes that among the competing sources of additional gas that are out there, section 29 gas is one of the quickest and most effective ways to provide additional supplies because the infrastructure needed to deliver it is already in place.

In conclusion, I would say to you today that there is no single energy supply solution, but we think that section 29 could play an important role in helping to reduce natural gas costs for consumers over the next 15 years, reducing our dependence on imported energy, helping to keep our environment as clean as possible, while providing the energy that we want and in spurring additional technological innovation over the coming years.

In addition to that, it also has direct impacts on the communities where we live, because in order to achieve that increase in production, we will need to drill another $15 billion worth of wells using services and employment in the communities where we live, all important things to those of us in this room.

I thank you very much, gentlemen, for allowing me to come and speak to you today, and I would certainly be happy to answer any questions I can.

[The prepared statement of Mr. Williams follows:]

Chairman MCCRERY. Thank you, Mr. Williams. Mr. Morrison.

STATEMENT OF ROBERT MORRISON, VICE PRESIDENT OF BUSINESS DEVELOPMENT, FPL ENERGY, LLC, JUNO BEACH, FLORIDA

Mr. MORRISON. I would like to thank Mr. Foley for introducing me.

Chairman McCrery, members of the Subcommittee, as Mr. Foley mentioned, my name is Robert Morrison. I am Vice President of Business Development for FPL Energy. FPL Energy is a subsidiary of FPL Group, one of the largest electric utility holding companies in the United States. Our sister company is Florida Power & Light. It serves south and eastern Florida as a regulated investor-owned electric utility.

I want to thank the chairman and the members of the Subcommittee for inviting me to testify on behalf of FPL Energy about the importance of extending the wind energy production tax credit. FPL Energy is the largest developer, owner and operator of wind-powered electric generating facilities in the United States. We have more than 1,500 megawatts of wind turbines in operation or under construction in seven States. By the end of 2001, wind-powered generating projects will represent 30 percent of FPL Energy's total generating portfolio. I think we have a map over here that demonstrates where FPL Energy currently owns or is constructing wind projects.

FPL Energy is committed to clean energy sources and strongly believes that, among all the renewable energy technologies, wind energy is the most economically-viable and has the best potential to quickly add significant new and clean sources of electric power generation across a broad range of geographic areas in the United States.

I want to commend Representatives Foley, Weller, Matsui, and Thurman for their leadership in introducing H.R. 876 to extend the production tax credit. I also want to thank you, Mr. Chairman, and full Committee Chairman Bill Thomas for your strong support of wind energy.

As I think everyone knows, the PTC provides an inflation adjusted 1.5 cents per kilowatt hour Federal tax credit for electricity produced with new wind turbines for the first ten years of each turbine's operation. The PTC stimulates new wind projects by assisting the industry in competing with fossil fuels used for electricity generation. We strongly believe that Congress should extend the PTC at the end of this year, as proposed by H.R. 876.

The PTC has proven to be an excellent legislative investment and is a shining example of a Federal policy initiative that has successfully achieved many of its original goals. The PTC has served as a catalyst, stimulating development of many large utility scale wind projects across the United States. With the support of the PTC, the wind industry expects its costs will continue to decline as turbine technology improves and the wind industry is able to realize economies of scale, both in turbine size and manufacturing volumes.

The turbine technology of the 1980s was an infant technology, and the cost of electricity from wind energy during that period of time often exceeded 25 cents per kilowatt hour. In the intervening 20 years, a relatively short period of time in the power generation business, the industry has reduced its costs by a remarkable 80 percent, to a current cost of around 4.5 cents per kilowatt hour, not including the effects of the production tax credit. With increasingly sophisticated turbine designs and manufacturing efficiencies, the wind industry expects the cost of wind energy will continue to decline, until such time in the relatively near future when it can compete directly with fossil fuels without any incentives.

The severe shortage of electricity in the Western United States points to the critical need for the development of new alternative energy sources. Throughout the West, power shortages have led authorities to call for the construction of new power plants. Even with the fastest construction schedules, conventional fossil fuel plants can take several years to bring on line. In contrast, environmentally benign new wind plants can often start producing energy in only a matter of months.

In California, for example, if PTC is available, FPL Energy sees the potential to develop new wind projects over the next 18 months in that State which could serve in excess of 400,000 homes, thus alleviating some of the electric supply problems in California.

Nationwide, wind power projects currently represent about 2,500 megawatts of capacity, enough power to meet the electric energy requirements of about 700,000 homes. As shown on the next map here, there are also vast parts of the country that are very suitable for the development of wind projects with an excellent wind resource, and many other parts of the country that have not yet even been explored for the potential to build wind projects in the future.

Also, most of America's farming and ranching regions have promising wind resources. Since wind projects displace only a tiny amount of crop or ranchland, in terms of roads and foundations and the like, lease payments from wind projects serve as a valuable and additional source of diversified and stable income for ranchers, farmers, and other rural landowners. Also, wind projects bring new economic opportunities to the rural areas where they're located, including local tax bases, new manufacturing opportunities, and new construction and operations jobs.

Domestic wind development also provides economic benefits to other sectors of the economy. FPL Energy has components of its wind turbines and wind projects manufactured throughout the United States, including a variety of States--California, Louisiana, Illinois, Wisconsin and Texas, just to name a few.

Since the PTC is directly linked to energy production, the credit is inextricably tied to the financing, permitting and construction of new facilities. With the credit due to expire in only a few months, it is very difficult to adequately plan for anything but the most immediate projects. Longer-term plans are simply prevented by the budgeting, permitting and project construction cycles, all of which are at least 12-18 months long. The immediate extension of the PTC is critical to the continued development of wind power in the United States.

This concludes my hearing testimony. Again, I would like to thank you for the opportunity to provide FPL Energy's testimony.

Thank you very much.

[The prepared statement of Mr. Morrison follows:]

Chairman MCCRERY. Thank you, Mr. Morrison. Mr. Carlson.

STATEMENT OF WILLIAM H. CARLSON, VICE PRESIDENT AND ALTERNATE ENERGY GROUP GENERAL MANAGER, WHEELABRATOR ENVIRONMENTAL SYSTEMS, INC., ANDERSON, CALIFORNIA, ON BEHALF OF USA BIOMASS POWER PRODUCERS ALLIANCE

Mr. CARLSON. Mr. Chairman, members of the Subcommittee, the USA Biomass Power Producers Alliance, whom I represent today, appreciates the opportunity to testify today in support of President Bush's inclusion in the 2002 budget of a provision allowing existing biomass plants to qualify for the section 45 tax credit. We intend to show why this represents good public policy and how it will be used to increase generation of renewable power from existing biomass plants.

The Alliance represents most of the 100 small biomass power plants spread across 30 States, from California to Maine, and New York to Florida. We dispose of over 22 million tons annually of waste wood from the Nation's agricultural, forestry, and urban wood waste streams, while producing one-half of one percent of the Nation's electricity. We combust rice hulls in Louisiana, sugar cane waste in Florida, orchard prunings in California, untreated urban wood in New York and Massachusetts, and forestry waste materials in Michigan, Maine, and the West. In the process, we lower air emissions by 96 percent versus open field burning, free up valuable landfill space, and assist public forest land managers in removing excess fuels to lower fire risks.

Our plants are typically located in rural areas, where we may be both the largest private employer and the largest property taxpayer.

Since 1992, the section 45 tax credit for wind and biomass has provided an inflation-adjusted 1.5 cent per kilowatt hour tax credit. Due to excessively narrow drafting, no biomass plant has even claimed one cent of credit. The existing credit simply does not work for our industry.

The credit applies only to closed-loop biomass, which are agricultural products grown exclusively to produce power. Not one plant has been built utilizing this material as the economics simply will not support the concept. On the other hand, well over 100 open-loop plants were built using clean waste wood and selling to utilities under the auspices of PURPA contracts.

These contracts typically contain ten or more years of known rates based on the utility's own costs, but most of these plants are now beyond that point and struggling to survive in a deregulated market which values price only. As a consequence, nearly 30 percent of the industry has closed its doors since 1994. Already, farmers have resumed open-field burning, wood is going back to landfills, and excess fuel removal in western forests has virtually halted.

So why should the President and this Congress care about saving this small renewable industry, whose electrical output could easily be replaced by a handful of new gas-fired plants? The answer is found in a November, 1999 study by the Department of Energy that sets out to put a dollar value on the environmental benefits of the biomass power industry. The study looked at the alternative fates of waste materials were they not to be combusted in a biomass plant. The conclusion is that the nonelectric environmental benefits of reduced air emissions, landfill avoidance, and improved forest health totaled the equivalent of 11.4 cents per kilowatt hour of biomass power produced. Clearly, the 1.5 cent per kilowatt hour tax credit applied to this technology is a wise investment of public funds with an exceptional return.

The Clinton and Bush administrations clearly recognized these values when they included in the 2001 and 2002 budgets, respectively, the definitional changes that would allow the types of open-loop plants that we operate to qualify for the credit.

Mr. Herger and Mr. Matsui introduced this week a comprehensive bipartisan biomass bill that provides further definition to the President's budget bill. On the Senate side, Senator Grassley has introduced S. 756, a bill virtually identical to the Herger/Matsui bill. Both Republican and Democratic energy bills include the definitional change to biomass and make it available to existing facilities. Clearly, this is a bipartisan issue with broad support.

This tax credit is the appropriate mechanism to stabilize the industry and incentivize additional production. It is only through maximum production from existing plants that the Nation captures the full range of environmental and energy benefits. In current energy markets, most biomass plants operate only a fraction of the time at full capacity, due to the low value of power during off-peak times and the rising cost of fuel with additional production.

The current credit is at the right level of allow virtually all plants to cost-effectively operate at maximum capacity at all times. A lower credit would not accomplish this same level of operation. Quite simply, if you run and produce the environmental benefits for the public, you get the credit.

The current tax credit includes a provision whereby the credit goes away during periods of high power prices. We support that protection against windfall profits and suggest no change.

We ask once again for your support of the President's expansion of the section 45 biomass tax credit, as modified and clarified by the Herger/Matsui bill. We advocate that this expanded credit represents good public policy and is a textbook example of how tax credits can be judiciously used to cost-effectively and simultaneously accomplish the Nation's energy and environmental objectives.

We thank you for this opportunity to testify and welcome your questions.

[The prepared statement of Mr. Carlson follows:]

Chairman MCCRERY. Thank you, Mr. Carlson. Mr. Wallace.

STATEMENT OF DAN WALLACE, OWNER, COLUMBUS OIL COMPANY, SEMINOLE, OKLAHOMA

Mr. WALLACE. Mr. Chairman and members of the Committee, after that introduction by Congressman Watkins, I feel compelled to tell you I am not J.R. Ewing.

[Laughter.]

But I am a blue jean-wearing, boot-wearing, pickup-driving "oily" from Seminole, OK. When invited here, I was invited here to represent that segment of the oil and gas industry known as the independent producer, operating marginal stripper production.

I heard the young lady earlier today testify that we produce about 50 percent of domestic crude barrels, and I suggest to you we probably produce about 70 percent.

I assume we all know what a marginal or a stripper production well is here today. I assume that we're acquainted with Congressman Watkins' introduction of the 100 percent net income tax limitation suspension back in '97, and I assume that we all know what happened to the price of oil in 1998 and '99, after the introduction of the suspension. I would suggest to you that if it was important enough in 1977 and 1997, it's probably more important to you today.

If the question were asked, should we continue the 100 percent net income limitation, the answer should be yes. If one would ask why, the answer should be to encourage the exploration and production of the domestic barrel. If not to increase production, at the least slow the decline curve.

If one was to ask how we would do that, my follow-up to the question would be I think there needs to be a partnership between the government, the private sector, the industry, to encourage the investment of risk capital in the production of the American barrel.

Tax incentives can and will help find the domestic barrel and the domestic natural gas. These efforts will not only help the independent producer, but also will help develop America's reserves. Businessmen and woman that make legitimate business decisions must be made on knowns, not hypotheticals, not projections.

In the independent business, we have to live in the real world. We have to get up every morning and put our clothes on and go to work with what is going on in the real world today. What is the price of the commodity? What are the percentages of the investment dollars? Are the rules going to get changed? Is the price going to get changed? That's what we get up and go to work with most every day.

I would suggest to you there are 1,440 minutes in a day, seven days in a week, and these wells run every day of every week of every year. This is a seven-day-a-week business. The consumption is a seven-day-a-week business. The supply side is the same.

You ask how does the suspension of the 100 percent net income limitation work, how does it affect my bottom line? As Wes said earlier, I'm currently, as of six o'clock this morning, about 3,600 foot deep on a 4,400 foot well. The estimated cost, about $220,000. I got up this morning watching CNBC, and the price of oil drops four percent yesterday.

I can assure you, that means something to me. It does not drop my cost. I don't have to explain that to you fellows. I'm sure you've all been there and done that before, like myself. But that's the world that we independents live in.

I own about 50 percent of this well, and four of my other buddies own the other 50 percent. My backing is my bank. My collateral at my bank is my stripper and marginal production. That's what they hold the mortgage on, for me to get the money. In case I can't come up with the money, at least I can go borrow the money and pay my 50 percent of this well. The other four guys, I can tell you, are the same way. If not this well, it will be the next well.

I can also tell you for a fact that this is the first well that I have drilled in about 12 years. One would ask, well, why is that? I suppose you're going to get around to asking that later on. Pretty simple logic is the answer to where the independent is.

I would also suggest to you that, in the past 15 years--and people are going to talk about the infrastructure, and I've heard some of the speakers today talk about it. Let me tell you one of the most important things. The infrastructure that's being lost in this country is about 70 percent of the independent producers who have either bellied up, gone broke, got out of the business, second generation, let's sell out and quit fighting it, take what we can get safe, and let's go on down the road and retire.

That's all the knowledge, all the experience. There is not a university in this country that can teach the things that the independent producer must know before he takes his risk dollars, or maybe somebody else's risk dollars, and puts them to work. There is not a book in any library. That's the infrastructure that's being lost, the independent producer.

I would suggest to you that behind me the generation will skip. There won't be an aggressive, risk-taking, gambling generation in numbers behind my particular generation in the independent sector.

My particular well that I just alluded to represents about four independent producers. If you would take the thousands of independent producers across the country and divide four into it, I think you will find there are literally hundreds of wells being drilled by the independent today. I can also tell you that only in the last three years this country has lost another 10 percent of its daily pipe-line runs. That's the infrastructure.

If you want to fix the problem in this country, from the people that do things--we're not much as talkers, although I have sit here and talked quite a bit. But I think we are the doers. That's the consensus of the independent producer.

Thank you.

[The prepared statement of Mr. Wallace follows:]

Chairman MCCRERY. Thank you, Mr. Wallace.

Mr. Wallace, with respect to the suspension of the 100 percent net income provision, did that suspension allow you to keep open some wells that you otherwise might have capped?

Mr. WALLACE. No question about it. No question about it. I can't say enough about that, and I can't say enough about any tax incentive that is offered in this particular industry.

Seriously, you must be dealing with some knowns. The incentives offered us, if not taken away, are the knowns. Whenever we create the budget in which we're going to try to operate on with the forthcoming year, it's a very volatile market and we don't know what the price of the commodity is going to be.

Chairman MCCRERY. If you had capped those wells rather than keeping them in production, would you have been able to just go back out in the field and open them up when the prices got back up?

Mr. WALLACE. No, sir. I heard somebody testify earlier, something about the capping of wells, the plugging of wells. That's a serious problem. That is not going to fix this problem today, but that is a problem that needs some consideration down the road.

I would suggest there be some technology looked into on how to plug a well. Maybe not the old conventional method that we've used for the last 50 years. Maybe that's not the best. That's in the event you want to go back.

Chairman MCCRERY. Now that prices have rebounded, what role does the suspension of the net income limitation play in developing capital and directing that to new production?

Mr. WALLACE. An excellent question. It provides the opportunity to take some profits from some profitable leases, wells, properties, and go back and rework those stripper wells, to try to improve them from possibly a three-barrels a day well to a five- or six-barrels a day well. That's the opportunity it offers you, the incentive to put those dollars at risk back into the business.

Chairman MCCRERY. Do you do your own taxes, Mr. Wallace?

Mr. WALLACE. No, sir. I'm fortunate enough to have a CPA in my office, who's been with me for 20-some years.

Chairman MCCRERY. Do you talk with your CPA about your taxes?

Mr. WALLACE. I think my CPA runs the business, rather than me, sometimes.

Chairman MCCRERY. Have you ever talked with your CPA about the effects of the alternative minimum tax--

Mr. WALLACE. I'm sorry?

Chairman MCCRERY. Have you ever talked with your CPA about the effects of the alternative minimum tax on your business?

Mr. WALLACE. Yes.

Chairman MCCRERY. And what does he tell you?

Mr. WALLACE. He doesn't much care for it.

Chairman MCCRERY. He doesn't much care for it. Have you gotten into any of the detail as to why he doesn't care for it?

Mr. WALLACE. Well, again--not in detail. I'm not an accountant and, after 20-some years--We have a lot of one-on-one conversations, I can assure you.

Chairman MCCRERY. I'm sure you do.

Mr. WALLACE. I don't try to tell him how to run the Tax Code, and he doesn't tell me how to run an oil well. But we have discussions. As far as me being well-versed, no.

Chairman MCCRERY. Well, allow me to just say, gentlemen on the Subcommittee, we need to take a look at the AMT and the effect it has on independent producers, because it is a very serious impediment to independent producers having reliable income. In fact, it's a very perverse influence on the production of oil by independents because, in bad times, it punishes them. If they're having bad years, income-wise, the alternative minimum tax actually punishes those independent producers at the worst possible time, driving some of them out of business and certainly preventing them from reinvesting in the ground, so to speak. So that may be something we'll have to get into in another hearing.

Mr. Williams, according to a study by the Gas Technology Institute that you referenced, non-conventional gas production tripled in the past 20 years, growing from about 1.5 trillion cubic feet per year in 1980 to about 4.6 trillion cubic feet currently.

Can you offer us any insight on the role that the section 29 credit played in this increase?

Mr. WILLIAMS. Certainly. I'm pretty intimately involved with it, and have been for a number of years. I think it absolutely played a key role in that increase.

I think maybe you could look at coalbed methane as the best example. In 1980, there was no effective coalbed methane production in the United States. In fact, through most of the eighties, it remained at relatively low levels. It was in direct response to the section 29 credit that people were willing to go out and take the additional risk to attempt to produce a formation that had never been produced before, effectively and economically.

That same kind of risk taking also applied to tight formation gas and Devonian shale, because of the additional incentive and security provided by the credit. Wells were drilled that wouldn't have been drilled; new techniques for drilling wells and producing wells, were developed that made wells that would not have been economic even with the credit 20 years ago very economic today, or much more economic.

I see that as a possibility for the future. I absolutely think that reinstating the credit would encourage our industry to take those kind of chances again. You know, over the last ten years, we've been living on our past laurels, going back in, completing the drilling of fields that were started before that, and doing less and less exploratory work. These kind of incentives help to take away some level of the risk. Basically, they help to ameliorate the price risk to some degree. It just reduces the number of risks that you have got to deal with before you decide to put your money in the ground.

Chairman MCCRERY. Thank you. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I want to thank Mr. Williams, Mr. Morrison, Mr. Carlson and Mr. Wallace for their assistance today. I'm just going to ask one question of Mr. Morrison.

In my opinion, there is tremendous merit in pursuing alternative sources of energy, particularly wind power. I noted in your testimony that you had some estimates about how much production could be increased given the proper resources. I want to get a handle on what you really mean by that and what would you consider to be the proper resources necessary in order to fulfill the vision that you have for wind power in the future, and if you could quantify what that actually would be in the end, if you could give some kind of a guess of your vision of what percentage of our energy supply could eventually come from wind power.

Mr. MORRISON. Sure. With respect to what is required to facilitate wind becoming a significant source of energy in the United States, I think the credit for the next few years is of essential importance.

As I alluded to in my testimony, the price of this energy has decreased dramatically, and we are now approaching the point where wind is (with the PTC) directly competitive with fossil fuels. I think the cost of the technology will continue to decrease as turbine sizes continue to get larger, which makes them more efficient because there's less steel, less copper, etc., per kilowatt hour that comes out of the turbines.

Additionally, most of the manufacturing of these machines currently occurs in Denmark. I am sure that, if there is a stable, long-term American market, that manufacturing will shift to the United States. There will be factories built in the United States and components will be sourced in the United States, gear-boxes, generators, and so on, which are currently manufactured in European factories. So with a stable, long-term American market, I think we will have tremendous growth and tremendous efficiencies and increasingly reduced costs in this business to the point where wind will be directly competitive with fossil resources.

With respect to what my guess is--and it's nothing more than a guess--as to what this technology could eventually provide in the way of electricity generation in the United States, west of the Mississippi is probably where most of the resource is. It is also where the land usage patterns are amenable to large-scale utility wind farms. Also, it just has population densities that are favorable for wind.

In that respect, I think it's interesting to draw a parallel to Denmark, where this technology has been around for a similar amount of time as it's been in the United States, but in Denmark it has benefited from a stable, long-term policy. The Danes currently provide about 15 percent of their national electricity from wind, and they're targeting a third by, I believe, the year 2012.

West of the Mississippi, I think this technology could easily provide 10 percent of the electricity consumed in that region. With favorable public policies and some luck on the technology side, it would be upwards of 15 percent. In the East it would be slightly less because the population densities are higher.

Wind will be a small percentage piece of the puzzle in solving the Nation's environmental and energy problems, but nevertheless, 10 percent of the electric energy consumed west of the Mississippi is an enormous absolute quantity of energy. In particular, as a marginal percentage of new capacity added, wind would be substantially greater than that.

This technology is not going to generate 40 percent of the energy in this country. Nevertheless, it's an important piece of the puzzle.

Mr. MCNULTY. Thank you very much. I thank all the panelists, and thank you, Mr. Chairman.

Chairman MCCRERY. Mr. Weller.

Mr. WELLER. Thank you, Mr. Chairman. This has been as good panel.

I would comment to Mr. Wallace that your Representative in Congress, my friend Wes Watkins, has been talking about these little guys and gals that are independent oil people back home, and it's nice to have you before the Committee today. Wes does a good job of speaking out for you, and it is nice to see, West, that you brought one of them. You brought a live one here and we appreciate Mr. Wallace being a part of this today.

There are a couple of questions I would like to direct first to Mr. Williams. You were talking about the section 29 tax credit and the role it plays, particularly in addressing the additional cost of non-conventional fuels, making that a competitive solution as we look for ways to increase domestic sources of energy.

According to the statistics that the chairman pointed out, about the increase in non-conventional gas production tripling over the last 20 years, do you feel today that we have reached the peak? Do you feel that we have an adequate supply of non-conventional fuels, or do you feel there's an opportunity to continually increase the amount of non-conventional fuels that could be made available as a result of the section 29 tax credit?

Mr. WILLIAMS. Certainly, I do think there's a great opportunity to continue to increase the supplies of non-conventional sources. In fact, I think it's essential that supplies of non-conventional sources continue to be increased. I have not seen any long-term supply model that doesn't have them playing a significant part in the future supplies.

The reality is that the amount of conventional resources available domestically is declining. We have developed more of our conventional resources because they're more economic and easier to develop. So more and more, what's left is non-conventional. If you want to have an adequate supply, that's where it's going to have to come from. But I certainly think we have developed some of the technologies to develop what's there, but there is certainly room for improvement over the coming years.

Mr. WELLER. What do you see as additional barriers to increasing non-conventional fuels that we need to address in the Congress? When you look at the Tax Code, not with just section 29, are there any other provisions in the Tax Code that have an impact on the production of non-conventional fuels?

Mr. WILLIAMS. The net income limitation is an issue, and the alternative minimum tax is very much an issue. I would point out that the chairman is absolutely correct, that when prices are low and our profits are lowest the alternative minimum tax has the most adverse impact. When profits are high, we tend to be not under the alternate minimum tax umbrella. Certainly that's been the experience with my company, and myself personally, with my own investments in the wells that we drill.

But I think, even beyond the Tax Code, one of the big issues is access. The more we cut off potential areas of development around the country from access for oil and gas development, the less resources will be available.

My company recently had an experience with denied access in Utah. We leased some land on a Federal lease and started to work putting together the permits for it. Initially we were delayed waiting for eagle nesting season to end. By the time that was done, the former President's roadless initiative had taken effect, or had been proposed, and we're sort of sitting and waiting to see whether we will even be able to get access to the land that we've already leased. I think that's a major issue for our industry.

Generally, I think there are a number of provisions in the Tax Code that are very helpful in the formation of capital. Capital formation is absolutely essential to our industry. Whether it's the small wells, one well that you're drilling for yourself, or a company like mine that goes out and accesses capital through public markets, in addition to our own money, having a project that has a reasonable level of risk and an acceptable rate of return is essential. With the price volatility that we've seen in the last decade, it becomes very difficult to do.

Mr. WELLER. Thank you, Mr. Williams.

Mr. Morrison, the wind energy tax credit, of course, I'm one of those who believes very strongly that it needs to be extended and that it's a key incentive as we look for alternative ways of generating electricity, something that's in shortage in California and elsewhere in this country. Of course, green power is a good thing.

You indicated--I believe the statistic you used was about 700,000 homes today are essentially provided electricity as a result of wind power, and there's a potential for continued growth, but it's not the ultimate solution.

A similar question as I asked Mr. Williams. Besides extension of the wind energy tax credit, are there other provisions in the Tax Code which have an impact on wind energy that we should be taking a look at?

Mr. MORRISON. Wind currently qualifies for the five-year Modified Accelerated Cost Recovery (MACRS) makers treatment, and that clearly enhances the economics of wind projects, so I think that's an important attribute.

Other than that, I think the PTC to-date have facilitated the development of many of these wind  projects which have been quite successful. I think that all we are asking for is time to allow us to have the technology further mature so that we don't need these incentives any more. That's basically what you heard in some of my testimony.

Mr. WELLER. Thank you, Mr. Morrison. I see my time has expired, Mr. Chairman. Thank you.

Chairman MCCRERY. Thank you, Mr. Weller. Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman. I have a question for Mr. Carlson.

Could you give me a range of items that would be covered by the proposal to extend the biomass credit to open-loop businesses, particularly in the northeast?

Mr. CARLSON. Yes, Mr. Neal. I will do that.

The definitional changes that we seek are something that we have worked on now for about three years, and involved a wide range of parties, including environmental groups, Treasury officials, others here in Washington, D.C., to try to get these definitional changes as narrow as possible in order to keep the cost to the Treasury down but broad enough to encompass the materials that we use.

Basically, they fall into three categories, and all of these are somewhat applicable to the northeast. The first is forestry waste materials. These are things like sawmill residues and the brush that is removed from thinning a lot of the overstocked woods that we find now that we have, particularly in the western States, but specifically it limits the materials from, for instance, old growth timber, which is not included in the definition.

Secondly, in the agricultural arena, all of the by-products of agriculture, such as shells and pits and stems and stocks of agricultural products, would be included within the definitional change that we seek.

Thirdly would be materials out of the urban wood stream, which would probably be most applicable to the more heavily populated areas of the northeast. This would be things like pallets and dunnage, tree trimmings, those kinds of materials, but specifically excluding, because of the parties that we have collaborated with, any treated or painted materials that might have some hazardous substances associated with them, and excluding paper materials that would typically be available for recycling.

So we're trying to find that slice of the market where there are materials that could be put to good use, that would have no other use, but would not usurp materials that would have a higher use somewhere else in the recycling realm.

Mr. NEAL. Well, given the rising price of electricity, what is the value to the public of extending this credit to the open loop biomass plants?

Mr. CARLSON. The rise in electricity, as you referred to, is probably primarily referring to the California market again, because that's the market that has seen the most rise recently. In that market, for instance--and there are numerous biomass plants in California, actually the largest location for these plants--virtually none of those plants have seen that rise in electricity. They are still under contract to utilities.

In fact, the problems that have been engendered by the high prices in California are actually more of a problem to the biomass producers there than they are an opportunity, because they haven't been paid for their December 2000 through March 2001 production.

What you will find is that in other areas of the country there has been no price rise. In fact, the next largest concentration of plants is in Maine, and the prices in Maine are very low, to the point where the plants there are suffering greatly.

The nice thing about the section 45 credit, as it's currently written, is that it has this provision that it phases out as electricity prices go up, so there is not the potential for windfall profits. In fact, when it reaches a fairly high level, the credit is gone altogether. So it really has a self-limiting mechanism that is very appropriate for this type of a credit.

Mr. NEAL. Thanks for your testimony, Mr. Carlson. I agree with you. Thank you, Mr. Chairman.

Chairman MCCRERY. Thank you, Mr. Neal.

Mr. Morrison, as you pointed out, I have supported the wind credit in the past. However, this is a question that we have to ask, I think, and I'm going to give you an opportunity to answer it.

Because we are seeing a rise in the price of electricity, I think it's intuitive to conclude that, if the price gets so high, then you guys don't need a credit. How do you answer that right now?

Mr. MORRISON. We have a couple of charts that I think would be illustrative here. We have made some comparisons with the price of natural gas rather than a direct comparison with market prices of electricity because electricity markets are fractured and somewhat difficult to make direct comparisons to. So we regard the marginal competitor for wind-generated energy as being natural gas, as the gas gets transformed through a combined cycle generating plant into electricity.

The chart on the left provides some historical and forecasted data for the price of natural gas. I think it's rather similar to some of the charts that the people from DOE presented today. I don't think there is anything particularly different from what we're showing from what was earlier presented.

On the left, in blue, is the historical price of natural gas on an inflation-adjusted basis at Henry Hub, based on the NYMEX contract. On the right in red is a similar forecasted Henry Hub price, which represents an average of forecasts from five nationally recognized energy forecasting firms.

I think what is clearly most conspicuous about the graph is that, if one considers historical trends and future forecasts--admittedly, they're just forecasts--we're in the middle of what appears to be an unprecedented spike in the price of natural gas.

Similarly, the chart on the right-hand side, which is all historical data over a much shorter time period, from May of 2000 through May of 2001, which is actual traded prices for the NYMEX contract for Henry Hub deliveries for natural gas, again we reached a tremendous spike in January, where we got to $10 per mm Btu, but immediately after that, we have seen the price of natural gas come down.

I think it is our belief, and I think it's generally the belief of most people in the energy business today, that prices we see today, while they may be good for producers and also good for generators of wind energy, they're not going to last, that supply will, expand to meet increased demand and that prices will decline in the future. Wind still needs a bit of time yet, with incentives, to perfect its technology to the point where it can compete on the basis of the sorts of forecasted prices for natural gas that we see here.

Chairman MCCRERY. Thank you for that explanation.

You also mentioned in your testimony that you foresee a day when wind energy could be competitive in the market without the tax incentive. Do you have any idea when that might occur?

Mr. MORRISON. It is certainly not in our business plan to come up here and get an extension every three years. Again, it's a bit of a guess, but in my conversations with turbine manufacturers and other people who are technically savvy in the business, I think the general expectation is that five to seven years is the sort of time frame that we need before we can be directly competitive.

The turbine manufacturers that I know have internal targets where, on a year-by-year basis, they target reductions in the cost of turbines, from manufacturing efficiencies, and supply-chain efficiencies, on the order of five percent per annum.

In addition, every time a new turbine model is introduced, which occurs about once every 18 months or 2 years, they target a 10 percent reduction in the cost of the turbines. Turbine costs are about 75 percent of the total cost of a wind generation facility, so a 5 percent per annum decrease, in addition to a 10 percent per new model decrease, pretty rapidly leads to some significant price decreases in the cost of the equipment and, therefore, the cost of the energy coming out of the equipment.

Chairman MCCRERY. Thank you. Mr. Watkins.

Mr. WATKINS. Thank you, Mr. Chairman.

You know, we talk about national energy policy. That has a different meaning for different people, I know. We see a lot of the peaks and valleys in the price of energy, and we yell out in the oil patch when it gets so low, and when it gets too high, the consumers are yelling, saying we have to do something. So, in my opinion, we need to try to stabilize a pricing system, stabilize it so that it can become more predictable.

Again, I'm excited, because I think we have some people who understand at the White House the need for this, and also may have some knowledge about how to do that.

Mr. Chairman, this has been a very informative panel, and I would like to have each one to state what tax provision--if you could just wave a magic wand, what tax provision in a national energy policy would each of you like to see, like the top one or two tax provisions that would allow you to increase production, stabilize and move forward?

Mr. Williams, we'll start with you and then move to Mr. Wallace.

Mr. WILLIAMS. I can't speak to wind power since I know nothing about it, so I will stick to oil and gas, if that's okay with you.

Mr. WATKINS. You stick to each of your industries. I figure that's why you're in that business.

Mr. WILLIAMS. Choosing just two measures that make a lot of sense in the oil and gas industry--certainly, I would have to put section 29 in there. I do think it focuses on the resources, the high cost resources, and helps pull them into the mix where they might not be there otherwise.

Another measure that I think makes a lot of sense would be a marginal well tax credit, because it reaches out and helps keep the wells that might otherwise be abandoned and a resource that would be lost permanently available in the mix going down the road. I think those would be my top two choices.

Mr. WATKINS. Thank you. Mr. Morrison?

Mr. MORRISON. I think for the wind industry, what we would most like would be a long-term extension--and by that I mean a five- to seven-year extension--of the section 45 credits. That's all.

Mr. WATKINS. That would probably do it for the wind industry. All right. Mr. Carlson.

Mr. CARLSON. Mr. Watkins, I would certainly second what Mr. Morrison just said. We are actually excited to be here today, because for the first time our industry is being included in section 45 in the President's budget, where we have been excluded because of definition before. This is virtually the perfect credit to incentivize our industry, because we are fairly unique, in that the more we run, the more expensive our fuel source becomes, because it needs to be hauled further distances to arrive at the plant for proper disposal.

This credit, as a production tax credit, really allows us to take what is a relatively low-cost power market for many hours of the week--even though we may get high prices, for instance, during a hot day in the summer time--and for months on end in the fall and the spring, and particularly when prices are extremely low--this credit will build a floor under the industry so that we can still be incentivized to go procure the fuel that we need to run these plants at full capacity.

So this is the type of incentive that our industry needs, the section 45 tax credit included in the President's budget, because as I mentioned, it has this self-limiting mechanism whereby don't get it when the prices are high, but when you need it the most, it's there for you so that you can procure the fuel that you need.

Mr. WATKINS. To help stabilize that, a little more predictable, right?

Mr. CARLSON. Absolutely.

Mr. WATKINS. Mr. Wallace, my friend from the oil patch.

Mr. WALLACE. Wes, if I wanted to approach this problem from a tax angle, I would probably do it on some sort of a sliding scale, tied to the price of oil, what is the lifting cost. Everybody wants to talk about the price of oil, but nobody wants to talk about what it costs to produce it, the lifting cost. That's the key to domestic production, the lifting cost.

I would tie it to some sort of a sliding scale. If you're making a profit and you don't plow part of it back into the production of America's oil and gas, I would probably tax you pretty good. I would just take a good, common sense approach, and the boys out there making obscene profits, we're going to tax you or you're going to go get us another barrel. That's probably what I would come up with.

The State of Oklahoma, nine or ten dollar oil, I was involved a little bit in that a couple of years ago. They removed all their tax to save the wells. We all know the gross production tax helped pay the bills in the State of Oklahoma. That's how serious it got with them, and that's the serious attitude they took.

If I were these people, I would declare war on them. I would roll up my shirt sleeves and go to work.

Mr. WATKINS. That's an excellent point. I think, for the consumer as well as the producer, over and over--I've been out in the oil patches and have visited with friends. All they are looking for is some kind of predictability, some stability, so that they can go borrow that money and know if they may have a shot at paying it back.

Mr. WALLACE. That's the key.

Mr. WATKINS. That's the sliding scale on tax credits, another bill that I've introduced along the way--and I noticed, Mr. Carlson, biomass is getting quite a bit of interest in some of the farm land around the country. But I think it's just exactly that in the oil patch.

Most of the people love it, they're working at it, but it is shocking when you realize we've lost 70 percent of the producers, independent producers, and that's not counting the skilled workers, that infrastructure that we've lost out in the oil patch, where today I would predict it would be difficult to get geared back up to increase that production that we have to have in order to get there.

If I'm hearing what they're saying to me, as I make the rounds and have a chance to visit along the way, I know it seems that way in our neck of the woods.

I want to thank all of you for being here, but I want to especially thank my friend, Dan Wallace, who is just exactly what he described. He's out there, he may have that CPA, but I'll tell you, I'll bet he's keeping an eye on that bottom line. But he's out there making sure that rig is running, making it work, and like this morning, calling and finding that it's down to 3,600 feet and he has still got about 600 feet or more to go before that well is complete. Dan, we wish you much success on that well.

Mr. WALLACE. Thank you, Wes.

Mr. WATKINS. Let me just ask, how many wells do you have overall?

Mr. WALLACE. We're probably operating right at 50 wells today, a carryover from '98 and '99--let me just share this with you. I don't care if you're an independent or a major. You take the calendar years of '98 and '99, your gross, $19.60 a barrel, less taxes, less royalty, you operated for 24 months at $14.60 a barrel. Now, start trying to pay your bills, take care of your family, and look for a barrel of oil on $14? It's not going to happen.

If you take the next calendar year, 2000, add it to that, you've got the same thing. We have operated for over three years out there at cost. No question.

Mr. WATKINS. No question about it. Thank you, Mr. Chairman. It was a very, very valuable meeting.

Chairman MCCRERY. Thank you, Mr. Watkins. Mr. McNulty.

Mr. MCNULTY. Thank you, Mr. Chairman. I just want to express my gratitude to all of those who gave testimony today, to thank you for calling this very important hearing. I noted that every single member of the Subcommittee participated in the hearing, and that's an indication of how important this subject is.

Finally, Mr. Chairman, I look forward to our next hearing, which will also be on this subject, and at that hearing I intend to steal a play from Wes Watkins' playbook and bring a couple of my constituents to talk about fuel cell technology.

Thank you, Mr. Chairman.

Mr. WATKINS. We look forward to that.

Chairman MCCRERY. Thank you, gentlemen, for your testimony today. We appreciate it very much. And to all of you who participated in today's hearing, thank you for coming and being such a polite audience. We look forward to our next hearing.

[Whereupon, at 1:05 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

American Gas Association, Charles Fritts, statement