S2095 Summary

Poor Policy At a High Cost:

A Review of Selected Portions of the Energy Policy Act (S. 2095)

Prepared by Doug Koplow

(c) April 2004, Earth Track / www.earthtrack.net

Total Cost of the Bill. The cost of the bill should be viewed with great suspicion, given its complexity, short deadlines available to staff to generate cost estimates, and a tremendous incentive for potential beneficiaries to mask their subsidies, lest they be discovered and stripped prior to passage. Most press reports mimic Chairman Domenici's language that S. 2095 is a "leaner," "slimmed down" version of the Energy Policy Act of 2003. They quote a cost of $14 billion, though available details on where the cost savings come from do not cleanly add up. In addition, much has not been counted in these values. Spending that is authorized by the bill, but subject to future appropriation, was not counted at all by CBO (which also classified its initial scoring in November as "preliminary"). These programs, if funded, would add roughly $67 billion additional to the cost of the bill according to work done by Aileen Roder at Taxpayers for Common Sense; this figure has not been reduced in S. 2095. While not all of this money will be appropriated, even the Wall Street Journal notes in a March 23, 2004 editorial that is naive to ignore the cost of authorizations. "But once the members have given the spending their vote of approval," the Journal writes, "you can bet they will find a way to get it out the door."

But there is more: a range of uncounted mandates, liability caps, and improper costing of programs such as the Strategic Petroleum Reserve, that are (re)authorized by the bill. These costs (detailed in this data table) bring the estimated cost of the bill's provisions to between $113 and $131 billion. The more digging one does in the legislative language, the more the cost estimate rises. Thus, since our review thus far included only some titles of the bill, it is reasonable to expect there is much we've not uncovered. Even though S. 2095 does appear $30 to $50 billion cheaper than its predecessor (HR 6), it still clocks in at a porcine weight of nearly ten times the official cost estimate. Lean it is not.

Process. While all bills contain some pork, and language so convoluted that is it clearly hiding something, process does matter. Language in the Energy Policy Act has been tightly controlled by the majority party. Language for the original version (HR 6) was released to minority members of the Senate Energy Committee and to the public only 48 hours before the intended vote. The subsequent delays have at least given people time to wade through the bill's morass of complex clauses, but the process has hardly been the stuff of either good democracy or good policy. Corporations may hate the ordeal, and sometimes the humiliation, associated with audited and public accounts. Yet this process of disclosure and visibility is what ensures that corporate practices are usually transparent, and that provide the clues for discovering fraud when it exists. Adoption of a bit more openness and accountability by the Senate Committee on Energy & Natural Resources would certainly enhance our chances as taxpayers of getting a real return on billions of dollars in government subsidy.

Legislative provisions likely to have a significant (often detrimental) environmental or fiscal impact are summarized below. Additional details on these items and more can be found here.

A summary of selected sections of S. 2095 that were reviewed follows.

Metering. Promising language to improve metering of energy and water (secs. 102, 103) in federal buildings, but not structured to (a) allocate charges for consumption back to consumers; or (b) enable multi-year payback for infrastructure improvements. Until users have to shell out the cash, conservation will remain a sideline.

Some promotion of waste materials purchases (sec. 110). These are generally for items at the bottom of the value chain (cement and concrete), and will do little to promote recycling of higher-valued goods.

Renewable energy production incentive (sec. 202). Already a fairly weak program due to variability in available public funds that makes cost estimation for investors difficult. S. 2095 would further weaken REPI by increasing payouts to the lower quality renewables, such as open-loop biomass. The bill would also expand the definition of renewables to include dirty fuels such as landfill gas, subsidizing landfilling at the expense of recycling.

Promotion of energy security in insular areas (sec. 204). Promotes increased linkage of these areas to centralized generation, transmission. Section should instead force clear cost accounting for delivering energy to these areas. Rising costs would in themselves promote increased application of decentralized energy sources in economically rational and more diverse ways than simple grid extensions.

Subsidies to biomass mining on public lands (sec. 206). Using the guise of fire protection, the bill provides wide and unchecked discretion for the Secretary of Interior to decide how much land to open to timbering, when and where to do it.

Reimbursement of NEPA compliance costs (sec. 217). Shifts costs of environmental planning from the project developer to the public taxpayer on geothermal projects effective 10/1/04. Later provisions do the same for oil and gas development remain, but with a later start date.

Geothermal leases as potential back-door to no-bid oil and gas extraction (secs. 220 and 223). Creates easier conversion of federal geothermal leases to include extraction of "byproducts" such as oil, gas, and coal. Invites gaming strategies to use geothermal extraction to access more valuable fuel minerals without proper oversight or competitive bidding.

Permanent reauthorization of Strategic Petroleum Reserve and Northeast Heating Oil Reserve without subsidy removal (sec. 301). Financial accounts for these entities dramatically understate actual costs of running the reserves, as they ignore the interest cost on working capital that is tied up as oil inventory. S. 2095 should have fixed this problem, and set up an excise fee on oil/gas consumption to pay the full costs. Instead, the bill continues to pretend these costs -- between $840 million and $3 billion per year -- don't exist.

Royalties in Kind (sec. 312). Royalty collection on oil and gas leases on both federal and state lands have not gone well. Decades of royalty underpayment by a wide range of companies resulted in massive litigation and billions of dollars in recoveries.

• S. 2095 should be simplifying royalty collection by disallowing virtually all deductions from cash royalties due (developers would adjust their bid prices accordingly), more closely mirroring practices in private sector franchising agreements. Instead S. 2095 does the opposite, pushing the federal government into the oil and gas marketing business, in which it has no experience or expertise. Past experiments in having the government take royalties on production on federal leases in fuels, rather than cash, resulted in a loss of over 6% of the royalty value.
• Equally troubling, the bill would also allow DOI (rather than the US Treasury) to oversee sales and to retain proceeds within the Department to pay for certain expenses associated with bringing the oil to market. The lack of transparency on funds flow, and the benefits from inefficient operations (since you get to keep more funds from oil and gas sales) both pose significant risks of corruption and mismanagement. They should not be done.

Assorted royalty relief for marginal oil and gas producers (sec. 313), natural gas from deep wells in the Gulf of Mexico (sec. 314), deep water (sec. 315), and Alaska) (sec. 316) add to a long line of "special" cases in oil and gas. The industry never met a subsidy it didn't like.

Oil and Gas Leasing in the National Petroleum Reserve of Alaska (sec. 317). In addition to opening access, the secretary of interior has wide discretion to subsidize it as well.

Abandoned wells (sec. 318). Rather than clean up the financing and financial assurance for these, S. 2095 just subsidizes their cleanup. It does it both with cash, and with royalty offsets -- again, difficult to monitor and easing the way for corruption and mismanagement. Annual subsidies to oil wells alone are already worth $120 to $450 million per year (see Chapter 5 of this report for additional details). 

Combined hydrocarbon leasing (sec. 319). Effectively opens huge tracts of tar sands public lands to oil and gas extraction.

Reduced oversight on LNG facilities (sec. 320). Huge explosions, big terror targets; S. 2095 should be increasing oversight on all aspects of LNG facilities.  By removing the ability of the Federal Trade Commission to restrict licenses to facilities built for the partial or sole benefit of shippers, the bill will encourage greater vertical integration of the LNG industry.  Increased market power often results in less public scrutiny on siting decisions and operating conditions.  Such lapses in the LNG arena could generate significant public safety risks.

Reimbursement of Costs of NEPA Analyses, Documentation, and Studies (sec. 326). One of the few internationally-agreed upon environmental policies is that the polluter should pay for his or her own pollution. This works wonders, driving the prices of highly-polluting activities up, encouraging the development of cleaner and cheaper alternatives. S. 2095 now wants to reverse this by shifting the costs of NEPA compliance from the project developer (who happens to get the cash flows from the project) to the taxpayer. Again, strikingly dumb policy. The Senate Energy Committee has delayed NEPA reimbursement until 2008 as part of its efforts to provide a "slimmed-down" energy bill. This silly idea should be canned entirely.

Opening up federal lands to oil and gas leasing. More streamlining and coordination (sec. 344), quicker deadlines (sec. 348), standardized costing of rights of way (sec. 349). Efficiency is good, but should not be limited to opening access. Where are the provisions to streamline validation of financial assurance on leases, enforcement of non-compliance or environmental damages, and remediation of contaminated sites? I was hoping they were working on them for the revised bill (this language was originally in HR 6); Senator Domenici must have been too busy creating jobs, jobs, jobs to have gotten it finished.

Alaska natural gas pipeline (Subtitle D). Streamlined environmental reviews and restricted court challenges. Biased route selection to benefit the state of Alaska and the expense of the rest of us (cheaper route goes through more of Canada). Potential loan guarantees of up to $18 billion (indexed for inflation). If we need this thing so badly, private finance shouldn't be that big of a deal. We're talking major international oil companies here, firms able to dump huge sums into Russia and its former constituent states without even the rule of law to back up their claims. What's the guarantee worth to the oil multinationals? Assuming the cap is reached over 8 years, the federal guarantee will have saved the firms more than $2.5 billion in financing relative to their costs of borrowing on the open market. Though this is only one of the many subsidies to fossil fuels in S. 2095, it constitutes nearly 3 1/2 times the aggregate subsidy to wind power provided by the bill. So much for promoting renewable energy.

More cash for "clean" coal. $200m/year, $1.8 billion total for projects to be named (sec. 401), despite a history of, how shall we say, "limited" success. A $125m loan to the Healy Clean Coal project (sec. 411) and loan guarantees in the hundreds of millions (sec. 412-416) for specific coal projects in key congressional districts. Public investors get no royalty stake in successful innovations, other than warm fuzzies that we helped coal get cleaner (though still dirtier than a whole range of other fuels). And for what? To support underwrite a highly polluting, large scale industry to make reinvestments that it must make anyway if it wishes to survive? It's called "creative destruction" when it happens to dry cleaners, or mom & pop retailers, or domestic textile or electronics companies. Reinvest, restructure, or die. And the process of continual restructuring, while painful, does ensure the country has vibrant and innovative industries. Time for coal to grow up. Regulate their emissions like a normal polluting industry (by ending the ridiculous grandfathering of their 1970s emissions), and let them finance their own innovation. Like the paper industry of the 1970s, they might actually be surprised by what they come up with.

Bigger (sec. 421), longer (sec. 422), cheaper (sec. 425) coal leases with less opportunity for public environmental oversight (sec. 425). Mine sizes on federal lands can increase by nearly a factor of 10; coal leases could be extended beyond 40 years; coal lease operation and reclamation plans can be delayed until mining operations begin, impeding the ability to force changes in mining operations to mitigate expected environmental damages. Sec. 425 allows selected firms to use a financial guarantee rather than a surety bond on the up-front payments associated with their bids. Cheaper for them; higher risk to the government. Fewer outside parties assessing the environmental risk of operations. Are these changes needed to allow efficient mining, or simply to ensure the very largest mining companies can do what they want on federal lands? Big question. Important question. Don't expect to see it answered before the energy bill goes to vote. As the Senate Committee on Energy & Natural Resources notes in its February 11, 2004 press release, "Coal provisions remain unchanged" in the modified bill.

Subsidizing pollution control (sec. 441). $500 million in air pollution control research, and $1.5 billion for research into improved generation. Intel can spend $2 billion a pop to build a new chip plant every two years, but it takes you and me to help coal giants figure out their production process. The more we spend, the less they have to. And the more we subsidize controlling coal-related pollution (rather than having them pass the cost through to consumers via electricity prices), the less the market will value clean energy from wind, solar, and improved efficiency.

Subsidies for new reactors. HR 6 included massive new subsidies to nuclear power, in the form of a nuclear production tax credit (see nuclear energy tax credit link for more information). Earth Track estimated the cost of this subsidy over its lifetime to be as high as $15 to 19.5 billion dollars. This item has thankfully been canned in the new version (S. 2095). However, look for it to reemerge soon. Recent announcements to pursue licensing for a new plant (not scheduled to come on line until 2010) indicate fierce lobbying for all sorts of nuclear subsidies will continue. Subsidies to new nuclear technologies do remain in S. 2095 (Title VI, Subtitle C) through the Advanced Hydrogen Cogeneration Project. Nearly $650 million through 2008 (with "such sums as may be necessary" after that date) is authorized in a high risk, high likelihood of failure effort to combine two very difficult tasks (new nuclear generating technology plus cost-efficient hydrogen production) into one impossible one.

More Price-Anderson (sec. 602). Another 20 years of federal liability caps on nuclear accidents for the commercial power industry. Efforts to allow some degree of financial accountability for contractors in the case of negligence and intentional misconduct was struck from the bill prior even to the final version of HR 6 in November 2003 -- not reassuring given the large potential risks nuclear plants and shipments face in the post-9/11 world. As with making firms reinvest into their own production process and paying to control their own pollution, insuring their own liabilities ensures the market price for nuclear energy is a realistic one. The cost of this extension in estimates for the bill developed by CBO is zero. The reason: they don't pay out cash for the cap, and they don't expect there will be an accident. Well then, how come my state makes me get auto insurance? I don't expect to have an accident either… The value of the cap is hard to estimate, but has been pegged at between 2 and 3 cents per kWh by economist Anthony Heyes. And even if the likelihood of a federal payout above the cap in any single year is extremely low, the actuarial cost of the cap to the government is way above zero. Unfortunately, present federal budgeting does a poor job incorporating this type of exposure.

Itty-bitty reactors can have itty-bitty insurance (sec. 608). The portion of accident risk that reactors do need to buy under Price-Anderson (tier 1 and tier 2 retrospective premiums) would be linked to a single site, rather than to a single reactor as is now the case. It is not clear, however, that the risks are site-related rather than reactor-related (though, of course, the new generation of reactors are so "inherently safe" that they don't even need to have secondary containment). While new technologies that use tiny bits of fuel (like the Pebble-Bed Modular Reactor -- just five years out, you know), may have lower risks than bigger reactors, the human error factor is not likely to follow such a neat pattern.

No anti-trust review for construction or operation of a nuclear utilization or production facilities (sec. 625). With the industry already highly concentrated, and with this concentration beginning to put at risk the quality of Tier 1 and Tier 2 accident insurance, checking concentration would be good thing. This is independent from the very obvious point that large scale, baseload power stations, on which huge numbers of people rely for electricity -- which, in turn, they sometimes rely for their lives -- should not become monopolies. Not that we would ever expect large energy companies to abuse their market power and violate the trust of shareholders or the public. Of course not.

Promote siting of new nuclear plants at existing DOE sites (sec. 629). You can offer subsidies until your Treasury is bare, but many people still aren't going to want a nuclear reactor next to them. Though Nuclear Energy Institute, fission power's Ministry of Truth, keeps insisting the risk is near zero (25 times less than being hit by lightning -- see 15th paragraph), those irrational plant neighbors just never seem to agree. So, dropping the new plants on already contaminated, often remote, federal lands solves many of the challenges likely to arise for new plant sitings. S. 2095 promotes studying this issue. No harm in study, of course, but let's be sure the process is fair and the results are public.

Increased nuclear proliferation risks from allowing export of highly enriched uranium abroad (sec. 633). The reason: production of medical isotopes. But you can also make the isotopes using lower enrichment levels that don't have the same proliferation risks; many isotope producers have already switched. But not Ontario firm MDS Nordion. Every industry faces periods when it must modify the way it does things or die. The US should incur no increased proliferation risks to slow the time when MDS Nordion must embrace its own future.

New uranium enrichment facility (sec. 637). By removing many of the roadblocks to creating a new enrichment facility, S. 2095 will be a huge boost to Louisiana Energy Services, the company this provision benefits most directly. Some of these roadblocks are kind of important though. Like technical review of the project, or an adequate and appropriate environmental review (old enrichment plant sites aren't exactly clean as a whistle), or environmental justice reviews, or figuring out what to do with the plant's wastes. Turns out, S. 2095 would make us buy that waste, dramatically improving the economic profile of the project. (If you have radioactive waste you'd like to sell the government at a good price, perhaps Pete Domenici will cut you a deal as well). Then there is the little economic problem. The current enrichment plant is operating well below capacity. In fact, there is so much extra capacity, that S. 2095 lists the evaluative criteria by which the Nuclear Regulatory Commission can determine whether or not to issue LES a license, and excludes market need. True, LES may, after all of its subsidies, be cheaper. But, one must wonder about the nuclear proliferation impacts of cheap uranium enrichment.

More nuclear security, compliments of the taxpayer (secs. 661-667). Large scale plants; radioactivity; huge disruptions; huge terrorist targets. More security is clearly warranted. But costs of that security should be paid for by those who use the product (electricity) rather than by random taxpayers. Why? Because, like pollution controls, it forces these costs to be reflected in power prices, allowing energy sources with a more favorable security profile to gain market share. While the bill doesn't state the funding levels, earlier estimates by CBO pegged the cost at roughly $50 million per year for assessing risks, improving background checks and plant/fuel procedures. Extra costs currently being incurred by all levels of the policy and national guard at these facilities is not reflected in these estimates.

Section 45 Tax Credits to "Renewable" Energy Resources. (sec. 1301).

So much for promoting new, cleaner energy. S. 2095 makes a few substantive changes to the language previously included in HR 6. Tax credits for landfill gas have thankfully been eliminated. On the negative side, many more sources get a credit rate of 1.8 cents/kWh (though no longer adjusted for inflation) than in the prior incarnation (where rates had been 1.2 cents/kWh). Of the projected cost of this subsidy ($2.3 to $3.6 billion), close to 70 percent flows to energy resources that are not new (they are already generating energy from biomass waste), not particularly environmental (unrestricted open-loop biomass, waste to energy), or both.  See summary data or fuel-by-fuel detail.

Subsidies to existing plants provide little energy gain at a high cost. Existing biomass plants, already economic in the current market environment, are nonetheless eligible for five years of tax credits for practices they have been doing for decades. While there is some uncertainty as to whether statutory language will allow plants where biomass does not comprise 100% of the input fuel to claim tax credits, Washington insiders have confirmed that the sponsors did intend for industries such as paper mills to access the provision. Should this occur, the revenue loss would exceed $850 million ($1.36 billion outlay equivalent), nearly 85% of which would accrue to the paper and lumber industries. Because virgin paper production is the main source of biomass energy recovery, fiber recycling will be hurt. The gains are concentrated: of the more than $1.1 billion in subsidies flowing to paper and lumber, a single corporation (International Paper) is positioned to receive subsidies worth more than $400 million.  See largest recipients by category or plant-by-plant listings.

Many eligible resources are not renewable. S. 2095 provides virtually no constraints on where the biomass may come from in order to obtain the production tax credit. Thus, timber from old growth forests, from steep slopes (creating erosion problems), from clear-cuts, and from homogenous agricultural, silvicultural, and feedlot operations all receive subsidies. This is likely to:

• Harm small farmers and organic farming. Only large farms will have enough animal wastes to build a power plant; transport costs will make burning less economic for smaller farms. Subsidies to burning over composting worsen relative economics for small farmers, and for organic farmers for whom natural soil fertility is a key economic advantage.
• Harm recycling. Recycling is economic if the net value of recovered materials is less than the cost of alternative disposal options such as landfilling and combustion. S. 2095 provides subsidies to disposal (combustion of a wide range of wood and paper products get the tax breaks, though recycling does not), undermining the economic value of recycling. Affected sectors include wood pallets, and construction and demolition debris. Paper recovery (the largest fraction of the waste stream) will be harmed both by tax credits to burning many types of waste paper (anything that is not "commonly" recycled), and by up to $1.1 billion in subsidies to pre-existing energy recovery and conversion operations inside of paper mills. Access to subsidies for waste-to-energy plants is not constrained by appropriate requirements to pull easily-recyclable or potentially toxic materials prior to combustion.

Surprise beneficiaries: hazardous "municipal solid waste." While MSW may not mean the same thing to all people, it is rare that this definition is stretched quite so far as in S. 2095. The bill adopts what is actually a much broader definition for "solid waste," and includes, well, almost everything: pollution treatment sludges and "other discarded material, including solid, liquid, semisolid, or contained gaseous material resulting from industrial, commercial, mining, and agricultural operations, and from community activities," excluding only raw sewage and return irrigation flows. Can it be hazardous waste? Sure looks that way: hazardous waste is a sub-category of the definition of solid waste. What about coal mining residues not normally burned? Could be; these would seem to be solid byproducts from the mining industry. If S. 2095 passes, look for an onslaught of tax cases as firms work to cram their wastes into the eligible group.

Last modified 4/19/04.