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Senate Committee Votes Out Energy Bill; Tough Issues Unresolved

The Senate Energy and Natural Resources Committee last Thursday voted out by a wide margin an omnibus energy bill, but it won the overwhelming support only by putting off some of the more controversial amendments involving the moratorium on drilling on the Outer Continental Shelf (OCS), siting authority over liquefied natural gas (LNG) terminals and a renewables' mandate for electricity production until the floor debate on the measure, which is likely to occur in June.

Racing through the remaining "Incentives" and "Oil and Gas" titles on Thursday, the Senate committee completed its mark-up of the wide-ranging bill within hours, given that few controversial issues were tackled. It is expected to go to the full Senate after the Memorial Day recess which extends through next week. There are likely to be floor fights over attempts to undermine FERC's authority over LNG terminal siting and over an amendment to allow states to opt out of the OCS oil and gas drilling moratorium.

The energy bill was voted out of committee by 21-1. Sen. Pete Domenici (R-NM), chairman of the Senate energy panel, and Sen. Jeff Bingaman of New Mexico, the ranking Democrat on the committee, agreed to put the more contentious energy issues off until the Senate floor debate, enabling them to get the bill out of committee, Congressional Green Sheets reported Friday.

Domenici, Sen. Lamar Alexander (R-TN) and Sen. Mary Landrieu (D-LA) chose to put off an amendment that would give states the opportunity to opt out of the congressional moratorium on drilling in much of the federal OCS. The amendment is likely to be offered on the floor. Bingaman, along with other prominent Democrats on the committee, signaled that they would have voted against the bill in committee if the OCS moratorium provision had been included, the publication noted. The House earlier this month rejected a proposal that would have overturned the 20-tear moratorium on natural gas drilling, but maintained the ban on oil drilling.

Landrieu also withdrew an amendment that called for 50-50 sharing of OCS revenues between the federal government and producing states with OCS production off of their coasts. The senator pulled it because Bingaman had "strong objections" to the measure, and threatened to block the entire energy bill, said Landrieu spokesman Adam Sharp. He noted that Landrieu plans to pursue the amendment later either on the Senate floor or in House-Senate conference on the energy bill.

Landrieu won a key victory Thursday when the committee approved an amendment to conduct a comprehensive inventory of the oil and gas reserves on the 1.67 billion-acre OCS. Currently only 43 million acres of the OCS is being explored, which is less than 2.6% of the total OCS, according to the senator's office. The inventory amendment will surely draw fire from senators representing coastal states, particularly Florida, who see this as the first step toward overturning the moratorium on drilling in the OCS.

Sen. Dianne Feinstein (D-CA) also withdrew a contentious amendment Thursday. She sought to block a provision in the bill that gives the Federal Energy Regulatory Commission "exclusive authority" over the siting of LNG terminals. Feinstein's proposal would call for both the federal government and states to have dual authority when locating terminals. She is expected to offer her amendment during floor debate on the bill.

Out of concern that the bill might be stuck in committee, Bingaman put off offering an amendment that calls for an electric utility to use renewable sources to provide 10% of its electricity by 2020. He plans to offer it on the floor.

The bill voted out by the Senate energy panel provides incentives for all forms of energy; and promotes conservation, energy efficiency, and electricity reliability; would remove roadblocks for natural gas transportation, LNG terminaling and storage; reinforces FERC's authority over the siting of LNG import terminals; promotes sharing of OCS revenues with states for coastal impact assistance; increases the civil and criminal penalty authority for FERC; prohibits market manipulation; and repeals the Public Holding Company Act of 1935 (PUHCA).

The U.S. House in late April approved a similar version of the energy bill, including numerous incentives for oil and gas production and transportation (see NGI, April 25). Two of the same sticking points in failed attempts to enact an energy bill in previous years remain to be resolved in conference. The House has approved drilling in the Arctic National Wildlife Refuge and the Senate has not, and the House bill contains product liability protection for producers of the gasoline additive methyl tertiary butyl ether, while the Senate's does not.

"This is a very good start," said Domenici of the Senate energy bill. "I recognize we have a tough conference ahead of us. The Senate bill is different from the House bill in several key areas. But Chairman [Joe] Barton and I are both determined to deliver a strong energy bill to the president's desk for his signature." President Bush has called for an energy bill by the end of summer.

There was new language in the Senate bill regarding FERC's authority to review utility mergers, in the wake of the repeal of PUHCA. It gives FERC the authority to regulate mergers and acquisitions in the electric industry valued in excess of $10 million. It directs the Commission to approve mergers that are consistent with the public interest and don't result in cross-subsidies to affiliates, and requires the agency to act within 180 days of receiving a merger application.

However, the American Gas Association (AGA) expressed concern that the bill "would expand FERC's authority to review and rule on utility mergers, including natural gas utility mergers, and to set a public interest standard." While it applauded the bill as a whole, AGA said it would work to persuade senators to strike that provision during floor debate.

One section of the bill provides for a coastal impact assistance program, calling for the distribution of $500 million annually to the coastal states and political subdivisions not under federal leasing moratoria to be used on coastal impact projects. The program would run from fiscal 2006 to 2011.

It codifies FERC's Hackberry policy, which treats LNG facilities as the functional equivalent of natural gas production facilities, over which the Commission has no open-access jurisdiction, and allows them to charge market-based rates for terminal services. It also allows FERC to grant new storage capacity market-based rate treatment, notwithstanding the fact the applicant may have market power, if (1) it is in the public interest, (2) it is needed storage capacity, and (3) customers are adequately protected.

Another section establishes FERC as the lead agency for National Environmental Policy Act (NEPA) purposes and provides FERC authority to set schedules for required Federal authorizations. Agencies with jurisdiction over natural gas infrastructure are encouraged to coordinate their proceedings with the timeframe established by FERC. If a schedule deadline is not met, the President may issue a decision.

It increases penalties under the Natural Gas Act and Natural Gas Policy Act, bans attempted market manipulation and sets penalties and calls on FERC to establish an electronic information system to provide information about the price or transportation costs of natural gas in interstate commerce.

The bill would amend the Coastal Zone Management Act by establishing a 270-day period in which the secretary of the Commerce Department must close the decision record. There are caveats, however. The Secretary may stay the 270-day clock for up to 60 days, and he would have 90 days after the record is closed to issue a decision or explain why he cannot, in which case the secretary has an additional 45 days to issue a decision. In total, this section allows for 1 year and 100 days for the Secretary to complete action on an appeal of a consistency determination.

Senate negotiators included a number of incentives to promote oil and gas drilling offshore and onshore. Specifically, the bill calls for the Interior Department secretary to issue regulations granting royalty relief suspension for volumes of up to 35 Bcf with respect to the production of natural gas from ultra deep wells on leases issued in shallow waters located in the Gulf of Mexico wholly west of 87 degrees, 30 minutes West longitude. The affected leases would have to be issued within 180 days of the enactment of the bill. The secretary shall not grant royalty incentives if the average annual gas price on the New York Mercantile Exchange exceeds a threshold price specified, and adjusted for inflation, by the secretary.

The measure also would provide royalty relief for oil and gas production from blocks located in water depths of more than 400 meters in the Western and Central Planning Areas of the Gulf (including the portion of the Eastern Planning Area of the Gulf encompassing whole lease blocks lying west of 87 degrees, 30 minutes West longitude) occurring during the five-year period following the enactment of the bill.

The suspension of royalties would apply to volumes of not less than: 1) five million barrels of oil equivalent (boe) for each lease in water depths of 400 meters or more, but less than 800 meters; 2) nine million boe for each lease in water depths of 800 meters or more, but not greater than 1,600 meters; and 3) 12 million boe for each lease in water depths greater than 1,600 meters.

Moreover, the bill calls for the Interior secretary to carry out an expeditious program of competitive leasing of oil and gas in the National Petroleum Reserve in Alaska. Each lease shall be issued for an initial period of not more than 10 years, and shall be extended for as long as oil or natural gas is produced from the lease, according to the Senate measure.

It would provide incentives for marginal oil and gas wells when oil prices fall below $15 per barrel for 90 consecutive days and when gas prices fall to approximately $2 Mcf/d for 90 consecutive days, both of which are unlikely to happen anytime soon.

The measure also gives the Interior secretary the authority to expand the royalty-in-kind program, allowing producers to use their production to pay off their royalty debt as opposed to making cash payments.

The bill further calls on the Interior secretary to arrange for the National Academy of Public Administration to conduct a review of federal onshore oil and gas leasing practices, focusing on the process by which federal land managers accept or reject an offer to lease; the process for applications for permits to drill; the process for considering surface use of operations; the process for administrative appeals of decisions or orders of officers or employees of the Bureau of Land Management (BLM) with respect to federal oil or gas leases; the process by which federal land managers identify stipulations to address site-specific concerns and conditions; and how federal land management agencies coordinate planning and analysis with federal, state and local agencies.

The Interior Department and National Academy are required to report the findings to the Senate Energy Committee and House Resources Committee within 18 months after the enactment of the bill.

For faster permitting of oil and gas production, the bill calls for the Interior Department to ensure expeditious compliance with NEPA; improve consultation and coordination with the states and the public; and improve the collection, storage and retrieval of information related to oil and gas leasing activities. It also called for the Agriculture Department to focus on more timely action for oil and gas lease applications.

Eighteen months following enactment of the bill, the Interior secretary would be required to develop and implement best management practices to improve the administration of onshore oil and gas leasing. Within 180 days of the development of the best management practices, the secretary is required to publish for comment proposed regulations that spell out specific timetables for processing leases and application.

The BLM would be appropriated an additional $60,000 in fiscal years 2006 through 2010 to carry out these activities, while the Fish and Wildlife Service would receive $5 million and the Agriculture Department would get $5 million in each of the fiscal years.

The departments of Interior and Agriculture also are required to enter into a memorandum of understanding (within 180 days of enactment of bill) to establish administrative procedures and lines of authority to ensure timely processing of oil and gas lease applications, surface-use plans of operation, and applications for permits to drill.

The bill calls on the Interior secretary to establish a "Federal Permit Streamlining Pilot Project." Toward this aim, the secretary is required to enter into a memorandum of understanding with the secretary of Agriculture, the administrator of the Environmental Protection Agency, and the Chief of Engineers. The Interior secretary also may request that the governors of Wyoming, Montana, Colorado, Utah and New Mexico be signatories to the memorandum.

Six BLM offices would serve as pilot project offices: Rawlins, WY; Buffalo, WY; Miles City, MT; Farmington, NM; Carlsbad, NM; and Grand Junction/Glenwood Springs, CO. Within three years of the enactment of the energy bill, the Interior secretary will submit a report to Congress on the results of the pilot project, and make recommendations to the president on whether the pilot should be implemented throughout the United States.

One title of the bill, referred to as the Indian Tribal Energy Development and Self Determination Act of 2005, substitutes for Title 26 of the Energy Policy Act of 1992, assisting Indian Tribes in the development of Indian energy resources by increasing Tribes' internal capacity to develop their own resources. It provides grants, low-interest loans, loan guarantees and technical assistance, and streamlines the approval process for Tribal leases, agreements, and rights-of-way so that outside parties have more incentive to partner with Tribes in developing energy resources.

Included in this title are provisions creating an Office of Indian Energy Policy and Programs within the Department of Energy. It makes the Dine Power Authority, a Navajo Nation enterprise, eligible for funding under this title. It also instructs the Secretary of Interior to develop an Indian energy resource development program to provide grants and low-interest loans to tribes to develop and utilize their energy resources and to enhance the legal and administrative ability of tribes to manage their resources. It provides for research programs and a loan guarantee program for energy projects using new technology. The guarantees would be limited to no more than $2 billion at any one time.

The Indian title also establishes a process by which an Indian tribe, upon demonstrating its technical and financial capacity and receiving approval of their Tribal Energy Resource Agreement, could negotiate and execute energy resource development leases, agreements and rights-of-way with third parties without first obtaining the approval of the Secretary of the Interior.

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