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Political Fallout from High Gasoline Prices Takes Toll on Natural Gas

Natural gas got caught in the crossfire last week as Democratic and Republican proposals seeking to tackle $3-plus gasoline prices flew left and right when lawmakers returned to Capitol Hill following their Easter recess.

The escalating gasoline prices, along with the staggering first-quarter profits being reported by major oil and natural gas producers last week, prompted the Senate Finance Committee to undertake an investigation into the taxes paid by large energy companies and ask the Internal Revenue Office (IRS) to provide corporate tax returns.

"We would like to inspect the annual federal corporate income tax returns for the last five years of the largest 15 oil and gas companies based on sales," said Senate Finance Committee Chairman Charles Grassley (R-IA) and Sen. Max Baucus of Montana, the ranking Democrat on the finance panel, in a letter last Wednesday to IRS Commissioner Mark W. Everson.

"We're seeing record profits and significant executive compensation in the oil and gas industry. We all know there can be a slip between cup and lip on corporate profits made and taxes paid. I want to make sure the oil companies aren't taking a speed pass by the tax man," Grassley said. "It's relevant to know what the real financial picture is for this industry because the financial picture for American consumers is pretty bleak," Baucus added.

"While our review of the federal taxes paid by these companies will be comprehensive, we would initially like to see consolidated Forms 1120 (the U.S. corporate income tax return), 1118 (Foreign tax credits-corporations), 5471 (Information with respect to certain controlled foreign corporations), 6765 (Credit for increasing research activities), Schedule M-3 (Net income (loss) reconciliation for corporations with total assets of $10 million or more), if applicable during those years, and any supplementary schedules, statements or attachments," the senators said.

This action by the Senate Finance Committee is considered unusual, but not unprecedented. The last time the panel sought corporate tax records was those of Enron Corp., according to The Washington Post. The request for the tax records came amid a political outcry on Capitol Hill over the soaring price of gasoline at the pump. Republicans and Democrats alike called for investigations into possible price gouging. But if past experience is any indication, the probes are likely to yield few, if any, tangible results.

In seeking the tax records, Grassley and Baucus said "recent press articles have highlighted the industry's record profits, as well as an extremely lucrative retirement plan by one oil and gas industry executive, benefits which may have been subsidized in part by the taxpayers."

In a related development, the Senate Judiciary Committee approved by voice vote last Thursday a bill that seeks to tame natural gas and crude oil prices by strengthening antitrust enforcement and bolstering competition in the energy industry.

The measure (S 2557) would subject energy companies to prosecution under the Clayton Act if they withhold oil and gas in an effort to raise prices; calls for a joint federal-state task force to be created to investigate information-sharing between companies to determine if the practice has encouraged anti-competitive pricing; and requires the Department of Justice and Federal Trade Commission to study whether future consolidations in the energy industry need closer scrutiny.

The legislation was sponsored by Sen. Arlen Specter (R-PA), chairman of the Senate Judiciary Committee, and Sen. Herb Kohl (D-WI). Co-sponsors included Sens. Mike DeWine (R-OH), Richard Durbin (D-IL), Dianne Feinstein (D-CA) and Patrick Leahy of Vermont, the ranking Democrat on the Senate judiciary panel.

"With the high fuel prices the American consumer is enduring, it is time for an examination of what oil and gas industry consolidations have done to prices," Specter said. "We have allowed too many companies to merge together and reduce competition. This legislation will help address the excessive concentration of power in the oil industry." Specter reported that more than 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s.

The GOP-led Congress "should pass this bill immediately instead of waiting until the price at the pump skyrockets any higher," Leahy said. It could not be immediately learned when the Senate would take up the bill on the floor.

The committee action follows a March 14 hearing that explored the connection between the stepped-up consolidation in the oil and gas industry and the run-up in energy prices. CEOs of the leading oil and gas companies, appearing before the Senate Judiciary panel, expressed their opposition to the bill, saying that they believed existing antitrust laws were adequate (see NGI, March 20).

Specter, as well as others on Capitol Hill, also suggested that Congress consider levying a tax on the windfall profits of oil and natural gas companies. "I think it's something worth considering among a number of options," Specter said during CNN's "Late Edition" on March 23. But the talk was not followed up by any action in that direction.

While the Republican leadership decried the high energy prices, GOP negotiators last Tuesday eliminated provisions in a major tax bill that would have forced oil and gas companies to pay billions of dollars more in taxes on their profits. "Despite tough talk from the White House and Capitol Hill, the [GOP] party is not ready to hit the oil companies hard -- even on measures that have broad support in the Senate," The Washington Post reported.

Sen. Pete Domenici (R-NM), chairman of the Senate Energy and Natural Resources Committee, took to the Senate floor last Wednesday to offer a compromise between competing Democratic and Republican energy proposals. He offered to support the Democrats' proposal for a gasoline tax holiday if they would back Republicans' efforts to spur more energy production.

"I can support that idea [gasoline tax break]. I like the idea of helping American families [keep] some of that money they are spending at the gas pump these days. But we use that money to build roads and mass transit. The federal government is going to have to make those revenues up somewhere. So let me propose this idea: Let's let oil companies make up the difference," Domenici said.

"Let's open up [ANWR] and use the revenue from the bonus lease sales to make up the revenue we're helping consumers keep," as well as use the revenue from increased oil and gas activity in Lease Sale 181 in the eastern Gulf of Mexico, he noted. "I think it makes sense. Democrats are blaming oil companies for the rising gasoline prices. Let's make them pay and, at the same time, let's produce enough of our own energy to ease gas prices at American pumps," Domenici proposed. "I say let's marry the tax break Democrats want with the real solution -- environmentally responsible energy development."

Domenici and Senate Majority Leader Bill Frist (R-TN), along with a number of other Republicans, introduced the Gas Price Relief and Rebate Act last Thursday, which seeks to open up the coastal plain of ANWR to drilling and would offer a tax rebate of $100 to taxpayers to offset the burden of high gasoline prices. Rebate checks, which could cost the Treasury at least $1 billion, would be issued to single tax filers earning less than $145,950 and couples who filed jointly and earned less than $218,950, according to Congressional Quarterly. The measure was attached to a bill being considered on the Senate floor last week that would provide supplemental funding for the war in Iraq.

The bill also calls for the elimination of some of the producer tax breaks that were included in the Energy Policy Act of 2005. "I am happy to help repeal tax breaks for development of oil in foreign countries. I support his [President Bush's] call to eliminate funding for research into deepwater drilling. I have said consistently in recent days that I cannot support the concept of tax breaks for oil companies while some American families are searching their budgets for the extra cash they need to fill their gas tanks," Domenici said.

With energy prices taking center stage, Sen. Feinstein and three other lawmakers last Tuesday introduced legislation that seeks to provide the Commodity Futures Trading Commission (CFTC) with greater authority to oversee over-the-counter (OTC) energy trades on electronic trading platforms that currently are largely unregulated.

"The problem...is that part of the energy market provides transparency, part does not. If you make a trade on [the New York Mercantile Exchange, or Nymex], a record is kept, an audit trail is there. But if you make a trade on an electronic trading platform, no records are kept and there is no audit trail," making OTC energy trades susceptible to fraud and manipulation, Feinstein said last Tuesday.

The vast number of energy trades occur in two markets -- Nymex and on electronic exchanges such as the InterContinentalExchange (ICE), she noted. Nymex is regulated by the CFTC, which requires traders to maintain records for five years and report large trading positions to the agency. However, the electronic exchanges such as ICE, where an estimated 80% of energy commodities are traded, are largely unregulated, Feinstein said. ICE is the largest OTC online trading exchange in the energy business.

The legislation sponsored by the four senators attempts to close this loophole by requiring:

In addition to Feinstein, sponsors of the bipartisan legislation are Sens. Olympia Snowe (R-ME), Carl Levin (D-MI) and Maria Cantwell (D-WA). The bill will probably be offered as an amendment to pending legislation reauthorizing the CFTC, which is expected to come before the full Senate in the coming weeks. Feinstein has tried twice to obtain CFTC oversight of the loosely regulated OTC market, but failed both times.

Some CFTC commissioners have said such legislation is unnecessary. They contend that the agency already has adequate authority to prevent fraud and manipulation in the OTC energy markets. Speaking to the Natural Gas Roundtable last month, CFTC Commissioner Sharon Brown-Hruska said the problem with lawmakers' proposals to enhance the CFTC's oversight of the OTC energy markets "is that they may represent more of a political response to high energy prices than...a practical attempt to identify manipulative behavior in the markets."

Despite beliefs to the contrary, she said that in a lot of OTC markets, the CFTC has "significant authority over what we call the exempt commercial market." As players have become more significant, the agency has approved rulemakings that require players in that market to provide more information to the CFTC, Brown-Hruska said (see NGI, April 3). She further noted that the CFTC has brought a number of actions against traders in the OTC market, collecting about $250 million in fines.

On the House side, chemical producers decried energy legislation proposed by the House Republican leadership last Wednesday for its failure to include anything that would increase natural gas supply and moderate prices.

The legislation, unveiled by House Speaker Dennis Hastert (R-IL), mainly responds to the public's rising sentiment against high gasoline prices and could come to the House floor for a vote as early as this week, along with a bill seeking to open up ANWR to oil and gas exploration and production.

"The proposal as it stands neglects one of the nation's most important issues -- the natural gas crisis that has been crippling America's manufacturing economy, exporting millions of jobs and causing hardship for consumers, small businesses, schools and hospitals across the country," the Arlington, VA-based American Chemistry Council (ACC) said last Thursday.

Natural gas legislation that would open up new domestic gas fronts for producers is "essential 'unfinished business' for the country and the Congress," the chemical producers said. "High gasoline prices are certainly causing pain at the pump, but a six-year crisis in natural gas markets acts as a hidden tax that is exacting a far greater toll on the nation's economy and is causing far greater job loss in America's manufacturing industries."

At its worst four months ago, the price of U.S. natural gas topped $15/MMBtu, a cost equivalent of $7.70 per gallon of gasoline, the ACC estimated. The average price of domestic natural gas last year was $9/MMBtu, equivalent to $4.62 for a gallon of gasoline. The nation's natural gas bill has increased by more than $425 billion since the start of the decade -- a hidden tax of more than $3,000 for every taxpayer in the United States, according to the ACC.

"Congress cannot let another year go by without passing legislation that increases access to America's own abundant supply of natural gas. We strongly urge Congress to include natural gas supply legislation in its energy package."

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