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Treasury Seeks to Repeal Gas Utility Write-Downs, Producer Tax Incentives

The Treasury Department is seeking to repeal a provision of the Energy Policy Act of 2005 (EPAct) that gives natural gas utilities faster depreciation -- 15 years rather than 20 years -- of their pipeline distribution facilities through January 2011. The agency also proposes to strip away tax incentives for oil and gas exploration.

In its revenue proposals for fiscal year 2007, Treasury is urging Congress to give gas utilities faster recovery of their investments only for distribution lines that are placed into service in 2006, with faster write-downs for the subsequent five years (2007 through 2011) to be canceled, according to Peggy Laramie, a spokeswoman for the American Gas Association (AGA), which represents gas utilities.

Under Treasury's proposal, the investment recovery period would revert to the longer, 20-year period for distribution lines placed into service after Dec. 31, 2006.

The AGA lobbied hard for the faster, 15-year depreciation schedule for the 2006-2011 period, she said, because it allows utilities to recover their investments in distribution lines at the same rate as interstate natural gas pipelines.

"We think this [action by Treasury] is ill-advised," Laramie told NGI. Existing gas utility customers may find that their older lines are not replaced as quickly with newer lines if utilities are unable to line up capital quickly, she said.

"Because the 15-year...recovery period for natural gas distribution lines benefits gas utilities rather than producers, it does not significantly add to our nation's energy supplies over what the market would provide if the recovery period were 20 years," Treasury claimed. "Moreover, the 15-year recovery period provides natural gas utilities with an unwarranted advantage over competitors such as electric utilities."

Treasury estimates that its proposal will result in $833 million in revenue savings for the federal government through 2016.

In a related development, Treasury also proposes to repeal tax incentives for oil and gas exploration that were provided in EPAct. Specifically, the department proposes to extend the amortization period from two to five years for geological and geophysical expenses incurred in connection with oil and gas exploration in the United States. The proposal would be effective for amounts paid or incurred in taxable years beginning after Dec. 31, 2006.

"Current high energy prices are already providing significant incentives for companies to invest in oil and gas exploration," Treasury said in justifying its proposal. It estimates that its plan will create $730 million in revenue savings for the federal government through 2016.

Treasury's proposals, to take effect, would have to be approved by the House and Senate as part of the budget process.

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