Ending six weeks of arduous and sometimes rancorous debate, the Democrat-led Senate last Thursday passed sweeping energy legislation, the Energy Policy Act of 2002, that dangles “carrots” in front of pipeline companies to build an Alaskan natural gas transportation system, gives small producers multi-billion dollar tax breaks to spur domestic oil and gas production, increases renewable fuel use and production, and offers reforms to further enhance competition in the electricity markets.

“This was a monumental undertaking. It’s coming to a positive result,” said Senate Minority Leader Trent Lott (R-MS), just prior to the vote of 88 to 11. The energy bill (S. 517), drafted by Sens. Tom Daschle (D-SD) and Jeff Bingaman (D-NM), who bypassed the Senate Energy Committee, came nearly nine months after the House adopted its omnibus energy bill last summer (H.R. 4). “It’s a good bill to send to conference” with the House, said Martin Edwards, director of legislative affairs for the Interstate Natural Gas Association of America (INGAA). One source gave it a “B-” grade.

The broad-based legislation drew mixed reviews from the natural gas and electricity industries, with several observers noting that the Senate’s effort probably was more notable for what was omitted from the bill than what was in it.

The biggest triumph for gas and power marketers and traders was the defeat of a proposal that sought to re-regulate trading of over-the-counter (OTC) energy and metals derivatives. The traders, as well as Wall Street interests and key energy trade associations, lobbied long and hard to scuttle the derivatives initiative from the Senate bill. Opposition, including some independent producers and smaller utilities, fought right up to the end to rein in marketers (see Daily GPI, April 25).

Ironically, many political experts had expected Enron-related reforms to take center stage during the Senate energy debate, but the only significant reform proposed — Sen. Dianne Feinstein’s (D-CA) initiative on derivatives — was withdrawn from consideration in the face of Republican opposition. Other West Coast Democrats — Sens. Barbara Boxer of California, Maria Cantwell of Washington and Ron Wyden of Oregon — tried to push narrower post-Enron initiatives, but were unsuccessful.

Eight Democrats — including Boxer and Feinstein — and three Republicans voted against the omnibus energy bill. The crowning blow for Boxer came last Thursday when she lost a vote to eliminate an initiative that grants ethanol producers an exemption from liability for adverse emissions associated with their product.

For Senate Republicans, the Bush administration and major producers, the biggest setback by far was the Senate’s failure to open the Arctic National Wildlife Refuge (ANWR) to oil and gas drilling. The drive to give producers access to ANWR, which was spearheaded by Sen. Frank Murkowski (R-AK), faced a wall of opposition from Democrats, and some Republicans.

But Capitol Hill observers aren’t ready to rule out ANWR drilling in a final energy bill. Given that Arctic refuge leasing is part of the House energy bill, they expect it to be actively discussed when House and Senate conferees meet to reconcile their measures. Even Boxer conceded that the controversy over ANWR access was far from over. “Drilling in Alaska did get 46 votes, and I am concerned that [it]…may not be dead in the conference committee.”

President Bush was not critical of the ANWR-absent measure last week. Rather, he expressed his hope that balanced energy legislation, made up of both environmentally-sound production and green initiatives, would emerge from a House-Senate conference.

Efforts to significantly raise the corporate average fuel economy (CAFE) standards for motor vehicles were cut short early on in the session, making it the first major casualty of the energy debate. Democrats had sought to raise the standards by 50% over a 30-year period.

With the Senate energy legislation finally completed, “I think there’s a pretty good chance” that Congress will approve a final energy bill before the year is up, said INGAA’s Edwards. If it doesn’t, Capitol Hill lawmakers will have to start from scratch on an energy bill next year.

The bill’s provisions promoting the construction of an Alaskan gas pipeline were the biggest win for interstate pipelines, according to Edwards. “They provide a lot of support to…jump start this project.” Specifically, the legislation clears the way for expedited permitting and regulatory review of an Alaskan line, would offer a loan guarantee of up to $10 billion to encourage the line’s construction, and would give producers a credit if prices fall below $3.25/Mcf for natural gas supplies delivered over the envisioned Alaskan transportation system. The pipeline, if built, would transport North Slope gas to the Lower 48 states, taking the route along the Alaska highway.

Producers “got their little honey amendment,” said Edwards, referring to the “safety net” credit for gas prices (see Daily GPI, April 24). “It should go a long way in addressing their concerns about what prices would be in the Lower 48” for gas transported over an Alaskan pipeline. Three major Alaskan producers — ExxonMobil, Phillips and BP — repeatedly have said the pipeline was not economically feasible.

But “it’s going to be pipelines that are going to build and run this pipeline,” not producers, Edwards countered. “We’re certainly eager to get that project underway, if we can.”

Pipelines, however, “are not exactly crazy” about the pipeline safety portion of the legislation, he told NGI. They have a big problem with a provision that would require gas pipes to undergo mandatory five-year inspections. “They don’t think this is practical or necessary.”

While the House energy bill does not address pipeline safety, Edwards said two House committees currently are working on legislation that the pipelines support. He believes this could be completed in time for the House-Senate conference on the energy bill, and included in final legislation.

The Senate bill contains about $4-5 billion in tax credits and incentives for independent oil and natural gas producers, noted Lee Fuller of the Independent Petroleum Association of America (IPAA). “They’re not huge, but they are very important changes.”

The incentives for traditional producers account for about one-third of the combined $14.1 billion in tax breaks offered in the bill. The House measure, on the other hand, awards a total of $33 billion in tax credits, of which $7.5 billion has been set aside for producers. The Senate’s tax package is slanted more toward energy conservation, efficiency and renewable fuels, while the House tax initiatives lean toward conventional energy sources, such as oil and gas.

For producers, the Senate measure offers a counter-cyclical tax credit for marginal well production, improved amortization of geological and geophysical costs, an extension of the suspension of the net income limitation on percentage depletion for marginal wells, and an extension of the unconventional fuels tax credit for new wells, Fuller said.

On the downside, the Senate legislation calls for the Environmental Protection Agency (EPA) to study the environmental effects of the use of hydraulic fracturing in oil and gas production to determine whether federal regulations are warranted, he noted.

Producers contend that current state regulation of hydraulic fracturing is sufficient, and that federal oversight of the activity isn’t needed, according to Fuller.”Producers see no reason to regulate hydraulic fracturing any differently than it is now.” Under hydraulic fracturing, producers use pressurized water to fracture formations — such as tight sands — so that oil and gas can flow freely into wells.

The Senate took some action to improve permitting of leases and provide greater access to public lands, said Fuller, but he noted the Senate was not as “robust” on these issues as the House.

The Senate defeat of ANWR drilling “was clearly a big loss with respect to domestic supply,” said Fuller, noting that oil supplies from the North Slope to Lower 48 states have been dropping over the past couple of years. He said the Senate’s action was more of a setback for major oil producers than for independents.

But with ANWR off the table, Fuller said independent producers are concerned that environmentalists will now re-direct their energies to oppose exploration and production in western states, particularly the Rocky Mountain region where potential gas resources have been estimated at 137 Tcf.

For gas distributors, the bill would accelerate the depreciation rate for new distribution facilities to 15 years from the current 20 years, said spokeswoman Peggy Laramie of the American Gas Association (AGA). The stepped-up depreciation would make it much easier for utilities to get the needed capital to build new facilities, she noted. The House measure offers a 10-year recovery period.

In addition, the Senate voted to increase the authorized funding level for low-income home assistance for energy bills to $3.4 billion from $2 billion, she said. The House energy legislation proposes an identical hike.

“For the most part, we think it’s positive legislation in terms of the electricity title,” said Mark Stultz, a spokesman for the Electric Power Supply Association (EPSA), which represents power producers, power marketers and merchant power plant developers. The House bill does not include an electricity section.

The “big win” for EPSA was the defeat of Feinstein’s proposal to re-regulate OTC derivatives, he noted. Another key victory was Sen. Mary Landrieu’s (D-LA) withdrawal of her “participant funding” proposal, which Stultz noted would have “made sure that ratepayers were the last resort when it came to paying for transmission upgrades.” If it had been adopted by the Senate, he said, it would have been a “disincentive” to the construction of new generation capacity.

In other moves that would benefit EPSA members, Stultz noted the Senate legislation would extend the authority of the Federal Energy Regulatory Commission to public power and rural cooperatives “in ways that didn’t previously exist;” keeps in place PURPA’s mandatory purchase requirement for qualifying facilities; and endorses the direction that FERC has taken on regional transmission organizations (RTOs). “We believe the bill represents progress toward a consistent playing field for all.”

The EPSA, however, was disappointed by the Senate’s adoption of what Stultz called a “cumbersome amendment on reliability.” The bill codifies mandatory reliability requirements, but he believes this issue should have been left to RTOs.

The Senate’s last minute move to reduce the cap on renewable energy credits to 1.5 cents/kWh above the wholesale cost of power from 3 cents/kWh won immediate plaudits from the Edison Electric Institute (EEI). The Senate took this action as part of the Renewable Portfolio Standard (RPS), which requires electric producers to generate 10% of their power from renewable sources by 2019 (see NGI’s Power Market Today, April 25). The renewable component was reduced from the 20% in a vigorous floor fight earlier in the session.

The proposal to reduce the cap, which was sponsored by Sen. Don Nickles (R-OK), is intended to reduce the cost to utilities of compliance with the RPS.

EEI spokeswoman Pat McMurray also believes the group dodged a bullet when the Senate defeated last week a proposal of Sen. Cantwell, which would have required FERC to develop several consumer protection rules related to investor-owned utilities.

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