House and Senate tax writers have finalized $14.5 billion of energy tax incentives over 10 years to be included in the sweeping energy bill that lawmakers are expected to vote on this week before they leave for their August recess. The House is poised to take up the measure (HR 6) Thursday, with the Senate to follow on Friday.

The tax portion, which has $3.1 billion in spending offsets, was negotiated by key members of the Senate Finance Committee and House Ways and Means Committee. It earmarks $2.6 billion of incentives for oil and gas production and refining, or approximately 18% of the energy tax incentives. An estimated $3.1 billion of incentives has been allocated for electricity reliability; $2.9 billion for clean coal; $2.7 billion for energy efficiency and conservation measures; and $3.1 billion for renewable and clean energy incentives.

For the oil and gas sector, the tax package would do the following: reduce the depreciation period for natural gas distribution lines from 20 years to 15 years for lines placed in service through Dec. 31, 2010 (total cost of $1 billion); allow two-year amortization of geological and geophysical costs incurred in connection with domestic oil and gas exploration (cost $974 million); and clarify that under current law gas gathering lines are subject to seven-year depreciation (cost $16 million).

The multi-billion-dollar tax package also creates a safe harbor exception to the tax-exempt bond arbitrage rules, which allows public utilities to finance pre-payments for natural gas with tax-exempt bond proceeds if the natural gas is used to supply the utility’s customers (cost $53 million). This would allow utilities to purchase natural gas supplies for their customers at the best prices, the tax writers said.

With the tax breaks and other benefits, the American Gas Association (AGA) said Wednesday that “natural gas customers…should benefit form [the] major energy bill that is nearing final vote in Congress.” But AGA President David Parker cautioned customers not to expect immediate reductions in gas prices. “Energy projects have long lead times before they yield [tangible] results.”

To bolster electricity reliability, the tax package cuts the depreciation period for assets used in the transmission and distribution of electricity from 20 years to 15 years. Electric utilities that sell their transmission assets to a FERC-approved independent company would be able to pay tax on the gains over eight years, and a five-year carryback would be allowed for net operating losses of up to 20% of the cost of electric transmission capital and pollution control expenditures.

With respect to renewable and clean energy, the tax package extends the renewable electricity production credit through Dec. 31, 2007 for wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation power, landfill gas and trash combustion. It also authorizes the issuance of $800 million of tax-credit bonds before Dec. 31, 2007 to support renewable investment by municipal power authorities, rural cooperatives and others.

The tax writers created three credits for investments in clean coal facilities producing electricity: 1) a 20% credit for industrial gasification projects; 2) 20% credit for integrated gasification combined-cycle projects; and 3) 15% credit for other advanced coal-based projects that produce electricity.

The package provides a number of incentives to encourage energy efficiency and conservation, including tax credits for the purchase of hybrid, fuel cell, advanced lean-burn diesel and other alternative powered vehicles; expansion of the small ethanol producer credit to producers with annual production capacity of 60 million gallon; creates a 10% personal tax credit for energy-efficient improvements to existing homes; and extends the income and excise tax credits for biodiesel through Dec. 31, 2008.

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