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Energy Tax Incentives Prominent in Senate Finance Committee’s Extenders Package

Apr 14 2014

The Senate Finance Committee approved its long-awaited tax extenders package on April 3, 2014. The Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, which the Committee approved by voice vote, would extend dozens of temporary tax incentives that expired at the end of last year or are set to expire at the end of this year. Moreover, the package includes numerous energy tax incentives that lapsed at the end of last year.

The EXPIRE Act would extend the following energy tax provisions:

* Production tax credit and investment tax credit with respect to facilities producing electricity from certain renewable sources (e.g., wind) (Sections 45 and 48)
* Deduction for energy efficient commercial building property (Section 179D)
* Credit for residential energy efficient property (Section 25C)
Alternative fuel refueling property credit (Section 30C)
Credit for electric motorcycles and three-wheeled vehicles (Section 30D)
Second generation biofuel producer credit (Section 40)
Special depreciation allowance for second generation biofuel plant property (Section 168(l))
Tax credits for biodiesel and renewable diesel (Section 40A)
Credit for the production of Indian coal (Section 45(e)(10))
Credit for energy efficient new homes (Section 45L)
Alternative fuel and alternative fuel mixture credit (Sections 6426 and 6427(e))
Credit for new qualified fuel cell motor vehicles (Section 30B) (expires in 2014)

* Provision was not included in Senator Ron Wyden’s (D-OR) “Chairman’s mark” but was added to the package before the Committee’s mark-up.

That said, the EXPIRE Act is, for the most part, a “clean” extenders package, meaning that the proposal mostly changes termination dates and includes few changes to underlying policy. As a result, certain modifications sought by the renewable energy industry were not included. For example, the proposal would not expand Master Limited Partnerships (MLPs) along the lines of Senator Chris Coons’ Master Limited Partnerships Parity Act (S. 795). Additionally, the EXPIRE Act would not impose a “commence construction” requirement (as opposed to a “placed in service” requirement) with respect to solar projects under the investment tax credit under Section 48. Finally, it would not extend the credit for energy efficient appliances under Section 45M.

K&L Gates hosted Chairman Wyden for a breakfast meeting on April 8. Wyden stated that he is working with Senate leadership on a strategy that would bring the EXPIRE Act to the Senate floor. Some staff indicate that floor action could occur as early as the next congressional work period, during the weeks of April 28 or May 5. Meanwhile, the House Ways and Means Committee may also consider energy tax incentives soon as part of its planned series of hearings on tax extenders.

We will provide more updates as this debate unfolds over the coming months.

President’s Budget Sets Energy Tax Priorities

Mar 24 2014

On March 4, President Obama released his annual budget request to Congress. The President’s Fiscal Year (FY) 2015 request includes many proposals from previous years, but it also includes some new ideas—including on energy taxes. Below is a summary of the Administration’s energy tax proposals.

Modify and Permanently Extend the Renewable Electricity Production Tax Credit (PTC). As in its budget request last year, the Administration would make the Internal Revenue Code (IRC) Section 45 PTC permanent, refundable, and available to solar facilities. However, there are two significant changes from last year: (1) the Administration would make the credit available for electricity consumed directly by the taxpayer; and (2) solar facilities could choose to use either the PTC or the investment tax credit (ITC) under IRC Section 48 through the end of 2016. After 2016, the proposal would repeal the permanent 10 percent ITC for solar and geothermal property.
Modify and Permanently Extend the Deduction for Energy-Efficient Commercial Building Property. The Administration would raise the current maximum deduction for energy-efficient commercial building property to $3.00 per square foot, increase the maximum partial deduction for each separate building system to $1.00 per square foot, and provide a new deduction to reward energy savings achieved by retrofits to existing buildings, among other changes.
Provide a Tax Credit for the Production of Advanced Technology Vehicles. The Administration would replace the existing tax credit for plug-in electric drive motor vehicles with a credit for “advanced technology vehicles” that: (1) operate primarily on an alternative to petroleum fuels; (2) use technology employed by few other vehicles in the U.S.; and (3) exceed the “target” miles per gallon gasoline equivalent (MPGe) by at least 25 percent.
Provide a Tax Credit for Medium- and Heavy-Duty Alternative Fuel Commercial Vehicles. The Administration would create a new tax credit for alternative fuel vehicles weighing more than 14,000 pounds. The credit would equal $25,000 for vehicles weighing up to 26,000 pounds and $40,000 for vehicles weighing more than 26,000 pounds.
Extend the Tax Credit for Cellulosic Biofuels. The tax credit for the production of cellulosic biofuels under IRC Section 40 (recently re-titled the “second generation biofuel producer credit”) expired at the end of 2013. The Administration would retroactively extend the credit through 2020 at its current level of $1.01 per gallon.
Modify and Extend the Tax Credit for the Construction of Energy-Efficient New Homes. The Administration would extend the tax credit for new energy-efficient homes acquired before 2015. For homes acquired between 2015 and 2025, the proposal would provide a $1,000 credit for the construction of a qualified ENERGY STAR certified new home. The Administration would also provide a $4,000 tax credit for construction of DOE Challenge Homes.
Reduce Excise Taxes on Liquefied Natural Gas (LNG) to Bring Into Parity with Excise Taxes on Diesel. The Administration would lower the 24.3 cents per gallon excise tax on LNG to 14.1 cents per gallon after 2014.

The Administration has also proposed to repeal numerous tax preferences for conventional energy companies. In particular, the President proposed to repeal the following provisions:

Credit for Enhanced Oil Recovery (“EOR”) Projects
Credit for Oil and Natural Gas Produced from Marginal Wells
Expensing of Intangible Drilling Costs
Deduction for Tertiary Injectants
Exemption to Passive Loss Limitation for Working Interests in Oil and Gas Properties
Percentage Depletion for Oil and Natural Gas Wells
Domestic Manufacturing Deduction for Oil and Natural Gas Production
Expensing of Exploration and Development Costs
Percentage Depletion for Hard Mineral Fossil Fuels
Capital Gains Treatment for Royalties
Domestic Manufacturing Deduction for the Production of Coal and Other Hard Mineral Fossil Fuels

In addition to repealing these provisions, the Administration would increase the geological and geophysical amortization period for independent oil producers from two years to seven years.

Although it’s unclear whether Congress will enact any of these proposals into law, the Administration’s budget request is significant in that it establishes the President’s position on energy tax issues moving forward. This positioning is especially important as Congress debates tax extenders legislation and energy tax reform. It’s also important when considered in comparison to recent proposals from House Ways and Means Committee Chairman Dave Camp (R-MI), whose tax reform discussion draft would repeal incentives for alternative energy, and former Senate Finance Committee Chairman Max Baucus (D-MT), whose tax reform staff discussion draft would establish a regime of technology-neutral tax incentives to reward reductions in greenhouse gas emissions while eliminating other energy tax provisions.

Stay tuned for more information as this debate unfolds.

DOJ’s Bird in the Hand: MBTA and BGEPA enforcement

Mar 17 2014

The American Bar Association recently held its 28th annual conference for the White Collar Crime Institute in Miami, Florida. http://www.americanbar.org/calendar/2014/03/white_collar_crime2014.html?sc_cid=CEN4WCC-CRS.

The Institute prides itself for showcasing the most significant white collar crime issues across the country. At this year’s meeting, Stacey Mitchell – Chief of the Environmental Crimes Section at U.S. Department of Justice (DOJ) – discussed new areas and developments during a panel discussion on “The Expanding Net of Environmental Crimes Prosecutions.”

During the Q&A, Ms. Mitchell was asked about new areas of environmental criminal enforcement for DOJ. She responded that enforcement actions against the wind energy industry would be new this year, and specifically, enforcement actions under the Migratory Bird Treaty Act (MBTA) and the Bald and Golden Eagle Protection Act (BGEPA).

While there is a lengthy history of MBTA and BGEPA enforcement, the focus thus far has been largely on individuals and the oil/gas industry – think poachers, farmers, and oil spills. DOJ’s enforcement record has been mixed as it relates to prosecuting companies that are operating legally but where migratory birds are injured. This year, however, Ms. Mitchell announced that DOJ would be taking a closer look at how wind companies comply with these laws. Ms. Mitchell pointed to a recent plea deal with Duke Energy Renewables, and alluded to more cases on the horizon. Just a few months ago the House Committee questioned the U.S. Fish & Wildlife Service about why it was prosecuting oil and gas companies under the MBTA and BGEPA, but not wind companies (see http://1.usa.gov/1fqL5Yt).

The Duke Energy Renewables (DER) plea was the first of its kind against involving a wind energy company. In late 2013, DER plead guilty to two counts of MBTA violations for killing approximately 163 migratory birds, including 14 golden eagles at two wind farms in Wyoming. Under the terms of the plea agreement, DER will pay nearly $1 million in fines and restitution, commit to taking up to $600,000 in operational adjustments per year for the life of the wind projects, and agree to file for an eagle take permit.

Other companies are being investigated under the MBTA and BGEPA, which establish criminal liability for unintentional take of migratory birds and eagles. The MBTA is a “strict liability statute,” and the BGEPA is enforced under a general intent criminal standard. The stakes are high for the wind industry given the low legal standards to sustain a conviction, the steep costs of operational adjustments, and the uncertain risks underlying bird/turbine interaction. These risks are compounded by the fact that there is no MBTA permit for incidental take of migratory birds from industrial activities, and that an eagle take permit has never (to date) been issued to a wind farm.

It remains to be seen how DOJ will exercise its enforcement discretion to target wind companies. But what is clear is that the wind industry may be DOJ’s bird-in-the-hand for high-profile environmental cases in the years to come.

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