Tax reform has been a hot topic as of late, particularly for the energy sector.  On September 17, 2014, the Senate Finance Committee continued the focus on energy tax reform by holding a hearing on “Reforming America’s Outdated Energy Tax Code.”  The hearing followed a trio of major proposals released this past year to revise the Internal Revenue Code’s energy tax provisions.  Last December, former Senate Finance Committee Chairman Max Baucus (D-MT) released a discussion draft proposal to streamline energy tax incentives to make them more predictable and technology-neutral.  The proposal consolidates the various tax incentives for clean electricity into a single production tax credit (PTC) or an investment tax credit for all types of power generation facilities that are placed into service after December 31, 2016. In February, House Ways and Means Committee Chairman Dave Camp (R-MI) released a discussion draft of the Tax Reform Act of 2014, which sets forth a broad framework for general tax reform, including the phase out and repeal of many energy-related tax credits such as the PTC.  And in March, the President released his fiscal year 2015 budget proposal, which contained energy-related tax provisions such as a permanent extension of the PTC and a provision making the PTC refundable thereby allowing taxpayers without current taxable income to take advantage of the credit.  A detailed review and comparison of these three proposals can be found here

The September hearing on energy tax reform included industry representatives and academic experts as witnesses.  At the beginning of the hearing, Committee Chairman Senator Ron Wyden (D-OR) articulated three principles that he views are important in moving energy tax reform forward.  First, “the tax code must take the costs and benefits of energy sources into account.”  This would include factors “such as efficiency, affordability, pollution, and sustainability.”  Second, he advocates replacing “today’s quilt of more than 40 energy tax incentives with a modern, technology-neutral approach.”  Third, “the disparity in how the tax code treats energy sources – and the uncertainty it causes – has to end.”

During the course of the hearing, several topics were addressed.  A central focus of the hearing centered on achieving “parity” between fossil fuels and renewable fuels through a technology neutral tax structure.  The witnesses debated over various ways to achieve such parity, including the proposal to eliminate expensing for drilling intangible costs.  Other topics addressed by the witness panel included how to encourage technology advancements in the transmission and storage of energy, allowing renewable energy production to be financed through master limited partnerships, and the carbon tax.

At the end of the hearing, Wyden again reiterated his focus for energy tax reform: a technology-neutral approach focused on performance not fuel type.  Although it is unlikely that any broad tax reform will be accomplished in the near future, it appears that there is continued interest in structuring the energy tax provisions in a way that is technology neutral and that achieves parity between fossil and renewable fuels.

A recording of the hearing, as well as the prepared written statements of the witnesses and the introductory remarks of Senators Wyden and Orrin Hatch (R-UT), can be found here.  

President Obama’s recently released budget proposal for the 2015 fiscal year contains energy-related tax provisions that include a permanent extension of the production tax credit (PTC) and a provision making it refundable.  The recently released discussion draft of the Tax Reform Act of 2014 from House Ways and Means Committee Chairman Dave Camp also contains numerous energy-related tax provisions, but would phase out and repeal the PTC, along with many other energy-related tax credits.  In late 2013, former Senate Finance Committee Chairman Max Baucus also released discussion drafts regarding energy-related tax provisions, including a proposal to consolidate the various tax incentives into a PTC or an investment tax credit.  This Special Report provides a comparison of the key energy-related tax provisions in each proposal.

Read the Special Report here.

The Senate Finance Committee passed the Expiring Provisions Improvement Reform and Efficiency Act (EXPIRE Act) on April 3, 2014.  The legislation would renew through 2015 more than 50 tax incentives that either have lapsed or will lapse at the end of 2014.  The EXPIRE Act is not yet scheduled for consideration by the full Senate.  The legislation includes a number of energy-related tax credits, including extensions for the renewable electricity production tax credit (PTC) and the new markets tax credit (NMTC).  The legislation also modifies the bonus depreciation rules under Section 168(k).

The EXPIRE ACT extends the PTC and the election to claim the energy investment tax credit (ITC) in lieu of the electricity production credit for two years, through December 31, 2015. The PTC expired for qualifying renewable energy facilities at the end of 2013 if construction of such facilities did not begin before January 1, 2014.  The PTC provided a credit that ranged from 1.1 cents to 2.3 cents per kilowatt-hour of renewable electricity produced, depending on the type of renewable energy.  If passed, the proposal would be effective as of January 1, 2014.

The legislation also includes an extension for bonus depreciation under Section 168(k).

  • The proposal extends the 50 percent additional first-year depreciation deduction through 2015 (and through 2016 for certain longer-lived and transportation property), and applies to property placed in service after December 31, 2013, in taxable years ending after such date.
  • The legislation also makes a conforming change to the percentage of completion rules under Section 460(b)(1)(A) for certain long-term contracts.
  • The EXPIRE Act extends the election to increase the alternative minimum tax (AMT) credit limitation in lieu of bonus depreciation for two years to property placed in service before January 1, 2016 (January 1, 2017, in the case of certain longer-lived property and transportation property).

The EXPIRE Act also extends the NMTC (which expired at the end of 2013) for two years, through 2015, permitting up to $3.5 billion in qualified equity investments for each of the 2014 and 2015 calendar years. The proposal extends for two years, through 2020, the carryover period for unused NMTCs. The proposal applies to calendar years beginning after December 31, 2013.

The EXPIRE Act also contains a variety of other energy extenders, including:

  • The  Section 30C credit for alternative fuel refueling property is extended for two years (one year in the case of hydrogen refueling property, the credit which continues under present law through 2014), through December 31, 2015.
  • The Section 30D credit for electric motorcycles and three-wheeled vehicles is extended for electric motorcycles for two years, through December 31, 2015. The credit for electric three-wheeled vehicles is not extended.
  • The Section 40(b)(6) second generation biofuel producer credit is extended for two years, through December 31, 2015.  The proposal is effective for fuel sold or used after December 31, 2013.
  • The Section 40A biodiesel fuel and renewable diesel fuel credit and the Section 6426 excise tax credit for biodiesel mixtures are extended for two years (through December 31, 2015).
  • The Section 45L credit for energy efficient new homes is extended to homes that are acquired prior to January 1, 2016.
  • The Section 30B credit for new qualified fuel cell motor vehicles is extended for one year to vehicles purchased prior to January 1, 2016.  The credit is currently available through the end of 2014.
  • The Section 25C credit for nonbusiness energy property is extended through December 31, 2015.  The EXPIRE Act also expands qualifying property for purposes of the credit to include all roof and roof products that meet the Energy Star program guidelines, and modifies the efficiency standards for certain other qualifying property.

The D.C. Circuit last week denied the Department of Energy’s (DOE) petition for en banc review of the court’s November decision holding that the DOE could not continue to collect nuclear waste fees from utilities.  The Nuclear Energy Institute (NEI) and National Association of Regulatory Utility Commissioners (NARUC) filed suit after the DOE’s termination of the Yucca Mountain repository program in 2010.  The organizations argued that the DOE could not continue to collect the fee from utilities if it did not have a waste management plan in place.  Last fall, the D.C. Circuit agreed and held that the DOE could not continue to collect the nuclear waste fee of one-tenth of a cent per kilowatt-hour.

In January, Secretary Moniz sent a letter to the Senate requesting that the fee be reduced to zero, in accordance with the court’s mandate.  The Secretary expressed his discontent with the court’s decision stating that “this proposal, mandated by the Court of Appeals, is not consistent with the process established in the [Nuclear Waste Policy Act] for adjusting the fee charged to utilities.”  On the same day the DOE filed a petition for en banc review of the D.C. Circuit’s decision.

The D.C. Circuit denied the rehearing request on March 18.  Both the NEI and NARUC issued statements declaring the move a win for consumers.  NEI stressed that despite the reduction of the fee, the government has a continuing obligation to remove spent nuclear fuel to a disposal facility.  Secretary Moniz’s fee reduction request is subject to a 90-day congressional review period.  If Congress does not act on it within that time period, the Secretary’s proposal will become effective and the fee will be reduced to zero.

Primary regulators of energy transactions, the Federal Energy Regulatory and Commodity Futures Trading Commissions (FERC, CFTC or jointly Participating Agencies) began the new year by entering on January 2 two overdue Memoranda of Understanding (MOU), one on overlapping jurisdictions, the other on sharing of information generated in connection with market surveillance and investigations into suspected market manipulation, fraud or abuse.  Both MOUs became effective immediately.

FERC, with jurisdiction over physical natural gas and power transactions, and the CFTC, with jurisdiction over financially settled products such as energy futures and swaps, had battled in recent years over the reach of each other’s jurisdiction, culminating in a March 2013 decision of the U.S. Court of Appeals for the D.C. Circuit finding that FERC improperly invaded CFTC’s jurisdiction when, under authority of the Energy Policy Act of 2005, it sought to fine Amaranth Advisors trader Brian Hunter for allegedly manipulating  natural gas futures in order to increase the profitability of corresponding physical natural gas transactions.  When the Participating Agencies failed to meet the 2011 deadline of the Dodd-Frank Wall Street Reform Act for reaching the jurisdictional understanding, a troika of western-state senators with energy committee portfolios – Dianne Feinstein (D-CA), Ron Wyden (D-OR) and Lisa Murkowski (R-AK) – expressed concern and called on the two commissions to expedite action on an MOU.

The MOUs put in place procedures that replace a reactive status quo ante in which the two agencies collaborated and shared information, if at all, only upon the request of one or the other, with a proactive framework that obliges the staffs of both agencies to notify each other of requests from within their regulated community for authorizations or exemptions from authorization requirements that may implicate the other’s regulatory responsibilities.  Once so notified, the Notified Agency must promptly inform the Notifying Agency that it (1) has no interest, (2) has an interest, triggering a consultative process between the staffs of the Participating Agencies, or (3) wants to revisit the issue once a regulated company has filed request for an authorization or exemption or the Notifying Agency has instigated sua sponte an authorization or exemption.  If (2) is selected, then the triggered consultative process will seek to determine whether the CFTC has jurisdiction under the Commodity Exchange Act or FERC has jurisdiction under the Federal Power, Natural Gas or Natural Gas Policy Acts, with disputes elevated from staff to directors and ultimately to the respective commissioners.  While the jurisdictional MOU imposes these obligations on the Participating Agencies, it expressly creates no private right of action that could be enforced by a regulated company or other third party.

The MOU on information sharing obligates the Participating Agencies to share information needed in connection with each other’s market surveillance or investigations into suspected manipulation, fraud or market power abuse in markets that the requesting Participating Agency regulates.  FERC is authorized to seek from the CFTC information from (1) designated contract markets, (2) registered swap execution facilities, (3) registered derivatives clearing organizations, (4) boards of trade and (5) market participants.  The CFTC, on the other hand, is authorized to seek from FERC information from (1) regional transmission organizations or independent system operators, (2) the North American Electric Reliability Corporation, (3) interstate natural gas pipelines and storage facility operators, and (4) market participants.  Specific provisions of the MOU obligate both Participating Agencies to take all actions reasonably necessary to preserve, protect and maintain privileges and claims of confidentiality for non-public information.  Sharing information pursuant to the MOU expressly does not constitute a waiver of any privilege or protection attached to the shared information.

Senate Finance Committee Chairman Max Baucus (D-MT) released a proposal on December 18 that would streamline energy tax incentives to make them more predictable and technology-neutral.  The proposal consolidates several different energy tax incentives into just two tax credits: one for electricity and one for transportation fuels.  The proposed provisions would allow facilities placed in service after 2016 to choose between a 10-year production tax credit and an investment tax credit of up to 20 percent.  The amount of the credit is dependent on the greenhouse gas emissions of the facility or fuel, as determined by the Environmental Protection Agency (EPA); the cleaner the facility the larger the credit.  Any facility producing electricity that is 25 percent cleaner than the average for all electric production facilities will receive the credit.  The credit would be open to all resources.  The credit phases out over four years once the greenhouse gas intensity in the market has declined by 25 percent.  The package of reforms is based on proposals previously offered by both Republicans and Democrats.  The package calls for extending current clean energy incentives through 2016 to provide for a smooth transition period.

Earlier in the week, over 30 Congressmen sent letters to the House Ways and Means Committee and Senate Finance Committee urging their fellow Congressmen to extend numerous clean-energy tax credits set to expire at the end of the year.  The letters supported a comprehensive reform of the tax code but urged immediate action to renew specific clean energy incentives facing expiration.

Among the tax incentives slated to expire are the production and investment tax credits for wind, biomass and other renewable technologies other than solar, and the advanced energy manufacturing tax credit.  Also set to expire are tax credits for efficient commercial buildings, new homes, appliances and home energy efficiency upgrades; transportation fringe benefits which provide parity between parking and transit benefits; and tax credits for biofuel production, hybrid medium- and heavy-duty trucks, and the installation of refueling equipment for alternative fuel vehicles.

The coalition of Congressmen urged long-term extension of the tax credits in order to accommodate the long planning horizon of renewable projects, such as offshore wind farms. However, another group of Senators urged the Senate Finance Committee on December 17 to allow for the expiration of the production tax credit for wind energy, arguing that it is time to let the technology stand on its own.


Jessica Bayles, associate in McDermott’s Energy Advisory practice, contributed to this article.

by Bethany K. Hatef

Congressman Ed Whitfield (R-KY.), the chairman of the House Energy and Commerce Committee’s Energy and Power Subcommittee, introduced a bill on October 28, 2013 that would void the U.S. Environmental Protection Agency’s (EPA) pending proposed rulemaking, regulating emissions of carbon dioxide from new coal-fired and natural gas-fired power plants.  Representative Whitfield worked closely with Senator Joe Manchin (D-WV), who will introduce the same bill in the Senate.  The legislation, if enacted, would impose restrictions on EPA’s issuance of any new proposal to regulate greenhouse gas (GHG) emissions from new and existing power plants, and could hinder EPA’s ability to comply with President Obama’s directive to regulate carbon emissions from existing power plants by June 1, 2015.  In connection with the legislation, coal miners and coal companies rallied on Capitol Hill in protest of EPA’s current proposed regulation limiting carbon emissions at new power plants, and the House Energy and Commerce Committee oversight panel held a hearing, entitled “EPA’s Regulatory Threat to Affordable, Reliable Energy: The Perspective of Coal Communities.”

The bill states that EPA may not issue, implement or enforce any proposed or final rule pursuant to Section 111 of the Clean Air Act that establishes a standard of performance for GHG (defined as carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons) emissions from a new source that is a fossil fuel-fired electric utility generating unit (EGU) unless EPA:  (1) establishes separate standards for coal and natural gas EGUs; (2) for the coal category, sets a standard that has been achieved for at least one continuous 12-month period by at least six EGUs at different plants in the U.S.; and (3) establishes a separate subcategory for new EGUs that use coal with an average heat content of 8300 or less British Thermal Units per pound (i.e., lignite coal) and sets a standard for such EGUs that has been achieved for at least one continuous 12-month period by at least three EGUs at different plants in the U.S.

The bill specifies that the EGUs used as the basis for the coal and lignite coal categories must collectively represent the operating characteristics of electric generation at different U.S. locations and EPA may not use results obtained from “a project to test or demonstrate the feasibility of carbon capture and storage technologies that has received government funding or financial assistance”).

The legislation states that any rule or guidelines addressing GHG emissions from existing, modified or reconstructed fossil fuel-fired EGUs will not be effective unless a federal law is first enacted specifying the effective date, and EPA has submitted a report to Congress containing the text of the rule, a description of its economic impacts, and the rule’s projected effects on global GHG emissions.  Finally, the legislation expressly repeals EPA’s prior proposed rulemakings establishing carbon dioxide limits for new EGUs.

by Ari Peskoe

On April 24, four Republican legislators and four Democratic legislators reintroduced the Master Limited Partnership Parity Act in the House and Senate. Master Limited Partnerships (MLP) provide tax advantages to energy project developers but are currently limited under the Tax Code to resources subject to depletion, such as oil and gas, and transportation and storage of certain fuels. The Act would expand the definition of qualified projects to include a range of clean energy resources and infrastructure projects. 

An MLP is a business structure that is taxed as a partnership, but whose ownership interests can be traded like corporate stock on a market. Congress enacted legislation in 1987 that allowed entities that earn at least 90 percent of their income from “qualified” sources to be treated as MLPs. Qualifying income includes “income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource.” In 2008, Congress expanded the definition of qualifying income to include income from the transportation and storage of certain renewable and alternative fuels, such as ethanol, biodiesel and industrial-source carbon dioxide.

As we reported last June, legislators first introduced the MLP Parity Act last year. The Act would have expanded the definition of qualifying income purposes to include income from wind, biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells and combined heat and power projects, as well as certain renewable transportation fuels.  Those bills were referred to the Senate Finance Committee and House Ways and Means Committee but never advanced. The updated MLP Act introduced on April 24, also includes carbon capture and storage, waste heat to power, renewable chemical and energy efficient building projects.    

In public statements, Senators Coon (D-DE) and Murkowski (R-AK), two of the Act’s sponsors, have emphasized that the MLP Parity Act attempts to “level the playing field” by providing renewable energy projects with the same tax benefits that fossil fuel projects have enjoyed. Although the rhetoric should be appealing to both sides of the aisle and the Act is backed by a range of industry groups that would benefit from the legislation, it’s fate in Congress is unclear. 

by Melissa Dorn

The United States Department of the Treasury released a notification on March 4, 2013 clarifying how sequestration will affect payments awarded under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 for specified energy property in lieu of tax credits. Treasury stated that it will reduce the amount of each final award issued from March 1, 2013 through September 30, 2013 by 8.7 percent, regardless of when the application was received by Treasury.  The 8.7 percent sequestration rate is subject to change following September 30, 2013.

For more information please contact your regular McDermott lawyer of Phil Tingle at +1 305 347 6536 or ptingle@mwe.com.

by William Friedman

President Obama proposed in his State of the Union creating an Energy Security Trust to invest in research and technology that will “shift our cars and trucks off oil for good.”  Oil and gas lease revenues, estimated at $150 billion over the next decade, would fund the Trust.  The idea of the Trust is more than 30 years old and was recently endorsed by the ranking Republican on the Senate Energy and Natural Resources Committee.  While predicting what Congress will do is a fool’s errand, there is some reason to think that an Energy Security Trust could become a reality.

President Carter in 1979 asked Congress to pass a windfall profits tax on oil company revenues in order to establish a trust that would be used to “protect low income families from energy price increases, to build a more efficient mass transportation system, and to put American genius to work solving our long-range energy problems.” More recently, Energy Security Trust Fund bills were proposed in 2007 and 2009.  The 2009 bill, entitled “America’s Energy Security Trust Fund Act of 2009,” proposed an excise tax on “carbon substances” including coal, petroleum products and natural gas.  The tax would have collected $15 per ton of carbon dioxide content in taxable substances sold by manufacturers, producers or importers and would have escalated at a base rate of $10 each year.  The proposed trust fund would have been used to finance research in clean energy technology, assist industries negatively affected by the bill, and provide payroll tax relief to individual taxpayers.  Neither the 2007 bill nor the 2009 bill, (both proposed by Rep. John Larson (D-CT.)) passed in Congress.

Unlike these previous proposals, President Obama’s proposal does not rely on tax revenues and instead resembles a recent energy policy blueprint put forward by Sen. Lisa Murkowski (R-AK), the ranking Republican on the Energy and Natural Resources Committee.  Senator Murkowski’s plan, “Energy 20/20: A Vision for America’s Energy Future,” calls for an Advanced Energy Trust Fund that would be funded by rents, royalties, bonus bids and corporate income taxes.  Murkowski also advocates opening up federal lands like Arctic National Wildlife Refuge (ANWR) and other offshore resources and using those revenues to fund a trust.  The Advanced Energy Trust Fund would be administered by the Department of Energy and used to pay for advances in renewable energy, energy efficiency, alternative fuels and advanced vehicles.

The White House has not released details yet on how the proposed Trust would be funded or administered. Unlike Senator Murkowski, the President is unlikely to support opening ANWR for drilling, which environmental groups have long opposed.  Yet, some version of an Energy Trust has support on both sides of the aisle.