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*Winner of the Onion Award—The HOUSE APPROVES ENERGY BILL (August 4th 2007)
*The Onion award: the more you read a document, the more it’s like pealing an Onion—your eyes tear
Energy Comment, 08/15/2007

In a rare weekend session, on August 4th, 2007 the House of Representatives approved its version of Energy Legislation (...take some comfort in the fact that our political leaders are hard at work, late on a Saturday night in the middle of summer). Investors need not worry, final energy legislation still has a long and politically difficult path to travel. Congress will pick up the subject when it reconvenes from its summer recess—and the battle lines are well established—thereby raising questions as to whether this Congress can deliver any new energy legislation in 2007—especially without the support of the Auto manufactures and the Oil & Gas industries.

Those groups happy with the Congressional proposals are:

Agricultural Groups
Environmental and Conservation Groups
Companies involved in Green Energy Production:

Solar
Wind

Ocean power
Geothermal power
Biofuels

Carbon capture and sequestration (...sequestration? Isn’t that curable with penicillin?)

The Auto Industry
Oil & gas companies
Electric Utilities
The Department of Energy (i.e., the Administration)

The massive 888 page document (...it took the Senate 278 painful pages to reach many of the same conclusions...who said size doesn’t matter!), required 10 different committees to draft—yet in the final hours before the summer recess, the House passed not one but two Bills (HR 3221) entitled the “New Direction for Energy Independence, National Security, and the Consumer Protection Act.” and (HR 2776) the “Renewable Energy and Energy Conservation Tax Act of 2007.” In June 2007 the Senate passed (S. 1419), the “Renewable Fuels, Consumer Protection and Energy Efficiency Act of 2007” (...see our COMMENTS on our website dated June 29, 2007). Reconciliation of the House and Senate’s renditions will now have to be hammered out into a single document when Congress convenes again in September.

Assuming Congress can reach a consensus, ultimately the legislation would have to be approved by the President. The White House has already made overtures that a veto is likely if final legislation resembles that which has been drafted to date. Insofar as that proposed by the House, senior White House officials have already commented that, “... H.R. 2776 and H.R. 3221 fail to deliver American consumers or businesses more energy security, but rather would lead to higher energy costs and higher taxes.” Thus, it may be a bit soon to draw hard and fast investment conclusions based on the legislative proposals currently floating around Congress, not to mention the President’s own proposal known as the “Twenty in Ten” (...it has a certain rhyme) initiative, which would reduce gasoline usage by 20% in ten years.

Separate But Not Equal: HR 2776 & HR 3221

HR 2776, the “Renewable Energy and Energy Conservation Tax Act of 2007” (Passed 221-189)

HR 3221 the “New Direction for Energy Independence, National Security, and the Consumer Protection Act.” (Passed 241-172)

HR 2776, the “Renewable Energy and Energy Conservation Tax Act of 2007” contains the more controversial provisions—notably, those features designed to exact $16 billion from oil companies, by eliminating $16 billion in oil and gas subsidies and an obligation that electric utilities derive 15% of the electricity produced from renewable resources by 2020—this target is to be reached by 2.75% increasing increments beginning in 2010 (...also referred to as the Renewable Energy Standard, the RES amendment).

The House’s proposals are intended to shift energy policy and improve the investment attractiveness of renewable energy resources”—which will have the greatest impact on major oil companies by eliminating a nearly $16 billion in oil and gas subsidies. HR 2776 also allows for an equivalent amount ($16 billion) in tax credits and bonds to promote investment in renewable energy production, biofuels and energy conservation efforts, including cellulosic ethanol, wind, solar and an array of “other” energy efficiency activities.

Speaker of the House Nancy Pelosi (D-CA) who led efforts to draft and pass the legislation characterized the legislation as “A new coalition is forming in the Congress. The legislation proves that energy production, job creation and environmental protection can be achieved all at once” (...could her remarks have been any more politically correct?)

Incentives & Separation: Get Through The BACK DOOR That Which You Can’t Fit Through The FRONT DOOR

It is curious that the House found it necessary to enact new energy legislation in 2 Bills rather than one (...which seems rather odd on a prima-fascia basis to us ... and, not to be cynical, but the Senate was able to do it in one Bill). Could it be that the separation anticipates severe opposition from the oil and gas industries and therefore, one Bill attempts to “get through” the back door what it might not be able to get through the front door—namely, incentives for alternative energy companies without having to go face-to-face with “big” industry? HR 2776 contains a host of incentives for alternative energy companies and by separating these benefits, it believes there is a higher probability of salvaging some incentives and “other” (...what a big rug this “other” is ...) for environmentally friendly energy. HR 2776’s “other” items would:

Be conducive to ongoing research, development and commercialization of solar energy technology are an eight-year extension of the 30% investment tax credit for businesses under Section 48 of the tax code
The ability for corporate and personal filers to claim the investment tax credit against the Alternative Minimum Tax, removal of the prohibition barring utilities from using the Section 48 investment tax credit
Elimination of the $2,000 maximum dollar investment tax credit limitation for homeowners under Section 25 of the tax code

Provides as much as to $2.4 billion in bonding authority for the issuance of Clean Renewable Energy Bonds

The Solar Energy Research and Advancement Act of the bill, provides funds, subject to appropriation to support research, development and commercialization of solar energy technologies with particular emphasis on solar power thermal storage research, solar lighting and cooling and advanced photovoltaic technology development

Relies on market-based mechanisms, including the purchase of renewable energy credits that will enable electric utilities to meet the RES’s mandated minimum renewable energy generation requirements, which grow incrementally from 2.75% by 2010 to 15% by 2020 (...do I see synthetic financial trading instruments in the future?)

In closing, we find the House’s version of energy legislation, interesting (...well, not really, it’s painfully boring) and disturbing that elected officials have a shallow understanding of our energy needs and resources. While capital incentives are vital if the alternative energy companies are to survive and prosper, the allocation of funds and bonding ability will prove to be a critical variable as if and when any legislation resembling that currently on the table sees the light of day (... we could make a bad pun here but we find the legislative actions too uninspiring). <

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