Senate Report 107-140 - ENERGY TAX INCENTIVES ACT OF 2002

[Senate Report 107-140]
[From the U.S. Government Publishing Office]

Calendar No. 320
107th Congress Report
SENATE
2d Session 107-140

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ENERGY TAX INCENTIVES ACT OF 2002

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March 1, 2002.--Ordered to be printed

_______

Mr. Baucus, from the Committee on Finance, submitted the following

R E P O R T

[To accompany S. 1979]

[Including cost estimate of the Congressional Budget Office]

The Committee on Finance reported an original bill (S.
1979) to provide energy tax incentives, having considered the
same, reports favorably thereon and recommends that the bill do
pass.

CONTENTS

Page
I. Legislative Background............................................3
II. Explanation of the Bill...........................................3
Title I. Renewable Energy.........................................3
A. Extension and Modification of the Section 45
Electricity Production Credit (secs. 101-104 of the
bill and sec. 45 of the Code)...................... 3
Title II. Alternative Vehicles and Fuel Incentives................6
A. Modifications and Extensions of Provisions Relating
to Electric Vehicles, Clean-Fuel Vehicles, and
Clean-Fuel Vehicle Refueling Property (secs. 201-20
of the bill and sec. 30 and 179A of the Code and
new Code secs. 30B, 30C, and 40A).................. 6
B. Modifications to Small Producer Ethanol Credit (sec.
206 of the bill and secs. 38, 40, 87 and 469 of the
Code).............................................. 11
C. Transfer Full Amount of Excise Tax Imposed on
Gasohol to the Highway Trust Fund (sec. 207 of the
bill and sec. 9503 of the Code).................... 12
D. Modify Income Tax and Excise Tax Rules Governing
Treatment of ETBE (sec. 208 of the bill and secs.
40 and 4081 of the Code)........................... 13
E. Income Tax Credit and Excise Tax Rate Reduction for
Biodiesel Fuel Mixtures (sec. 209 of the bill and
new sec. 40B of the Code).......................... 14
Title III. Conservation and Energy Efficiency Provisions.........15
A. Business Credit for Construction of New Energy-
Efficient Homes (sec. 301 of the bill and new sec.
45G of the Code)................................... 15
B. Tax Credit for Energy-Efficient Appliances (sec. 302
of the bill and new sec. 45H of the Code).......... 17
C. Credit for Residential Energy Efficient Property
(sec. 303 of the bill and new sec. 25C of the Code) 18
D. Business Tax Incentives for Fuel Cells (sec. 304 of
the bill and sec. 48 of the Code).................. 20
E. Allowance of Deduction for Energy-Efficient
Commercial Building Property (sec. 305 of the bill
and new sec. 179B of the Code)..................... 21
F. Allowance of Deduction for Qualified Energy
Management Devices and Retrofitted Qualified Meters
(sec. 306 of the bill and new sec. 179C of the
Code).............................................. 22
G. Three-Year Applicable Recovery Period for
Depreciation of Qualified Energy Management Devices
(sec. 307 of the bill and sec. 168 of the Code).... 23
H. Energy Credit for Combined Heat and Power System
Property (sec. 308 of the bill and sec. 48 of the
Code).............................................. 24
I. Credit for Energy Efficiency Improvements to
Existing Homes (sec. 309 of the bill and new sec.
25D of the Code)................................... 25
Title IV. Clean Coal Incentives..................................27
A. Investment and Production Credits for Clean Coal
Technology (secs. 401, 411-412, and 421 of the bill
and new Code secs. 45I, 45J, and 48A).............. 27
Title V. Oil and Gas Provisions..................................31
A. Tax Credit for Oil and Gas Production from Marginal
Wells (sec. 501 of the bill and new sec. 45K of the
Code).............................................. 31
B. Natural Gas Gathering Lines Treated as Seven-Year
Property (sec. 502 of the bill and sec. 168 of the
Code).............................................. 32
C. Repeal of Requirement of Certain Approved Terminals
to Offer Dyed Diesel or Kerosene for Nontaxable
Purposes (sec. 503 of the bill and sec. 4101 of the
Code).............................................. 33
D. Expensing of Capital Costs Incurred and Credit for
Production in Complying with Environmental
Protection Agency Sulfur Regulations (secs. 504 and
505 of the bill and new secs. 45L and 179D of the
Code).............................................. 34
E. Determination of Small Refiner Exception to Oil
Depletion Deduction (sec. 506 of the bill and sec.
613A of the Code).................................. 35
F. Extension of Suspension of Taxable Income Limit With
Respect to Marginal Production (sec. 507 of the
bill and sec. 613A of the Code).................... 36
G. Amortization of Geological and Geophysical
Expenditures (sec. 508 of the bill and new sec. 199
of the Code)....................................... 38
H. Amortization of Delay Rental Payments (sec. 509 of
the bill and new sec. 199A of the Code)............ 41
I. Extension and Modification of Credit for Producing
Fuel From a Non-Conventional Source (secs. 510 and
511 of the bill and sec. 29 of the Code)........... 41
J. Natural Gas Distribution Lines Treated as Fifteen-
Year Property (sec. 512 of the bill and sec. 168 of
the Code).......................................... 44
Title VI. Provisions Relating to Electric Industry Restructuring.45
A. Ongoing Study and Reports With Regard to Tax Issues
Resulting from Future Restructuring Decisions (sec.
601 of the bill)................................... 46
B. Modification to Special Rules for Nuclear
Decommissioning Costs (sec. 602 of the bill and
sec. 468A of the Code)............................. 46
C. Treatment of Certain Income of Electric Cooperatives
(sec. 603 of the bill and sec. 501 of the Code).... 49
Title VII. Additional Provisions.................................53
A. Extension of Accelerated Depreciation and Wage
Credit Benefits on Indian Reservations (sec. 701 of
the bill and secs. 45A and 168(j) of the Code)..... 53
B. GAO Study (sec. 702 of the bill).................... 55
III.Budget Effects of the Bill.......................................56

A. Committee Estimates................................. 56
B. Budget Authority and Tax Expenditures............... 60
C. Consultation with Congressional Budget Office....... 60
IV. Votes of the Committee...........................................63
V. Regulatory Impact and Other Matters..............................63
A. Regulatory Impact................................... 63
B. Unfunded Mandates Statement......................... 64
C. Tax Complexity Analysis............................. 64
VI. Changes in Existing Law Made by the Bill, as Reported............64

I. LEGISLATIVE BACKGROUND

The Senate Committee on Finance marked up an original bill,
S. 1979 (the ``Energy Tax Incentives Act of 2002''), on
February 13, 2002, and, with a quorum present, ordered the bill
favorably reported by a unanimous voice vote on that date.
The Committee held a series of hearings in 2001 to consider
the role of tax incentives in energy policy. The first hearing,
on July 10, 2001, addressed alternative vehicles and fuels and
tax incentives to encourage their development. The second
hearing, on July 11, 2001, considered incentives for domestic
production of conventional fuels and development of alternative
and renewable energy sources. The third hearing, in Billings,
Montana, on August 24, 2001, addressed rural energy needs and
how energy tax incentives might address those needs.\1\ A
fourth hearing on electric utility restructuring was scheduled
for September 12, 2001, but was cancelled after the September
11, 2001 terrorist attacks.
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\1\ See S. Hrg. 107-267 and S. Hrg. 107-192.
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II. EXPLANATION OF THE BILL

TITLE I. RENEWABLE ENERGY

A. Extension and Modification of the Section 45 Electricity Production
Credit

(Secs. 101-104 of the bill and sec. 45 of the Code)

Present Law

An income tax credit is allowed for the production of
electricity from either qualified wind energy, qualified
``closed-loop'' biomass, or qualified poultry waste facilities
(sec. 45). The amount of the credit is 1.5 cents per kilowatt
hour (indexed for inflation) of electricity produced. The
amount of the credit was 1.7 cents per kilowatt hour for 2001.
The credit is reduced for grants, tax-exempt bonds, subsidized
energy financing, and other credits.
The credit applies to electricity produced by a wind energy
facility placed in service after December 31, 1993, and before
January 1, 2002, to electricity produced by a closed-loop
biomass facility placed in service after December 31, 1992, and
before January 1, 2002, and to a poultry waste facility placed
in service after December 31, 1999, and before January 1, 2002.
The credit is allowable for production during the 10-year
period after a facility is originally placed in service. In
order to claim the credit, a taxpayer must own the facility and
sell the electricity produced by the facility to an unrelated
party. In the case of a poultry waste facility, the taxpayer
may claim the credit as a lessee/operator of a facility owned
by a governmental unit.
Closed-loop biomass is plant matter, where the plants are
grown for the sole purpose of being used to generate
electricity. It does not include waste materials (including,
but not limited to, scrap wood, manure, and municipal or
agricultural waste). The credit also is not available to
taxpayers who use standing timber to produce electricity.
Poultry waste means poultry manure and litter, including wood
shavings, straw, rice hulls, and other bedding material for the
disposition of manure.
The credit for electricity produced from wind, closed-loop
biomass, or poultry waste is a component of the general
business credit (sec. 38(b)(8)). The credit, when combined with
all other components of the general business credit, generally
may not exceed for any taxable year the excess of the
taxpayer's net income tax over the greater of (1) 25 percent of
net regular tax liability above $25,000, or (2) the tentative
minimum tax. For credits arising in taxable years beginning
after December 31, 1997, an unused general business credit
generally may be carried back one year and carried forward 20
years (sec. 39). To coordinate the carryback with the period of
application for this credit, the credit for electricity
produced from closed-loop biomass facilities may not be carried
back to a tax year ending before 1993 and the credit for
electricity produced from wind energy may not be carried back
to a tax year ending before 1994 (sec. 39).

Reasons for Change

The Committee recognizes that the section 45 production
credit has fostered additional electricity generation capacity
in the form of non-polluting wind power. The Committee believes
it is important to continue this tax credit by extending the
placed in service date for such facilities to bring more wind
energy to the United States electric grid. The Committee
alsobelieves it is important to extend the placed in service date for
closed-loop biomass facilities and poultry waste facilities to give
those potential fuel sources an opportunity in the market place. The
Committee also believes it is appropriate to include in qualifying
facilities those facilities that co-fire closed-loop biomass fuels with
coal.
Based on the success of the section 45 credit in the
development of wind power as an alternative source of
electricity generation, the committee further believes the
country will benefit from the expansion of the production
credit to certain other ``environmentally friendly'' sources of
electricity generation such as swine and bovine waste
nutrients, geothermal power, solar power, and open-loop
biomass. While open-loop biomass facilities are not pollution
free, they do address environmental concerns related to waste
disposal. In addition, these potential power sources further
diversify the nation's energy supply.
Because tax-exempt persons such as public power systems and
cooperatives provide a significant percentage of electricity in
the United States, the Committee believes it is important to
provide the incentive for production from renewable resources
to these persons in addition to taxable persons.
Lastly, the Committee believes that certain pre-existing
facilities should qualify for the section 45 production credit,
albeit at a reduced rate. These facilities previously received
explicit subsidies, or implicit subsidies provided through rate
regulation. In a deregulated electricity market, these
facilities, and the environmental benefits they yield, may be
uneconomic without additional economic incentive. The Committee
believes the benefits provided by such existing facilities
warrant their inclusion in the section 45 production credit.

Explanation of Provision

The provision extends the placed in service date for wind
facilities, closed-loop biomass facilities, and poultry waste
facilities to facilities placed in service after December 31,
1993 (December 31, 1992 in the case of closed-loop biomass
facilities and December 31, 1999 in the case of poultry waste
facilities) and before January 1, 2007.
The provision also defines four new qualifying energy
resources: open-loop biomass, swine and bovine waste nutrients,
geothermal energy, and solar energy. Open-loop biomass is
defined as any solid, nonhazardous, cellulosic waste material
which is segregated from other waste materials and which is
derived from any of forest-related resources, solid wood waste
materials, or agricultural sources. Eligible forest-related
resources are mill residues, precommercial thinnings, slash,
and brush, but not including old-growth timber (other than old
growth timber that has been permitted or contracted for removal
by appropriate Federal authority under the National
Environmental Policy Act or appropriate State law authority).
Solid wood waste materials include waste pallets, crates,
dunnage, manufacturing and construction wood wastes (other than
pressure-treated, chemically-treated, or painted wood wastes),
and landscape or right-of-way tree trimmings. Agricultural
sources include orchard tree crops, vineyard, grain, legumes,
sugar, and other crop by-products or residues. However,
qualifying open-loop biomass does not include municipal solid
waste (garbage), gas derived from biodegradation of solid
waste, or paper that is commonly recycled. Swine and bovine
waste nutrients are defined as swine and bovine manure and
litter, including bedding material for the disposition of
manure. Geothermal energy is energy derived from a geothermal
deposit which is a geothermal reservoir consisting of natural
heat which is stored in rocks or in an aqueous liquid or vapor
(whether or not under pressure).
Qualifying open-loop biomass facilities are facilities
using open-loop biomass to produce electricity that are placed
in service prior to January 1, 2005. Qualifying swine and
bovine waste nutrient facilities are facilities using swine and
bovine waste nutrients to produce electricity that are placed
in service after the date of enactment and before January 1,
2007. Qualifying geothermal energy facilities are facilities
using geothermal deposits to produce electricity that are
placed in service after the date of enactment and before
January 1, 2007. Qualifying solar energy facilities are
facilities using solar energy to generate electricity that are
placed in service after the date of enactment and before
January 1, 2007.
In the case of qualifying open-loop biomass facilities,
taxpayers may claim the otherwise allowable credit for a three-
year period. For a facility placed in service after the date of
enactment, the three-year period commences when the facility is
placed in service. In the case of open-loop biomass facility
originally placed in service before the date of enactment, the
three-year period commences after December 31, 2002 and the
otherwise allowable 1.5 cent-per-kilowatt-hour credit (adjusted
for inflation) is reduced to 1.0 cent-per-kilowatt-hour credit
(adjusted for inflation). In the case of qualifying geothermal
energy and solar energy facilities, taxpayers may claim the
otherwise allowable credit for the five-year period commencing
when the facility is placed in service.
The provision modifies present law to provide that
qualifying closed-loop biomass facilities include any facility
originally placed in service before December 31, 1992 and
modified to use closed-loop biomass to co-fire with coal before
January 1, 2007. The taxpayer may claim credit for all
electricity produced at such qualifying facilities with no
reduction for the thermal value of the coal.
In the case of qualifying open-loop biomass facilities and
qualifying closed-loop biomass facilities modified to use
closed-loop biomass to co-fire with coal, the provision permits
a lessee operator to claim the credit in lieu of the owner of
the facilities.
The provision provides that certain persons (public
utilities, electric cooperatives, rural electric cooperatives,
and Indian tribes) may sell, trade, or assign to any taxpayer
any credits that would otherwise be allowable to that person,
if that person were a taxpayer, for production of electricity
from a qualified facility owned by such person. However, any
credit sold, traded, or assigned may only be sold, traded, or
assigned once. Subsequent trades are not permitted. In
addition, any credits that would otherwise be allowable to such
person, to the extent provided by the Administrator of the
Rural Electrification Administration, may be applied as a
prepayment to certain loans or obligations undertaken by such
person under the Rural Electrification Act of 1936.
Lastly, the provision repeals the present-law reduction in
allowable credit for facilities financed with tax-exempt bonds
or with certain loans received under the Rural Electrification
Act of 1936.

Effective Date

The provision generally is effective for electricity sold
from qualifying facilities after the date of enactment. For
electricity produced from qualifying open-loop biomass
facilities originally placed in service prior to the date of
enactment, the provision is effective January 1, 2003.

TITLE II. ALTERNATIVE VEHICLES AND FUEL INCENTIVES

A. Modifications and Extensions of Provisions Relating to Electric
Vehicles, Clean-Fuel Vehicles, and Clean-Fuel Vehicle Refueling
Property

(Secs. 201-205 of the bill and sec. 30 and 179A of the Code and new
Code secs. 30B, 30C, and 40A)

Present Law

A 10-percent tax credit is provided for the cost of a
qualified electric vehicle, up to a maximum credit of $4,000
(sec. 30). A qualified electric vehicle is a motor vehicle that
is powered primarily by an electric motor drawing current from
rechargeable batteries, fuel cells, or other portable sources
of electrical current, the original use of which commences with
the taxpayer, and that is acquired for the use by the taxpayer
and not for resale. The full amount of the credit is available
for purchases prior to 2002. The credit phases down in the
years 2002 through 2004, and is unavailable for purchases after
December 31, 2004. There is no carry forward or carryback of
the credit for electric vehicles.
Certain costs of qualified clean-fuel vehicle property and
clean-fuel vehicle refueling property may be expensed and
deducted when such property is placed in service (sec. 179A).
Qualified clean-fuel vehicle property includes motor vehicles
that use certain clean-burning fuels (natural gas, liquefied
natural gas, liquefied petroleum gas, hydrogen, electricity and
any other fuel at least 85 percent of which is methanol,
ethanol, or any other alcohol or ether). The maximum amount of
the deduction is $50,000 for a truck or van with a gross
vehicle weight over 26,000 pounds or a bus with seating
capacities of at least 20 adults; $5,000 in the case of a truck
or van with a gross vehicle weight between 10,000 and 26,000
pounds; and $2,000 in the case of any other motor vehicle.
Qualified electric vehicles do not qualify for the clean-fuel
vehicle deduction.
Clean-fuel vehicle refueling property comprises property
for the storage or dispensing of a clean-burning fuel, if the
storage or dispensing is the point at which the fuel is
delivered into the fuel tank of a motor vehicle. Clean-fuel
vehicle refueling property also includes property for the
recharging of electric vehicles, but only if the property is
located at a point where the electric vehicle is recharged. Up
to $100,000 of such property at each location owned by the
taxpayer may be expensed with respect to that location.
The deduction phases down in the years 2002 through 2004,
and is unavailable for purchases after December 31, 2004.

Reasons for Change

The Committee believes that further investments in
alternative fuel and advanced technology vehicles are necessary
to transform automotive transportation in the United States to
be cleaner, more fuel efficient, and less reliant on petroleum
fuels.
Tax benefits provided directly to the consumer to lower the
cost of new technology and alternative-fueled vehicles can help
lower consumer resistance to these technologies by making the
vehicles more price competitive with purely petroleum-based
fuel vehicles and creating increased demand for manufacturers
to produce the technologies. The eventual goal is mass
production and mass market acceptance of new technology
vehicles. No one technology has established that it alone
provides the solution. Therefore, it is appropriate to provide
tax benefits tailored to specific vehicle technologies, as long
as the vehicle's engine technology directly replaces gasoline
and diesel fuel with an alternative energy source.
The Committee expects that hybrid motor vehicles and
dedicated alternative fuel vehicles are the near-term
technological advancement that will replace gasoline- and
diesel-burning engines with alternative-powered engines, and
electrical and fuel cell vehicles will be the long-term
technological advancement.
Applying these technologies to medium and heavy-duty trucks
and buses is also important for transforming the transportation
sector to a cleaner, more fuel efficient sector less reliant on
petroleum-based fuels. Therefore, it is appropriate to use tax
incentives to encourage the introduction of advanced vehicle
technologies in large trucks and buses.
In addition, because new vehicle technologies require new
fuels and infrastructure to deliver those fuels, investments in
new technology automobiles alone are not sufficient to
transform the market to accept these vehicles. Therefore,
substantial investments in new refueling stations and new fuels
are also necessary to make alternative vehicle technologies
feasible.

Explanation of Provision

Alternative motor vehicle credits

The provision provides a credit to the taxpayer for the
purchase of a new qualified fuel cell motor vehicle, a new
qualified alternative fuel motor vehicle, and a new qualified
hybrid motor vehicle. In general, the credit amount is
determined by calculation of a base credit for attainment of a
particular technology and an additional credit if the vehicle
attains certain improvements in fuel economy or complies with
an emissions standard in advance of the date the standard goes
into effect. The credit allowable in the taxable year cannot
exceed the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. The taxpayer may carry forward unused credits for
20 years or carry unused credits back for three years (but not
carried back to taxable years beginning before October 1,
2002). In the case of property purchased by tax-exempt persons,
the seller may claim the credit. In addition to the
specifications described below, a qualifying vehicle must meet
certain emissions standards.
Fuel cell motor vehicles
The base credit for the purchase of new qualified fuel cell
motor vehicles ranges between $4,000 and $40,000 depending upon
the weight class of the vehicle. For automobiles and light
trucks, the otherwise allowable credit amount ($4,000) is
increased by an amount from $1,000 to$4,000 if the vehicle
meets certain fuel economy increases compared to a stated standard.\2\
Credit may not be claimed for qualified fuel cell motor vehicles
purchased after December 31, 2011. The taxpayer's basis in the property
is reduced by the amount of credit claimed.
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\2\ The fuel efficiency comparison of fuel cell vehicles is to be
made on the basis of Btu equivalent measures of the fuel utilized in
the fuel cell to one gallon of gasoline.
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Hybrid motor vehicles
The base credit for the purchase of a new qualified hybrid
motor vehicle ranges from $250 to $10,000 depending upon the
weight of the vehicle and the maximum power available from the
vehicle's rechargeable energy storage system.\3\ For
automobiles and light trucks, the otherwise allowable credit
amount ($250 to $1,000) is increased by an amount from $500 to
$3,000 if the vehicle meets certain fuel economy increases. For
heavy duty hybrid motor vehicles, the otherwise allowable
credit ($1,000 to $10,000) is increased depending upon the
vehicle's weight and provided the vehicle meets certain 2007
(and beyond) emissions standards. The amount of credit is
increased by between $3,500 and $14,000 for vehicles placed in
service in 2002; is increased by between $3,000 and $12,000 for
vehicles placed in service in 2003, is increased by between
$2,500 and $10,000 for vehicles placed in service in 2004, is
increased by between $2,000 and $8,000 for vehicles placed in
service in 2005, and is increased by between $1,500 and $6,000
for vehicles placed in service in 2006. Credit may not be
claimed for qualified hybrid motor vehicles purchased after
December 31, 2006. The taxpayer's basis in the property is
reduced by the amount of credit claimed.
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\3\ In the case of an electric rechargeable energy storage system
consisting of a battery pack, the percentage of maximum available power
is the electrical power verified by the 10 second discharge test
divided by the sum of the electric power plus the SAE net engine power
for the conventional engine. In order to determine this percentage for
any vehicle, the manufacturer shall need to document both SAE net
engine power and verification of the net electric power of the battery
pack over a 10-second discharge. The constant power discharge applied
for this verification is the same experienced by the battery during
nominal operating conditions in the vehicle as specified by the
manufacturer (i.e., the battery capability as limited by the electric
motor, power electronics and/or control logic on the vehicle as
applicable).
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Alternative fuel motor vehicles
The base credit for the purchase of a new alternative fuel
motor vehicle equals 40 percent of the incremental cost of such
vehicle. The otherwise allowable credit for 40 percent of the
incremental cost is increased by an additional 30 percent of
the incremental cost of the vehicle if the vehicle meets
certain emissions standards. For computation of the credit, the
incremental cost of the vehicle may not exceed between $5,000
and $40,000 (resulting in a maximum total credit of between
$3,500 and $28,000) depending upon the weight of the vehicle.
For this purpose, incremental cost generally is defined as the
amount of the increase of the manufacturer's suggested retail
price of such a vehicle compared to the manufacturer's
suggested retail price of a comparable gasoline or diesel
model. Qualifying alternative fuel motor vehicles are vehicles
that operate only on qualifying alternative fuels and are
incapable of operating on gasoline or diesel (except in the
extent gasoline or diesel fuel is part of a qualified mixed
fuel). Qualifying alternative fuels are compressed natural gas,
liquefied natural gas, liquefied petroleum gas, hydrogen, and
any liquid mixture consisting of at least 85 percent methanol.
Taxpayers purchasing certain mixed-fuel vehicles also may
claim the alternative fuel motor vehicle credit, at a reduced
rate. A mixed-fuel vehicle is a vehicle with gross weight of
seven tons or more and is certified by the manufacturer as
being able to operate on a combination of alternative fuel and
a petroleum-based fuel. A qualifying mixed-fuel vehicle must
use at least 75 percent alternative fuel (a ``75/25 mixed-fuel
vehicle'') or 90 percent alternative fuel (a ``90/10 mixed-fuel
vehicle'') and be incapable of operating on a mixture
containing less than 75 percent alternative fuel in the case of
a 75/25 vehicle (less than 90 percent alternative fuel in the
case of a 90/10 vehicle). A taxpayer purchasing a 75/25 mixed-
fuel vehicle may claim 70 percent of the otherwise allowable
credit. A taxpayer purchasing a 90/10 mixed-fuel vehicle may
claim 90 percent of the otherwise allowable credit.
Credit may not be claimed for qualified alternative fuel
motor vehicles purchased after December 31, 2006. The
taxpayer's basis in the property is reduced by the amount of
credit claimed.

Modification of credit for qualified electric vehicles

The provision modifies the present-law credit for electric
vehicles to provide that the credit for qualifying vehicles
generally ranges between $3,500 and $40,000 depending upon the
weight of the vehicle and, for certain vehicles, the driving
range of the vehicle. In the case of property purchased by tax-
exempt persons, the seller may claim the credit. The taxpayer
would be ineligible for the deduction allowable under present-
law section 179A for a qualified battery electric vehicle on
which a credit is allowable. The provision also extends the
expiration date of the credit from December 31, 2004 to
December 31, 2006 and would repeal the phaseout schedule of
present law. The taxpayer would be able to carry forward unused
credits for 20 years or carry unused credits back for three
years (but not carried back to taxable years beginning before
October 1, 2002).

Extension of present-law section 179A

The provision extends the deduction for costs of qualified
clean-fuel vehicle property and clean-fuel vehicle refueling
property through December 31, 2006. The phase-down of present
law for clean fuel vehicles would be modified such that the
taxpayer may claim 75 percent of the otherwise allowable
deduction in 2003 and 2004, 50 percent of the otherwise
allowable deduction in 2005, and 25 percent of the otherwise
allowable deduction in 2006.

Credit for installation of alternative fueling stations

The provision permits taxpayers to claim a 50-percent
credit for the cost of installing clean-fuel vehicle refueling
property to be used in a trade or business of the taxpayer or
installed at the principal residence of the taxpayer. In the
case of retail clean-fuel vehicle refueling property the
allowable credit may not exceed $30,000. In the case of
residential clean-fuel vehicle refueling property the allowable
credit may not exceed $1,000. The taxpayer's basis in the
property is reduced by the amount of the credit and the
taxpayer may not claim deductionsunder section 179A with
respect to property for which the credit is claimed. In the case of
refueling property installed on property owned or used by a tax-exempt
person, the taxpayer that installs the property may claim the credit.
To be eligible for the credit, the property must be placed in service
before January 1, 2007. The credit allowable in the taxable year cannot
exceed the difference between the taxpayer's regular tax (reduced by
certain other credits) and the taxpayer's tentative minimum tax. The
taxpayer may carry forward unused credits for 20 years.

Credit for retail sale of alternative fuels

The provision permits taxpayers to claim a credit equal to
the gasoline gallon equivalent of 30 cents per gallon of
alternative fuel sold in 2002 and 2003, 40 cents per gallon in
2004, and 50 cents per gallon thereafter. Qualifying
alternative fuels are compressed natural gas, liquefied natural
gas, liquefied petroleum gas, hydrogen, any liquid mixture
consisting of at least 85 percent methanol, and any liquid
mixture consisting of at least 85 percent ethanol. The gasoline
gallon equivalency of any alternative fuel is determined by
reference to the British thermal unit content of the
alternative fuel compared to a gallon of gasoline. The credit
may be claimed for sales prior to January 1, 2007. Under the
provision, the credit is part of the general business credit.

Effective Date

The provisions relating to the credit for new fuel cell
motor vehicles, hybrid motor vehicles, and alternative fuel
motor vehicles, the credit for battery electric vehicles, the
credit for alternative fuel vehicle refueling property, and
deductions for clean fuel vehicles and clean fuel refueling
property are effective for property placed in service after
September 30, 2002, in taxable years ending after September 30,
2002. The credit for retail sales of alternative fuels is
effective for sales of fuels after September 30, 2002, in
taxable years ending after September 30, 2002.

B. Modifications to Small Producer Ethanol Credit

(Sec. 206 of the bill and secs. 38, 40, 87 and 469 of the Code)

Present Law

Small producer credit

Present law provides several tax benefits for ethanol and
methanol produced from renewable sources (e.g., biomass) that
are used as a motor fuel or that are blended with other fuels
(e.g., gasoline) for such a use. In the case of ethanol, a
separate 10-cents-per-gallon credit for small producers,
defined generally as persons whose production does not exceed
15 million gallons per year and whose production capacity does
not exceed 30 million gallons per year. The alcohol fuels tax
credits are includible in income. This credit, like tax credits
generally, may not be used to offset alternative minimum tax
liability. The credit is treated as a general business credit,
subject to the ordering rules and carryforward/carryback rules
that apply to business credits generally. The alcohol fuels tax
credit is scheduled to expire after December 31, 2007.

Taxation of cooperatives and their patrons

Under present law, cooperatives in essence are treated as
pass-through entities in that the cooperative is not subject to
corporate income tax to the extent the cooperative timely pays
patronage dividends. Under present law, the only excess credits
that may be flowed-through to cooperative patrons are the
rehabilitation credit (sec. 47), the energy property credit
(sec. 48(a)), and the reforestation credit (sec. 48(b)).

Reasons for Change

The Committee believes provisions allowing greater
flexibility in utilizing the benefits of the small ethanol
producer credit are consistent with the objective of the bill
to increase availability of alternative fuels.

Explanation of Provision

The provision makes several modifications to the rules
governing the small producer ethanol credit. First, the
provision liberalizes the definition of an eligible small
producer to include persons whose production capacity does not
exceed 60 million gallons. Second, the provision allows
cooperatives to elect to pass-through the small ethanol
producer credits to its patrons. The credit allowed to a
particular patron is that proportion of the credit that the
cooperative elects to pass-through for that year as the amount
of patronage of that patron for that year bears to total
patronage of all patrons for that year.
Third, the provision repeals the rule that includes the
small producer credit in income of taxpayers claiming it and
liberalizes the ordering and carryforward/carryback rules for
the small producer ethanol credit. Fourth, the provision allows
the small producer credit to be claimed against the alternative
minimum tax. Finally, the provision provides that the small
producer ethanol credit is not treated as derived from a
passive activity under the Code rules restricting credits and
deductions attributable to such activities.

Effective Date

The provision is effective for taxable years beginning
after date of enactment.

C. Transfer Full Amount of Excise Tax Imposed on Gasohol to the Highway
Trust Fund

(Sec. 207 of the bill and sec. 9503 of the Code)

present law

An 18.4 cents-per-gallon excise tax is imposed on gasoline.
The tax is imposed when the fuel is removed from a refinery
unless the removal is to a bulk transportation facility (e.g.,
removal by pipeline or barge to a registered terminal). In the
case gasoline removed in bulk by registered parties, tax is
imposed when the gasoline is removed from the terminal
facility, typically by truck (i.e., ``breaks bulk''). If
gasoline is sold to an unregistered party before it is removed
from a terminal, tax is imposed on that sale. When the gasoline
subsequently breaks bulk, a second tax is imposed. The payor of
the second tax may file a refund claim if it can prove payment
of the first tax. The party liable for payment of the gasoline
excise tax is called a ``position holder,'' defined as the
owner of record inside the refinery or terminal facility.
A 53-cents-per-gallon income tax credit is allowed for
ethanol used as a motor fuel (the ``alcohol fuels credit'').
The benefit of the alcohol fuels tax credit may be claimed as a
reduction in excise tax payments when the ethanol is blended
with gasoline (``gasohol''). The reduction is based on the
amount of ethanol contained in the gasohol. The excise tax
benefits apply to gasohol blends of 90 percent gasoline/10
percent ethanol, 92.3 percent gasoline/7.7 percent ethanol, or
94.3 percent gasoline/5.7 percent ethanol. The income tax
credit is based on the amount of alcohol contained in the
blended fuel.
In general, 18.3 cents per gallon of the gasoline excise
tax is deposited in the Highway Trust Fund and 0.1 cent per
gallon is deposited in the Leaking Underground Storage Tank
Trust Fund (the ``LUST'' rate). In the case of gasohol with
respect to which a reduced excise tax is paid, 2.5 cents per
gallon of the reduced tax is retained in the General Fund. The
balance of the reduced rate (less the LUST rate) is deposited
in the Highway Trust Fund.

reasons for change

The Committee believes that it is appropriate that the
entire amount of alcohol fuel taxes be devoted to the Highway
Trust Fund.

explanation of provision

The provision transfers the 2.5 cents per gallon of excise
tax on gasohol that currently is retained in the General Fund
to the Highway Trust Fund.

effective date

The proposal would be effective on taxes imposed after
September 31, 2003.

D. Modify Income Tax and Excise Tax Rules Governing Treatment of ETBE

(Sec. 208 of the bill and secs. 40 and 4081 of the Code)

present law

An 18.4 cents-per-gallon excise tax is imposed on gasoline.
The tax is imposed when the fuel is removed from a refinery
unless the removal is to a bulk transportation facility (e.g.,
removal by pipeline or barge to a registered terminal). In the
case gasoline removed in bulk by registered parties, tax is
imposed when the gasoline is removed from the terminal
facility, typically by truck (i.e., ``breaks bulk''). If
gasoline is sold to an unregistered party before it is removed
from a terminal, tax is imposed on that sale. When the gasoline
subsequently breaks bulk, a second tax is imposed. The payor of
the second tax may file a refund claim if it can prove payment
of the first tax. The party liable for payment of the gasoline
excise tax is called a ``position holder,'' defined as the
owner of record inside the refinery or terminal facility.
A 53-cents-per-gallon income tax credit is allowed for
ethanol used as a motor fuel (the ``alcohol fuels credit'').
The benefit of the alcohol fuels tax credit may be claimed as a
reduction in excise tax payments when the ethanol is blended
with gasoline (``gasohol''). The reduction is based on the
amount of ethanol contained in the gasohol. The excise tax
benefits apply to gasohol blends of 90 percent gasoline/10
percent ethanol, 92.3 percent gasoline/7.7 percent ethanol, or
94.3 percent gasoline/5.7 percent ethanol. The income tax
credit is based on the amount of alcohol contained in the
blended fuel.
ETBE is an ether that is manufactured using ethanol. Unlike
ethanol, ETBE can be blended with gasoline before the gasoline
enters a pipeline because ETBE does not result in contamination
of fuel with water while in transport. Treasury Department
regulations provide that gasohol blenders may claim the income
tax credit and excise tax rate reductions for ethanol used in
the production of ETBE. The regulations also provide a special
election allowing refiners to claim the benefit of the excise
tax rate reduction even though the fuel being removed from
terminals does not contain the requisite percentages of ethanol
for claiming the excise tax rate reduction.

reasons for change

The Committee believes the tax benefits currently available
to ethanol used in the production of ETBE should be clarified.
The provision will simplify significantly the current
regulatory rules under which the alcohol fuels credit may be
claimed for alcohol used in the production of ETBE.

explanation of provision

The provision replaces the present-law regulatory
procedures enabling refiners to claim excise tax benefits on
ETBE-blended gasohol with a new excise tax credit alternative
to the alcohol fuels income tax credit. Under the provision in
lieu of excise tax rate reductions for specified gasohol
blends, a refiner blending ETBE and gasoline will accrue an
excise tax credit equal to the amount of the alcohol fuels
credit or excise tax rate reduction otherwise available for the
ETBE blended fuel. The refiner may use this credit to offset
its excise tax liability for highway motor fuels under Code
section 4081. Alternatively, the credit may be transferred to a
registered position holder that is a member of the same
controlled group of corporations as the refiner, and the
position holder may use the excise tax credit to offset its
liability for excise taxes under Code section 4081.

effective date

The provision is effective for fuels blended after date of
enactment.

E. Income Tax Credit and Excise Tax Rate Reduction for Biodiesel Fuel
Mixtures

(Sec. 209 of the bill and new sec. 40B of the Code)

present law

No income tax credit or excise tax rate reduction is
provided for biodiesel fuels under present law.
However, a 53-cents-per-gallon income tax credit (the
``alcohol fuels credit'') is allowed for ethanol and methanol
(derived from renewable sources) when the alcohol is used as a
highway motor fuel. The 53-cents-per-gallon rate is scheduled
to decline to 51 cents per gallon in two steps, beginning in
calendar years 2003 and 2005. The benefit of this income tax
credit may be claimed through reductions in excise taxes paid
on alcohol fuels. In the case of alcohol blended with other
fuels (e.g., gasoline), the excise tax rate reductions are
allowable only for blends of 90 percent gasoline/10 percent
alcohol, 92.3 percent gasoline/7.7 percent alcohol, or 94.3
percent gasoline/5.7 percent alcohol. These present law
provisions are scheduled to expire in 2007.

reasons for change

The Committee believes that providing a new income tax
credit for biodiesel fuel will promote energy self-sufficiency
and also is consistent with the environmental objectives of the
bill.

explanation of provision

A new income tax credit is provided for biodiesel fuel
mixtures. The structure of the new credit is similar to
structure of the present-law alcohol fuels credit. Biodiesel is
defined as virgin vegetable oils derived from corn, soybeans,
sunflower seeds, cottonseeds, canola, crambe, rapeseeds,
safflowers, flaxseeds, rice bran, or mustard seeds and meeting
the requirements of the Environmental Protection Agency under
section 211 of the Clean Air Act (42 U.S.C. 7545) and the
American Society of Testing and Materials D6751. The per gallon
biodiesel credit rate equals one cent for each percentage point
of biodiesel in the fuels mixture, subject to a maximum credit
of 20 cents per blended gallon of fuel.
As with the present-law alcohol fuels credit, the biodiesel
fuel mixture credit can be claimed as a reduction in excise tax
paid on these mixtures. Also, like the present-law alcohol
fuels credit, the amount of the biodiesel fuel mixture credit
is includible in income.
The provision further provides for transfers to the Highway
Trust Fund from the funds of the Commodity Credit Corporation
of amounts equivalent to the reduction in receipts to the Trust
Fund resulting from the excise tax rate reduction allowed under
the provision.

effective date

The biodiesel fuel mixture credit (and excise tax rate
reductions) is effective for biodiesel fuel blended after
December 31, 2002, and before January 1, 2006.

TITLE III. CONSERVATION AND ENERGY EFFICIENCY PROVISIONS

A. Business Credit for Construction of New Energy-Efficient Homes

(Sec. 301 of the bill and new sec. 45G of the Code)

present law

A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. For credits
arising in taxable years beginning after December 31, 1997, an
unused general business credit generally may be carried back
one year and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for the construction of new
energy-efficient homes.

reasons for change

The Committee recognizes that residential energy use for
heating and cooling represents a large share of national energy
consumption, and accordingly believes that measures to reduce
heating and cooling energy requirements have the potential to
substantially reduce national energy consumption. The Committee
further recognizes that the most cost-effective time to
properly insulate a home is when it is under construction and
that the most effective mechanism to encourage the utilization
of energy-efficient components in the construction of new homes
is through an incentive to the builder. Accordingly, the
Committee believes that a tax credit for the use of energy-
efficiency components in a home's envelope (exterior windows
(including skylights) and doors and insulation) or heating and
cooling appliances will encourage contractors to produce highly
energy-efficient homes, which in turn will reduce national
energy consumption. Reduced energy consumption will in turn
reduce reliance on foreign suppliers of oil and will reduce
pollution in general.

Explanation of Provision

The proposal provides a credit to an eligible contractor of
an amount equal to the aggregate adjusted bases of all energy-
efficient property installed in a qualified new energy-
efficient home during construction. The credit cannot exceed
$1,250 ($2,000) in the case of a new home which has a projected
level of annual heating and cooling costs that is 30 percent
(50 percent) less than a comparable dwelling constructed in
accordance with Chapter 4 of the 2000 International Energy
Conservation Code.
The eligible contractor is the person who constructed the
home, or in the case of a manufactured home, the producer of
such home. Energy efficiency property is any energy-efficient
building envelope component (insulation materials or system
designed to reduce heat loss or gain, and exterior windows,
including skylights, and doors) and any energy-efficient
heating or cooling appliance that can, individually or in
combination with other components, meet the standards for the
home.
To qualify as an energy-efficient new home, the home must
be: (1) a dwelling located in the United States; (2) the
principal residence of the person who acquires the dwelling
from the eligible contractor; and (3) certified to have a
projected level of annual heating and cooling energy
consumption that meets the standards for either the 30-percent
or 50-percent credit. The home may be certified according to a
component-based method or an energy performance based method.
The component-based method of certification shall be based
on applicable energy-efficiency specifications or ratings,
including current product labeling requirements. The Secretary
shall develop component-based packages that are equivalent in
energy performance to properties that qualify for the credit.
The performance-based method of certification shall be
based on an evaluation of the home in reference to a home which
uses the same energy source and system heating type, and is
constructed in accordance with the Chapter 4 of the 2000
International Energy Conservation Code. The certification shall
be provided by an individual recognized by the Secretary for
such purposes.
The certification process requires that energy savings to
the consumer be measured in terms of energy costs. To ensure
consistent and reasonable energy cost analyses, the Department
of Energy shall include in its rulemaking related to this bill
specific reference data to be used for qualification for the
credit.
The credit will be part of the general business credit. No
credits attributable to energy efficient homes may be carried
back to any taxable year ending on or before the effective date
of the credit.

Effective Date

The credit applies to homes whose construction is
substantially completed after the date of enactment and which
are purchased during the period beginning on the date of
enactment and ending on December 31, 2007.

B. Tax Credit for Energy-Efficient Appliances

(Sec. 302 of the bill and new sec. 45H of the Code)

Present Law

A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment: (1)
that uses solar energy to generate electricity, to heat or cool
a structure, or to provide solar process heat; or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of: (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. For credits
arising in taxable years beginning after December 31, 1997, an
unused general business credit generally may be carried back
one year and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for the manufacture of
energy-efficient appliances.

Reasons for Change

The Committee believes that providing a tax credit for the
production of energy-efficient clothes washers and
refrigerators will encourage manufacturers to produce such
products currently and to invest in technologies to achieve
higher energy-efficiency standards for the future. In addition,
the Committee intends to encourage those manufacturers already
producing energy-efficient clothes washers and refrigerators to
accelerate production.

Explanation of Provision

The bill provides a credit for the production of certain
energy-efficient clothes washers and refrigerators. The credit
would equal $50 per appliance for energy-efficient clothes
washers produced with a modified energy factor (``MEF'') of
1.26 or greater and for refrigerators produced that consume 10
percent less kilowatt-hours per year than the energy
conservation standards promulgated by the Department of Energy
that took effect on July 1, 2001. The credit equals $100 for
energy-efficient clothes washers produced with a MEF of 1.42 or
greater (1.5 or greater for washers produced after 2004) and
for refrigerators produced that consume 15 percent less
kilowatt-hours per year than the energy conservation standards
promulgated by the Department of Energy that took effect on
July 1, 2001. A refrigerator must be an automatic defrost
refrigerator-freezer with an internal volume of at least 16.5
cubic feet to qualify for the credit. A clothes washer is any
residential clothes washer, including a residential style coin
operated washer, that satisfies the relevant efficiency
standard.
For each category of appliances (i.e., washers that meet
the lower MEF standard, washers that meet the higher MEF
standard, refrigerators that meet the 10 percent standard,
refrigerators that meet the 15 percent standard), only
production in excess of average production for each such
category during calendar years 1999-2001 would be eligible for
the credit. The taxpayer may not claim credits in excess of $30
million for all taxable years for appliances that qualify for
the $50 credit, and may not claim credits in excess of $30
million for all taxable years for appliances that qualify for
the $100 credit. Additionally, the credit allowed for all
appliances may not exceed two percent of the average annual
gross receipts of the taxpayer for the three taxable years
preceding the taxable year in which the credit is determined.
The credit will be part of the general business credit. No
credits attributable to energy-efficient appliances may be
carried back to taxable years ending before January 1, 2003.

Effective Date

The credit applies to appliances produced after December
31, 2002 and prior to (1) January 1, 2005 in the case of
refrigerators that only meet the 10 percent credit standard, or
(2) January 1, 2007 in the case of all other qualified energy-
efficient appliances.

C. Credit for Residential Energy Efficient Property

(Sec. 303 of the bill and new sec. 25C of the Code)

Present Law

A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law personal tax credit for energy
efficient residential property.

Reasons for Change

The Committee believes that allowing a credit for the
purchase of certain energy efficient appliances and systems
that generate electricity through renewable and pollution-free
alternative energy sources will encourage the purchase of these
products. The Committee believes that the use of these products
will help reduce reliance on conventional energy sources and
reduce atmospheric pollutants. The Committee believes that the
on-site generation of electricity and solar hot water will
reduce reliance on the United States' electricity grid and on
natural gas pipelines. Furthermore, the Committee believes that
the use of highly efficient residential equipment will lead to
decreased energy consumption in households, resulting in
significant energy savings.

Explanation of Provision

The bill provides a personal tax credit for the purchase of
qualified wind energy property, qualified photovoltaic
property, and qualified solar water heating property that is
used exclusively for purposes other than heating swimming pools
and hot tubs. The credit is equal to 15 percent for solar water
heating property and photovoltaic property, and 30 percent for
wind energy property. The maximum credit for each of these
systems of property is $2,000. The proposal also provides a 30
percent credit for the purchase of qualified fuel cell power
plants. The credit for any fuel cell may not exceed $1,000 for
each kilowatt of capacity.
Qualifying solar water heating property means an
expenditure for property to heat water for use in a dwelling
unit located in the United States and used as a residence if at
least half of the energy used by such property for such purpose
is derived from the sun. Qualified photovoltaic property is
property that uses solar energy to generate electricity for use
in a dwelling unit. Solar panels are treated as qualified
photovoltaic property. Qualified wind energy property is
property that uses wind energy to generate electricity for use
in a dwelling unit. A qualified fuel cell power plant is an
integrated system comprised of a fuel cell stack assembly and
associated balance of plant components that converts a fuel
into electricity using electrochemical means, and which has an
electricity-only generation efficiency of greater than 30
percent and that generates at least 1 kilowatt of electricity.
The qualified fuel cell power plant must be installed on or in
connection with a dwelling unit located in the United States
and used by the taxpayer as a principal residence.
The proposal also provides a credit for the purchase of
other qualified energy efficient property, as described below:
Electric heat pump hot water heaters with an Energy Factor
of at least 1.7. The maximum credit is $75 per unit.
Electric heat pumps with a heating efficiency of at least 9
HSPF (Heating Seasonal Performance Factor) and a cooling
efficiency of at least 15 SEER (Seasonal Energy Efficiency
Rating) and an energy efficiency ratio (EER) of 12.5 or
greater. The maximum credit is $250 per unit.
Natural gas heat pumps with a coefficient of performance
for heating of at least 1.25 and for cooling of at least 0.70.
The maximum credit is $500 per unit.
Central air conditioners with an efficiency of at least 15
SEER and an EER of 12.5 or greater. The maximum credit is $250
per unit.
Natural gas water heaters with an Energy Factor of at least
0.8. The maximum credit is $75 per unit.
Geothermal heat pumps which have an EER of at least 21. The
maximum credit is $250 per unit.
The credit is nonrefundable, and the depreciable basis of
the property is reduced by the amount of the credit.
Expenditures for labor costs allocable to onsite preparation,
assembly, or original installation of property eligible for the
credit are eligible expenditures. The credit is allowed against
the regular and alternative minimum tax.
Certain equipment safety requirements need to be met to
qualify for the credit. Special proration rules apply in the
case of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations.

Effective Date

The credit applies to purchases after December 31, 2002 and
before January 1, 2008.

D. Business Tax Incentives for Fuel Cells

(Sec. 304 of the bill and sec. 48 of the Code)

Present Law

A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, when combined with all other components of the
general business credit, generally may not exceed for any
taxable year the excess of the taxpayer's net income tax over
the greater of (1) 25 percent of net regular tax liability
above $25,000 or (2) the tentative minimum tax. An unused
general business credit generally may be carried back one year
and carried forward 20 years (sec. 39).
A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present-law credit for fuel cell power plant
property.

Reasons for Change

The Committee believes that investments in qualified fuel
cell power plants represent a promising means to produce
electricity through non-polluting means and from
nonconventional energy sources. Furthermore, the on-site
generation of electricity provided by fuel cell power plants
will reduce reliance on the United States' electricity grid.
The Committee believes that providing a tax credit for
investment in qualified fuel cell power plants will encourage
investments in such systems.

Explanation of Provision

The bill provides a 30 percent business energy credit for
the purchase of qualified stationary or portable fuel cell
power plants for businesses. A qualified stationary fuel cell
power plant is an integrated system comprised of a fuel cell
stack assembly and associated balance of plant components that
converts a fuel into electricity using electrochemical means,
and which has an electricity-only generation efficiency of
greater than 30 percent. A qualified portable fuel cell is a
portable fuel cell that generates at least 1 kilowatt of
electricity using an electrochemical process. The credit for
any fuel cell may not exceed $1,000 for each kilowatt of
capacity. The credit is nonrefundable. The taxpayer's basis in
the property is reduced by the amount of the credit claimed.

Effective Date

The credit for businesses applies to property placed in
service after December 31, 2002 and before January 1, 2007,
under rules similar to rules of section 48(m) of the Internal
Revenue Code of 1986 (as in effect on the day before the date
of enactment of the Revenue Reconciliation Act of 1990).

E. Allowance of Deduction for Energy-Efficient Commercial Building
Property

(Sec. 305 of the bill and new sec. 179B of the Code)

Present Law

No special deduction is currently provided for expenses
incurred for energy-efficient commercial building property.

Reasons for Change

The Committee recognizes that commercial buildings consume
a significant amount of energy resources and that reductions in
commercial energy use have the potential to significantly
reduce national energy consumption. Accordingly, the Committee
believes that a special deduction for commercial building
property (lighting, heating, cooling, ventilation, and hot
water supply systems) that meets a high energy-efficiency
standard will encourage construction of buildings that are
significantly more energy efficient than the norm. The
Committee further believes that the special deduction will
encourage innovation to reduce the costs of meeting the energy-
efficiency standard.

Explanation of Provision

The bill provides a deduction equal to energy-efficient
commercial building property expenditures made by the taxpayer.
Energy-efficient commercial building property expenditures are
defined as amounts paid or incurred for energy-efficient
commercial building property installed in connection with the
new construction or reconstruction of property: (1) which are
otherwise be depreciable property; (2) which is located in the
United States, and (3) the construction or erection of which is
completed by the taxpayer. The deduction is limited to an
amount equal to the product of $2.25 and the square footage of
the property for which such expenditures were made. The
deduction is allowed in the year in which the property is
placed in service.
Energy-efficient commercial building property mean any
property that reduces total annual energy and power costs with
respect to the lighting, heating, cooling, ventilation, and hot
water supply systems of the building by 50 percent or more in
comparison to a reference building which meets the requirements
of a Standard 90.1-1999 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America. Certain
certification requirements must be met in order to qualify for
the deduction. The Secretary shall promulgate procedures for
the inspection and testing of compliance for buildings.
Individuals qualified to determine compliance shall only be
those recognized by one or more organizations certified by the
Secretary for such purposes.
For public property, such as schools, the Secretary will
issue regulations to allow the deduction to be allocated to the
person primarily responsible for designing the property in lieu
of the public entity owner. Other rules will apply.

Effective Date

The provision is effective for taxable years beginning
after October 1, 2002 for plans certified prior to December 31,
2007, whose construction is completed on or before December 31,
2009.

F. Allowance of Deduction for Qualified Energy Management Devices and
Retrofitted Qualified Meters

(Sec. 306 of the bill and new sec. 179C of the Code)

Present Law

No special deduction is currently provided for expenses
incurred for qualified energy management devices.

Reasons for Change

The Committee believes that consumers could better manage
their electricity and natural gas use if they had better
information concerning its price. In the case of electricity,
if time-of-day pricing is used, energy management devices that
provide information to consumers regarding their peak
electrical use and the time-of-day price variation could
encourage consumers to defer certain electrical use, such as
use of a clothes washer and dryer, to periods of the day when
electricity prices are lower. In addition to reducing
consumers' electricity bill, spreading the demand for
electricity throughout the day will reduce the need for utility
investments in generation capacity to satisfy peak demand
periods.
The Committee believes that a deduction for qualified
energy management devices, in conjunction with a 3-year
recovery period for qualified energy management devices
provided in the bill, will provide sufficient incentive to
encourage their adoption as a means for consumers to control
electricity and natural gas usage.

Explanation of Provision

The bill provides a $30 deduction for each qualified new or
retrofitted energy management device placed in service by any
taxpayer who is a supplier of electric energy or natural gas or
is a provider of electric energy or natural gas services. A
qualified energy management device is any tangible property
eligible for accelerated depreciation under section 168 and
which is acquired and used by the taxpayer to enable consumers
or others to manage their purchase, sale, or use of electricity
in response to energy price and usage signals and which permits
reading of energy price and usage signals on at least a daily
basis.
The deduction is not allowed to property used outside of
the United States. The taxpayer would have basis reduction for
such property equal to the deduction. Other rules apply.

Effective Date

The proposal is effective for any qualified energy
management device placed in service after the date of enactment
of the Act.

G. Three-Year Applicable Recovery Period for Depreciation of Qualified
Energy Management Devices

(Sec. 307 of the bill and sec. 168 of the Code)

Present Law

No special recovery period is currently provided for
depreciation of qualified energy management devices.

Reasons for Change

The Committee believes that consumers could better manage
their electricity and natural gas costs if they had better
information concerning the price of electricity and natural gas
use. In the case of electricity, if time-of-day pricing is
used, energy management devices that provide information to
consumers regarding their peak electrical use and the time-of-
day price variation could encourage consumers to defer certain
electrical use, such as use of a clothes washer and dryer, to
periods of the day when electricity prices are lower. In
addition to reducing consumers' electricity bill, spreading the
demand for electricity throughout the day will reduce the need
for utility investments in generation capacity to satisfy peak
demand periods.
The Committee believes that a 3-year recovery period for
qualified energy management devices, in conjunction with the
special deduction for qualified energy management devices
provided in the bill, will provide sufficient incentive to
encourage their adoption as a means for consumers to control
electricity and natural gas usage.

Explanation of Provision

The bill provides a three-year recovery period for
qualified new or retrofitted energy management devices placed
in service by any taxpayer who is a supplier of electric energy
or natural gas or is a provider of electric energy or natural
gas services. A qualified energy management device is any
tangible property eligible for accelerated depreciation under
code section 168 and which is acquired and used by the taxpayer
to enable consumers or others to manage their purchase, sale,
or use of electricity in response to energy price and usage
signals and which permits reading of energy price and usage
signals on at least a daily basis.

Effective Date

The provision is effective for any qualified energy
management device placed in service after the date of enactment
of the Act.

H. Energy Credit for Combined Heat and Power System Property

(Sec. 308 of the bill and sec. 48 of the Code)

Present Law

Reasons for Change

The Committee believes that investments in combined heat
and power systems represent a promising means to achieve
greater national energy efficiency by encouraging the dual use
of the energy from the burning of fossil fuels. Furthermore,
the on-site generation of electricity provided by CHP systems
will reduce reliance on the United States' electricity grid.
The Committee believes that providing a tax credit for
investment in combined heat and power property will encourage
investments in such systems.

Explanation of Provision

The bill provides a 10 percent credit for the purchase of
combined heat and power property. (``CHP property'').
CHP property is defined as property: (1) which uses the
same energy source for the simultaneous or sequential
generation of electrical power, mechanical shaft power, or
both, in combination with the generation of steam or other
forms of useful thermal energy (including heating and cooling
applications); (2) which has an electrical capacity of more
than 50 kilowatts or a mechanical energy capacity of more than
67 horsepower or an equivalent combination of electrical and
mechanical energy capacities; (3) which produces at least 20
percent of its total useful energy in the form of thermal
energy and at least 20 percent in the form of electrical or
mechanical power (or a combination thereof); and (4) the energy
efficiency percentage of which exceeds 60 percent (70 percent
in the case of a system with an electrical capacity in excess
of 50 megawatts or a mechanical energy capacity in excess of
67,000 horsepower, or an equivalent combination of electrical
and mechanical capacities.)
CHP property does include property used to transport the
energy source to the generating facility or to distribute
energy produced by the facility.
If a taxpayer is allowed a credit for CHP property, and the
property would ordinarily have a depreciation class life of 15
years or less, the depreciation period for the property is
treated as having a 22-year class life. The present-law carry
back rules of the general business credit generally would apply
except that no credits attributable to combined heat and power
property may be carried back before the effective date of this
provision.

Effective Date

The credit applies to property placed in service after
December 31, 2002 and before January 1, 2007.

I. Credit for Energy Efficiency Improvements to Existing Homes

(Sec. 309 of the bill and new sec. 25D of the Code)

Present Law

A taxpayer may exclude from income the value of any subsidy
provided by a public utility for the purchase or installation
of an energy conservation measure. An energy conservation
measure means any installation or modification primarily
designed to reduce consumption of electricity or natural gas or
to improve the management of energy demand with respect to a
dwelling unit (sec. 136).
There is no present law credit for energy efficiency
improvements to existing homes.

Reasons for Change

Since residential energy consumption represents a large
fraction of national energy use, the Committee believes that
energy savings in this sector of the economy have the potential
to significantly impact national energy consumption, which will
reduce reliance on foreign suppliers of oil and reduce
pollution in general. The Committee further recognizes that
many existing homes are inadequately insulated. Accordingly,
the Committee believes that a tax credit for certain energy-
efficiency improvements related to a home's envelope (exterior
windows (including skylights) and doors, insulation, and
certain roofing systems) will encourage homeowners to improve
the insulation of their homes, which in turn will reduce
national energy consumption.

Explanation of Provision

The proposal would provide a 10-percent nonrefundable
credit for the purchase of qualified energy efficiency
improvements. The maximum credit for a taxpayer with respect to
the same dwelling for all taxable years is $300. A qualified
energy efficiency improvement would be any energy efficiency
building envelope component that is certified to meet or exceed
the prescriptive criteria for such a component established by
the 2000 International Energy Conservation Code, or any
combination of energy efficiency measures that is certified to
achieve at least a 30 percent reduction in heating and cooling
energy usage for the dwelling and (1) that is installed in or
on a dwelling located in the United States; (2) owned and used
by the taxpayer as the taxpayer's principal residence; (3) the
original use of which commences with the taxpayer; and (4) such
component can reasonably be expected to remain in use for at
least five years.
Building envelope components would be: (1) insulation
materials or systems which are specifically and primarily
designed to reduce the heat loss or gain for a dwelling; and
(2) exterior windows (including skylights) and doors.
Homes shall be certified according to a component-based
method or a performance-based method. The component-based
method shall be based on applicable energy-efficiency ratings,
including current product labeling requirements. The
performance-based method shall be based on a comparison of the
projected energy consumption of the dwelling in its original
condition and after the completion of energy efficiency
measures. The performance-based method of certification shall
be conducted by an individual or organization recognized by the
Secretary for such purposes.
The certification process requires that energy savings to
the consumer be measured in terms of energy costs. To ensure
consistent and reasonable energy cost analyses, the Department
of Energy shall include in its rulemaking related to this bill
specific reference data to be used for qualification for the
credit.
The taxpayer's basis in the property would be reduced by
the amount of the credit. Special rules would apply in the case
of condominiums and tenant-stockholders in cooperative housing
corporations.
The credit is allowed against the regular and alternative
minimum tax.

Effective Date

The credit is effective for qualified energy efficiency
improvements installed on or after the date of enactment and
before January 1, 2006.

TITLE IV. CLEAN COAL INCENTIVES

A. Investment and Production Credits for Clean Coal Technology

(Secs. 401, 411-412, and 421 of the bill and new Code secs. 45I, 45J,
and 48A)

Present Law

Present law does not provide an investment credit for
electricity generating units that use coal as a fuel. Nor does
present law provide a production credit for electricity
generated at units that use coal as a fuel. However, a
nonrefundable, 10-percent investment tax credit (``business
energy credit'') is allowed for the cost of new property that
is equipment (1) that uses solar energy to generate
electricity, to heat or cool a structure, or to provide solar
process heat, or (2) that is used to produce, distribute, or
use energy derived from a geothermal deposit, but only, in the
case of electricity generated by geothermal power, up to the
electric transmission stage (sec. 48). Also, an income tax
credit is allowed for the production of electricity from either
qualified wind energy, qualified ``closed-loop'' biomass, or
qualified poultry waste units placed in service prior to
January 1, 2002 (sec. 45). The credit allowed equals 1.5 cents
per kilowatt-hour of electricity sold. The 1.5 cent figure is
indexed for inflation and equals 1.7 cents for 2001. The credit
is allowable for production during the 10-year period after a
unit is originally placed in service. The business energy tax
credits and the production tax credit are components of the
general business credit (sec. 38(b)(1)).

Reasons for Change

The Committee recognizes that coal is the nation's most
abundant fuel source. The Committee is also sensitive to the
environmental impact of burning coal for the production of
electricity. For coal to continue to be a viable fuel source,
the Committee seeks to encourage ways to burn coal in a more
efficient and environmentally friendly manner. Therefore, the
Committee supports the development and deployment of the most
advanced technologies for generating electricity from coal by
providing investment and production credits to a limited number
of experimental production-scale electricity generating units
to reduce the cost of building and operating units that
represent the frontier of thermal efficiency and pollution
control.
Tax-exempt organizations make up a significant percentage
of the electricity industry in the United States. The Committee
believes it is important to provide the incentives for
investment in, and production from, clean coal technologies to
all producers.

Description of Provision

In general

The provision creates three new credits: a production
credit for electricity produced from qualifying clean coal
technology units; a production credit for electricity produced
from qualifying advanced clean coal technology units; and a
credit for investments in qualifying advanced clean coal
technology units. Certain persons (public utilities, electric
cooperatives, Indian tribes, and the Tennessee Valley
Authority) will be eligible to obtain certifications from the
Secretary of the Treasury (as described below) for each of
these credits and sell, trade, or assign the credit to any
taxpayer. However, any credit sold, traded, or assigned may
only be sold, traded, or assigned once. Subsequent trades are
not permitted.

Credit for investments in qualifying advanced clean coal technology
units

The provision provides a 10-percent investment tax credit
for qualified investments in advanced clean coal technology
units.\4\ Qualifying advanced clean coal technology units must
utilize advanced pulverized coal or atmospheric fluidized bed
combustion technology, pressurized fluidized bed combustion
technology, integrated gasification combined cycle technology,
or some other technology certified by the Secretary of Energy.
Any qualifying advanced clean coal technology unit must meet
certain capacity standards, thermal efficiency standards, and
emissions standards for SO2, nitrous oxides,
particulate emissions, and source emissions standards as
provided in the Clean Air Act. In addition, a qualifying
advanced clean coal technology unit must meet certain carbon
emissions requirements.
---------------------------------------------------------------------------
\4\ A qualifying advanced clean coal unit does not include any unit
that uses ``refined coal'' (as defined elsewhere in the bill). Nor, can
the unit be a qualified clean coal technology unit as defined below.
---------------------------------------------------------------------------
If the advanced clean coal technology unit is an advanced
pulverized coal or atmospheric fluidized bed combustion
technology unit, a pressurized fluidized bed combustion
technology unit, or an integrated gasification combined cycle
technology unit and if the unit uses a design coal with a heat
content of not more than 9,000 Btu per pound, the unit must
have a carbon emission rate less than 0.60 pound of carbon per
kilowatt hour of electricity produced. If the advanced clean
coal technology unit is an advanced pulverized coal or
atmospheric fluidized bed combustion technology unit, a
pressurized fluidized bed combustion technology unit, or an
integrated gasification combined cycle technology unit and if
the unit uses a design coal with a heat content greater than
9,000 Btu per pound, the unit must have a carbon emission rate
less than 0.54 pound of carbon per kilowatt hour of electricity
produced. In the case of an advanced clean coal technology unit
that uses another eligible technology and if the unit uses a
design coal with a heat content of not more than 9,000 Btu per
pound, the unit must have a carbon emission rate less than 0.51
pound of carbon per kilowatt hour of electricity produced. In
the case of an advanced clean coal technology unit that uses
another eligible technology and if the unit uses a design coal
with a heat content greater than 9,000 Btu per pound, the unit
must have a carbon emission rate less than 0.459 pound of
carbon per kilowatt hour of electricity produced.
To be a qualified investment in advanced clean coal
technology, the taxpayer must receive a certificate from the
Secretary of the Treasury. The Secretary may grant certificates
to investments only to the point that 4,000 megawatts of
electricity production capacity qualifies for the credit.\5\
From the potential pool of 4,000 megawatts of capacity, not
more than 1,000 megawatts in total and not more than 500
megawatts in years prior to 2009 shall be allocated to units
using advanced pulverized coal or atmospheric fluidized bed
combustion technology. From the potential pool of 4,000
megawatts of capacity, not more than 500 megawatts in total and
not more than 250 megawatts in years prior to 2009 shall be
allocated to units using pressurized fluidized bed combustion
technology. From the potential pool of 4,000 megawatts of
capacity, not more than 2,000 megawatts in total and not more
than 1,000 megawatts in years prior to 2009 and not more than
1,500 megawatts in year prior to 2013 shall be allocated to
units using integrated gasification combined cycle technology,
with or without fuel or chemical co-production. From the
potential pool of 4,000 megawatts of capacity, not more than
500 in total and not more than 250 megawatts in years prior to
2009 shall be allocated to any other technology certified by
the Secretary of Energy.
---------------------------------------------------------------------------
\5\ If the Secretary grants a certificate for a megawattage
allocation that is less than the rated megawatt capacity of the unit,
the taxpayer may claim credit for expenses related to the percentage of
the unit equal to the percentage of the Secretary's allocation compared
to the unit's capacity.
---------------------------------------------------------------------------

Production credit for electricity produced from qualifying clean coal
technology units

The provision provides a production credit for electricity
produced from certain units that have been retrofitted,
repowered, or replaced with a clean coal technology within ten
years of the date of enactment. The value of the credit is 0.34
cents per kilowatt-hour of electricity produced and is indexed
for inflation occurring after 2002 with the first potential
adjustment in 2004. The taxpayer may claim the credit
throughout the ten-year period commencing from the date on
which the qualifying unit is placed in service.
A qualifying clean coal technology unit is a clean coal
technology unit that meets certain capacity standards, thermal
efficiency standards, and emissions standards for
SO2, nitrous oxides, particulate emissions, and
source emissions standards as provided in the Clean Air Act. In
addition, a qualifying clean coal technology unit cannot be a
unit that is receiving or is scheduled to receive funding under
the Clean Coal Technology Program, the Power Plant Improvement
Initiative, or the Clean Coal Power Initiative administered by
the Secretary of the Department of Energy. Lastly, to be a
qualified clean coal technology unit, the taxpayer must receive
a certificate from the Secretary of the Treasury. The Secretary
may grant certificates to units only to the point that 4,000
megawatts of electricity production capacity qualifies for the
credit. However, no qualifying unit would be eligible if the
unit's capacity exceeded 300 megawatts.

Production credit for electricity produced from qualifying advanced
clean coal technology

The provision also provides a production credit for
electricity produced from any qualified advanced clean coal
technology electricity generation unit that qualifies for the
investment credit for qualifying clean coal technology units,
as described above.\6\ The taxpayer may claim a production
credit on the sum of each kilowatt-hour of electricity produced
and the heat value of other fuels or chemicals produced by the
taxpayer at the unit.\7\ The taxpayer may claim the production
credit for the 10-year period commencing with the date the
qualifying unit is placed in service (or the date on which a
conventional unit was retrofitted or repowered). The value of
the credit varies depending upon the year the unit is placed in
service, whether the unit produces solely electricity or
electricity and fuels or chemicals, and the rated thermal
efficiency of the unit. In addition, the value of the credit is
reduced for the second five years of eligible production. The
value of the credit is indexed for inflation occurring after
2002 with the first potential adjustment in 2004. The tables
below specify the value of the credit (before indexing is
applied).
---------------------------------------------------------------------------
\6\ In the case of a taxpayer who received a megawatt allocation
for a qualifying advanced clean coal technology unit that is less than
the rated capacity of such unit, the taxpayer may claim credit on a
percentage of the electricity produced from the unit. The percentage is
the percentage that the taxpayer's megawatt allocation represents as a
percentage of the rated capacity of the unit.
\7\ Each 3,413 Btu of heat content of the fuel or chemical is
treated as equivalent to one kilowatt-hour of electricity.
---------------------------------------------------------------------------

Advanced clean coal technology units producing solely electricity

Units placed in service before 2009

------------------------------------------------------------------------
Credit amount per kilowatt-hour
The unit net heat rate, Btu/kWh ---------------------------------
adjusted for the heat content for the For the first For the second
design coal is equal to: five years five years
------------------------------------------------------------------------
Not more than 8,400................... $.0060 $.0038
More than 8,400 but not more than .0025 .0010
8,550................................
More than 8,550 but less than 8,750... .0010 .0010
------------------------------------------------------------------------

Units placed in service after 2008 and before 2013

------------------------------------------------------------------------
Credit amount per kilowatt-hour
The unit net heat rate, Btu/kWh ---------------------------------
adjusted for the heat content for the For the first For the second
design coal is equal to: five years five years
------------------------------------------------------------------------
Not more than 7,770................... $.0105 $.0090
More than 7,770 but not more than .0085 .0068
8,125................................
More than 8,125 but less than 8,350... .0075 .0055
------------------------------------------------------------------------

Units placed in service after 2012 and before 2017

------------------------------------------------------------------------
Credit amount per kilowatt-hour
The unit net heat rate, Btu/kWh ---------------------------------
adjusted for the heat content for the For the first For the second
design coal is equal to: five years five years
------------------------------------------------------------------------
Not more than 7,380................... $.0140 $.0115
More than 7,380 but not more than .0120 .0090
7,720................................
------------------------------------------------------------------------

Advanced clean coal technology units producing electricity and a fuel
or chemical

Units placed in service before 2009

------------------------------------------------------------------------
Credit amount per kilowatt-hour
The unit design net thermal efficiency ---------------------------------
is equal to: For the first For the second
five years five years
------------------------------------------------------------------------
Not less than 40.6%................... $.0060 $.0038
Less than 40.6% but not less than 40%. .0025 .0010
Less than 40% but not less than 39%... .0010 .0010
------------------------------------------------------------------------

Units placed in service after 2008 and before 2013

------------------------------------------------------------------------
Credit amount per kilowatt-hour
The unit design net thermal efficiency ---------------------------------
is equal to: For the first For the second
five years five years
------------------------------------------------------------------------
Not less than 43.6%................... $.0105 $.0090
Less than 43.6% but not less than 42%. .0085 .0068
Less than 42% but not less than 40.9%. .0075 .0055
------------------------------------------------------------------------

Units placed in service after 2012 and before 2017

------------------------------------------------------------------------
Credit amount per kilowatt-hour
The unit design net thermal efficiency ---------------------------------
is equal to: For the first For the second
five years five years
------------------------------------------------------------------------
Not less than 44.2%................... $.0140 $.0115
Less than 44.2% but not less than .0120 .0090
43.9%................................
------------------------------------------------------------------------

The credits are part of the general business credit. No
credit may be carried back to taxable years ending on or before
the date of enactment.

Effective Date

The provision relating to investment credits for advanced
clean coal technology units is effective after the date of
enactment. The provisions relating to production credits are
effective after the date of enactment.

TITLE V. OIL AND GAS PROVISIONS

A. Tax Credit for Oil and Gas Production From Marginal Wells

(Sec. 501 of the bill and new sec. 45K of the Code)

present law

There is no credit for the production of oil and gas from
marginal wells. The costs of such production may be recovered
under the Code's depreciation and depletion rules and in other
cases as a deduction for ordinary and necessary business
expenses.

reasons for change

The highly volatile price of oil and gas can result in lost
production during periods when prices are low. The Committee
determined that a price support program administered through a
tax credit will help ensure that supply is not lost as a result
of low market prices.

explanation of provision

The provision would create a new, $3 per barrel credit for
the production of crude oil and a $0.50 credit per 1,000 cubic
feet of qualified natural gas production. The maximum amount of
production on which credit could be claimed is 1,095 barrels or
barrel equivalents. In both cases, the credit is available only
for production from a ``qualified marginal well.'' The credit
is not available to production occurring if the reference price
of oil exceeded $18 ($2.00 for natural gas). The credit is
reduced proportionately as for reference prices between $15 and
$18 ($1.67 and $2.00 for natural gas). Reference prices are
determined on a one-year look-back basis.
A qualified marginal well is defined as (1) a well
production from which was marginal production for purposes of
the Code percentage depletion rules or (2) a well that during
the taxable year had (a) average daily production of not more
than 25 barrel equivalents and (b) produced water at a rate of
not less than 95 percent of total well effluent.
The credit is treated as part of the general business
credit.

effective date

The provision is effective for production in taxable years
beginning after the date of enactment.

B. Natural Gas Gathering Lines Treated as Seven-Year Property

(Sec. 502 of the bill and sec. 168 of the Code)

present law

The applicable recovery period for assets placed in service
under the Modified Accelerated Cost Recovery System is based on
the ``class life of the property.'' The class lives of assets
placed in service after 1986 are generally set forth in Revenue
Procedure 87-56.\8\ Revenue Procedure 87-56 includes two asset
classes that could describe natural gas gathering lines owned
by nonproducers of natural gas. Asset class 46.0, describing
pipeline transportation, provides a class life of 22 years and
a recovery period of 15 years. Asset class 13.2, describing
assets used in the exploration for and production of petroleum
and natural gas deposits, provides a class life of 14 years and
a depreciation recovery period of seven years. The uncertainty
regarding the appropriate recovery period of natural gas
gathering lines has resulted in litigation between taxpayers
and the IRS. The 10th Circuit Court of Appeals held that
natural gas gathering lines owned by nonproducers falls within
the scope of Asset class 13.2 (i.e., 7-year recovery
period).\9\ More recently, the U.S. District Court for the
Eastern District of Michigan, Southern Division, held that
natural gas gathering lines owned by nonproducers falls within
the scope of Asset class 46.0 (i.e., 15-year recovery
period).\10\
---------------------------------------------------------------------------
\8\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22,
1988-1 C.B. 785).
\9\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999),
rev'g 109 T.C. 416 (1997). See also True v. United States, 97-2 U.S.
Tax Cas. (CCH) par. 50,946 (D. Wyo. 1997).
\10\ Saginaw Bay Pipeline Co. v. United States, 124 F. Supp. 2d 465
(E.D. Mich. 2001).
---------------------------------------------------------------------------

reasons for change

The Committee believes the appropriate recovery period for
natural gas gathering lines is seven years.

explanation of provision

The provision establishes a statutory 7-year recovery
period and a class life of 10 years for natural gas gathering
lines. A natural gas gathering line is defined to include any
pipe, equipment, and appurtenance that is (1) determined to be
a gathering line by the Federal Energy Regulatory Commission,
or (2) used to deliver natural gas from the wellhead or a
common point to the point at which such gas first reaches (a) a
gas processing plant, (b) an interconnection with an interstate
transmission line, (c) an interconnection with an intrastate
transmission line, or (d) a direct interconnection with a local
distribution company, a gas storage facility, or an industrial
consumer.

effective date

The provision is effective for property placed in service
after the date of enactment. No inference is intended as to the
proper treatment of natural gas gathering lines placed in
service before the date of enactment.

C. Repeal of Requirement of Certain Approved Terminals To Offer Dyed
Diesel or Kerosene for Nontaxable Purposes

(Sec. 503 of the bill and sec. 4101 of the Code)

present and prior law

Excise taxes are imposed on highway motor fuels, including
gasoline, diesel fuel, and kerosene, to finance the Highway
Trust Fund programs. Subject to limited exceptions, these taxes
are imposed on all such fuels when they are removed from
registered pipeline or barge terminal facilities, with any tax-
exemptions being accomplished by means of refunds to consumers
of the fuel. One such exception allows removal of diesel fuel
and kerosene without payment of tax if the fuel is destined for
a nontaxable use (e.g., use as heating oil) and is indelibly
dyed.
Terminal facilities are not permitted to receive and store
non-tax-paid motor fuels unless they are registered with the
Internal Revenue Service. Under present law, a prerequisite to
registration is that if the terminal offers for sale diesel
fuel, it must offer both dyed and undyed diesel fuel.
Similarly, if the terminal offers for sale kerosene, it must
offer both dyed and undyed kerosene. This ``dyed-fuel mandate''
was enacted in 1997, to be effective on July 1, 1998.
Subsequently, the effective date was delayed until July 1, 2000
and delayed again through December 31, 2001.

reasons for change

When the rules governing taxation of kerosene used as a
highway motor fuel were enacted in 1997, there was a concern
that dyed kerosene (destined for nontaxable use) might not be
available in markets where that fuel was commonly used (e.g.,
as heating oil). To ensure availability of untaxed kerosene for
these uses, a requirement that terminals offer both dyed and
undyed kerosene and diesel fuel (if they offered the fuels for
sale at all) as a condition of receiving untaxed fuels was
included. Since that time, markets have provided dyed kerosene
and diesel fuel for nontaxable uses in markets where there is a
demand for such fuel even in the absence of a statutory mandate
for such fuels. The Committee believes that a statutory mandate
is not necessary and should be repealed.

explanation of provision

The provision repeals the diesel fuel and kerosene-dyeing
mandate.

effective date

The provision is effective on January 1, 2002.

D. Expensing of Capital Costs Incurred and Credit for Production in
Complying With Environmental Protection Agency Sulfur Regulations

(Secs. 504 and 505 of the bill and new secs. 45L and 179D of the Code)

present law

Taxpayers generally may recover the costs of investments in
refinery property through annual depreciation deductions.
Present law does not provide a credit for the production of
low-sulfur diesel fuel.

reasons for change

The Committee believes it is important for all refiners to
meet applicable pollution control standards. However, the
Committee is concerned that the cost of complying with the
Highway Diesel Fuel Sulfur Control Requirement of the
Environmental Protection Agency may force some small refiners
out of business. To maintain this refining capacity and to
foster compliance with pollution control standards the
committee believes it is appropriate to modify cost recovery
provisions for small refiners to reduce their capital costs of
complying with the Highway Diesel Fuel Sulfur Control
Requirement of the Environmental Protection Agency.

description of provision

The bill generally permits small business refiners to claim
an immediate deduction (i.e., expensing) for up to 75 percent
of the qualified capital costs paid or incurred for the purpose
of complying with the Highway Diesel Fuel Sulfur Control
Requirements of the Environmental Protection Agency. Qualified
capital costs are those costs paid or incurred and otherwise
chargeable to the taxpayer's capital account that are necessary
for the refinery to come into compliance with the EPA diesel
fuel requirements.
In addition, the bill provides that a small business
refiner may claim a credit equal to five cents per gallon for
each gallon of low sulfur diesel fuel produced at a facility of
a small business refiner. The total production credit claimed
by the taxpayer generally is limited to 25 percent of the
qualified capital costs incurred with respect to expenditures
at the refinery during the period beginning one year after the
date of enactment and ending with the date that is one year
after the date on which the taxpayer must comply with
applicable EPA regulations. No deduction is allowed to the
taxpayer for expenses otherwise allowable as a deduction in an
amount equal to the amount of production credit claimed during
the taxable year.
For these purposes a small business refiner is a taxpayer
who within the business of refining petroleum products employs
not more than 1,500 employees directly in refining on business
days during a taxable year in which the deduction or production
credit is claimed and had an average daily refinery run not
exceeding 205,000 barrels per day for the year prior to
enactment.
For taxpayers with an average daily refinery run in the
year prior to enactment in excess of 155,000 and not greater
than 205,000 barrels per day, the provision limits otherwise
qualifying small business refiners to an immediate deduction
for a percentage of qualifying capital costs equal to 75
percent less the percentage points determined by the excess of
the average daily refinery runs over 155,000 barrels per day
divided by 50,000 barrels per day. In addition, for these
taxpayers, the limitation on the total production credit that
may be claimed also is reduced proportionately.
In the case of a qualifying small business refiner that is
owned by a cooperative, the cooperative is allowed to elect to
pass any production credits to patrons of the organization.

effective date

The provision is effective for expenses paid or incurred
after the date of enactment.

E. Determination of Small Refiner Exception to Oil Depletion Deduction

(Sec. 506 of the bill and sec. 613A of the Code)

present law

Present law classifies oil and gas producers as independent
producers or integrated companies. The Code provides numerous
special tax rules for operations by independent producers. One
such rule allows independent producers to claim percentage
depletion deductions rather than deducting the costs of their
asset, a producing well, based on actual production from the
well (i.e., cost depletion).
A producer is an independent producer only if its refining
and retail operations are relatively small. For example, an
independent producer may not have refining operations the runs
from which exceed 50,000 barrels on any day in the taxable year
during which independent producer status is claimed.

reasons for change

The Committee believes that the goal of present law, to
identify producers without significant refining capacity, can
be achieved while permitting more flexibility to refinery
operations.

explanation of provision

The provision increases the current 50,000-barrel-per-day
limitation to 60,000. In addition, the provision changes the
refinery limitation on claiming independent producer status
from a limit based on actual daily production to a limit based
on average daily production for the taxable year. Accordingly,
the average daily refinery run for the taxable year cannot
exceed 60,000 barrels. For this purpose, the taxpayer would
calculate average daily refinery run by dividing total
production for the taxable year by the total number of days in
the taxable year.

effective date

The provision is effective for taxable years beginning
after December 31, 2002.

F. Extension of Suspension of Taxable Income Limit With Respect to
Marginal Production

(Sec. 507 of the bill and sec. 613A of the Code)

present law

In general

Depletion, like depreciation, is a form of capital cost
recovery. In both cases, the taxpayer is allowed a deduction in
recognition of the fact that an asset--in the case of depletion
for oil or gas interests, the mineral reserve itself--is being
expended in order to produce income. Certain costs incurred
prior to drilling an oil or gas property are recovered through
the depletion deduction. These include costs of acquiring the
lease or other interest in the property and geological and
geophysical costs (in advance of actual drilling).
Depletion is available to any person having an economic
interest in a producing property. An economic interest is
possessed in every case in which the taxpayer has acquired by
investment any interest in minerals in place, and secures, by
any form of legal relationship, income derived from the
extraction of the mineral, to which it must look for a return
of its capital.\11\ Thus, for example, both working interests
and royalty interests in an oil- or gas-producing property
constitute economic interests, thereby qualifying the interest
holders for depletion deductions with respect to the property.
A taxpayer who has no capital investment in the mineral deposit
does not possess an economic interest merely because it
possesses an economic or pecuniary advantage derived from
production through a contractual relation.
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\11\ Treas. Reg. sec. 1.611-1(b)(1).
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Cost depletion
Two methods of depletion are currently allowable under the
Internal Revenue Code (the ``Code''): (1) the cost depletion
method, and (2) the percentage depletion method (secs. 611-
613). Under the cost depletion method, the taxpayer deducts
that portion of the adjusted basis of the depletable property
which is equal to the ratio of units sold from that property
during the taxable year to the number of units remaining as of
the end of taxable year plus the number of units sold during
the taxable year. Thus, the amount recovered under cost
depletion may never exceed the taxpayer's basis in the
property.
Percentage depletion and related income limitations
The Code generally limits the percentage depletion method
for oil and gas properties to independent producers and royalty
owners.\12\ Generally, under the percentage depletion method 15
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable
year (sec. 613A(c)). The amount deducted generally may not
exceed 100 percent of the net income from that property in any
year (the ``net-income limitation'') 613(a)). By contrast, for
any other mineral qualifying for the percentage depletion
deduction, such deduction may not exceed 50 percent of the
taxpayer's taxable income from the depletable property. A
similar 50-percent net-income limitation applied to oil and gas
properties for taxable years beginning before 1991. Section
11522(a) of the Omnibus Budget Reconciliation Act of 1990
prospectively changed the net-income limitation threshold to
100 percent only for oil and gas properties, effective for
taxable years beginning after 1990. The 100-percent net-income
limitation for marginal wells has been suspended for taxable
years beginning after December 31, 1997, and before January 1,
2002.
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\12\ Sec. 613A.
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Additionally, the percentage depletion deduction for all
oil and gas properties may not exceed 65 percent of the
taxpayer's overall taxable income (determined before such
deduction and adjusted for certain loss carrybacks and trust
distributions) (sec. 613A(d)(1)).\13\ Because percentage
depletion, unlike cost depletion, is computed without regard to
the taxpayer's basis in the depletable property, cumulative
depletion deductions may be greater than the amount expended by
the taxpayer to acquire or develop the property.
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\13\ Amounts disallowed as a result of this rule may be carried
forward and deducted in subsequent taxable years, subject to the 65-
percent taxable income limitation for those years.
---------------------------------------------------------------------------
A taxpayer is required to determine the depletion deduction
for each oil or gas property under both the percentage
depletion method (if the taxpayer is entitled to use this
method) and the cost depletion method. If the cost depletion
deduction is larger, the taxpayer must utilize that method for
the taxable year in question (sec. 613(a)).

Limitation of oil and gas percentage depletion to independent producers
and royalty owners

Generally, only independent producers and royalty owners
(as contrasted to integrated oil companies) are allowed to
claim percentage depletion. Percentage depletion for eligible
taxpayers is allowed only with respect to up to 1,000 barrels
of average daily production of domestic crude oil or an
equivalent amount of domestic natural gas (sec. 613A(c)). For
producers of both oil and natural gas, this limitation applies
on a combined basis.
In addition to the independent producer and royalty owner
exception, certain sales of natural gas under a fixed contract
in effect on February 1, 1975, and certain natural gas from
geopressured brine,\14\ are eligible for percentage depletion,
at rates of 22 percent and 10 percent, respectively. These
exceptions apply without regard to the 1,000-barrel-per-day
limitation and regardless of whether the producer is an
independent producer or an integrated oil company.
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\14\ This exception is limited to wells, the drilling of which
began between September 30, 1978, and January 1, 1984.
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reasons for change

The Committee is concerned that, while current oil and gas
operations may be profitable, the highly volatile nature of oil
and gas prices could quickly create economic hardships in the
industry. Thus, to help minimize the adverse effects of future
price fluctuations, the Committee believes it is appropriate to
extend the suspension of the 100-percent net-income limitation
for marginal wells.

explanation of provision

The suspension of the 100-percent net-income limitation for
marginal wells is extended an additional five years, through
taxable years beginning before January 1, 2007.

effective date

The provision is effective on date of enactment for taxable
years after December 31, 2001.

G. Amortization of Geological and Geophysical Expenditures

(Sec. 508 of the bill and new sec. 199 of the Code)

present law

In general

Geological and geophysical expenditures are costs incurred
by a taxpayer for the purpose of obtaining and accumulating
data that will serve as the basis for the acquisition and
retention of mineral properties by taxpayers exploring for
minerals. A key issue with respect to the tax treatment of such
expenditures is whether or not they are capital in nature.
Capital expenditures are not currently deductible as ordinary
and necessary business expenses, but are allocated to the cost
of the property.\15\
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\15\ Under section 263, capital expenditures are defined generally
as any amount paid for new buildings or for permanent improvements or
betterments made to increase the value of any property or estate.
Treasury regulations define capital expenditures to include amounts
paid or incurred (1) to add to the value, or substantially prolong the
useful life, of property owned by the taxpayer or (2) to adapt property
to a new or different use. Treas. Reg. sec. 1.263(a)-1(b).
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Courts have held that geological and geophysical costs are
capital, and therefore are allocable to the cost of the
property \16\ acquired or retained.\17\ The costs attributable
to such exploration are allocable to the cost of the property
acquired or retained. As described further below, IRS
administrative rulings have provided further guidance regarding
the definition and proper tax treatment of geological and
geophysical costs.
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\16\ ``Property'' means an interest in a property as defined in
section 614 of the Code, and includes an economic interest in a tract
or parcel of land notwithstanding that a mineral deposit has not been
established or proved at the time the costs are incurred.
\17\ See, e.g., Schermerhorn Oil Corporation v. Commissioner, 46
B.T.A. 151 (1942). By contrast, section 617 of the Code permits a
taxpayer to elect to deduct certain expenditures incurred for the
purpose of ascertaining the existence, location, extent, or quality of
any deposit of ore or other mineral (but not oil and gas). These
deductions are subject to recapture if the mine with respect to which
the expenditures were incurred reaches the producing stage.
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Revenue Ruling 77-188

In Revenue Ruling 77-188 \18\ (hereinafter referred to as
the ``1977 ruling''), the IRS provided guidance regarding the
proper tax treatment of geological and geophysical costs. The
ruling describes a typical geological and geophysical
exploration program as containing the following elements:
---------------------------------------------------------------------------
\18\ 1977-1 C.B. 76.
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It is customary in the search for mineral
producing properties for a taxpayer to conduct an exploration
program in one or more identifiable project areas. Each project
area encompasses a territory that the taxpayer determines can
be explored advantageously in a single integrated operation.
This determination is made after analyzing certain variables
such as (1) the size and topography of the project area to be
explored, (2) the existing information available with respect
to the project area and nearby areas, and (3) the quantity of
equipment, the number of personnel, and the amount of money
available to conduct a reasonable exploration program over the
project area.
The taxpayer selects a specific project area from
which geological and geophysical data are desired and conducts
a reconnaissance-type survey utilizing various geological and
geophysical exploration techniques. These techniques are
designed to yield data that will afford a basis for identifying
specific geological features with sufficient mineral potential
to merit further exploration.
Each separable, noncontiguous portion of the
original project area in which such a specific geological
feature is identified is a separate ``area of interest.'' The
original project area is subdivided into as many small projects
as there are areas of interest located and identified within
the original project area. If the circumstances permit a
detailed exploratory survey to be conducted without an initial
reconnaissance-type survey, the project area and the area of
interest will be coextensive.
The taxpayer seeks to further define the
geological features identified by the prior reconnaissance-type
surveys by additional, more detailed, exploratory surveys
conducted with respect to each area of interest. For this
purpose, the taxpayer engages in more intensive geological and
geophysical exploration employing methods that are designed to
yield sufficiently accurate sub-surface data to afford a basis
for a decision to acquire or retain properties within or
adjacent to a particular area of interest or to abandon the
entire area of interest as unworthy of development by mine or
well.
The 1977 ruling provides that if, on the basis of data
obtained from the preliminary geological and geophysical
exploration operations, only one area of interest is located
and identified within the original project area, then the
entire expenditure for those exploratory operations is to be
allocated to that one area of interest and thus capitalized
into the depletable basis of that area of interest. On the
other hand, if two or more areas of interest are located and
identified within the original project area, the entire
expenditure for the exploratory operations is to be allocated
equally among the various areas of interest.
If no areas of interest are located and identified by the
taxpayer within the original project area, then the 1977 ruling
states that the entire amount of the geological and geophysical
costs related to the exploration is deductible as a loss under
section 165. The loss is claimed in the taxable year in which
that particular project area is abandoned as a potential source
of mineral production.
A taxpayer may acquire or retain a property within or
adjacent to an area of interest, based on data obtained from a
detailed survey that does not relate exclusively to any
discrete property within a particular area of interest.
Generally, under the 1977 ruling, the taxpayer allocates the
entire amount of geological and geophysical costs to the
acquired or retained property as a capital cost under section
263(a). If more than one property is acquired, it is proper to
determine the amount of the geological and geophysical costs
allocable to each such property by allocating the entire amount
of the costs among the properties on the basis of comparative
acreage.
If, however, no property is acquired or retained within or
adjacent to that area of interest, the entire amount of the
geological and geophysical costs allocable to the area of
interest is deductible as a loss under section 165 for the
taxable year in which such area of interest is abandoned as a
potential source of mineral production.
In 1983, the IRS issued Revenue Ruling 83-105,\19\ which
elaborates on the positions set forth in the 1977 ruling by
setting forth seven factual situations and applying the
principles of the 1977 ruling to those situations. In addition,
Revenue Ruling 83-105 explains what constitutes ``abandonment
as a potential source of mineral production.''
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\19\ 1983-2 C.B. 51.
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Reasons for Change

The Committee believes that substantial simplification for
taxpayers and significant gains in taxpayer compliance and
reductions in administrative cost can be obtained by
establishing that geological and geophysical costs can be
amortized over two years, regardless of the taxpayer's
determination of the suitability of the site or sites examined
for future production.

Explanation of Provision

The provision allows geological and geophysical costs
incurred in connection with oil and gas exploration in the
United States to be amortized over two years.

Effective Date

The provision is effective for geological and geophysical
costs paid or incurred in taxable years beginning after
December 31, 2002. No inference is intended from the
prospective effective date of this proposal as to the proper
treatment of pre-effective date geological and geophysical
costs.

H. Amortization of Delay Rental Payments

(Sec. 509 of the bill and new sec. 199A of the Code)

Present Law

Present law generally requires costs associated with
inventory and property held for resale to be capitalized rather
than currently deducted as they are incurred. (sec. 263). Oil
and gas producers typically contract for mineral production in
exchange for royalty payments. If mineral production is
delayed, these contracts provide for ``delay rental payments''
as a condition of their extension. In proposed regulations
issued in 2000, the Treasury Department took the position that
the uniform capitalization rules of section 263A require delay
rental payments to be capitalized.\20\
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\20\ 65 Fed. Reg. 6090 (2000).
---------------------------------------------------------------------------

Reasons for Change

The Committee believes that, in essence, a delay rental
payment is a substitute, both in the eyes of the payor and the
payee, for a royalty payment that would have been made had the
property been brought into production. The Committee believes
it appropriate to allow delay rental payments to be amortized
over a two year period.

Explanation of Provision

The provision allows delay rental payments incurred in
connection with the development of oil or gas within the United
States to be amortized over two years.

Effective Date

The provision applies to delay rental payments paid or
incurred in taxable years beginning after December 31, 2002. No
inference is intended from the prospective effective date of
this proposal as to the proper treatment of pre-effective date
delay rental payments.

I. Extension and Modification of Credit for Producing Fuel From a Non-
Conventional Source

(Secs. 510 and 511 of the bill and sec. 29 of the Code)

Present Law

Certain fuels produced from ``non-conventional sources''
and sold to unrelated parties are eligible for an income tax
credit equal to $3 (generally adjusted for inflation) per
barrel or BTU oil barrel equivalent (sec. 29). Qualified fuels
must be produced within the United States.
Qualified fuels include:
(1) oil produced from shale and tar sands;
(2) gas produced from geopressured brine, Devonian
shale, coal seams, tight formations (``tight sands''),
or biomass; and
(3) liquid, gaseous, or solid synthetic fuels
produced from coal (including lignite).
In general, the credit is available only with respect to
fuels produced from wells drilled or facilities placed in
service after December 31, 1979, and before January 1, 1993. An
exception extends the January 1, 1993 expiration date for
facilities producing gas from biomass and synthetic fuel from
coal if the facility producing the fuel is placed in service
before July 1, 1998, pursuant to a binding contract entered
into before January 1, 1997.
The credit may be claimed for qualified fuels produced and
sold before January 1, 2003 (in the case of non-conventional
sources subject to the January 1, 1993 expiration date) or
January 1, 2008 (in the case of biomass gas and synthetic fuel
facilities eligible for the extension period).\21\
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\21\ The provision does not apply to liquid, gaseous, or solid
synthetic fuels produced from coal as described under present law
section 29(c)(1)(C), but does provide credit for a new category,
refined coal, described below.
---------------------------------------------------------------------------

Reasons for Change

The Committee concludes that the section 29 credit on the
margins has increased production of oil and natural gas from
domestic sources and that in the absence of these non-
conventional sources the demand for imported fuels may have
increased. To increase domestic sources of supply, the
Committee believes it is appropriate to extend the section 29
credit to help foster new domestic fuel sources. The Committee
is also concerned that, because of the higher extraction costs
of certain ``viscous oil,'' without the implicit subsidy of the
production credit, entrepreneurs will not exploit this domestic
energy source. Therefore, the Committee believes it is
appropriate to extend the credit for certain fuels produced
from new wells or facilities.
The Committee also recognizes that the credit for
production of synthetic fuels from coal has been interpreted to
include fuels that are merely chemical changes to coal that do
not necessarily enhance the value or environmental performance
of the feedstock coal. Therefore, the Committee believes it is
appropriate to extend the section 29 credit only to fuels
produced from coal that achieve significant environmental and
value-added improvements.
Methane in coal mines is a serious safety hazard. In many
coal mining operations, the cost of collection exceeds the
value of the recovered methane so the methane is vented
directly into the atmosphere. Methane is an extremely potent
and long-lived greenhouse gas. Therefore, the Committee seeks
to encourage capture of methane from coal mines in particular.
The Committee recognizes that the world price of oil as the
nation enters the 21st century has not risen to levels forecast
in 1978. Therefore, the Committee believes it is appropriate to
restart the section 29 credit at a level lower than that
currently available to existing production.
Lastly, the Committee believes it is important to study the
efficacy of the section 29 credit in the case of methane
recovered from coal seams or so-called ``coal beds.''

Explanation of Provision

Extension for certain non-conventional fuels

The provision permits taxpayers to claim the section 29
credit for production of certain non-conventional fuels
produced at wells placed in service after the date of enactment
and before January 1, 2005. Under the provision, qualifying
fuels are oil from shale or tar sands, and gas from
geopressured brine, Devonian shale, coal seams, a tight
formation, or biomass. The value of the credit is re-based to
$3.00 and the amount is not indexed for inflation. Taxpayers
may claim the credit for production from the well for each of
the first three years of production from the qualifying well.

Expansion for ``viscous oil''

The provision expands section 29 to permit taxpayers to
claim the section 29 credit for production of certain viscous
oil produced at wells placed in service after the date of
enactment and before January 1, 2005. The provision defines
``viscous oil'' as domestic crude oil produced from any
property if the crude oil has a weighted average gravity of 22
degrees API or less (corrected to 60 degrees Fahrenheit). The
value of the credit for viscous oil also is $3.00 per barrel.
Taxpayers may claim the credit for production from the well for
each of the first three years of production from the time the
well is placed in service. The provision provides that
qualifying sales to related parties for consumption not in the
immediate vicinity of the wellhead qualify for the credit.

Extension and modification for ``refined coal''

The provision also expands section 29 to include certain
``refined coal'' as a qualified non-conventional fuel.
``Refined coal'' is a qualifying liquid, gaseous, or solid
synthetic fuel produced from coal (including lignite) from
placed in service after date of enactment and before January 1,
2007. Refined coal also would include a qualifying fuel derived
from high-carbon fly ash produced from facilities placed in
service after the date of enactment and before January 1, 2007.
A qualifying fuel is a fuel that when burned emits 20 percent
less SO2and nitrogen oxides than the burning of
feedstock coal or comparable coal predominantly available in the
marketplace as of January 1, 2002, and if the fuel sells at prices at
least 50 percent greater than the prices of the feedstock coal or
comparable coal. However, no fuel produced at a qualifying advanced
clean coal facility (as defined elsewhere in the committee bill) would
be a qualifying fuel. The amount of credit for refined coal also is
$3.00 per barrel equivalent. Taxpayers may claim the credit for fuel
produced during the five-year period beginning on the date the facility
is placed in service.

Credit for coalmine methane gas

In addition, the provision permits taxpayers to claim
credit for coalmine methane gas captured by the taxpayer and
utilized as a fuel source or sold by or on behalf of the
taxpayer to an unrelated person. The term ``coalmine methane
gas'' means any methane gas which is being liberated during
qualified coal mining operations or as a result of past
qualified coal mining operations, or which is captured in
advance of qualified coal mining operations as part of specific
plan to mine a coal deposit. In the case of coalmine methane
gas that is captured in advance of qualified coal mining
operations, the credit is allowed only after the date the coal
extraction occurs in the immediate area where the coalmine
methane gas was removed. The value of the credit for coalmine
methane also is $3.00 per Btu oil barrel equivalent (51.7 cents
per million Btu of heat value in the gas) for gas captured and
utilized or sold. Taxpayers may claim the credit for gas
captured and utilized or sold after the date of enactment and
before January 1, 2005.

Study of coal bed methane gas

Lastly, the committee bill directs the Secretary of the
Treasury to undertake a study of effect section 29 has had on
the production of coal bed methane. The Secretary's study is to
be made in conjunction with the study to be undertaken by the
Secretary of the Interior on the effects of coal bed methane
production on surface and water resources, as provided in
section 608 of the Energy Policy Act of 2002 (should that study
be required by law). The study should estimate the total amount
of credit claimed annually and in aggregate related to the
production of coal bed methane since the enactment of section
29. The study should report the annual value of the credit
allowable for coal bed methane compared to the average annual
wellhead price of natural gas (per thousand cubic feet of
natural gas). The study should estimate the incremental
increase in production of coal bed methane that has resulted
from the enactment of section 29. The study should estimate the
cost to the Federal government, in terms of the net tax
benefits claimed, per thousand cubic feet of incremental coal
bed methane produced annually and in aggregate since the
enactment of section 29.

Effective Date

The provisions apply to fuels sold from qualifying wells
and facilities after the date of enactment.

J. Natural Gas Distribution Lines Treated as Fifteen-Year Property

(Sec. 512 of the bill and sec. 168 of the Code)

Present Law

Reasons for Change

The Committee recognizes the importance of modernizing our
aging energy infrastructure to meet the demands of the twenty-
first century, and the Committee also recognizes that both
short-term and long-term solutions are required to meet this
challenge. The Committee understands that investment in our
energy infrastructure has not kept pace with the nation's
needs. In light of this, the Committee believes it is
appropriate to reduce the recovery period for investment in
certain energy infrastructure property to encourage investment
in such property. In particular, more rapid depreciation of
natural gas distribution lines will help rural utilities
overcome the higher cost of service in rural areas, where there
are fewer customers per mile of pipeline.

Explanation of Provision

The provision establishes a statutory 15-year recovery
period and a class life of 20 years for natural gas
distribution lines.

Effective Date

The provision is effective for property placed in service
after the date of enactment.

TITLE VI. PROVISIONS RELATING TO ELECTRIC INDUSTRY RESTRUCTURING

The electric service industry has undergone great change in
the past decade. The Federal Energy Regulatory Commission
(``FERC'') has undertaken significant initiatives, such as
Order No. 2000 and more recent guidance, to encourage
organization of the electric transmission system into a
national grid. At the present time, however, the ultimate
structure of the industry when the currently anticipated
industry restructuring is completed remains highly
uncertain.\23\ For example, representatives of the Federal
Energy Regulatory Commission (``FERC'') have stated there is a
policy goal to form separate regional transmission
organizations (``RTOs''), but the ultimate structure and
ownership of such organizations is not fully resolved. Further,
the role of public power entities, including the extent to
which and the circumstances under which these entities legally
or economically may be required to participate in open access
arrangements, is unresolved.
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\23\ The Committee held a field hearing that addressed these issues
in Billings, Montana, on August 24, 2001. In addition, the Committee
scheduled a hearing for September 12, 2001, on electricity
restructuring and associated tax issues. This hearing was cancelled due
to the September 11, 2001, terrorist attacks, but the Committee has
reviewed the written testimony of the witnesses who were scheduled to
appear. The scheduled witnesses were John Tiencken, Jr., on behalf of
the American Public Power Association and the Large Public Power
Council; Theodore Vogel on behalf of the Edison Electric Institute;
Robert Bauman with the Butler County Rural Electric Cooperative,
Allison, Iowa; Brett Harvey with CONSOL Energy, Inc., Pittsburgh,
Pennsylvania (testimony relating to clean coal incentives); and Howard
Gruenspecht, Ph.D., with Resources for the Future, Washington, D.C.
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The Committee believes that the tax code should not be an
obstacle to this changing electric industry marketplace.
However, the Committee concluded that it is not possible at the
present time to design tax provisions that will address as yet
undefined legal and economic industry structures. The bill puts
in place a mechanism to ensure that up-to-date information on
tax issues that arise from future developments is available to
the Congress so that appropriate changes to the tax law can be
considered on a timely basis.
With respect to changes that already have occurred in the
electric service industry, the Committee believes it is
appropriate to provide certainty to industry participants. On
January 18, 2001, the Department of the Treasury (``Treasury'')
published temporary and proposed regulations to provide
guidance to issuers of governmental bonds for electric output
facilities. Those regulations provide interim relief for
outstanding electric output facility bonds. Because of this
interim relief and the aforementioned uncertainty regarding
future industry structure, the bill does not address issues
related to issuance of tax-exempt bonds. The bill does,
however, address certain aspects of electric industry
restructuring that are known at the present time and for which
comparable interim regulatory relief has not been provided--
issues relating to certain transfers of nuclear decommissioning
plants by investor-owned utilities (``IOUs'') and certain
transactions engaged in by rural electric cooperatives.

A. Ongoing Study and Reports With Regard to Tax Issues Resulting From
Future Restructuring Decisions

(Sec. 601 of the bill)

The bill directs Treasury to conduct an ongoing study of
tax issues resulting from restructuring of the electric service
industry. Treasury (after consultation with FERC) is required
to report to the Senate Committee on Finance and the House
Committee on Ways and Means at least annually, no later than
December 31, on tax issues identified since its last report.
The first report is due no later than December 31, 2002. These
annual reports are to continue until such time as the electric
industry restructuring activities contemplated under the
legislation in conjunction with which the provision is to be
considered have been completed.
Among other issues, this ongoing study is expected to focus
on the tax consequences of restructuring for IOUs and
cooperatives (e.g., asset divestitures). In addition, the
Committee anticipates that Treasury as part of the analysis
underlying its ongoing study will review the interim relief
provided to certain tax-exempt bonds in the regulations
described above. The Committee hopes that Treasury will
finalize as quickly as possible regulations relating to the
definition of private activity bond for public power entities.
In adopting its regulations, the Committee hopes that Treasury
will use its regulatory authority, as appropriate, to provide
flexibility to foster the participation of public power in a
restructured electric industry (e.g., relating to participation
in RTOs and treatment of distribution facilities). Where
Treasury determines that changes in the Code's private business
use rules to accommodate restructuring exceed its regulatory
authority or otherwise are more appropriately accomplished
through legislation, the Committee anticipates that Treasury
will include recommendations on such changes in its annual
reports to Congress.
Further, in connection with its study, the Committee
believes that Treasury should exercise its authority, as
appropriate, to modify or suspend regulations that may impede
an IOU's ability to reorganize its capital stock structure to
respond to a competitive marketplace.

B. Modification to Special Rules for Nuclear Decommissioning Costs

(Sec. 602 of the bill and sec. 468A of the Code)

Present Law

Overview

Special rules dealing with nuclear decommissioning reserve
funds were adopted by Congress in the Deficit Reduction Act of
1984 (``1984 Act''), when tax issues regarding the time value
of money were addressed generally. Under general tax accounting
rules, a deduction for accrual basis taxpayers is deferred
until there is economic performance for the item for which the
deduction is claimed. However, the 1984 Act contains an
exception under which a taxpayer responsible for nuclear
powerplant decommissioning may elect to deduct contributions
made to a qualified nuclear decommissioning fund for future
decommissioning costs. Taxpayers who do not elect this
provision are subject to general tax accounting rules.

Qualified nuclear decommissioning fund

A qualified nuclear decommissioning fund (a ``qualified
fund'') is a segregated fund established by a taxpayer that is
used exclusively for the payment of decommissioning costs,
taxes on fund income, management costs of the fund, and for
making investments. The income of the fund is taxed at a
reduced rate of 20 percent for taxable years beginning after
December 31, 1995.\24\
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\24\ As originally enacted in 1984, a qualified fund paid tax on
its earnings at the top corporate rate and, as a result, there was no
present-value tax benefit of making deductible contributions to a
qualified fund. Also, as originally enacted, the funds in the trust
could be invested only in certain low risk investments. Subsequent
amendments to the provision have reduced the rate of tax on a qualified
fund to 20 percent and removed the restrictions on the types of
permitted investments that a qualified fund can make.
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Contributions to a qualified fund are deductible in the
year made to the extent that these amounts were collected as
part of the cost of service to ratepayers (the ``cost of
service requirement'').\25\ Funds withdrawn by the taxpayer to
pay for decommissioning costs are included in the taxpayer's
income, but the taxpayer also is entitled to a deduction for
decommissioning costs as economic performance for such costs
occurs.
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\25\ Taxpayers are required to include in gross income customer
charges for decommissioning costs (sec. 88).
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Accumulations in a qualified fund are limited to the amount
required to fund decommissioning costs of a nuclear powerplant
for the period during which the qualified fund is in existence
(generally post-1984 decommissioning costs of a nuclear
powerplant). For this purpose, decommissioning costs are
considered to accrue ratably over a nuclear powerplant's
estimated useful life. In order to prevent accumulations of
funds over the remaining life of a nuclear powerplant in excess
of those required to pay future decommissioning costs of such
nuclear powerplant and to ensure that contributions to a
qualified fund are not deducted more rapidly than level funding
(taking into account an appropriate discount rate), taxpayers
must obtain a ruling from the IRS to establish the maximum
annual contribution that may be made to a qualified fund (the
``ruling amount''). In certain instances (e.g., change in
estimates), a taxpayer is required to obtain a new ruling
amount to reflect updated information.
A qualified fund may be transferred in connection with the
sale, exchange or other transfer of the nuclear powerplant to
which it relates. If the transferee is a regulated public
utility and meets certain other requirements, the transfer will
be treated as a nontaxable transaction. No gain or loss will be
recognized on the transfer of the qualified fund and the
transferee will take the transferor's basis in the fund.\26\
The transferee is required to obtain a new ruling amount from
the IRS or accept a discretionary determination by the IRS.\27\
---------------------------------------------------------------------------
\26\ Treas. reg. sec. 1.468A-6.
\27\ Treas. reg. sec. 1.468A-6(f).
---------------------------------------------------------------------------

Nonqualified nuclear decommissioning funds

Federal and State regulators may require utilities to set
aside funds for nuclear decommissioning costs in excess of the
amount allowed as a deductible contribution to a qualified
fund. In addition, taxpayers may have set aside funds prior to
the effective date of the qualified fund rules.\28\ The
treatment of amounts set aside for decommissioning costs prior
to 1984 varies. Some taxpayers may have received no tax benefit
while others may have deducted such amounts or excluded such
amounts from income. Since 1984, taxpayers have been required
to include in gross income customer charges for decommissioning
costs (sec. 88), and a deduction has not been allowed for
amounts set aside to pay for decommissioning costs except
through the use of a qualified fund. Income earned in a
nonqualified fund is taxable to the fund's owner as it is
earned.
---------------------------------------------------------------------------
\28\ These funds are generally referred to as ``nonqualified
funds.''
---------------------------------------------------------------------------

Reasons for Change

The Committee does not believe a utility should be denied
the opportunity to contribute to a qualified fund simply
because it operates in a deregulated environment. In addition,
the Committee recognizes the importance of providing clear and
concise rules to minimize disputes between taxpayers and the
IRS.

Explanation of Provision

Repeal of cost of service requirement

The provision repeals the cost of service requirement for
deductible contributions to a nuclear decommissioning fund.
Thus, all taxpayers, including unregulated taxpayers, would be
allowed a deduction for amounts contributed to a qualified
fund.

Clarify treatment of transfers of qualified funds and deductibility of
decommissioning costs

The provision clarifies the Federal income tax treatment of
the transfer of a qualified fund. No gain or loss would be
recognized to the transferor or the transferee (or the
qualified fund) as a result of the transfer of a qualified fund
in connection with the transfer of the power plant with respect
to which such fund was established. In addition, the provision
provides that all nuclear decommissioning costs are deductible
when paid or incurred.

Effective Date

The provision is effective for taxable years beginning
after December 31, 2002.

C. Treatment of Certain Income of Electric Cooperatives

(Sec. 603 of the bill and sec. 501 of the Code)

Present Law

In general

Under present law, an entity must be operated on a
cooperative basis in order to be treated as a cooperative for
Federal income tax purposes. Although not defined by statute or
regulation, the two principal criteria for determining whether
an entity is operating on a cooperative basis are: (1)
ownership of the cooperative by persons who patronize the
cooperative; and (2) return of earnings to patrons in
proportion to their patronage. The Internal Revenue Service
requires that cooperatives must operate under the following
principles: (1) subordination of capital in control over the
cooperative undertaking and in ownership of the financial
benefits from ownership; (2) democratic control by the members
of the cooperative; (3) vesting in and allocation among the
members of all excess of operating revenues over the expenses
incurred to generate revenues in proportion to their
participation in the cooperative (patronage); and (4) operation
at cost (not operating for profit or below cost).\29\
---------------------------------------------------------------------------
\29\ Announcement 96-24, Proposed Examination Guidelines Regarding
Rural Electric Cooperatives, 1996-16 I.R.B. 35.
---------------------------------------------------------------------------
In general, cooperative members are those who participate
in the management of the cooperative and who share in patronage
capital. As described below, income from the sale of electric
energy by an electric cooperative may be member or non-member
income to the cooperative, depending on the membership status
of the purchaser. A municipal corporation may be a member of a
cooperative.
For Federal income tax purposes, a cooperative generally
computes its income as if it were a taxable corporation, with
one exception--the cooperative may exclude from its taxable
income distributions of patronage dividends. In general,
patronage dividends are the profits of the cooperative that are
rebated to its patrons pursuant to a pre-existing obligation of
the cooperative to do so. The rebate must be made in some
equitable fashion on the basis of the quantity or value of
business done with the cooperative.
Except for tax-exempt farmers' cooperatives, cooperatives
that are subject to the cooperative tax rules of subchapter T
of the Code (sec. 1381, et seq.) are permitted a deduction for
patronage dividends from their taxable income only to the
extent of net income that is derived from transactions with
patrons who are members of the cooperative (sec. 1382). The
availability of such deductions from taxable income has the
effect of allowing the cooperative to be treated like a conduit
with respect to profits derived from transactions with patrons
who are members of the cooperative.
Cooperatives that qualify as tax-exempt farmers'
cooperatives are permitted to exclude patronage dividends from
their taxable income to the extent of all net income, including
net income that is derived from transactions with patrons who
are not members of the cooperative, provided the value of
transactions with patrons who are not members of the
cooperative does not exceed the value of transactions with
patrons who are members of the cooperative (sec. 521).

Taxation of electric cooperatives exempt from subchapter T

In general, the cooperative tax rules of subchapter T apply
to any corporation operating on a cooperative basis (except
mutual savings banks, insurance companies, other tax-exempt
organizations, and certain utilities), including tax-exempt
farmers' cooperatives (described in sec. 521(b)). However,
subchapter T does not apply to an organization that is
``engaged in furnishing electric energy, or providing telephone
service, to persons in rural areas'' (sec. 1381(a)(2)(C)).
Instead, electric cooperatives are taxed under rules that were
generally applicable to cooperatives prior to the enactment of
subchapter T in 1962. Under these rules, an electric
cooperative can exclude patronage dividends from taxable income
to the extent of all net income of the cooperative, including
net income derived from transactions with patrons who are not
members of the cooperative.\30\
---------------------------------------------------------------------------
\30\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
---------------------------------------------------------------------------

Tax exemption of rural electric cooperatives

Section 501(c)(12) provides an income tax exemption for
rural electric cooperatives if at least 85-percent of the
cooperative's income consists of amounts collected from members
for the sole purpose of meeting losses and expenses of
providing service to its members. The Internal Revenue Service
takes the position that rural electric cooperatives also must
comply with the fundamental cooperative principles described
above in order to qualify for tax exemption under section
501(c)(12).\31\ The 85-percent test is determined without
taking into account any income from qualified pole rentals and
cancellation of indebtedness income from the prepayment of a
loan under sections 306A, 306B, or 311 of the Rural
Electrification Act of 1936 (as in effect on January 1, 1987).
The exclusion for cancellation of indebtedness income applies
to such income arising in 1987, 1988, or 1989 on debt that
either originated with, or is guaranteed by, the Federal
Government. Rural electric cooperatives generally are subject
to the tax on unrelated trade or business income under section
511.
---------------------------------------------------------------------------
\31\ Rev. Rul. 72-36, 1972-1 C.B. 151.
---------------------------------------------------------------------------

Reasons for Change

The purpose of the 85-percent test under section 501(c)(12)
is to ensure that the primary activities of a tax-exempt
electric cooperative fulfill the statutory purpose of providing
electricity services to the members of the cooperative.
Similarly, the fundamental cooperative principles described
above are the defining characteristics of a cooperative upon
which the Federal tax rules condition conduit treatment.
The Committee believes that the nature of an electric
cooperative's activities does not change because it has income
from open access transactions with non-members or from nuclear
decommissioning transactions (as these terms are defined in the
bill). Accordingly, the Committee believes that the 85-percent
test for tax exemption under present law should beapplied
without regard to such income. The Committee intends that the term
``open access transaction'' shall be applied in a manner that allows an
electric cooperative to carry out its statutory purpose in a
restructured electric energy market environment without adversely
impacting its tax-exempt status.
For similar reasons, the Committee believes that the 85-
percent test for tax exemption under present law should be
applied without regard to cancellation of indebtedness income
from the prepayment of certain loans that are provided,
insured, or guaranteed by the Federal government, as well as
income from certain transactions that would otherwise qualify
for deferred gain recognition under section 1031 or 1033.
The Committee further believes that electric energy sales
to non-members should not result in a loss of tax-exempt status
or cooperative status to the extent that such sales are
necessary to replace lost sales of electric energy to members
as a result of restructuring of the electric energy industry.
Accordingly, the Committee believes that replacement electric
energy sales to non-members (defined as ``load loss
transactions'' in the bill) should be treated, for a limited
period of time, as member income in applying the 85-percent
test for tax exemption of rural electric cooperatives. The
Committee believes that such treatment also should apply for
purposes of determining whether tax-exempt and taxable electric
cooperatives comply with the fundamental cooperative
principles. Finally, the Committee believes that income from
replacement electric energy sales should not be subject to the
tax on unrelated trade or business income under Code section
511.

explanation of provision

Treatment of income from open access transactions

The bill provides that income received or accrued by a
rural electric cooperative from any ``open access transaction''
(other than income received or accrued directly or indirectly
from a member of the cooperative) is excluded in determining
whether a rural electric cooperative satisfies the 85-percent
test for tax exemption under section 501(c)(12). The term
``open access transaction'' is defined as--
(1) The provision or sale of electric energy
transmission services or ancillary services on a
nondiscriminatory open access basis: (i) pursuant to an
open access transmission tariff filed with and approved
by the Federal Energy Regulatory Commission (``FERC'')
(including acceptable reciprocity tariffs), but only if
(in the case of a voluntarily filed tariff) the
cooperative files a report with FERC within 90 days of
enactment of this provision relating to whether or not
the cooperative will join a regional transmission
organization (``RTO''); or (ii) under an RTO agreement
approved by FERC (including an agreement providing for
the transfer of control--but not ownership--of
transmission facilities); \32\
---------------------------------------------------------------------------
\32\ Under this provision, references to FERC are treated as
including references to the Public Utility Commission of Texas or the
Rural Utilities Service.
---------------------------------------------------------------------------
(2) The provision or sale of electric energy
distribution services or ancillary services on a
nondiscriminatory open access basis to end-users served
by distribution facilities owned by the cooperative or
its members; or
(3) The delivery or sale of electric energy on a
nondiscriminatory open access basis, provided that such
electric energy is generated by a generation facility
that is directly connected to distribution facilities
owned by the cooperative (or its members) which owns
the generation facility.
For purposes of the 85-percent test, the bill also provides
that income received or accrued by a rural electric cooperative
from any ``open access transaction'' is treated as an amount
collected from members for the sole purpose of meeting losses
and expenses if the income is received or accrued indirectly
from a member of the cooperative.

Treatment of income from nuclear decommissioning transactions

The bill provides that income received or accrued by a
rural electric cooperative from any ``nuclear decommissioning
transaction'' also is excluded in determining whether a rural
electric cooperative satisfies the 85-percent test for tax
exemption under section 501(c)(12). The term ``nuclear
decommissioning transaction'' is defined as--
(1) Any transfer into a trust, fund, or instrument
established to pay any nuclear decommissioning costs if
the transfer is in connection with the transfer of the
cooperative's interest in a nuclear powerplant or
nuclear powerplant unit;
(2) Any distribution from a trust, fund, or
instrument established to pay any nuclear
decommissioning costs; or
(3) Any earnings from a trust, fund, or instrument
established to pay any nuclear decommissioning costs.

Treatment of income from asset exchange or conversion transactions

The bill provides that gain realized by a tax-exempt rural
electric cooperative from a voluntary exchange or involuntary
conversion of certain property is excluded in determining
whether a rural electric cooperative satisfies the 85-percent
test for tax exemption under section 501(c)(12). This provision
only applies to the extent that: (1) the gain would qualify for
deferred recognition under section 1031 (relating to exchanges
of property held for productive use or investment) or section
1033 (relating to involuntary conversions); and (2) the
replacement property that is acquired by the cooperative
pursuant to section 1031 or section 1033 (as the case may be)
constitutes property that is used, or to be used, for the
purpose of generating, transmitting, distributing, or selling
electricity or natural gas.

Treatment of cancellation of indebtedness income from prepayment of
certain loans

The bill provides that income from the prepayment of any
loan, debt, or obligation of a tax-exempt rural electric
cooperative that is originated, insured, or guaranteed by the
FederalGovernment under the Rural Electrification Act of 1936
is excluded in determining whether the cooperative satisfies the 85-
percent test for tax exemption under section 501(c)(12).

Treatment of income from load loss transactions

Tax-exempt rural electric cooperatives.--The bill provides
that income received or accrued by a tax-exempt rural electric
cooperative from a ``load loss transaction'' is treated under
501(c)(12) as income collected from members for the sole
purpose of meeting losses and expenses of providing service to
its members. Therefore, income from load loss transactions is
treated as member income in determining whether a rural
electric cooperative satisfies the 85-percent test for tax
exemption under section 501(c)(12). The bill also provides that
income from load loss transactions does not cause a tax-exempt
electric cooperative to fail to be treated for Federal income
tax purposes as a mutual or cooperative company under the
fundamental cooperative principles described above.
The term ``load loss transaction'' is generally defined as
any wholesale or retail sale of electric energy (other than to
a member of the cooperative) to the extent that the aggregate
amount of such sales during a seven-year period beginning with
the ``start-up year'' does not exceed the reduction in the
amount of sales of electric energy during such period by the
cooperative to members. The ``start-up year'' is defined as the
calendar year which includes the date of enactment of this
provision or, if later, at the election of the cooperative: (1)
the first year that the cooperative offers nondiscriminatory
open access; or (2) the first year in which at least 10 percent
of the cooperative's sales of electric energy are to patrons
who are not members of the cooperative.
The bill also excludes income received or accrued by rural
electric cooperatives from load loss transactions from the tax
on unrelated trade or business income.
Taxable electric cooperatives.--The bill provides that the
receipt or accrual of income from load loss transactions by
taxable electric cooperatives is treated as income from patrons
who are members of the cooperative. Thus, income from a load
loss transaction is excludible from the taxable income of a
taxable electric cooperative if the cooperative distributes
such income pursuant to a pre-existing contract to distribute
the income to a patron who is not a member of the cooperative.
The bill also provides that income from load loss transactions
does not cause a taxable electric cooperative to fail to be
treated for Federal income tax purposes as a mutual or
cooperative company under the fundamental cooperative
principles described above.

effective date

This provision is effective for taxable years beginning
after the date of enactment.

TITLE VII. ADDITIONAL PROVISIONS

A. Extension of Accelerated Depreciation and Wage Credit Benefits on
Indian Reservations

(Sec. 701 of the bill and secs. 45A and 168(j) of the Code)

present law

Present law includes the following tax incentives for
businesses located within Indian reservations.

Accelerated depreciation

With respect to certain property used in connection with
the conduct of a trade or business within an Indian
reservation, depreciation deductions under section 168(j) will
be determined using the following recovery periods:

Years
3-year property................................................... 2
5-year property................................................... 3
7-year property................................................... 4
10-year property.................................................. 6
15-year property.................................................. 9
20-year property.................................................. 12
Nonresidential real property...................................... 22

``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property which is (1) used by
the taxpayer predominantly in the active conduct of a trade or
business within an Indian reservation, (2) not used or located
outside the reservation on a regular basis, (3) not acquired
(directly or indirectly) by the taxpayer from a person who is
related to the taxpayer (within the meaning of section
465(b)(3)(C)), and (4) described in the recovery-period table
above. In addition, property is not ``qualified Indian
reservation property'' if it is placed in service for purposes
of conducting gaming activities. Certain ``qualified
infrastructure property'' may be eligible for the accelerated
depreciation even if located outside an Indian reservation,
provided that the purpose of such property is to connect with
qualified infrastructure property located within the
reservation (e.g., roads, power lines, water systems, railroad
spurs, and communications facilities).
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum tax.
The accelerated depreciation for Indian reservations is
available with respect to property placed in service on or
after January 1, 1994, and before January 1, 2004.

Indian employment credit

In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by theemployer with respect to certain employees (sec. 45A).
The credit is equal to 20 percent of the excess of eligible employee
qualified wages and health insurance costs during the current year over
the amount of such wages and costs incurred by the employer during
1993. The credit is an incremental credit, such that an employer's
current-year qualified wages and qualified employee health insurance
costs (up to $20,000 per employee) are eligible for the credit only to
the extent that the sum of such costs exceeds the sum of comparable
costs paid during 1993. No deduction is allowed for the portion of the
wages equal to the amount of the credit.
Qualified wages means wages paid or incurred by an employer
for services performed by a qualified employee. A qualified
employee means any employee who is an enrolled member of an
Indian tribe or the spouse of an enrolled member of an Indian
tribe, who performs substantially all of the services within an
Indian reservation, and whose principal place of abode while
performing such services is on or near the reservation in which
the services are performed. An employee will not be treated as
a qualified employee for any taxable year of the employer if
the total amount of wages paid or incurred by the employer with
respect to such employee during the taxable year exceeds an
amount determined at an annual rate of $30,000 (adjusted for
inflation after 1993).
The wage credit is available for wages paid or incurred on
or after January 1, 1994, in taxable years that begin before
December 31, 2003.

reasons for change

The Committee recognizes the significant potential on
Indian lands for development of energy resources and other
projects. The special nature of Native American tribes and high
poverty rates in certain areas in some circumstances create
unique barriers to development that these incentives help
overcome. The Committee understands that a significant portion
of these incentives are used in development of energy projects.
The Committee concluded that extending the accelerated
depreciation and wage credit tax incentives within Indian
reservations will both increase the supply of energy and expand
business and employment opportunities in these areas.

explanation of provision

Accelerated depreciation

The provision extends the accelerated depreciation
incentive for two years (to property placed in service before
January 1, 2006).

Indian employment credit

The provision extends the Indian employment credit
incentive for two years (to taxable years beginning before
January 1, 2006).

effective date

The provision is effective on the date of enactment.

B. GAO Study

(Sec. 702 of the bill)

present law

Present law does not require study of the present law
provisions relating to clean fuel vehicles and electric
vehicles.

reasons for change

The Committee believes it is important to gain information
on the value of benefits compared to costs in order to make
informed decisions regarding the propriety of special tax
treatment of various products or technologies designed to
reduce dependence on petroleum, reduce emissions of pollutants,
or to promote energy conservation. The Committee believes it is
important to have measures of the amount of conservation or
reduction in pollution that results from provisions designed to
achieve such results.

explanation of provision

The bill directs the Comptroller General to undertake an
ongoing analysis of the effectiveness of the tax credits
allowed to alternative motor vehicles and the tax credits
allowed to various alternative fuels under Title II of the bill
and the tax credits and enhanced deductions allowed for energy
conservation and efficiency under Title III of the bill. The
studies should estimate the energy savings and reductions in
pollutants achieved from taxpayer utilization of these
provisions. The studies should estimate the dollar value of the
benefits of reduced energy consumption and reduced air
pollution in comparison to estimates of the revenue cost of
these provisions to the U.S. Treasury. The studies should
include an analysis of the distribution of the taxpayers who
utilize these provisions by income and other relevant
characteristics.
The bill directs the Comptroller General to submit annual
reports to Congress beginning not later than December 31, 2002.

effective date

The provision is effective on the date of enactment.

III. BUDGET EFFECTS OF THE BILL

A. Committee Estimates

In compliance with paragraph 11(a) of rule XXVI of the
Standing Rules of the Senate, the following statement is made
concerning the estimated budget effects of the revenue
provisions of the ``Energy Tax Incentives Act of 2002'' as
reported.

ESTIMATED REVENUE EFFECTS OF THE ``ENERGY TAX INCENTIVES ACT OF 2002,'' AS REPORTED BY THE COMMITTEE ON FINANCE
[Fiscal years 2002-2012, in millions of dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Provision Effective 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002-07 2002-12
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Renewable Energy--Extend and esfqfa DOE............... -30 -133 -243 -336 -364 -375 -379 -372 -370 -364 -306 -1,481 -3,272
Modify the Section 45 Credit for
Producing electricity From
Certain Sources.
=============================================================================================================================================================
Alternative Vehicles and Fuel
Incentives

1. GAO study...................... DOE...................... No Revenue Effect
2. Modified CLEAR Act:
a. Credits for purchase of 10/1/02.................. ........ -61 -205 -319 -350 -219 22 15 10 4 1 -1,156 -1,104
alternative motor vehicles
and modifications to credit
for electric vehicles.
b. Credit for retail sale of 10/1/02.................. ........ -52 -100 -169 -215 -90 -1 -1 -1 -1 (\1\) -627 -632
alternative fuels (30 cents/
gallon in 2002 and 2003, 40
cents in 2004, and 50 cents
in 2005 through 2006).
c. Extension of deduction for 10/1/02.................. ........ -50 -122 -133 -62 50 73 48 29 12 3 -316 -150
certain vehicles and
refueling property.
d. Credit for installation of 10/1/02.................. ........ -2 -2 -2 -2 (\1\) (\2\) (\2\) (\2\) (\2\) ........ -9 -8
alternative fueling stations.
3. Modifications to small producer tyba DOE................. ........ -16 -34 -34 -34 -34 -18 (\1\) (\1\) (\1\) ........ -152 -171
ethanol credit.
4. Transfer full amount of excise 10/1/03.................. No Revenue Effect
tax imposed on gasohol to the
Highway Trust Fund.
5. Modify income tax and fuels DOE...................... Negligible Revenue Effect
excise tax treatment of ETBE.
6. Biodiesel income tax credit and 1/1/03................... ........ -12 -22 -30 -10 ........ ........ ........ ........ ........ ........ -74 -74
excise tax rate reduction (sunset
12/31/05) \3\.
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Total of Alternative ......................... ........ -193 -485 -687 -673 -293 76 62 38 15 4 -2,334 -2,139
Vehicles and Fuel
Incentives.
=============================================================================================================================================================
Conservation and Energy Efficiency
Provisions

1. Business credit for DOE & ppisb 1/1/08....... -8 -16 -16 -11 -8 -7 -4 -1 (\1\) ........ ........ -66 -72
construction of new energy
efficient homes.
2. Credit for energy efficiency tyeo/a DOE............... ........ -89 -117 -128 -111 -38 -10 ........ ........ ........ ........ -483 -494
improvements to existing homes.
3. Tax credit for energy efficient ppb 1/1/07............... ........ -19 -31 -33 -65 -50 -28 -13 -2 ........ ........ -198 -241
appliances.
4. Tax credit for residential fuel tyea 12/31/02 & ppb...... ........ -4 -18 -22 -29 -32 -30 ........ ........ ........ ........ -105 -135
cell, solar, and wind energy 1/1/08...................
property.
5. Credit for energy efficient air tyea 12/31/02............ ........ -21 -97 -55 -47 -38 -33 -34 -35 -36 -36 -259 -433
conditioners, water heaters, heat
pumps, and geothermal heat pumps.
6. Business tax incentives for
qualifying fuel cells (through 12/
31/06):
a. Stationary................. ppisa 12/31/02........... ........ -3 -8 -14 -16 -10 -6 -3 -2 (\1\) ........ -51 -62
b. Portable................... ppisa 12/31/02........... Negligible Revenue Effect
7. Allowance of deduction for pcpt 1/1/08 & 10/1/02 & ........ -60 -61 -63 -64 -65 -65 -23 ........ ........ ........ -313 -401
certain energy efficient ccb 1/1/10.
commercial building property.
8. Allowance of deduction for new ppisa DOE................ -11 -17 -20 -23 -24 -22 -20 -18 -17 -16 -16 -117 -205
and retrofitted energy management
devices; three-year applicable
recovery period for depreciation
of qualified new energy
management devices.
9. Energy credit for combined heat episa 12/31/02 & episb... ........ -34 -65 -72 -76 -51 -26 -15 -7 -1 ........ -298 -347
and power system property. 1/1/07...................
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Total of Conservation and ......................... -19 -263 -433 -421 -440 -313 -222 -107 -63 -53 -52 -1,890 -2,390
Energy Efficiency
Provisions.
=============================================================================================================================================================
Clean Coal Incentives--Investment
and Production Credits for Clean
Coal Technology

1. Credit for production from a pa DOE................... ........ -2 -33 -61 -73 -84 -91 -94 -97 -99 -101 -253 -733
qualifying clean coal technology
unit.
2. Credit for investment in ppisa DOE................ ........ -1 -22 -54 -56 -47 -31 -77 -62 -26 -17 -180 -394
qualifying advanced clean coal
technology.
3. Credit for production of pa DOE................... ........ \1\ -5 -19 -42 -63 -80 -104 -136 -158 -171 -129 -780
electricity from qualifying
advanced clean coal technology
units.
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Total of Clean Coal ......................... ........ -3 -60 -134 -171 -194 -202 -275 -295 -283 -289 -562 -1,907
Incentives--Investment and
Production Credit for Clean
Coal Technology.
=============================================================================================================================================================
Oil and Gas Provisions

1. Tax credit for marginal DOE...................... No Revenue Effect
domestic oil and natural gas well
production.
2. Natural gas gathering pipelines ppisa DOE................ -1 -4 -5 -6 -7 -8 -9 -11 -11 -12 -13 -31 -87
treated as 7-year property.
3. Repeal of requirement that 1/1/02................... Negligible Revenue Effect
certain terminals offer both dyed
and undyed diesel fuel and
kerosene as a condition of
registration.
4. Expensing of capital costs epoia DOE................ ........ ........ ........ ........ -5 -10 -17 -27 -7 5 4 -14 -57
incurred and credit for
Production in complying with
Environmental Protection Agency
sulfur regulations for small
refiners.
5. Determination of small refiner tyba 12/31/02............ ........ -4 -7 -7 -7 -7 -7 -8 -8 -8 -8 -32 -71
exception to oil depletion
deduction--modify definition of
independent refiner from daily
maximum run less than 50,000
barrels to average daily run less
than 60,000 barrels.
6. Extension of suspension of 100% tyba 12/31/01............ -21 -35 -38 -40 -42 -15 ........ ........ ........ ........ ........ -191 -191
of taxable income limit with
respect to marginal production
(through 12/31/06).
7. Election to amortize geological cpoii tyba 12/31/02...... ........ 291 205 -73 -154 -146 -146 -155 -161 -165 -170 -122 -675
and geophysical expenditures over
2 years (no transition rule).
8. Election to amortize delay apoii tyba 12/31/02...... ........ 107 44 -82 -116 -116 -55 -86 -121 -123 -124 -162 -672
rental payments over 2 years (no
transition rule).
9. Study of coal bed methane...... DOE...................... No Revenue Effect
10. $3 credit for refined coal.... fsa DOE.................. ........ \1\ -1 -4 -8 -9 -8 -8 -5 -1 ........ -22 -44
11. Natural gas distribution lines ppisa DOE................ -8 -30 -59 -87 -111 -133 -152 -173 -199 -226 -254 -427 -1,431
treated as 15-year property.
12. Extend section 29 credit for DOE...................... -32 -177 -380 -445 -297 -77 ........ ........ ........ ........ ........ -1,409 -1,409
facilities placed in service
after the date of enactment
including viscous oil and coal
mine methane ($3 credit) \4\.
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Total of Oil and Gas ......................... -62 148 -241 -744 -747 -521 -394 -468 -512 -530 -565 -2,166 -4,637
Provisions.
=============================================================================================================================================================
Provisions Relating to Electric
Industry Restructuring

1. Ongoing study and reports DOE...................... No Revenue Effect
with regard to tax issues
resulting from future
restructuring decisions.
2. Modification to Special tyba 2002................ ........ -18 -46 -56 -75 -99 -131 -143 -152 -161 -171 -294 -1,052
Rules for Nuclear
Decommissioning Costs--
eliminate cost of service
requirement and clarify
treatment of fund transfers.
3. Treatment of certain income tyba DOE................. -6 -13 -16 -19 -21 -23 -25 -27 -29 -32 -35 -97 -245
of electric cooperatives.
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Total of Provisions Relating ......................... -6 -31 -62 -75 -96 -122 -156 -170 -181 -193 -206 -391 -1,297
to Electric Industry
Restructuring.
=============================================================================================================================================================
Extension of Tax incentives for DOE...................... ........ 8 -153 -468 -427 -100 97 200 225 157 62 -1,140 -399
Indian Reservations--Extension of
Accelerated Depreciation and Wage
Credit Benefits for Businesses on
Indian Reservation (through 12/31/
05).
-------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Total................... ......................... -117 -468 -1,677 -2,865 -2,918 -1,918 -1,180 -1,130 -1,158 -1,251 -1,352 -9,964 -16,041
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Loss of less than $500,000.
\2\ Gain of less than $500,000.
\3\ This provision may also have indirect effects on Federal outlays for certain farm programs. Outlay effects will be estimated by the Congressional Budget Office.
\4\ Effective for facilities placed in service from the date of enactment through December 31, 2004. Qualified facilities would be given 3 years of credit.

Legend for ``Effective'' column: apoii=amounts paid or incurred in; ccb=construction completed before; cpoii=costs paid or incurred in; DOE=date of enactment; epoia=expenses paid or incurred
after; episa=equipments placed in service after; episb=equipment placed in service before; esfqfa=electricity sold from qualifying facilities after; fsa=fuels sold after; pa=production
after; pccpt=plans certified prior to; ppb=property purchased before; ppisa=property placed in service after; ppisb=property placed in service before; tyba=taxable years beginning after;
tyea=taxable years ending after; and tyeo/a=taxable years ending on or after.

Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.

B. Budget Authority and Tax Expenditures

Budget authority

In compliance with section 308(a)(1) of the Budget Act, the
Committee states that the revenue provisions of the bill as
reported involve no new or increased budget authority.

Tax expenditures

In compliance with section 308(a)(2) of the Budget Act, the
Committee states that the revenue-reducing provisions of the
bill involve increased tax expenditures (see revenue table in
Part III. A., above).

C. Consultation With Congressional Budget Office

In accordance with section 403 of the Budget Act, the
Committee advises that the Congressional Budget Office
submitted the following statement on this bill:

U.S. Congress,
Congressional Budget Office,
Washington, DC, February 27, 2002.
Hon. Max Baucus,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for the Energy Tax
Incentives Act of 2002.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Erin
Whitaker.
Sincerely,
Dan L. Crippen,
Director.
Enclosure.

Energy Tax Incentives Act of 2002

Summary: The Energy Tax Incentives Act (ETIA) would amend
numerous provisions of tax law relating to energy. The bill
would enhance and create credits for the use and development of
energy-efficient technologies, amend tax rules to provide
deductions for certain devices and credits for businesses that
provide energy, and enhance and create credits and deductions
for the production of oil, gas, and other types of fuel.
Provisions of the bill would generally take affect in 2003, but
some provisions would take effect in 2002, and some provisions
would expire during the 2006-2012 period.
The Congressional Budget Office (CBO) and the Joint
Committee on Taxation (JCT) estimate that enacting the bill
would decrease governmental receipts by $117 million in 2002,
by about $10 billion over the 2002-2007 period, and by about
$16 billion over the 2002-2012 period. CBO estimates that
certain provisions requiring studies and reports would have an
insignificant impact on spending subject to appropriation.
Since ETIA would affect receipts, pay-as-you-go procedures
would apply.
JCT and CBO have determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act (UMRA) and would not affect the
budgets of state, local, or tribal governments.
Estimated Cost to the Federal Government: The estimated
budgetary impact on the bill is shown in the following table.
All revenue estimates were provided by JCT.

----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------
2002 2003 2004 2005 2006 2007
----------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES

Estimated Revenues............................ -117 -467 -1,677 -2,865 -2,918 -1,918
----------------------------------------------------------------------------------------------------------------

Basis of estimate

Revenues
All estimates of the revenue provisions were provided by
JCT. Four provisions would compose a significant portion of the
effect on revenues if enacted. Those provisions would extend
the credit for producing energy from certain sources, extend
the credit for purchase of alternative motor vehicles, and
modify the credit for purchase of electric vehicles. They also
would establish a statutory 15-year recovery period for natural
gas distribution lines, expand the credit for certain
qualifying fuels produced from coal to fuels produced in
facilities placed in service after the date of enactment, and
modify the rules governing certain requirements for
contributions to, and transfers of, qualified nuclear
decommissioning funds. These provisions would, if enacted,
reduce revenues by $40 million in 2002, $3.2 billion over the
2002-2007 period, and $4.9 billion over the 2002-2012 period.
Spending subject to appropriation
The bill would require the General Accounting Office and
the Department of the Treasury to provide annual reports on
energy tax incentives. Based on information from these
agencies, CBO expects that preparing the reports would cost
less than $500,000 per year, assuming appropriation of the
necessary amounts.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. For the
purposes of enforcing pay-as-you-go procedures, only the
effects through 2006 are counted.

--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes in outlays............. Not applicable
Changes in receipts............ -117 -467 -1,677 -2,865 -2,918 -1,918 -1,180 -1,130 -1,158 -1,251 -1,352
--------------------------------------------------------------------------------------------------------------------------------------------------------

Intergovernmental and private-sector impact: The bill
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Revenues: Erin Whitaker; Federal
Costs: Matthew Pickford; Impact on State, Local, and Tribal
Governments: Susan Sieg Tompkins; and Impact on the Private
Sector: Paige Piper/Bach.
Estimate approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis and Robert A. Sunshine, Assistant
Director for Budget Analysis.

IV. VOTES OF THE COMMITTEE

In compliance with paragraph 7(b) of rule XXVI of the
Standing Rules of the Senate, the following statements are made
concerning the roll call votes in the Committee's consideration
of the ``Energy Tax Incentives Act of 2002.''

Motion to report the bill

The bill (S.______, the ``Energy Tax Incentives Act of
2002'') was ordered favorably reported, by a unanimous voice
vote on February 13, 2002.

Votes on other amendments

An amendment by Senator Thomas to provide a tax credit for
producing fuel from a nonconventional source was agreed to by
voice vote.
An amendment by Senator Lincoln to provide tax benefits for
biodiesel fuel mixtures was agreed to by a record vote of 16
ayes and 5 nays. The ayes and nays were:
Ayes.--Senators Baucus, Rockefeller, Daschle (proxy),
Breaux, Conrad (proxy), Graham, Jeffords, Bingaman, Kerry,
Torricelli (proxy), Lincoln, Grassley, Hatch, Murkowski,
Thompson, and Snowe.
Nays.--Senators Nickles, Gramm, Lott, Kyl (proxy), and
Thomas.
An amendment by Senator Baucus (for Senator Kyl), and
modified by Senators Hatch and Nickles to study the efficacy of
the new credits for vehicles and fuels and the new tax credits
and enhanced deductions for energy conservation, was agreed to
by voice vote.

V. REGULATORY IMPACT AND OTHER MATTERS

A. Regulatory Impact

Pursuant to paragraph 11(b) of rule XXVI of the Standing
Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact that might be
incurred in carrying out the provisions of the bill as amended.

Impact on individuals and businesses

With respect to individuals and businesses, the bill
modifies the rules relating to (1) tax benefits for alternative
fuels; (2) coal production; (3) oil and gas production; (4)
energy conservation; and (5) electric industry participants
involved in industry restructuring activities. Taxpayers may
elect whether to avail themselves of the provisions of the
bill. Thus, the provisions do not impose increased regulatory
burdens on individuals or businesses. Certain provisions of the
bill, such as the provision relating to transfers of
decommissioning funds associated with nuclear generating
facilities, simplify the present-law rules and, therefore,
reduce burdens on taxpayers electing to utilize the provision.
Thus, the bill does not impose increased regulatory burdens on
individuals and businesses.

Impact on personal privacy and paperwork

The provisions of the bill do not impact personal privacy.
Individuals may elect whether to avail themselves of the
provisions of the bill. Thus, the bill does not impose
increased paperwork burdens on individuals. Individuals who
elect to take advantage of the bill may in some cases need to
keep records in order to demonstrate that they qualify for the
tax treatment provided by the bill. In some cases the bill
simplifies present law, thus reducing recordkeeping
requirements.

B. Unfunded Mandates Statement

This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
The Committee has determined that the revenue provisions of
the bill do not contain Federal mandates on the private sector.
The Committee has determined that the revenue provisions of the
bill do not impose a Federal intergovernmental mandate on
State, local, or tribal governments.

C. Tax Complexity Analysis

Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the Senate Committee on
Finance, the House Committee on Ways and Means, or any
committee of conference if the legislation includes a provision
that directly or indirectly amends the Internal Revenue Code
(the ``Code'') and has widespread applicability to individuals
or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.

VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In the opinion of the Committee, it is necessary in order
to expedite the business of the Senate, to dispense with the
requirements of paragraph 12 of rule XXVI of the Standing Rules
of the Senate (relating to the showing of changes in existing
law made by the bill as reported by the Committee).