Lawmakers Call for GAO Study of Federal Energy Spending

Several Republican lawmakers on Wednesday called on the U.S. General Accountability Office (GAO) to examine the impact of federal spending and subsidies for energy-related technologies, projects and companies.

The amount and types of energy-targeted federal subsidies have grown substantially thanks to federal policies over the past two decades, from the Energy Policy Act of 1992 to the American Recovery and Reinvestment Act of 2009.

However, little analysis has been completed with respect to the impacts such as federal interventions and subsidies have on energy markets, said Fred Upton, chairman of the Committee of Energy and Commerce, along with committee members Ed Whitfield, Tim Murphy and Mike Pompeo, in an Oct. 10 letter to Gene L. Dodaro, comptroller general of the U.S. Government Accountability Office.

"Despite the expansion and extension of federal support for energy technologies, there is not a thorough understanding of how such federal interventions and subsidies are impacting – either positively or negatively – the energy sector and corresponding energy markets," said lawmakers in the letter.

Upton and the other lawmakers have requested GAO study the federal subsidies in energy markets provided from fiscal year 2003 through fiscal year 2012.

The study "will allow policymakers to make informed, fiscally responsible decisions in support of a national energy policy that best utilizes federal expenditures while eliminating wasteful and duplicative spending," the lawmakers said.

The study should include energy-related research and development; facilities that manufacture energy-related components; transportation fuels and infrastructure; and electricity production, transmission and consumption.

Lawmakers also request that the study results include the impact of subsidies on costs to the U.S. Treasury, U.S. energy security, impact on electricity and transportation fuel prices, and federal subsidies in energy markets provided to foreign persons or corporations under the American Recovery and Reinvestment Act.

The U.S. Energy Information Administration estimates the value of direct financial interventions and subsidies in energy markets to have doubled between 2007 and 2010, rising from $17.9 billion to $37.2 billion. Energy-specific tax expenditures alone are five times higher than they were in 1999, increasing from $3.2 billion in 1999 to over $16.2 billion in 2010.

President Obama in last week's presidential debate called for the end of tax incentives for the energy sector in the debate.

Republican presidential candidate and former Massachusetts Gov. Mitt Romney noted during the Oct. 4 debate that the $2.8 billion a year tax breaks for oil companies is actually an accounting treatment that has been in place for a century and goes mainly to small companies.

However, Romney indicated that the $2.8 billion in tax subsidies would be on the table if the tax rate is brought down from 35 percent to 25 percent.

The American Petroleum Institute (API) is still trying to get some clarity on the request for GAO to conduct an analysis, said Stephen Comstock, manager of tax and accounting policies for API, in an interview with Rigzone.

One question is how a subsidy would be defined in the analysis and what they want to examine in the analysis, Comstock said.

In terms of industry specific tax codes, the marginal well and enhanced oil recovery credits in the code phase out when the indexed crude and gas prices rise above a certain level. The Internal Revenue Service determines this amount and the credits have been phased out for some time and expected to be phased out going forward.

The industry does not get tax credits, but deductions on business expenses instead.

"We [the energy industry] are very capital intensive and need to be able to recover costs in an efficient and effective manner," said Comstock.

Eliminating the ability of energy companies to recover costs over the life of a reservoir will determine which plays are economic, posing a concern for projects on the margin, Comstock said. It could also slow down investment on higher cost plays such as the Arctic or other Arctic.

API has not examined what the energy industry would accept if the corporate tax is lowered and tax policies are changed, said Comstock. But the group is focusing on educating policymakers on how the energy industry operates and the important of capital recovery to the industry.

A 2010 Wood Mackenzie study commissioned by API of proposed tax changes found that the intangible drilling costs (IDC) and the domestic production activities deduction had the greatest impact on the industry.

"API is certainly concerned about the impact on operations from a targeted repeal of the IDC provision and the manufacturing deduction," said Comstock.

The proposals examined in the 2010 study are similar to the proposals found in President Obama's budget and the proposals in the Menendez bill earlier this spring, which Senate Republicans rejected.


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