[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE WIND ENERGY PRODUCTION TAX CREDIT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY,
HEALTH CARE AND ENTITLEMENTS
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
OCTOBER 2, 2013
__________
Serial No. 113-62
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland,
MICHAEL R. TURNER, Ohio Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT,
TREY GOWDY, South Carolina Pennsylvania
BLAKE FARENTHOLD, Texas MARK POCAN, Wisconsin
DOC HASTINGS, Washington TAMMY DUCKWORTH, Illinois
CYNTHIA M. LUMMIS, Wyoming ROBIN L. KELLY, Illinois
ROB WOODALL, Georgia DANNY K. DAVIS, Illinois
THOMAS MASSIE, Kentucky PETER WELCH, Vermont
DOUG COLLINS, Georgia TONY CARDENAS, California
MARK MEADOWS, North Carolina STEVEN A. HORSFORD, Nevada
KERRY L. BENTIVOLIO, Michigan MICHELLE LUJAN GRISHAM, New Mexico
RON DeSANTIS, Florida
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Stephen Castor, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
Subcommittee on Energy Policy, Health Care and Entitlements
JAMES LANKFORD, Oklahoma, Chairman
PATRICK T. McHENRY, North Carolina JACKIE SPEIER, California, Ranking
PAUL GOSAR, Arizona Minority Member
JIM JORDAN, Ohio ELEANOR HOLMES NORTON, District of
JASON CHAFFETZ, Utah Columbia
TIM WALBERG, Michigan JIM COOPER, Tennessee
PATRICK MEEHAN, Pennsylvania MATTHEW CARTWRIGHT, Pennsylvania
SCOTT DesJARLAIS, Tennessee TAMMY DUCKWORTH, Illinois
BLAKE FARENTHOLD, Texas DANNY K. DAVIS, Illinois
DOC HASTINGS, Washington TONY CARDENAS, California
ROB WOODALL, Georgia STEVEN A. HORSFORD, Nevada
THOMAS MASSIE, Kentucky MICHELLE LUJAN GRISHAM, New Mexico
C O N T E N T S
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Page
Hearing held on October 2, 2013.................................. 1
WITNESSES
Mr. Curtis G. Wilson, Associate Chief Counsel, Passthroughs and
Special Industries, Internal Revenue service
Oral Statement............................................... 5
Written Statement............................................ 8
Mr. Rob Gramlich, Senior Vice-President for Public Policy,
American Wind Energy Association
Oral Statement............................................... 15
Written Statement............................................ 17
Mr. Dan W. Reicher, Executive Director, Steyer-Taylor Center for
Energy Policy & Finance, Stanford University
Oral Statement............................................... 20
Written Statement............................................ 22
Mr. Robert J. Michaels, Ph.D., Senior Fellow, Institute for
Energy Research, Professor of Economics, California State
University, Fullerton
Oral Statement............................................... 30
Written Statement............................................ 32
APPENDIX
The Hon. Jackie Speier, a Member of Congress from the State of
California, Opening Statement.................................. 78
A Letter from Thomas A. Barthold to the Hon. James Lankford...... 82
OVERSIGHT OF THE WIND ENERGY PRODUCTION TAX CREDIT
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Wednesday, October 2, 2013
House of Representatives,
Subcommittee on Energy Policy, Health Care and
Entitlements,
Committee on Oversight and Government Reform,
Washington, D.C.
The subcommittee met, pursuant to call, at 9:30 a.m., in
Room 2154, Rayburn House Office Building, Hon. James Lankford
[chairman of the subcommittee] presiding.
Present: Representatives Lankford, Farenthold, Jordan,
Walberg, Speier, Lujan Grisham, Horsford, and Duckworth.
Staff Present: Molly Boyl, Senior Counsel and
Parliamentarian; Joseph A. Brazauskas, Counsel; Caitlin
Carroll, Deputy Press Secretary; John Cuaderes, Deputy Staff
Director; Brian Daner, Counsel; Adam P. Fromm, Director of
Member Services and Committee Operations; Linda Good, Chief
Clerk; Tyler Grimm, Professional Staff Member; Ryan M.
Hambleton, Professional Staff Member; Frederick Hill, Director
of Communications and Senior Policy Advisor; Christopher Hixon,
Deputy Chief Counsel, Oversight; Mark D. Marin, Director of
Oversight; Laura Rush, Deputy Chief Clerk; Sarah Vance,
Assistant Clerk; Jeff Wease, Chief Information Officer; Jaron
Bourke, Minority Director of Administration; Beverly Britton
Fraser, Minority Counsel; Jennifer Hoffman, Minority Press
Secretary; Elisa LaNier, Minority Deputy Clerk; and Daniel
Roberts, Minority Staff Assistant/Legislative Correspondent.
Mr. Lankford. The meeting will come to order. I want to
begin this hearing by stating the Oversight and Government
reform mission statements. We exist to secure two fundamental
principles: First, Americans have the right to know that the
money Washington takes from them is well spent. Second,
Americans deserve an efficient, effective government that works
for them. Our duty on the Oversight and Government Reform
committee is to protect these rights. Our solemn responsibility
is to hold government accountable to taxpayers because
taxpayers do have the right to know what they get from their
government.
We work tirelessly in partnership with citizen watchdogs to
deliver the facts to the American People and bring genuine
reform to the Federal bureaucracy. This is the mission of the
Oversight and Government Reform committee.
Today's hearing is really about the oversight of the wind
energy production tax credit. There is some changes that
happened in the past year to the way that tax credit is
written. So today we're going to talk not only about some of
the changes in section 45 of the Internal Revenue Code, but
also the issue of long term, where is this really going, how we
are trying to unfold the PTC. The PTC was first enacted 1992,
it was not supposed to be permanent, it was a subsidy to help a
Nation industry to help get on its feet.
However since then, it has been renewed by Congress eight
times, most recently, as I just mentioned as part of the fiscal
cliff deal signed January the 2nd of this year. The deal
provided for 1-year extension of tax credit, lasting until
January of 2014 coming up. We are rapidly approaching that date
and this hearing is designed to examine this credit.
First and foremost, it is critical that we ensure our laws
have clear standards that agencies can enforce. I am glad to
see a representative of the Internal Revenue Service is here
today, thank you, Mr. Wilson, for being here, and will be able
to help with this conversation to provide some clarity.
The most recent extension include a significant change for
how producers qualify for the credit. Previously a wind
facility had to be placed in service, meaning producing
electricity before the deadline. Now one facility only has to
begin construction by the deadline to qualify.
One of the goals of this hearing is to make sure this
change to the PTC is working properly for the taxpayers and for
the Treasury. We need to make sure that the IRS is able to
evenly apply the law in a manner that reflects Congressional
intent. The IRS's guidance document defining beginning of
construction appears to be lenient and vague at some points and
we need to provide some clarity.
Furthermore, there are serious deficiencies in the
mechanisms to ensure a taxpayer has complied with the tax
credits requirements. There is a real risk the IRS is not
properly positioned to ensure that credit is not being
improperly claimed at some future date. According to a recent
estimate from the Joint Committee on Taxation that I requested,
another 1-year extension of the PTC will cost $6.2 billion for
just wind alone, and that's over the next 10 years. A 5-year
extension for wind would reduce Federal budget receipts by 18.5
billion over the next 10 years.
As long ago as the 1980s proponents of wind energy have
been saying that tax credits only needed temporarily. So we are
trying to look for what is that temporary date and how does
this keep working. We keep hearing that we're almost there or
just a little bit longer, but the facts state that wind power
has been steadily increasing over the last ten years. And there
is this point of saying when does wind power take off on its
own?
In 2003 wind accounted for about .12 quadrillion Btu in
power consumed. According to the energy information
administration, the projected total for 2013 will be 1.61
quadrillion Btus rising to almost 1.7 quadrillion for 2014.
From 2003 to 2012, wind power consumption increased over a
thousand percent. Additionally wind power has a share of our
domestic electricity generation has risen progressively. As of
2012, wind power is at 3.46 percent of our US electricity
generation. This is up from .29 percent in 2003, representing
almost 12-fold increase in wind share of electricity generation
in a 10-year period. Additionally wind has increased its share
of total renewables from about 14 percent in 2003 to over 64
percent last year.
In all these metrics, wind energy use on a steady and
uninterrupted rise. Today 30 States and the District of
Columbia mandate a certain percentage of total energy
production come from renewable sources, another 7 States,
including my home State of Oklahoma have voluntary goals. To
date, wind generation accounts for 90 percent of all new
renewable resources developed under the State RPS programs.
It is my hope today that we can provide additionally
clarity to wind producers, seeking to legally claim a credit
that is in the law. And we have a healthy dialogue among
economists in industry regarding whether the tax credit--
continuing to use this tax credit is a good steward over
taxpayer dollars. As we're preparing the Nation for a
diversified energy profile, it is important that we look at all
energy sources, how we handle that for the coming days. With
that I recognize the gentlelady from California, Ms. Speier,
for an opening statement.
Ms. Speier. Mr. Chairman, thank you. Now I appreciate that
several of our witnesses have traveled long distances to be
here today, so moving forward with this hearing can be
rationalized. But our government is in a shutdown, 800,000
Federal employees are furloughed, and Congress has abdicated
its fundamental constitutional responsibility to fund the
government. So moving forward, I think it would be appropriate
for this committee and other committees to shut down during
this shutdown so that we feel the complete and utter efforts
being made to not function in an adequate fashion.
Having said that, we are here today for a hearing on the
production tax credit which has helped the wind industry grow
to a major source of renewable energy here in the United States
as the chairman has mentioned. In fact, wind energy has grown
from about 1 percent of the U.S. total energy production before
the PTC to now 4 percent. Today the wind energy industry
employs more than 80,000 American workers, including workers at
manufacturing facilities up and down the supply chain, as well
as engineers and construction workers who build and operate
wind farms. And these are good paying jobs.
Wind turbines are now made domestically by approximately
550 new manufacturing facilities in all regions of the country.
These facilities produce more than 70 percent of the content of
an average wind turbine installed in the U.S. compared to just
25 percent in 2005. In fact, as a direct result of the PTC, the
wind industry was the number one source of new generation
capacity in the United States last year, and we are making
these turbines in America.
Wind energy also means lower prices for consumers,
Department of Energy data shows that from 2005 to 2010,
electricity rates increased by twice as much in the 40 States
with at least wind power compared to rates in 10 States with
the most wind generation. I can tell you that clean wind energy
and the PTC are important to California, and I know that
Oklahoma is one of the biggest producers of wind energy as
well.
Only weeks ago, the IRS issued new guidance interpreting
the latest extension of the PTC. That was passed on January 2nd
of this year. Not a single energy company has yet claimed the
tax credit under this 1-year extension, and it will
realistically be at least 18 months before the IRS will be
called upon to apply its guidance. This can be a risky
proposition for companies that are investing hundreds of
millions of dollars in new wind energy projects. After all, if
they don't build and get it operating, they don't get the
credit. There are no loans or guarantees or upfront benefits.
That's why clarity is an essential. We can help make sure we
don't face problems down the road when those investing now seek
to claim the credit.
Mr. Chairman, call me paranoid, but I also have to note
that on the same day this hearing was announced, Americans for
Prosperity, FreedomWorks and more than 20 other conservative
groups launched a campaign to end the PTC. The majority's
witness is also known as an opponent of the PTC and wind energy
altogether. I hope that we are really conducting oversight of
the implementation of the law and not using this hearing simply
to launch another attack on a clean energy program that has
worked well for many years.
There is little doubt that the elimination of the PTC or
the risk of its determination lapse will damage the industry
and put a break on its renewable growth. The wind energy has
gone through a boom and bust cycle whatever Congress has
allowed the benefit to expire or get close to expiration. Last
year, even though the PTC lapsed for just 1 day, hundreds of
workers who manufactured wind turbines were laid off and
construction and manufacturing projects were cancelled in
anticipation of the lapse. Workers in Grand Forks, North Dakota
and Little Rock, Arkansas lost their jobs at turbine
manufacturers when the PTC's future was in question.
Some object to the wind energy industry receiving any
Federal support. But let's get real, the fossil fuel industry
has received tax subsidies since the early 1900s. And other
government incentives that far exceed everything we are doing
for renewable energy. Big oil still gets Federal subsidies even
though justified biggest oil companies, BP, Chevron,
ConocoPhillips, ExxonMobil and Shell made a combined $118
billion in profits in 2012. Of course, those profits were down
from their record high of $137 billion in 2011.
I want to bring your attention to this chart which
illustrates the huge differences in subsidies for fossil fuels
as opposed to wind energy over time. Oil and gas have received
over $4.8 billion each year in government subsidies over 90
years. Wind energy, by contrast, has received a small fraction
of that, an average of about $370 million per year for the last
19.
So if anyone has fiscal concerns about Federal support for
energy producers, I think this chart shows clearly that there
is much more reason to be concerned about support for fossil
fuel industry than renewable energy sources. If we want to get
rid of the PTC, well, let's get rid of all the subsidies for
all of the various forms of energy. We need to give as much
support to clean renewable energy sources as we have provided
and continue to provide for fossil fuel industry.
The committee and the Federal Government shouldn't be in
the business of picking winners and losers in the energy
marketplace. We certainly shouldn't be using our hearing to
promote the interests of fossil fuels by creating problems for
renewable energy, especially when the PTC and other renewable
programs help ensure that our Nation maintain a diverse energy
portfolio.
Mr. Chairman, I thank the members for participating in this
hearing. I thank, in particular, the witnesses who are here and
hopefully we will have a thoughtful examination of ways to
encourage greater use of renewable energy sources as we tackle
the growing problems of climate change and energy independence.
I yield back.
Mr. Lankford. Thank you. And just to remove any paranoia--
--
Ms. Speier. Yes, I need that.
Mr. Lankford. --this is actually the first that I've heard
that they released that that day, so there was no connection on
that. So I will be interested in being able to see that, that
way you can be totally free of any paranoia.
Ms. Speier. Good to know.
Mr. Lankford. That's great. Members will have seven days to
submit opening statements for the record. We now recognize our
first and only panel today and look forward to the
conversation. Mr. Curtis Wilson, associate chief counsel for
Passthroughs and Special Industries in the Internal Revenue
Service. Thanks for being here. As well, Mr. Robert Gramlich is
the senior vice president for Public Policy, the American Wind
Energy Association. Thanks. Mr. Dan Reicher is the executive
director for the Steyer-Taylor Center for Energy Policy &
Finance at Stanford University. Thanks for the flight. And Mr.
Robert Michaels is a senior fellow at the Institute for Energy
Research and Professor of Economics, California State
University in Fullerton. Hopefully you all rode on the same
plane together coming from California. So I appreciate your
coming on this.
Pursuant to committee rules all witnesses are sworn in
before they testify. Gentlemen if you please stand add raise
your right-hand.
Do you solemnly swear or affirm the testimony you are about
to give will be the truth, the whole truth and nothing but the
truth, so help you God?
Thank you. You may be seated. Let the record reflect the
witnesses have answered in the affirmative.
In order to allow time for a discussion I would ask you to
limit your testimony to 5 minutes, there is a countdown clock
in front of you that will help with that. If you go a little
bit over we will have mercy, if you go a little bit under it's
bonus points. And then we'll have a conversation and dialog
from there. So recognizing the panel, Mr. Wilson, we'd ask you
to be able to go first on this and look forward to receiving
your testimony.
WITNESS STATEMENTS
STATEMENT OF CURTIS G. WILSON
Mr. Wilson. Thank you, Chairman Lankford Ranking Member
Speier and members of the subcommittee. My name Curt Wilson,
and I appreciate the opportunity to appear before you today to
discuss renewable energy credits under the Internal Revenue
Code. Before I begin, I will provide to you a little background
about my office and its role in connection with renewable
energy credits. As you said, I'm the associate chief counsel of
the Passthroughs and Special Industries division of the IRS
Office of Chief Counsel. My division has between 70 and 80
lawyers, plus six support staff. Our responsibilities include
providing advice to the Commissioner of the Internal Revenue
Service and his staff, providing litigation support to our
colleagues in our field offices and at the Department of
Justice tax division, working with taxpayers on private letter
ruling requests and drafting guidance to taxpayers in the
Internal Revenue Service that is published in the Federal
Register and the Internal Revenue bulletin.
When drafting published guidance, we work very closely with
the Office of Tax Policy at the Department of Treasury. My
office has subject matter responsibility for a wide range of
issues. One of those issues is the credit for production of
electricity from renewable energy sources under section 45 of
the Code. That section generally permits taxpayers to earn a
credit each year based on the amount of energy that they
produce over a 10-year period from qualified resources at a
qualified facility.
Alternatively, taxpayers may elect an investment tax credit
based on a percentage of their eligible basis and qualifying
property in lieu of claiming the production tax credit.
Qualified resources include wind, geothermal, closed loop
biomass, open loop biomass, municipal solid waste and a few
others. In addition to the production tax credit and investment
tax credit section 1603 of the American Recovery and
Reinvestment Act of 2009 allowed taxpayers a third option of
requesting a cash payment in lieu of either the production
credit or the investment tax credit.
To qualify for that cash payment in lieu of the credits, a
taxpayer had to place a qualifying facility in service in 2009,
'10 or '11, or alternatively, the taxpayer could place a
facility into service after 2011, but only if the taxpayer
began construction during 2009 through 2011 and then placed the
facility in service before a termination date, and that
termination date varied depending on the type facility.
In contrast to the section 1603 program, to claim the
production tax credit or the investment tax credit, taxpayers
initially had to place a facility in service by the end of 2012
in the case of wind facilities, and by the end of 2013 for
other eligible technologies.
The American Taxpayer Relief Act of 2012 extended
eligibility for the credit for wind to the end of 2013, and
also changed the qualification requirement for wind as well as
other eligible technologies from a requirement that the
taxpayer placed on facility and service to a requirement that
the taxpayer begin construction.
The statutory language of the ATRA amendment didn't define
beginning of construction standard. The 1603 program, which
addressed similar energy related facilities, had used a similar
phrase however. So when we began to consider publishing
guidance for taxpayers, we look to how that standard was
administered in the section 1603 program. Guidance regarding
the section 1603 program had been previously issued in
question-and-answer format. It generally provided that physical
work of a significant nature constituted beginning of
construction.
The determination of whether that task was met in any case
was based on all the relevant facts and circumstances, and the
Q and As provided examples. In addition, the section 1603
program provided a safe harbor that basically said you would be
treated as if you had begun construction if you had spent at
least 5 percent of the ultimate cost of the property.
The section 1603 guidance, in turn, used the description of
beginning of construction that was very similar to regulatory
language pertaining to bonus depreciation under section 16
168(k). So when we issued our first published guidance in
notice 2013-29, we turned to that prior precedent in the 1603
program. For the most part, we followed that prior precedent
providing both the physical work of a significant nature, and a
5 percent safe harbor, but we also noted that there would be
strict scrutiny like there was in 1603 program if taxpayers
didn't begin construction and then maintain a continuous
construction program.
It's important to note that whether the taxpayers apply
under the safe harbor of the 5 percent, or a second safe harbor
that we provided in 2013-60 following questions from the
industry about beginning of construction that taxpayers can
still meet that standard if they do perform physical work of a
significant nature.
I hope I've provided sufficient background on this credit
and I am happy to take questions.
Mr. Lankford. Thank you.
[Prepared statement of Mr. Wilson follows:]
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Mr. Lankford. Mr. Gramlich.
STATEMENT OF ROB GRAMLICH
Mr. Gramlich. Thank you. Good morning, Chairman Lankford,
Ranking Member Speier, subcommittee members. I appreciate the
opportunity to speak to you this morning about the success of
the PTC and its value to American taxpayers. I also appreciate
the interest in clear standards and making sure the policy
works effectively. The short answer is we now believe we have
clear standards and we believe it will work very effectively.
The PTC is a production-based tax credit provided to a
variety of different renewable electricity sources, including
small hydro, geothermal and biomass to name a few, and it's
also available for new nuclear energy facilities. Congress
designed the PTC as a performance-based incentive such as the
credit can be taken only if and when actual electricity is
produced. It does not provide to finance development or
construction. It is also broad-based and competitive such that
every company that develops an eligible project can claim the
credit on their tax return. There is not an application process
and government employees do not pick or choose winners or
losers.
On January 1st, 2013, as part the American Tax Payer Relief
Act of 2012, just as the PTC expired, Congress extended and
modified the structure of how projects qualify for the PTC.
This was done in recognition of the uncertainty created by the
exploration and the recognition of project development delays
such as permitting delays or weather-related construction
delays that can occur and create uncertainty as to when a
project will be placed in service.
Under the modification projects that commence construction
before January 1st, 2014 qualify for the credit. However
consistent with prior law, a wind operator cannot actually
claim the PTC until it produces and sells electricity. The IRS,
as you have just heard, has issued much needed and much more
clear guidance on the statutory change in a manner consistent
with congressional intent and start construction precedence.
Under the guidance construction commences when physical work of
a significant nature starts. This start of construction
framework has ample precedent and several other sections of the
Tax Code, including sections for bonus depreciation for self-
constructed property, expensing for qualified property use and
refining liquid fuels and with respect to the recovery period
for natural gas distribution lines.
Over the years, the PTC has been a tremendous success. With
the credit in place, the U.S. wind industry was the number one
source of new generation capacity last year, wind turbines are
now generally made domestically by approximately 550
manufacturing facilities in all regions of the country. Wind
projects in the U.S. have brought economic growth to rural
communities, roughly $400 million in annual property taxes or
similar payments to communities, and lease payments to farmers
and ranchers of around $120,000 per turbine over its life time.
This tax credit estimated by the Joint Committee on
Taxation to cost less than $2 billion per year drives over $20
billion in private investment annually and brings electricity
to the equivalent of 15 million American homes. Without the
PTC, these economic benefits and this private investment in the
United States would not have occurred. Wind energy is also
saving money for consumers across the country.
One recent report from May of this year found that doubling
the use of wind energy in the Mid Atlantic and Great Lake
States would save consumers close to $7 billion per year. Even
in the southeast utilities have entered into power purchase
agreements with wind energy owners, because wind energy proved
to be the least expensive option for their customers.
Furthermore wind energy offers the stability of long-term fixed
energy price which is offered by very few other energy sources.
This protects consumers from fluctuations in fuel prices much
like a fixed rate mortgage protects home owners from interest
rate spikes. The cost of wind energy has dropped by 43 percent
in the last 4 years, a great indication of a policy that's
working. But the PTC is still needed to prevent us from relying
too heavily on any single fuel source.
For decades, Federal policies, especially within the Tax
Code, has fostered a diverse mix of fuels in the interest of
our economic and national security. So while the PTC may be a
more recent addition to the Tax Code, it is one of many
incentives that have been available over the years for many, in
fact, all electricity sources.
In conclusion, the PTC is a wise investment. Allowing it to
expire as is scheduled to occur at the end of this year will
move us away from further diversification of our energy
portfolio, take away opportunities for consumers to save money,
dampen domestic manufacturing and innovation, and cause
companies to hold off on investing in communities across
America. Again, thank you for the opportunity to be here today,
I look forward to answering your questions.
Mr. Lankford. Thank you.
[Prepared statement of Mr. Gramlich follows:]
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Mr. Lankford. Mr. Reicher.
STATEMENT OF DAN W. REICHER
Mr. Reicher. Chairman Lankford, Ranking Member Speier,
members of the subcommittee, my name is Dan Reicher, and I'm
pleased to share my perspective on the wind energy production
tax credit. The PTC has been a highly effective policy tool in
the financing of tens of thousands of megawatts of U.S. Wind
projects. I support the extension of the PTC for a multiyear
period, with a gradual phase-down as Congress simultaneously
transitions the industry to the same financing mechanisms that
have provided low cost capital to hundreds of billions of
dollars worth of oil, gas, coal and transmission infrastructure
for decades. I refer to Master Limited Partnerships, MLPs, and
Real Estate Investment Trusts, or REITs.
MLPs and REITs combine the fundraising advantages of a
classic corporation, that is the sale of publicly traded stock
with the tax benefits of a partnership. That is, a single layer
of taxation. These two financing mechanisms were authorized by
Congress decades ago and importantly, do not require periodic
reauthorization unlike renewable energy tax credits. Since
Apache Petroleum launched the first MLP in 1981, MLPs have
reached a total market capitalization over $440 billion.
REITs have a total market cap of over 670 billion, with IRS
rulings opening up REIT investment and electricity
transmission, gas pipelines and other traditional energy-
related projects. The use of MLPs and REITs would give
renewable energy projects access to far greater pools of
capital than in the tax equity markets, and as a result, lower
the cost of project capital significantly and with it,
renewable electricity prices. And with publicly traded shares,
MLP and REITs would allow millions of Americans to invest in
our Nation's renewable energy future just like they can today
in fossil energy and transmission infrastructure.
A bipartisan bill, the MLP Parity Act, would extend MLPs to
renewable energy, energy efficiency, carbon capture and
storage, cogeneration and other technologies. The bill is
cosponsored by Representatives Poe, Republican of Texas, Gibson
Republican of New York, Gardner, Republican of Colorado, Welch,
Democrat of Vermont, and Mike Thompson, Democrat of California.
Senators Coons, Moran, Murkowski and Stabenow back a bipartisan
and identical companion bill in the Senate.
On the REIT front the IRS, on its own, could issue a broad
revenue ruling that would extend REITs to renewable energy. The
IRS has already issued private letter rulings extending REIT
status to, among other things, electricity transmission lines,
gas pipelines, cell towers and billboards. In December 2012, 35
Members of Congress Republicans and Democrats, wrote President
Obama urging him to support the extension of REITs and MLPs to
renewable energy. I understand that the administration is
considering these approaches. A smart transition to the
financing of U.S. wind projects would involve a 3-pronged
approach: Number 1, a multiyear extension of the PTC with a
gradual phase down; number 2, the near-term congressional
adoption of the MLP Parity Act; number 3, an IRS revenue ruling
that expands REITs to include renewables. This smart transition
would allow the wind industry for the next several years to
continue to build projects using a well established financing
approach that PTC, while the industry also works with the
existing MLP and REIT finance community to transition to these
long-standing lower cost financing mechanisms. In this way,
wind companies could land in a place that much of the rest of
the energy industry has long enjoyed, low cost, government
authorized financing mechanisms, not requiring periodic
Congressional extensions. This would be a big step forward for
an industry that is generating more and more good paying U.S.
jobs as it also generates more and more low carbon electricity.
I want to emphasize that my support for MLPs and REITs
should, in no way, signal that I endorse an immediate phaseout
of the PTC or any weakening of the current investment tax
credit for solar. We need significant time for a thoughtful
phase-down of the PTC, and we need significant time for an
effective ramp up of MLP and REIT financing. Above all the
industry needs policy certainty and continuity to avoid the
serious consequence of past boom and bust cycles. I'd be
pleased to take questions. Thank you.
[Prepared statement of Mr. Reicher follows:]
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Mr. Lankford. Dr. Michaels.
STATEMENT OF ROBERT J. MICHAELS
Mr. Michaels. Thank you, Chairman Lankford, Ranking Member
Speier and members of the committee for the opportunity to
testify today on the loss of taxpayer dollars in the form of
wind production tax credit. To start with, go back to the
creation, the PTC began as an obscure part of the Energy Policy
Act of 1992, a tiny subsidy to an infant industry that might
need support to grow. Not until 1990s was it even mentioned in
DOE's annual energy outlook where it was expected to produce
very little by 2020. It surprised us, it grew to a highly
competitive international industry, wind turbines accounted for
the largest block of new power generation in 2012. Throughout
this the PTC sunsetted, was renewed and so on.
Today, wind lobbyists are again asking for full
continuation permanent subsidy. Looked at objectively, wind
power is a poor choice for continued subsidy through the PTC.
It is in no way an infant industry, generator manufacturers
compete around the world and could fund their own research.
Even if advances are on the horizon, a subsidy like the PTC
should not be offered because it pays turbine owners to operate
rather than to invent. Even without the PTC the wind is
exceptional because it still does have a long-term market in
the form of State renewable portfolio standard requirements
which are expected to lead to approximately a large amount over
the next 20 years under these programs.
Wind is hardly without its drawbacks, we hear that a wind
turbine could light 20,000 homes per year. Because wind blows
intermittently, most of the residents will be living in the
dark most of the time. An electric grid only works if supply
equals demand every second which requires the Nation's power
plants to compensate for winds randomness and act as reserves.
Over 85 percent of these plants obtain their energy from coal,
natural gas and nuclear power. Adding one of those plants to
the system increases reliability because it is controllable.
Adding a wind generation does the opposite because it requires
additional reserves to compensate for wind's unpredictability.
For system planning purposes, the ERCOT, the Texas grid
operator, counts a megawatt of wind generation capacity as
equal to 8.7 percent of a reliable fossil fuel megawatt.
Wind entails other costs. Over the past 5 years,
approximately $22 billion have been spent on transmission
dedicated to reaching wind facilities which would not otherwise
have to have been built. The fact that wind turbines do not
burn fuel or emit no pollutants or carbon does not make them
green. The reasoning conveniently neglects the reality of the
substantial volume of fossil fuel generation must operate and
pollute solely as backup for the intermittent wind power that
most utilities have no choice but to accept. Going back a step,
wind turbines are made of materials whose production entails
emissions, and the material requirements per megawatt of wind
capacity are substantially greater than for gas or coal
capacity.
Finally, some advocates see wind is worthy of public
support because of its alleged ability to create jobs. There is
nothing discernibly unique about wind as an industry.
Construction jobs are short lived and mostly in conventional
building trades, most construction employment is small and post
construction employment, is small in volume and skewed toward
low skills.
Claims that the wind production tax credit increases
employment are without foundation. There are computer programs
that purport to show job creation as wind workers incomes are
re-spent. When households and businesses pay premium prices for
wind power those funds are unavailable for them to spend
elsewhere. Every visible new job in the wind industry comes
with a less visible lost job elsewhere in the economy. It
concerns me that the National Renewable Energy Laboratory now
offers computer models for use by wind advocates, that
calculate created jobs, and never consider the lost jobs due to
overpriced power. Wind power has grown from a novelty boutique
energy source into a mainstream industry that employs numerous
high-paid lobbyists at the Federal and State level.
The PTC has remained, and even expanded despite the lack of
any rationale for keeping it. At the wind industry's present
size, other seeming advantages have also vanished to be
replaced by higher costs, generally funded by consumers rather
than wind investors. Winds environmental implications are not
all benign, advocates of the PTC cannot substantiate claims of
job creation. The PTC's rationale has vanished, it's usefulness
to taxpayers has expired and so should the PTC. Thank you.
[Prepared statement of Mr. Michaels follows:]
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Mr. Lankford. Thank you. I am very grateful for all four of
you to be here. Listening to opening statements could not have
been more different, and I'm looking forward to the dialogue on
that, and I really do appreciate that and that's the way it
should be to be able to go through the dialog as we try to
pursue some of this.
Mr. Wilson, I mentioned to you before and giving you the
heads up on it. Mr. Gramlich had mentioned much greater clarity
is there, the 5 percent phaseout, or the 5 percent safe harbor
is obviously a clear safe harbor based on what the final price
is. My concerns are the way the rule is written as it comes out
right now and based on beginning construction, it gives the
impression almost that IRS has to be there to be able to
inspect the roads, to be able to inspect the purposes and the
intents, when really this is going to be filed later on it.
To make it more clear, there is a section, I mentioned to
you before, if the road is done for construction, it counts as
under construction. But if that same road was built for
employee use or for visitors to come on, it doesn't count. So
is it the intent of the IRS to say make this as non nebulous as
you can, make sure that you've spent at least 5 percent to get
safe harbor because everything else is going to be a guess.
Mr. Wilson. That was certainly not my intent to make it
nebulous. We--as I mentioned earlier, we did pattern our
guidance off the prior guidance and----
Mr. Lankford. Sure.
Mr. Wilson. --section 1603 program and section 168(k). We
do have a history with that and it has not generated a lot of
questions on those points. Just to clarify, the service doesn't
typically--wouldn't typically go and determine whether or not
someone had began construction at the time that they were doing
it. They might get picked up on audit at a later stage, and
then the taxpayer would demonstrate that they had actually
begun construction through the normal business records process.
Mr. Lankford. Correct, and that was my point. When I read
through the regulations and they are invigorating reading,
which is great, by the way, try to be a clear as you can, when
I read through the regulations on it, it almost gives the
assumption that someone is going to have to look at it before
it begins to make that judgment call if they doesn't reach this
5 percent safe harbor.
So my question to you is, is it the assumption that
industry will make sure they hit that 5 percent, and if they
don't hit that 5 percent safe harbor it's going to be quite a
significant paperwork process to be able to prove they were
under construction by that date.
Mr. Wilson. I--the--there is no assumption that people will
try to make the--to use the safe harbor, the 5 percent safe
harbor more than the other safe harbor which I mentioned and
noticed in 2013-60, which is a place in service by the end of
2015. That is an alternative that they can use. They can make
the 5 percent safe harbor, they can make the place in service
safe harbor, or they can do the physical construction.
Mr. Lankford. But physical construction, if they are going
to put up, let's say, 100 towers and they put in the footings
for two of them, that is under construction, so they might have
only spent 3 percent of the actual total end cost. So the
question is, that now it becomes were they under construction
enough, were two footings with the steel and the concrete down,
I know they are not going to pour that way by the way, they are
going to have to do multiples, but putting in a road, and
putting in two footings for 100 different units, does that
count long term? For all 100 eventually?
Mr. Wilson. That depends, if the all 100 are operated as a
unit----
Mr. Lankford. Right.
Mr. Wilson. --it is a facts-and-circumstances
determination, but you can treat multiple units as one project
for purposes of beginning a construction. If you begin work
on----
Mr. Lankford. If they do continuous construction, let's say
they put in two footings, and it ends up being 3 percent of the
total cost of the final cost of projects, but then they do a
little bit of construction each year for the next 10 years, and
they don't really put it into use, start actually generating
producing power for 11 years from now, would that 10-year time
clock begin for the PTC at the point that they put the first
tower in as far as actually producing electricity, when does
that 10-year clock begin for the PTC for them?
Mr. Wilson. That, again, I will have to say it, it will
depend. If there--one of the things that the guidance provides
is that we will look carefully with strict scrutiny at a
taxpayer who begins construction but then doesn't maintain a
program.
Mr. Lankford. Some level of continuous--I am assuming they
are going to have some kind of level of continuous
construction. Could they take 10, 11 years--I know that they
would have a difficult time getting capital for that, I get
that. Could they take 10 or 11 years to do a project and then
start the 10-year clock running? Could an investor know I'm
going to trickle this project along while I'm working on other
things just to keep something moving and then get the PTC at
some future date?
We have the responsibility on this dais to also do
budgeting. When we put a tax credit out there in the past it
has been very clear, we know when it guess online and we know
we have 10 years from there. With this one, some of the
difficulty we have in budgeting on this is, we don't know when
it's going to go online. We don't know how many projects are
going to take, and how long it continues construction, and when
we talked about phase-out and such, that a typical project may
take 3 or 4 years to do in construction, not including all the
very lengthy permitting processes. The challenge is this is
somewhat of a phase-out already because of the length of time
and it is unknown. So could they theoretically hold this
indefinitely?
Mr. Wilson. They could, if they still met the beginning of
construction and continuous program of construction, then there
is not an end date for that.
Mr. Lankford. Okay. Well, that's something we'll work on,
that is our responsibility. I am going to continue to move on
so we keep the conversation moving. Ms. Speier.
Ms. Speier. Thank you, Mr. Chairman. Mr. Gramlich, give me
an idea of the kind of high-paying jobs the industry generates.
Mr. Gramlich. Sure there certainly are a lot of
construction jobs; manufacturing jobs would be the other
general area as you noted and I noted as well; the 550
manufacturing facilities in the country now producing wind
energy.
Ms. Speier. Give me an average salary.
Mr. Gramlich. Oh, boy, I'm not sure I know. Manufacturing
jobs are notoriously well paying, and it is one of the very few
sectors that is actually growing, and significantly growing,
manufacturing jobs in this country.
Ms. Speier. So maybe on behalf of the committee, you could
you submit to us some numbers so that we'll have the benefit of
that as we evaluate the PTC in the future.
Mr. Gramlich. Sure.
Ms. Speier. Dr. Michaels suggested that these aren't
permanent jobs. Would you like to comment on the robustness of
the jobs that are created within this industry?
Mr. Gramlich. Well, he said there as nothing discernibly
different about this industry, I mean, these are great jobs,
many industries have great jobs, our industry happens to have a
lot of manufacturing jobs. As long as the industry keeps
growing, those facilities, those 550 facilities will keep
churning out wind turbines over the years. It's very similar to
the auto manufacturing sector in terms of the skills and the
types of jobs, and of course, those auto manufacturing
facilities, as long as there is a market they keep turning out
automobiles year in and year out. That what we expect and hope
for.
Ms. Speier. Mr. Reicher.
Mr. Reicher. Let me say quickly, I worked for a wind
company for several years after I left Washington. This is a
longstanding wind company, it is in the business of R&D,
manufacturing assembly, installation maintenance, this is in a
small New England town, it has been a real important industry
in that community. They have installed turbines for the
military around the world for native Alaskan villages all over
this country and all over the world, it is a very specialized
type of turbine, and these have been great jobs for people who
I don't think would otherwise have the access to those kinds of
jobs.
Ms. Speier. My other question was to what extent are we
exporting these turbines?
Mr. Gramlich. There is a little of a bit growing export
market. One of the reasons we produced so much here is that
these happen to be very large, heavy pieces of equipment. So we
actually have a unique strategic advantage for this sector in
manufacturing these turbines here in this country compared to a
lot of other industries where policymakers may be looking to,
you know, where can we grow manufacturing jobs? This is
actually because of the unique physical attributes of wind
turbines, this is actually a great opportunity where we really
can't expect to manufacture the turbines here that we end up
deploying here.
Ms. Speier. All right. So when we do, as we often do, is
not act until the last minute, do this lurching forward as we
have this year in extending it for 1 year, the implications are
profound. Can any of you talk about the impacts to jobs lost
when we don't give any clarity and consistency in what we are
offering in terms of tax credits?
Mr. Gramlich. I can, sure. I mean, last year, we expected,
with the impending expiration of the tax credit last year, we
commissioned a study that found 37,000 jobs, or roughly half
the jobs in the industry would have been lost. We did, in fact,
lose many of those jobs in the latter half of the year as the
exploration approached. Some of which we lost to manufacturing
and may never get back.
Now the industry has rebounded with the extension of the
tax credit and the change to the start construction framework
as opposed to solely using placement service qualification----
Ms. Speier. Mr. Gramlich, I'm going to ask one more
question, so if you could just wrap up.
Mr. Gramlich. Sure. That has alleviated some of the time
pressure so it is a more workable policy than it used to be.
Ms. Speier. So Mr. Reicher suggested, Mr. Wilson, that you
could administratively extend REITs and MLPs to apply to wind
energy companies. Are you contemplating that, is that on the
agenda within the administration?
Mr. Wilson. That's a question that the Office of Tax Policy
at the Department of Treasury has responsibility for doing. My
office works with them, but they are the ones who would make
the policy call on that.
Ms. Speier. So have you made any recommendations to them?
Mr. Wilson. Unfortunately that's outside the REIT or
outside my area of responsibility.
Ms. Speier. My time has expired. But Dr. Michaels, you
basically said that we don't need this tax credit. And if that
is, in fact, your position, then do we need a credit for oil,
and gas, and coal that have been around for generations, are
not new industries, and I realize my time has expired so maybe
you can include that in some response.
Mr. Lankford. No, the witness can answer the question.
Ms. Speier. Thank you.
Mr. Michaels. Thank you. This hearing is about wind, I am
not an expert on subsidies to those other industries. I think
they should all be evaluated. But again, if we're simply
looking at wind, I think it's particularly worthy of note in
light of the PTC, in light of the general energy situation. All
those others, I agree with you, are imminently worth studying.
I didn't come prepared to do that, would be happy to do it
otherwise.
Mr. Lankford. Mr. Walberg.
Mr. Walberg. Thank you, Mr. Chairman, and thanks to the
panel for being here. Interesting, interesting subject to deal
with.
Mr. Wilson, according to David Burton, a tax law specialist
with Akin, Gump, he stated, ``Savvy project developers could
theoretically bank tax credits well into the future.'' If a
developer plans well and banks through 2013, PTC-eligible
component parts it may be able to continue to construct PTC
eligible wind farms indefinitely. His concern--Mr. Burton's
concern appears to be fair. Why is there no hard deadline in
your guidance?
Mr. Wilson. We didn't place a hard deadline because the
statute doesn't place a hard deadline. It allows the credit if
you begin construction before the end of the--of appropriate--
before the end of 2014 or '13, and so we didn't think we had
authority to place a hard deadline.
Mr. Walberg. So in other words there was a lot of
flexibility that credits could still be claimed years down the
road.
Mr. Wilson. That's true. Unlike the section 1603 program
which had termination dates, the extension that was part of the
ATRA did not have an end date to it.
Mr. Walberg. Mr. Gramlich, many States like Michigan have
renewable energy suggestions or requirements already in place
and working, doesn't this suggest that when energy can function
on its own without further Federal subsidies like PTC?
Mr. Gramlich. Well, the State renewable portfolio standards
are very effective policies. The thing is we met and exceeded
most of them by now, so for the foreseeable next few years,
they have no real market impact. In a few States where more
than 5,000 megawatts, I think that would be maybe double what
the actual requirement would be.
Mr. Walberg. It would seem like it would be in the States'
best interest then if they are seeing that type of impact to
increase, but we're not seeing that, are we?
Mr. Michaels, along that line of questioning, you note in
your testimony that the widespread use of RPSs negate the need
for the wind PTC, could you elaborate further on that?
Mr. Michaels. The RPS requirements in States are projected
to require somewhere around 100,000 megawatts of renewable
generation, most of them are going to be wind over about the
next 15 years. That means one thing, even if wind is
uneconomic, it says that these people, utilities in these
States will have to buy it. It will support the industry in a
very real sense, it supports demand without complexities and
the incentives that come with protection tax credit.
Mr. Walberg. Mr. Gramlich, response to that?
Mr. Gramlich. Dr. Michaels, I believe in his testimony,
said 70 gigawatts of additional wind would be needed, and then
a minute ago in his oral testimony said some large number, and
then just now, I think he said 100 gigawatts. The truth is it
is actually 28, so far less than half of his lowest claim.
Mr. Walberg. Dr. Michaels, response to that?
Mr. Michaels. I have never heard the 28 gigawatts. I think
we can simply resolve this by looking at the references.
Mr. Walberg. Dr. Michaels, you note that the PTC is
probably a poor tool to bring forth innovations, explain that a
little further. That's a fairly strong statement.
Mr. Michaels. I would challenge someone to tell me any
innovations in the industry that have directly been brought
about as a result of operations under the PTC. My argument is
if you really wanted to reward innovation, reward innovation,
don't reward operation. The link between operation and
innovation is likely to be far weaker than the link between a
dedicated research effort in innovation, that's all I'm saying.
Mr. Walberg. Mr. Gramlich, your association suggests that
Congress should extend the wind PTC. How long?
Mr. Gramlich. We submitted testimony and spoke with the
House Ways and Means Committee this spring. They are looking at
tax reform. They are--as we understand, they are looking at all
energy resources as has been discussed here, we're not quite
sure or we haven't seen any bills obviously on that. Senate
Finance Committee is looking at some alternative structures, so
we are engaged in that.
Mr. Walberg. But what would you suggest at this moment?
Mr. Gramlich. We offered some ideas that would, in fact,
probably more than any other industry has offered in terms of
how long would be needed to sustain a minimally viable
industry, which we believe everybody wants at least that much
so that we can keep the cost reductions going, which are, in
fact, caused by the production tax credit. The reduction of
over 40 percent in our cost in 4 years is very, very much tied
to the PTC.
Mr. Walberg. I've run out of time here. How many years?
Mr. Gramlich. The letter that we put out in December which
was in the record in the House Ways and Means is available to
see, we said 6 years under certain assumptions would create the
minimally viable industry, but the stability that would be
required to get to those----
Mr. Walberg. Thank you, Mr. Chairman.
Mr. Lankford. Thank you. Ms. Duckworth.
Ms. Duckworth. Thank you, Mr. Chairman. You know I think if
we are serious about reducing our reliance on foreign oil,
reducing harmful greenhouse emissions and ensuring that
Americans have access to reliable and affordable energy, we
must make serious investments in a diverse energy sector, not
just wind, not just oil, and not just gas, but a diverse
sector. And I think wind energy is playing an important role in
meeting these goals.
In my district, wind energy has been an amazingly
successful story American manufacturing. I'm proud to say that
the State of Illinois is leading the way in both wind turbine
manufacturing and capacity. Illinois now has the wind power in
place to power 1.1 million homes, and we host over 2,000 wind
turbines in 36 manufacturing facilities for wind turbine
components with many of those in my district, including Winergy
and Bly Industries. Bly Industries is a great example of the
type of innovation and investment in American manufacturing
that the wind industry is a great story of. Bly Industry
manufactured rotating swash plates for helicopters. And with
the cuts in defense spending, they were reducing production,
they quickly, agilely adjusted their production line, and now
have more orders than they can fill in the wind industry, and
now have doubled their workforce.
Good manufacturing jobs, good jobs that have benefits and a
lot of people put back to work. So I am somewhat interested in
knowing--looking at this aspect of it, we've got 6,000 wind
related jobs in Illinois, a thousand of them in manufacturing.
Although Dr. Michaels has said wind energy is a dying industry,
I'm not sure how that jibes with the fact China, India, Brazil,
Germany and Romania, all countries with very different
economies and governments, are all supporting wind projects and
resulting in employment. I'm going to ask both Dr. Michaels and
Mr. Gramlich to answer this question, how competitive, Mr.
Gramlich, is the global wind industry?
Mr. Gramlich. It is very competitive. As you say a number
of countries are investing a great deal in wind energy; China
for example, and a number of European countries. So it's been
very difficult but the Nation, U.S. has done a great job in
bringing again 70 percent of the domestic production here to
this country, and we have great resources, tools, training
capabilities in this particular manufacturing sector that we've
been able to keep up with that, even with our limited policy
stability that we've had here.
Ms. Duckworth. I know that in my own district, I have at
least one manufacturer who makes gear boxes for windmills,
exports them globally to places like China, one of their
biggest customers.
Dr. Michaels, you said this was a dying industry. Can you
talk a little bit about the global situation for wind?
Mr. Michaels. I do not know where the word ``dying'' came
from. To my recollection, I have never stated that and it has
it is clearly not a dying industry.
Ms. Duckworth. I have this quote from you, it says it would
be dying were it not for the fact that the industry gets all
sorts of subsidies and tax breaks. It gets far heavier
subsidies than any other energy sources. You're talking about
nothing but incredibly expensive technologies that produce low
quality power. You didn't say that?
Mr. Michaels. I said that it might well be dead, and dead
may have been an extreme. It might me be a much, much small
presence, I think is a more accurate thing to say. If, in fact,
your story is correct, and it may be, then wind can stand on
its own, and it should stand on its own without the PTC. It is
a competitive industry, the type we like to always encourage in
America, and there's a lot of people who don't like government
intervention in these types of markets, precisely because it
interferes with their dynamism. So dying may have been not the
best word to choose.
Ms. Duckworth. Mr. Reicher, can you address the topic of
the global wind industry?
Mr. Reicher. Representative Duckworth, it's a very
competitive global industry that lots of countries want to own.
The Chinese have taken big, big steps forward to build a very
significant wind industry, they are beginning to put up
turbines in this country, they have been long competitors in
Germany and in Denmark. It is a big race and it is a big global
market.
The international energy agency said we are going to spend
$38 trillion between now and 2035 in building energy
infrastructure of all types, $38 trillion. That is a huge
market. An increasing chunk of that market will be renewable
energy. The Chinese and other nations want to own a big chunk
of that market, I think if we could put our policy, technology
and finance tools in place in the right way, we could own a big
chunk of that market as well. A market for technologies, many
of which were developed and invented and deployed first in the
United States.
Ms. Duckworth. Thank you, thank you, Mr. Chairman.
Mr. Lankford. Mr. Farenthold.
Mr. Farenthold. Thank you very much, Mr. Chairman. And I
will start with Mr. Gramlich. I'm concerned that the wind
energy subsidies that we're spending, and the growth of wind
energy is actually costing us more than we know. Are you
familiar with concerns that the military that have been raised
with respect to interference of wind turbines with radar use
for air traffic control and military training and any of the
costs associated with that?
Mr. Gramlich. Every project does need to review a number of
things, including wildlife impacts, local community impacts,
but certainly if you are anywhere near a military installation,
there has been a lot of work and a lot of interaction with the
Department of Defense on how radar and training routes can be
preserved, intact, and consistent with both development and
military objectives.
Mr. Farenthold. I'm going to go now to Dr. Michaels. The
Public Utility Commission of Texas chair Donna Nelson has
stated that Federal incentives for renewable energy have
distorted the competitive wholesale market in Texas. Wind has
been supported by Federal production tax credit that provides
$22 per megawatt hour of energy generated by wind resources.
With these substantial Federal incentives, some wind producers
have actually bid negative prices into the market and can still
make a process, we've seen a number of days where the negative
clearing price in the west zone of ERCOT, which is the Texas
energy market, where most of the wind farms are installed.
These market distortions are creating a problem in Texas in
that because wind is unreliable and it makes it difficult for
other generators to recover their cost and discourages
investment in new generation. Do you believe that her statement
is accurate?
Mr. Michaels. Um, Chairman Nelson and I worked in
proceedings before the Public Utility Commission of Texas. We
have our differences but on this one, I'm generally in
agreement with her. It is a much deeper problem because it is
going to become greater as wind grows as a presence. What
happens is that congestion on the transmission lines, people
have to bid for it, limited capacity, and because of the PTC,
essentially you can bid a negative price, and after you get the
PTC back, you're still making an income greater than zero from
that. Why is that a distortion? Very simply, it's at variance
with the realities of resource scarcity. It is a variance of
what we would see in competitive markets, and there doesn't
seem to be anything we can do about it when obtaining the
efficiency of the grid. It's going to be a much bigger problem
because it is not just in Texas, there are at least three other
regional transmission operators who are starting to face
increasing volumes of this in the same way that Texas is and
nobody really knows how to resolve it.
Mr. Farenthold. Thank you, Mr. Reicher, you indicate in
your written testimony that a multiyear extension in the PTC,
Protection Tax Credit, is necessary to avoid a bust in the wind
energy industry. As former DOE Chief of Staff, you are
certainly familiar with the Energy Information Administration's
annual energy outlook, are you not?
Mr. Reicher. I am.
Mr. Farenthold. Could you turn your microphone on, please?
You answered in the affirmative.
Mr. Reicher. I don't know this year's specific outlook, but
I am generally familiar with the----
Mr. Farenthold. You agree that it is one of the definitive
resources with respect to energy and economic forecasts.
Mr. Reicher. It's a useful one.
Mr. Farenthold. And so AEO's reference case which assumes
that the PTC will not be reauthorized by December 13th of-- I'm
sorry, December 31st of 2013, projects strong growth for the
wind energy development in the United States. In fact, it says,
the increase in wind power generation from 2011 to 2040, had
134 billion kilowatt hours, or 2.6 percent per year. It
represents the largest absolute increase in renewable energy
generation. It also indicates that wind will add more than 42
gigawatts of capacity by 2040, and total wind capacity will
exceed hydropower by 2040. How can you characterize that
projection with no PTC extension as a bust?
Mr. Reicher. I don't know the details of that projection.
Let me just say, what I do know is the history of the
development of this industry, and that is when the PTC is in
place, we see growth in this industry. When we lose it as a
result of unreliable Federal policy, we see a drop-off.
Mr. Farenthold. And let me just follow up on Mr. Walberg's
question to you. He asked how long do you think it needs to be
extended. Do you have a time frame?
Mr. Reicher. I have said in my testimony, we need to put it
in place for a multiyear period with a phase-down. I was very
clear there ought to be a phase-down.
Mr. Farenthold. And multi----
Mr. Reicher. Just if I could finish, and that ought to be
linked, and I don't know if you were here to hear my statement,
this absolutely needs to be linked to opening up master limited
partnerships and real estate investment trusts to renewable
energy. Both of those financing mechanisms put in place by this
Congress have been available to conventional energy sources and
they ought to be----
Mr. Farenthold. And those won't-- and those alone won't do
it. You've still got to basically give them money.
Mr. Reicher. Be careful. I said a multiyear extension with
a phase-down. With a smart ramp up of those, I am very clear
that if we give some years to the PTC, phase it down, and then
ramp up these other two financing mechanisms that have been so
vital to the development of oil and gas infrastructure, to the
tune of roughly $500 billion, that's a smart transition, and
that's what we ought to be doing. And let me just finish. We
have bipartisan support in this House for that bill and we
ought to--we ought to get on with it.
Mr. Farenthold. All right, well, I'm out of time. Thank you
very much for your testimony.
Mr. Lankford. Ms. Lujan Grisham.
Ms. Lujan Grisham. Thank you, Mr. Chairman, and I
appreciate the panel being here today. New Mexico ranks 12th in
the Nation for the production of wind energy and it's currently
producing energy for about 280,000 homes. And it is also
providing great economic promise in our State which currently
has negative job growth and is experiencing one of the toughest
economic situations in the country.
I am--and you have heard this, I think, several times this
morning, but we have one of the national labs also, two
national labs in New Mexico, and they are both very clear that
in the interest of national security, having a diverse energy
portfolio is critical; not just necessary, critical, must
happen, and making sure that there is a clear strategy to
assure that that is developing and growing in a meaningful way
is also on their critical list for national security issues.
But recognizing that most--that some of the testimony today,
and some of the questions that really focused on the credit and
whether or not that's a useful investment, I want to focus on
for a minute, Dr.--Mr. Michaels.
Now, you state in your written testimony, that Federal data
and forecasts show that all in all, the cost of wind turbines
have and will be higher than that of gas-fired plants. And you
referred to the cost estimates released by the U.S. Energy
Information Administration in Exhibit 1. Now, Exhibit 1
compares the cost of different types of energy production, and
it shows that wind power is one of the least expensive methods
of producing electricity compared to all other types of
conventional and non-conventional forms of power generation.
Now, considering that my own State, its potential, has the
potential and is capable of needing more than 73 times the
State's current electricity needs, I'm very encouraged. The
Intergovernmental Panel on Climate Change, which is a worldwide
committee tasked with examining climate change, recently found
that it is extremely likely that human influence has been the
dominant cause of observed global warming and the panel warns
that extreme weather will continue unless we act aggressively
to reduce the pace of greenhouse gas emissions.
In New Mexico, we are on the forefront of climate change.
Earlier this year the Federal drought monitor listed New
Mexico's drought as the worst in the country. Nearly the entire
State was classified as experiencing extreme or exceptional
drought, and currently we are under a state of emergency due to
extreme flooding.
I have lived in New Mexico all my life and I have never
seen anything like this, destroying roads, farms, and homes.
Now, what I'm getting at here, is that the cost of electricity
is not the only cost that should be considered. There are
environmental and health costs associated with power plant
pollution from destroyed and damaged property due to droughts,
fires, floods, rising oceans, to health care costs due to heart
attacks, premature deaths and many types of respiratory
illnesses.
In Exhibit 1, Mr. Michaels, does your written testimony
include these environmental and public health costs associated
with the different types of energy production?
Mr. Michaels. I'm using--pardon me, I'm using the figures
from the Energy Information Administration and no, those
figures do not include all of those costs. And again, they also
don't include costs of overpriced power, and how people may
suffer under that for various reasons. And the most important
thing they don't do for wind is they are assuming that a
megawatt of wind power comes out with the same reliability as a
megawatt of fossil fuel power. You have to add to that wind
expense the fact that you need backup; that you have to do a
lot more than just look at the cost of that unit. The gas fired
units----
Ms. Lujan Grisham. Well, Mr. Michaels, or Dr. Michaels, I
appreciate that. I have got Mister in here and I see clearly it
is a doctor. So I apologize for getting your title wrong. But
in any event, it is clear then that this comparison in your
exhibit is not complete.
Mr. Michaels. I think it is impossible to make a complete
comparison. I'm trying to do the best I can with data that I
think I can live with. Yet----
Ms. Lujan Grisham. Without a complete cost comparison, is
it fair to say that in making recommendations about using all
of our tools and investing, particularly in something that
affects national security, that maybe we ought to have an
effective, complete, comprehensive cost comparison that would
include all of those things, including the things that you have
identified?
Mr. Michaels. Personally, if I----
Ms. Lujan Grisham. Apples to apples, for all of these
energy sources.
Mr. Michaels. Please pardon me.
Ms. Lujan Grisham. Oh, sure.
Mr. Michaels. Personally, I would really very much like to
see that. I think that costs would come out and I think we
would learn a tremendous amount, and I think both of us would
probably learn quite a bit on both sides of this issue. Are, in
fact, we overstating or understating, say, the health issues
and the climate issues, or are we overstating or understating
the costs of backing up reliable wind power? These are open
issues, and I certainly favor doing more research into that.
Ms. Lujan Grisham. Dr. Michaels, I'm out of time and I
appreciate the chair's allowance of that, but as policymakers,
I agree we should definitely be doing things in a much more
comprehensive, factual manner to make these decisions and
recommendation. Thank you, Mr. Chairman.
Mr. Lankford. I now recognize Mr. Jordan.
Mr. Jordan. I give my time to the chairman. Thank you.
Mr. Lankford. Thank you. Ms. Lujan Grisham, I completely
agree the difficulty of this, as this committee has dealt with
before is trying to evaluate the social cost of carbon and all
these things because that number is difficult to get your hands
around. We have seen the administration change it by 50 percent
in just 3 years, saying their models have changed. So there is
this great challenge of this very subjective, how do you get
your hands around that. We have an economists here that live
and breathe on subjective data, and giving their advice in the
middle of all of that, and I understand that, but that dynamic
is incredibly difficult for us to do. It is part of our
conversation today as we both figure out how do we provide
greater certainty for the industry that is currently living
under this law? And then also, where are we going on this long
term? We do need to have a broader energy portfolio but we have
a lot of issues to deal with this as well.
Mr. Reicher, you have mentioned a couple of times about the
MLPs. I would like to go into greater depth with you on that,
because this conversation about, as you said before, a
significant trailing off of the PTC to give it a significant
amount of time to be able to become where Mr. Gramlich--6 years
or more whatever it may be. It was interesting. I have been in
Congress a relatively short period of time, about 3 years. But
in my first months here, because my energy--my State is a
significant producer of wind. We are jokingly called the Saudi
Arabia of wind in Oklahoma because we have so much wind
generation and we are an exporter of wind out of our State,
which is a good thing economically for us and functionally for
us. But the grand challenge of it is is how do we do this? I
had folks that caught me in my office from my industry in the
first months that I was here and said, we just need 4 more
years of the PCT, and I think we can trail this off if we get a
good sunset on it. This is not a comment from Mr. Gramlich, but
to hear you say we just need 6 more years, made me think about
that conversation I had 3 years ago with someone that said, we
just need 4 more years.
This is one of those very difficult things to get our arms
around. We have got to find a way to be able to figure out how
do we provide some certainty in Federal policy? Let's talk in
greater depth of what you are trying to do with this MLP
proposal. How does that fit in? How does that work
economically? How does that bring more capital into the
industry?
Mr. Reicher. Well, let's take it back home, in fact, to
Oklahoma where your oil and gas industry, the infrastructure
that backs up a lot of that oil and gas industry has been
financed largely using master limited partnerships.
Mr. Lankford. Yes, it has.
Mr. Reicher. And they have been vital to this from the
early 1980s. They do, in fact, lower the cost of capital for
infrastructure. They are certain in terms of their policy base,
you don't need to reauthorize them. And they have been a--have
had a dramatic impact on the building of energy infrastructure.
My point is, let's open up those mechanisms to the rest of the
energy industry. I'm not just talking renewable energy. I'm
talking carbon capture and storage. So that if we need to pull
carbon out of coal plants and you have to build infrastructure,
finance that with MLPs. I'm talking energy efficiency. I'm
talking cogeneration.
The bill sitting here in this House and over in the Senate
is very broad technologically. So put that in place. The IRS
can, in fact, issue a revenue ruling to do something very
similar.
Ranking Member Speier, they can make the change to REITs.
Congress has to make the change to MLPs. Meanwhile, link that,
don't, don't cut off--don't cut off the PTC at the end of this
year. Give it some running room.
Mr. Lankford. Well, just to push back somewhat, what is
your guess at this point of how long the PTC has right now, as
it currently stands under construction? If someone is under
construction, and they begin to hit the 5 percent safe harbor
threshold, for instance, how many years is this trailing right
now? Because it's--well, it is ending ``this year.'' It is
really not ending this year. They have got 3 or 4 years. How
many companies, how many years is this really going to be a
trailing off of what we currently have?
Mr. Reicher. Mr. Chairman, I was in the wind energy
development business, and you know, these are projects that
generally take in the larger ones in 2 to 4 years, something
like that. I wouldn't lose a lot of sleep over the fact that
there could be a project that goes a little bit longer. I think
the IRS has done exactly what it should do, which is you, the
Congress, didn't give them a specific date. They have written
some good guidance as they have to in many of these cases, and
they have said, here is what under construction means. I don't
think there is going to be major abuses of this. I think it is
going to take a few years to get out of this. So let that
happen. Meanwhile, extend the PTC for a reasonable period of
time, and then pull these other two long-term financing
mechanisms in, that means the MLP and the REIT.
Mr. Lankford. Mr. Gramlich, Dr. Michaels has mentioned a
couple of times on it, and I have talked to several folks in
the industry as well, this issue of where you have a wind farm,
you also have got to be connected at some point in that grid to
nuclear, coal, gas, something, because even in Oklahoma, the
wind does stop blowing on days. I have been to a wind farm and
stood next to it and seen every tower still. So that what is
the connection there between other fuel sources that are
consistent that you can turn on and off, and the wind which
only God turns on and off?
Mr. Gramlich. Chairman Lankford, there are three States
getting more than 20 percent of their electricity from wind
right now. They are----
Mr. Lankford. Of their actual production, or their
production capacity?
Mr. Gramlich. Their production, their megawatt hours over
the course of a year from wind energy. Iowa is one of them.
These are perfectly reliable systems. You could have those
utilities in here talk about how their lights stay on. So----
Mr. Lankford. But because they are partnering with another
fuel source, and I'm running out of time.
Mr. Gramlich. Exactly how it worked for fossil and nuclear
facilities, because every single generation facility can go off
at any moment. It is nothing----
Mr. Lankford. While we have a diversified fuel structure,
that's why, quite frankly, I believe it is good to have coal
and natural gas, and nuclear, and wind, have all of these out
there because you wanted a diversified source on it. But that
is true, they are going to always be partnered with. They can't
be just be a standalone consistent power source.
Mr. Gramlich. Exactly. That is why I did not advocate for a
100 percent wind energy grid.
Mr. Lankford. Okay, thank you. Mr. Horsford.
Mr. Horsford. Thank you. Good morning, Mr. Chairman. I
thank you to our panel for being here. Those who oppose wind
energy argue that production tax credits should be permanently
eliminated as an incentive for wind project development because
the wind industry is no longer in its: ``infancy,'' and
therefore no longer needs such support. The argument goes
further that all electricity generators should be subject to
smart-based competition, and but only wind projects should
compete on their own economic and environmental merits without
the support of Federal financial incentives.
Mr. Gramlich, your expertise lies in the wind industry, and
I have met with your organization in the past. I'm from Nevada.
My district is 52,000 square miles. I have both rural, and
urban. One portion of my district in the northeast in White
Pine County has a major wind farm. There is another one in the
Northwest portion of the district that's in Representative
Amodei's district, but wind is a very important part of the
economic diversification opportunities in rural America. So you
are an expert in wind industry, so I want to ask you to respond
to this graphic. Do you agree with the data depicted on the
chart displayed regarding energy subsidies?
Mr. Gramlich. I do. I think that's a very accurate and
informative chart. I think it's very important to look at the
number of years over which different energy technologies have
received incentives, because it effectively gives them a long
head start in the market.
Mr. Horsford. Is there any way that you can characterize
the oil and gas industry as being in its infancy given that it
has been receiving Federal subsidies now for more than 90
years?
Mr. Gramlich. Well, I don't have ways to characterize it
other than to say that incentives do exist for all
conventional, as well as newer clean technologies.
Mr. Horsford. But after 90 years, they are not infants.
Mr. Gramlich. I do think the time frame absolutely matters.
Yeah, the relative short period over which clean energy sources
have received incentives is very relevant to determine how long
they are needed. I mean, one answer to the question of--from
Representative Walberg would be, well, I don't believe the
incentives for wind will be needed as long as conventional
sources have received them. I don't know, you know, it of
course matters a great deal, what your assumption is on what
other technologies receive in order to say how much we need and
we don't know that yet.
Mr. Horsford. Okay, well, let's stay with this for just a
moment though. The production tax credit has been around since
1992, that's correct?
Mr. Gramlich. Correct.
Mr. Horsford. But a significant increase in wind energy
capacity didn't actually occur until about 8 years ago in 2005,
is that also correct?
Mr. Gramlich. I know that well because that's when I joined
AWEA, that's correct, yes.
Mr. Horsford. So would you say that wind energy tax credits
are still in its infancy?
Mr. Gramlich. Yes, I think they have made a great impact,
but they have certainly not reached their--completed their
task.
Mr. Horsford. Okay, so let's take a look at the amount of
the subsidies on this chart. According to this chart, the oil
and gas industry receives about $4.8 billion in Federal
subsidies on average every year, and which have developed into
giant industries as a result.
Mr. Reicher, would it be a fair competition if the oil and
gas industry was permitted to keep receiving $4.8 billion worth
of Federal subsidy while the wind industry receive nothing?
Mr. Reicher. Representative Horsford, we have subsidies
across the board for the energy industry ranging from oil and
gas, to nuclear, to renewables, to energy efficiency, and they
have all served important roles in different ways across
research development, demonstration, and deployment. So we
really do have to take a hard look at all of this, and put it
all on a level playing field and it is not on a level playing
field today.
You cite nuclear power. Nuclear provides 20 percent of U.S.
electricity, zero carbon, very important in our--in our energy
mix today. And it has received some important subsidies over
time from R&D dollars, to Federal liability insurance, to tax
credits for new reactors. It's become an important mix and
Congress has backed these subsidies over decades and decades.
And we are doing similar things in the oil and gas area and we
ought to continue to push the renewable area as well.
Mr. Horsford. Okay.
Mr. Reicher. Now, the option to get rid of all of them. I
don't see that happening. If we are not going to get rid of all
of them, let's build a level playing field.
Mr. Horsford. Thank you. My time is expired, Mr. Chairman.
I would just say that we need to be careful. It seems that the
distractors of the wind industry are asking the government to
pick winners and losers by only removing Federal subsidies for
one particular sector of the energy capacity, which is wind
energy, but leaving all of the other subsidies intact, and I
would not support that approach. Thank you.
Mr. Lankford. Thank you. We are going to start a second
round of questioning here in just--people on the dais wants to
be able to participate in that.
Mr. Gramlich, when a wind farm does construction they have
business expensing as well, just normal business expensing for
the actually tower itself. Are they able to write off the
products they produce and such as their normal tax treatment
for a wind farm? Is there anything else in addition to the PTC?
Mr. Gramlich. I'm not--we could certainly give you an
answer to that and follow-up on that. I'm not exactly sure how
the other tax provisions work.
Mr. Lankford. Right. They operate as a business and
function as a business and have normal business expensing
through products, through purchasing the towers to whatever it
may be. It is considered a business expense. They are able to
write off that business expense. Does anyone disagree with
that? Mr. Wilson, I know I'm outside of your lane there on that
but----
Mr. Wilson. I'm not aware of any others. We can check and
get back to you. But I don't think--I'm not aware of anything
that is not available to any other business.
Mr. Lankford. Correct. Every other business would be
treated the same and be consistent on that. Part of the--part
of the conversation on this, and I mention Mr. Horsford and his
comment on that, the challenge of it is, is when you take oil
and gas and say, okay, I'm going to take all of their IDCs and
all of their normal business expensing and I'm going to call
that a subsidy. But for wind, I'm not going to call their
version of the IDCs their products, that's not a subsidy. That
is just normal business expensing. But for oil and gas, that's
different. They shouldn't have any way to do business
writeoffs, and normal business expense.
I know, this hearing was not about trying to compete
different types of fuels. I think everyone has been clear on
this dais. We want every type of fuel. But if we are going to
be consistent in comparing apples and oranges, we probably
should compare apples and apples and oranges and oranges in
this to be able to compare as far as how tax treatment is done,
whether this normal business expensing, if we are going to do
that, let's put it all in there. And let's actually compare not
based on size, because it is my guess--I don't have the exact
number in front of me--I think the oil and gas industry is
slightly larger than the wind industry. So when you talk about
the dollars that are involved in actual investment, it is a
different amount of dollars that are involved in investment as
well.
I need to ask about renewable fuel standards. Obviously,
many states, my State, Oklahoma, is one of the largest wind
producers in the country. We don't have a mandatory renewable
fuel standard. It is a voluntary process. In our State it has
thrived in that, as far as wind energy. The question becomes of
trying to guess this, and this is for the two economists that
are here as well as anyone else that wants to jump in on it.
How do we begin to compare and say what's the effect of the
PTC, versus what is the effect of the renewable, of all of the
renewable requirements that are on every single State? So every
State has this blend of fuels that's now--that's putting this
in place and we see this thriving wind energy there because the
State's mandating some sort of renewables in the portfolio. So
how do we balance the two? How do we begin to guess what's due
to the renewable requirement portfolio? What's due to the PTC?
Dr. Michaels, do you want to do that? And then Mr. Reicher, you
can jump in as well. Is there a way to be able to guess and to
separate those two out on greatest impact?
Mr. Michaels. It sounds like something that I would spend
several months trying to think of how to redo the research.
Quite frankly----
Mr. Lankford. That's the benefit of being an economist.
Mr. Michaels. And other economist jokes. No, that is really
a problem. I don't know how I would approach it at this point.
Mr. Lankford. Okay.
Mr. Michaels. I'm sure there probably are people who are
looking at it though.
Mr. Lankford. Mr. Reicher, do you have a guess on that as
well?
Mr. Reicher. Mr. Chairman, it's push and pull. There have
been vital complementary mechanisms over the last couple of
decades. And as a former developer, I would look out into the
market and say, you know, where is a good place to build a
project? Is there some pull going on as a result of State
policy? Is there some push going on as a result of the
availability of tax credit? You sit down, you look at the deal,
and you see if the numbers work and you decide whether to build
it. You take either one of those out, and these would not be--
--
Mr. Lankford. Sure.
Mr. Reicher. --as attractive a project.
Mr. Lankford. No, I definitely agree. Both of these have
driven production. In the earlier stages, even in my State, if
you wanted to declare your home as a home that's running on
wind power, your electricity bill is higher and you would pay a
premium for that. But it's individuals that were very concerned
about those issues and wanted to pay a part of that because the
cost was higher initially.
Now, I don't know how our cost is catching up and where
things are going on that, but there is no question that there's
some individuals who want to do that. That's why the master
limited partnerships is a very interesting, capital thing for
people that want to invest in that, could actively invest in
that, provide greater capital, but there is also that process
as well. Let me briefly go into this as well, and we may have
time to be able to come back on it also. And that is on is
environmental issues.
The effects of the environmental requirements and requests,
the permitting process. The wind farm that is in Oklahoma is
currently going through the process with Fish and Wildlife on a
taking permit for the number of eagles that will be killed in
the future days by the wind farm. Other solar projects have
large problems with a random lizard that is in that area and so
they are having difficulty in moving it's solar project.
All of these things are real dynamics of actually moving
forward in the permitting process. What effect do we have right
now on some of the environmental regulations and the permitting
and actually moving wind power ahead? Mr. Gramlich, you want to
jump into that?
Mr. Gramlich. Sure, I would mainly just offer that our goal
in that area is the same as it is in tax policy. We are looking
for clarity, like every other industry. We want to know what
the rules of the road are, and with this change in the
statutory provision for the tax credit, we sought for and
received clarity from the IRS. We are seeking the same from
Interior and the Fish and Wildlife Service. And you know,
hopefully we will get more. We don't have full clarity, but you
know, the good news is, wildlife impacts are being managed.
Wind is, even though it tends to get far more attention than
anything else that impacts wildlife, I think it is .0003
percent, of bird--human-induced bird deaths are caused by wind,
where every bird death is regrettable and we are working hard
to mitigate those.
Mr. Lankford. Yeah, it just makes for a great photograph is
really what it does on that. And we have just as many issues in
Western Oklahoma, saying we can't put up a wind tower because
of the habitat of the lesser prairie chicken in Western
Oklahoma. And to say, it is not a matter of the taking of an
eagle, it is a matter of the habitat of a lesser prairie
chicken that someone has said prairie chickens are afraid of
wind towers, and so we don't want to put more wind towers in
this area because we fear that when we get a lesser prairie
chicken on a couch and begin to do counseling with them, they
are nervous about those towers. And so we have a whole
different set of issues. Obviously, that is a different hearing
for a different day. Mr. Horsford.
Mr. Horsford. Thank you, Mr. Chairman. I actually enjoy
coming to this committee because it's actually the one time
when we get have a little bit of substantive debate. And I
really do appreciate your leadership as chair that allows us to
have more of these discussions. And I didn't want to interrupt
you or ask you to yield prior when you were clarifying the
issue around the subsidies, and all I have to say about the
subsidies is, you know, oil and gas has a whole lot of
exemptions and loopholes that have been built into those
subsidies over the 90 years. And I agree that if we are going
to look at things apple-to-apple comparison, then it should lay
out some of the unique exemptions that that industry has
enjoyed, and whether or not it's proper for them to continue to
enjoy them at the expense of having a new burgeoning portion of
renewables to have an appropriate incentive to participate. And
I think that is a fundamental policy question that we need to
have, so I agree with you.
Mr. Lankford. Would the gentleman yield for a colloquy?
Mr. Horsford. Sure.
Mr. Lankford. And I'll extend your time. I think we can do
unanimous consent fairly easily to extend your time.
Mr. Horsford. Sure.
Mr. Lankford. The issue that I have is, most of those tax
treatments for oil, gas, other traditional fuels that have been
around for a while, most of them really are normal business
expensing; just their business expenses look different.
Obviously it is very expensive to be able to put up a tower, do
a drilling operation for a moment and being able to pull that
out. But that's the normal operation. They are able to write
that off.
So while some folks will say that's a loophole, or a
special subsidy, that's their normal business. That's what they
do as a business, and it only applies if they keep doing it. If
they ever stop, then that goes away. And some of the challenge
of this is for wind at this moment, they have more business
expensing which they should, by the way, have normal business
expensing. They also have a PTC that is driving that. They also
have renewable portfolios that are driving that.
It's an industry that has grown rapidly. It is rapidly
catching up with hydro, which no one would have guessed decades
ago that it would catch up with hydro. And the challenge is,
how do we do this in the future for any industry that's
functioning? And I totally agree, everything should be looked
at, but we also need to be able to keep it in context; what it
really is. Like a--for instance, going to one of the loopholes
you talked about, G&G for oil and gas. That's just geology.
That's a normal part of their business expensing. If you are
doing geologic research, you are going to have to spend that if
you are actually going to poke a hole in the ground and do the
research. So it is just research, normal business expensing.
But we will work through this process in the days ahead. We
will have, hopefully, a tax reform proposal come to the House,
and we will have this in a very aggressive format at that point
on a lot of issues simultaneous.
Mr. Horsford. Reclaiming my time, Mr. Chairman, I
appreciate those points. I will just note that the oil and gas
industry is much more profitable than any of these other
sectors, and the question will remain, and the policy choice,
is, should those special exemptions, tax loopholes and other
subsidies continue to apply for some 90 years for what is a
very profitable industry?
And I have no, you know, say what you will, it is a private
business. They can make money. But wind energy and other
renewables are much more entrepreneurial. They are more of the
small business that's partnering to develop an energy project
with, oftentimes, a utility. That's what happened in my home
State of Nevada. It's a small wind energy project that has a
purchase power agreement with a major utility. And their margin
of profit is nil, if there's a profit at all, because they are
trying to demonstrate that this approach will work.
So I just hope that as we proceed, and I'm glad to hear
that we may ultimately have a comprehensive tax reform package,
because we need to look at these industries who have
historically gotten special exemptions, tax breaks, and other
subsidies, who have tremendous profits to the detriment of
entrepreneurs, small businesses, and those who should be
getting Federal subsidy in order to grow our economy.
Thank you, Mr. Chairman.
Mr. Lankford. Absolutely. And while we are having this
dialogue, and I do appreciate the dialogue going back and forth
on it, I'm glad to see every type of energy is extremely
entrepreneurial. Wind is much more efficient now in its
generation than it was 20 years ago in the actual production of
electricity and what they are actually putting into the line.
So we are more entrepreneurial. But what is happening right now
with oil and gas in the revolution that has occurred in
fracking is because of an entrepreneurial risk as well.
So those were small businesses that have also taken an
enormous risk. The cost of a well now that we have this, as a
Nation, a wash in natural gas. But that also, each drilling
platform has gone from a little over $1.5 million to about $6
million just to go try to get down to that hole and be able to
do it.
So there is lots of entrepreneurial risk in that. That's a
great part of being an American, quite frankly, is that every
one of these industries has a tremendous amount of
entrepreneurial risk, and when they take the risk, it pays off
for them.
Mr. Wilson, I'm going to ask you one quick question. The
IRS provides the private letter rulings in response for
guidance. Is there a plan to do private letter rulings for wind
developers just to make sure that they are going to meet the
under construction, or they have begun construction test? Is
that dialogue already occurring with industry to give them some
sort of stability and confidence?
Mr. Wilson. We haven't received any request for private
letter rulings yet.
Mr. Lankford. Would you anticipate those would come in the
next 3 months as we get closer and closer to this deadline?
Mr. Wilson. I'm not really anticipating that. I think, for
the most part, the wind industry is pretty satisfied with the
placed in service safe harbor. I think, for the most part, they
think they are going to be able to make that comfortably. So
I'm not anticipating private letter rulings.
Mr. Lankford. Okay, so what--your assumption is at this
point that the majority of everyone is going to make the above
5 percent safe harbor target for final cost of construction,
and they are not going to have to worry about some of the
earlier rulings if they are less than 5 percent.
Mr. Wilson. Right.
Mr. Lankford. Obviously, you can't say with certainly at
this point----
Mr. Wilson. Right.
Mr. Lankford. --but that's your assumption at this point.
Mr. Wilson. Either the 5 percent safe harbor or the
alternative safe harbor for placed in service----
Mr. Lankford. Correct.
Mr. Wilson. --before the end of 2015.
Mr. Lankford. Correct. Mr. Gramlich, do you assume the same
thing on that?
Mr. Gramlich. I can't speak to whether private letter
rulings will come, but the guidance that they did provide is, I
know, our investors are ready to go now. That guidance, as I
said before, was much, much needed, both the one in the spring
as well as the one just issued. So I think there is going to be
a lot of business happening based on that. And may I say one
more thing about the Treasury rules?
Mr. Lankford. Certainly.
Mr. Gramlich. I'm a little concerned with an impression
that may have been left by some questions and some answers
earlier about the open-ended nature of the IRS rules. You
should be assured that under either approach, safe harbor, or
physical work, significant investment to the tune of tens of
millions of dollars for a particular wind project will be
needed and committed to, and payments begun by the end of this
year in order to qualify.
So--and that risk, as we have just discussed on the
entrepreneurial, that is on the developer. That is not on the
taxpayer, or on anybody else. So the companies are, you know,
doing what they can right now to sign their power purchase
agreements with utilities. They need and off-taker, they need a
customer, they need to know where that sale is going because
they don't want to hold that risk with no customers. So it is
not open-ended. It is not indefinite. That risk will be held by
them, and we expect a very limited universe of projects to
qualify for that. Partly the, you know, the power markets are
somewhat soft for all new electricity, so it is not going to be
a huge set of projects that do qualify, regardless, and also,
keep in mind that PTC applies to other technologies than wind.
So when Treasury and IRS are looking at these timelines, they
have to account for the construction timelines of not just one
technology, but multiple.
Mr. Lankford. Right. Mr. Reicher, you look like you are
leaning onto your button there. Do you have a comment?
Mr. Reicher. Thank you, Mr. Chairman. I would just say that
it's this kind of a situation, the complexity of this, that
gives investors pause; that other countries look at the U.S.
and they say, this is a strange way to support a very important
industry. And I think it is unfortunate, and I think it's the
reason why a multiyear extension with clarity would be so
helpful. This is not the way to build an industry. It sends
such poor signals to investors, so let's do that, and those
other two pieces.
Mr. Lankford. Let me ask you a question with that. Is it
better, let's say we can get into a tax treatment to do a
multiyear extension with a clear phase-out so that everyone
knows, it's here 100 percent this year, 100 percent year this
year; it phases out, 50 percent, 50 percent, and the trailing
off occurs that everyone talks about, is that better than what
we have now, and to set a clear definite, and I agree with your
statements, by the way, with the Master Limited Partnerships,
blending with that, to provide that kind of clarity than what
we have now?
Mr. Reicher. Absolutely, and I think that's consistent with
what the American Wind Energy Association has said in its
statement at the end of 2012.
Mr. Lankford. Right.
Mr. Reicher. Pick a significant amount of time, a
reasonable amount of time, phase it down, and put these other
things into place.
Mr. Lankford. Correct. But my own--my own question, we have
two things here. My own request to joint tax evaluates we do
this another 5 years, it's another $18 billion in costs. So we
have to look at cost issues to say, what does that really look
like, and the discouragement that I would have on this side of
the dais is, if you set a, let's say a 6-year time period and
say there is going to be a phase-out, what is not there so that
2 years from now when the phase-out actually begins and it
starts trickling off, our offices aren't flooded with saying we
just need 6 more years to go through that. Setting that
definite time period and making sure it's clear. Let's get a
balanced look at this to make sure we have the infrastructure
in place to provide this, but we also know the industry is
going to continue to fly on its own. Any thoughts on that?
Mr. Reicher. Yeah, number one, you are correct. You know,
in theory, you can't bind a subsequent Congress.
Mr. Lankford. Right.
Mr. Reicher. Decisions can change. Having said that, if you
blend these other financing mechanisms in, I would sit here
today and bet that you will see the sort of logical transition
that I'm talking about, and there will be less and less of a
reason to seek another 6 years.
I actually think that this multiyear phase-down and pull
these other mechanisms in, I think we will be at a point in 5
or 6 years where people will say, boy, we have done a really
smart transition of this industry to a way that grown-up
industries like oil and gas infrastructure and transmission
infrastructure now use to get built.
Mr. Lankford. Right. Mr. Michaels--Dr. Michaels, one quick
comment, and then I'm going to recognize the ranking member.
You had mentioned something about jobs and about job growth.
These are manufacturing jobs. I know you didn't mean this, but
I want to be able to just clarify one thing. And I'm not
evaluating your heart on this one. You said they are low
skilled, they are manufacturing, they are not good jobs. I want
to give you an opportunity to clarify that because I can assure
you, there are lots of folks in manufacturing jobs in my
district that are great people, and that are great jobs on
that.
Mr. Michaels. No, that definitely----
Mr. Lankford. Can you get your microphone there?
Mr. Michaels. That definitely does need a clarification.
Manufacturing jobs come in all sorts of skills, so do
construction jobs, and the only thing I was saying, was if you
look at the typical educational attainment, training attainment
of people who are in these jobs, people who work at the wind
installations after they go into operation, I have seen these
in things like environmental impact statements for wind
operations where they have to inventory the workforce, and I
think generally speaking, the people in the construction and in
the wind are pretty standard, good people, but pretty standard,
and the people operating are simply relatively less qualified
people.
Mr. Lankford. Yeah, the grand challenge of this is, is that
the new push to have a definition of what's a green job and
what's not a green job. And that's where this gets drawn in, to
suddenly say it's a green job and so it's on a higher level and
you actually meet that person and they are doing manufacturing
and other things, like a lot of other jobs. I went to a green
job training location that was a Federal grant that went into
my district from several years ago and they were doing green
job training, and at the end of it I met the director I met
some of the folks, I went through the program, and I asked the
director privately, how many people in this program that have
gone through for a couple of years, will work in a green job?
And her answer was, the skills are transferrable. I said, that
means zero, doesn't it? And her response was, the skills are
transferrable.
There are jobs that are out there that are great jobs and I
have no opposition to this at all to be able to have great
manufacturing jobs, and jobs operating and that kind of such in
wind power, but create this sense that the only way American
economy is going to move forward, is if we create more green
jobs, I think begs the question of--we need to create more
jobs, period, to have a growing economy. With that, I recognize
the Ranking Member Speier.
Ms. Speier. Mr. Chairman, thank you. On that note, in a
country that has been reeling from extraordinary unemployment
numbers for 5 years now, I think Americans would applaud the
creation of any job, green or otherwise, and I am, I guess,
bullish on the wind industry, in part, because we are making it
in America. And the more we can bring manufacturing back, the
more we can be insourcing, the more we can be restoring the
manufacturing base that has really served us so well for so
long, is to our advantage.
Now, having said all that, this has been a really good
discussion, Mr. Chairman, and the robustness of it and the
thoughtfulness of it is really the kind of dialogue that should
take place in this committee more often. So I want to thank you
for that. Now, I do think what it has underscored for me is
that we should not look at any one of these credits in
isolation; that if we are going to look at these credits, we
look at them in toto, we look at them to make sure that we are
not picking winners and losers, something that I have said and
that others have said this morning. We have got to be fair. And
I am one of those that really wants to embrace that kind of a
review, and since that is under the jurisdiction of this
subcommittee, I hope that you will consider having a hearing
where we can look at all of these tax credits, and evaluate
them completely.
Let me just ask one last question. And that is to you, Mr.
Wilson. Has the GAO identified any abuses of the PTC in your
recollection?
Mr. Wilson. I'm not aware of any, no.
Ms. Speier. Do any of you know of any kinds of abuses that
have taken place? So this is not a situation where people have
somehow tooled the system, or used it to feather their beds in
a manner that wasn't consistent with generating energy,
correct?
Mr. Wilson. Not that I'm aware of, no.
Ms. Speier. All right, so with that, Mr. Chairman, I thank
you for bringing this hearing to our attention, and for opening
up some other avenues of review.
Mr. Lankford. Thank you.
Ms. Speier. And thank you, all of the witnesses.
Mr. Lankford. Thank you. And I ask unanimous consent. I
have mentioned a couple of times a letter that I wrote to the
Joint Committee on Taxation asking for some information
documentation, and I ask unanimous consent to place this in the
record. No objection.
Mr. Lankford. Gentlemen, thank you for being here and
letting us pepper you with questions. We will do some follow-up
in the days ahead. I'm grateful for the clarification that's
happening, and look forward to us finding some solutions to be
able to solve this long term. We do need a plan so this is not
a perpetual, never-ending proposal of how we handle energy
production. We need a plan and structure that we know is going
to work and help us. So gentlemen, thank you very much for your
time. With that, we are adjourned.
[Whereupon, at 11:16 a.m., the subcommittee was adjourned.]
APPENDIX
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Material Submitted for the Hearing Record
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