Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 02:30 PM

Mr. Brian Ferguson

Chief Executive Officer, Eastman Chemical Company

Testimony Submitted to
U. S. Senate Committee on Senate Energy & Natural Resources
May 1, 2006
Concerning

ENERGY POLICY ACT OF 2005

Written Statement by
Brian Ferguson, Chairman and Chief Executive Officer
Eastman Chemical Company
P.O. Box 431
Kingsport, TN  37662

Mr. Chairman, members of the Committee, I am Brian Ferguson, CEO and Chairman of Eastman Chemical Company, headquartered in Kingsport, Tennessee.  I want to thank you for the invitation to come before you today and give you my perspective on the Energy Policy Act of 2005. And I appreciate the opportunity to discuss with you our concerns with certain provisions of the Act, particularly those around the Section 48B Federal Industrial Gasification Investment Tax Credits in Title 13 and the self-pay Federal Loan Guarantees for industrial gasification projects under Title 17.

Introduction to Eastman
The corporation I represent is Eastman Chemical Company.  Eastman manufactures and markets chemicals, fibers and plastics worldwide. It provides key differentiated coatings, adhesives and specialty plastics products; is the world’s largest producer of PET polymers for packaging; and is a major supplier of cellulose acetate fibers. Founded in 1920 and headquartered in Kingsport, Tenn., Eastman is a FORTUNE 500 company with 2005 sales of $7 billion and approximately 12,000 employees. For more information about Eastman and its products, visit
www.eastman.com

Eastman is not unlike many chemical companies in the United States today. That is to say that we are all under extreme pressure from rising costs of energy and raw materials. My industry has experienced a cumulative $60 billion – that's billion with a 'B' – a $60 billion increase in our natural gas bill since the beginning of the decade.

What's the result? Let me give you a quick example.

One report in Business Week noted that there were 120 global chemical sites valued at more than $1 billion currently under construction in the world. Of those, only one was located in the United States. The remaining plants – offering high wages and stable employment – are being constructed in places where energy and raw materials not only cost less, but their availability and prices are more stable, too.

Dow Chemical Company, for example, is currently building a $4 billion plant in Oman. This plant was originally going to be built in Freeport, Texas. But the high cost of natural gas in this country – which was 12 times higher in Texas than on the Arabian Peninsula – forced Dow to site it in the Middle East instead.

With that decision, America has lost a new plant that will employ 1,000 people in high-paying science, engineering and operations jobs – and we have taken on more step toward creating for our chemicals industry the same kind of dependence that we face with imported oil.  One thousand employees who could have been U.S. employees and billions of dollars that could be flowing into – rather than from the U.S. economy – if we had an energy policy that worked to help – not punish – industrial manufacturers like Dow.

Dow isn't alone, of course. Every industrial company is facing the same dilemma. Build in the U.S. or build overseas. Invest where the energy prices are a liability – or go where they are an asset.

That's why I was so pleased when I saw that Congress finally created within the Energy Policy Act of 2005 the incentives that would help correct 20 years of short-sighted energy regulations and finally begin to move us away from a costly and wasteful dependence on natural gas for electricity generation.

Importance of Gasification

Wide spread deployment of sound, proven gasification technology is an important tool that can help keep currently-natural-gas-dependent globally competitive American industries in America.  Gasification provides the opportunity for American industry to use a wide array of feedstocks such as coal, petcoke, biomass and even many industrial waste materials in lieu of expensive natural gas.  On the market side, creation of synthesis gas permits a very broad suite of products and uses.  So, gasification technologies offer important flexibility to industry.

Other benefits:
• Feedstock Diversity - Reduced cost and greater flexibility of feedstock input.  Industrial manufacturers operate in a globally competitive market where their price of natural gas makes a huge difference in final product prices.  Unlike the electric utility industry, for example, production costs largely determine where our goods are manufactured.  
• Jobs - Preservation of U.S. jobs, especially high-paying ones in the chemical industry which has already lost more than 100 plants and 100,000 jobs between 1999 and 2005.  But notably, other natural gas dependent sectors have also suffered dramatically, i.e., agriculture, paper, metals, iron and steel.  See Attachment 3.
• Avoids Mid-East Energy Dependency - Maintains U.S. economic strength and avoids “oil style” dependence on Middle East - truly a slippery slope.
• Environment  - Even using fossil fuels, emissions of SO2 and NOx from gasification processes are similar to sources using natural gas.  Also, gasification can capture mercury and CO2 for safe disposal-sequestration, etc.
• Trade balance – The U.S. has lost $484 billion in domestic industrial production between 1999 and 2005, further exacerbating our Nation’s huge trade deficit in manufactured goods.  As capital costs decline with broad deployment of gasification technology, new plants will produce synthesis gas that permits domestic production to be competitive with foreign plants.
• All Natural Gas Consumers – With industrial gasification, natural gas prices for all domestic consumers (48A program also contributes to this benefit) will fall.  Facilities operational under 48B tax credits will reduce costs to all American natural gas consumers over the long term and pay for themselves in about six months. This is a conservative estimate which assumes only the output of the plants receiving the credit and does not reflect the subsequent stimulation of additional, cheaper gasification plants which will reduce natural gas demand and prices further.


Need for Timely Action

There is suddenly a lot of hype regarding gasification technologies.  Not a week goes by that I don’t read or hear some story in the news about a new gasification technology that will be the panacea for the Nation’s energy ills.   Development of new technology is important –important in the next decade or the one after that.  For gasification to make a difference to American industry now, when industry needs it most, we must deploy sound, proven, currently available technology. 

For both the Section 48B Investment Tax Credits and Federal Loan Guarantees to be effective in my industry – if they're to change the course of investment in energy and feedstock technology investments in this country – they need to support commercial scale projects that address global market risks, now.  I want to emphasize that point.  Industry needs deployment of proven, commercial scale gasification technology now, not just more research and more demonstration projects that may, or may not be adopted by industry ten or fifteen years from now.   While there is a need for future demonstration projects to validate key technologies, the real difference for America now is to assure that these incentives support investment in commercial scale industrial gasification projects that are calculated to meet global competition so that these industries will still be contributing mightily to the American economy when those new technologies become available.


America will need technology improvements in the future if we are to remain competitive in the global industrial marketplace, but only if we take the necessary steps now to ensure that the U.S. still has an industrial base in the next decade.  That may sound like hyperbole until one considers the more than 2 million American manufacturing job losses overall since 1999, and particularly in the natural gas dependent industries - in chemicals, forest products, glass, steel, and even agriculture.

Need to Maintain the Original Focus

The Section 48B tax credits were added to HR 6 specifically for the gasification of coal, biomass, petcoke and waste materials to serve the fuel and/or feedstock requirements of certain globally competitive industries that were facing economic distress due to rapidly rising natural gas prices in the U.S. The focus for these incentives needs to continue to be squarely aimed at domestic industries that are suffering under the burden of high natural gas prices, as identified in the new law. We anticipate that the availability of these incentives will attract a number of project developers who will try to claim qualification even though they are not in the intended group of recipients.

It is important that the focus of the incentives remain on the group of eligible entities that were listed in Section 48B of the Energy Policy Act.  Now is not the time to dilute the impact of the incentives by spreading the relatively moderate amount of incentives across too many projects or to unintended projects. The selected projects should be adequately funded, should be focused on directly helping the intended industries, and should be ones deemed most likely to succeed in the near term.  

Hard Work Ahead

The subject of today’s hearing: the passage of legislation (PL 109-58) was only the first of many steps needed to realize the potential of gasification technologies.

The hard work has just begun for both industry and government. 

The second step – the step that is in play right now – is the drafting of regulations to implement the authorities conveyed to the Administration by the energy bill. 

I have serious concerns about the implementation of the Investment Tax Credit and the self-pay Federal Loan Guarantee programs. 

Congress passed Public Law 109-58 more than nine months ago (July 29, 2005); yet, to date, there has been no formal dialogue between the private sector and the Department of Energy (or other federal agencies) regarding implementation of the loan guarantee provisions of Title 17.  Of greater and more immediate concern is that the regulations published this February regarding the 48B industrial gasification tax credits need major revision if the credits are to be awarded effectively, fairly and for sound projects, as I believe Congress intended.

The Section 48B tax credits were originally added to HR 6 as a Senate Finance Committee amendment totaling $850 million.  As mentioned above, these funds were provided specifically for the gasification of coal, biomass, petcoke and waste materials to serve the fuel and/or feedstock requirements of certain globally-competitive industries that were facing economic distress due to rapidly rising natural gas prices in the U.S.

Even at the $850 million amount, it was generally assumed that there would be many more applicants for the tax credit than available funds.  Given the cost premium for the first generation of gasification projects to be built, parceling out the limited funding to all qualified applicants on a pro rata basis was recognized as potentially spreading the money too thinly to advance any projects.  Consequently, industry proposed that DOE and Treasury jointly solicit tax credit applications on a single date after which DOE would evaluate and rank the projects according to technical and economic merits for Treasury’s subsequent award of the credits on a “competitive” basis.

When funding for Section 48B was cut to $350 million in Conference, the need for a strong DOE role to assess and rank applicants by merit became even more apparent to industry.

The competitive award of the 48B tax credits is a novel way for Congress to target limited financial resources to the most meritorious applicants within a class.  Such an approach might not be appropriate for many types of tax credits; but I believe it clearly is when the intent of Congress is to stimulate investment in technology to achieve broad public benefits with limited funds.

Fortunately, even though there was no direct legislative requirement to do so, Treasury and the DOE did agree to establish a “competitive process” for accepting, evaluating and awarding certificates of eligibility for the limited pool of 48B industrial tax credits.

Both departments should be commended for the novel mechanism that has been crafted to promote the most effective use of taxpayer resources to spur the early introduction of gasification technology leading to the many benefits identified at the beginning of this testimony.  But more can and must be done by both departments to ensure that fairness, process transparency, merit and technical readiness for deployment are the final determinants in the awards that are made later this fall.

Government sources anticipate perhaps six or seven times [Note: if recent estimates of 48 projects are correct, that would be sixteen times] the number of project applications that can be supported by the $350 million available.  And, each industrial applicant will spend, on average, more than $1 million developing their application.  In such a competitive and expensive situation where industry is preparing to commit very large financial resources to build these gasification projects (greater than $1billion in many cases), fairness, transparency and judgment on project merits seem like a small request.  And, it is just “good government.”

 

 

Detailed Concerns and Recommendations 

Eastman Chemical Company joined with numerous other companies and trade associations (also known as the Industrial Gasification Initiative) to present unified recommendations to both departments related to the process for awarding the 48B investment tax credits.  Subsequently, the Department of the Treasury published guidelines in the Federal Register on February 21st for the joint conduct of the 48B Industrial Gasification Program with DOE.  Certainly the intent of IRS and DOE to work together to award the tax credits on a competitive basis is a good first step.  However, the process described in the February announcement ignored many constructive suggestions proposed by the Industrial Gasification Initiative. 

Specifically, the 48B process designed by Treasury will not utilize DOE’s capability to evaluate, compare and rank multiple large projects applications, such as it does in the Clean Coal program.  Instead, Treasury has asked DOE to simply determine whether a project meets a “pass – fail” standard in several categories.   Obviously, an evaluation process of this nature does not separate the simply good projects from the superior ones. 

Did Congress intend that the industrial gasification investment tax credits potentially be awarded to “B” grade projects over “A+” projects?  I hope not.

There is still time to fix this problem if key Members of Congress move quickly to do so.  The Committee has jurisdiction over DOE; but of course Treasury, and specifically IRS, has the lead in determining the process for awarding the 48B industrial gasification tax credits.  I urge the Senate Energy and Natural Resources Committee to collaborate with the Senate Finance Committee to ensure that the Industrial Gasification Initiative’s recommendation for a transparent and competitive process for industrial gasification tax credit awards based on merit is achieved. 

Members of the Industrial Gasification Initiative would be pleased to work with the Congress and the agencies on these improvements.

The Initiative members have many additional concerns about the criteria that may, or may not, be used by the DOE and IRS to evaluate projects.  Mr. Chairman, you were one of the first Senators to recognize the need for legislation addressing the adverse impacts of rising natural gas prices on domestic manufacturing industries’ ability to compete in world markets, in fact on their very ability to continue operations in the U.S.

The Section 48B Industrial Gasification Investment Tax Credits were born of that very concern.  Congress intended for the credits to stimulate investment in gasification plants that can use a wide variety of fuels to displace natural gas as a fuel and/or feedstock.  The credits are intended to assist early adopters of gasification technologies to “buy down” the high price of these first plants to be deployed. 

This approach is quite different than DOE’s usual mission of developing and demonstrating new technologies.  Yet, there appear to be suggestions in the February IRS guidelines that novel technologies, not proven technologies, will be favored in the selection of projects.  This “research” bias is reflected in two of the three Program Policy Factors listed in Appendix B, section “F” of the February Notice: 1) “Diversity of technology approaches and methods, and 2) Geographic distribution of potential markets.  These factors would be suitable for a technology demonstration program such as Clean Coal, but they are wholly inappropriate for the purposes of Section 48B  - - -  to deploy technically sound synthesis gas plants that can begin to reduce natural gas demand in globally competitive domestic industries, to reduce the cost penalty associated with those plants, to offer hope for saving U.S. industrial jobs, and to do so in an environmentally sound manner.

So, the Industrial Gasification Initiative members ask the Committee to ensure that the 48B program is not hijacked to become just another extension of existing federal RD&D programs.

Beyond these points, the Industrial Gasification Initiative is concerned by the process for obtaining clarification on many technical issues raised by the February Federal Register notice (IRS Notice 25-2006).  The Initiative submitted ten questions to the DOE more than one month ago.  The DOE responses are underlined.  Additionally, questions that appear in italics were also submitted to the IRS at that time.  To date, no response has been received from the Service. 

The Initiative’s questions and answers received to date follow as Attachment 1 at the end of my testimony.

I call your attention to submitted question #4b and the “non-answer” as an illustration of the confusion that still exists less than 60 days before applications are due.  Although obviously a technical question, DOE deferred it to the IRS, which has provided no timetable of their response – nor is IRS likely to possess the technical background to appreciate the basis for this question.  If this language were to remain, and depending on its interpretation, potentially, no project would qualify.  All projects need start-up fuels, chiefly natural gas, in the testing and ramp-up period. These start-up fuels will be used in far less quantities during normal operations.   As soon as a project uses the first molecule of natural gas for start-up, it fails this criterion based on current language.  While this outcome might seem like a ridiculous scenario, unanswered, the question raises considerable doubts about how the notice will be applied.  There needs to be an allowable and adequate start-up period before which such language is applied, or else there needs to be a more distinct boundary regarding its application to only the production of syngas from the gasification block (which is the primary boundary of the eligible property definition for application of the tax credit).  Companies that are spending considerable time and money to develop applications and, more importantly, to develop projects that are essential to our nation’s energy objectives, deserve a straight answer, especially to questions as purely technical as #4b.

Another basis for concern is the non-response to question #5c and the second part of question #5b.  This process-type question was again deferred to the IRS.  Eastman and most of the companies that may apply for the ITC are public companies with extremely sensitive disclosure requirements.  We need to know the process of public announcements in enough time so that we can be prepared with our concurrent public disclosure.  This is a process question, not a policy question, so again it should be fairly straightforward to address.

Both of these questions were raised according to the DOE procedure on March 25th.  DOE indicated a response time of about five business days.  It is now May 1, the closing date for questions.  Any applicant that has follow up questions regarding any response, or non-response, to previous questions will not be allowed to seek further clarification after today.

Closing Remarks

Let me close by encouraging you to maintain the integrity of this process. It is crucial, not only for those beneficiaries who have projects in the pipeline, but crucial for the country as well.

If the desire of this Congress continues to be one of providing help to the job-producing portion of the American economy – to keep jobs here in the U.S. – it is critical that you protect the funding for those sectors where it can do the most good: commercial, industrial projects.

That's where American jobs are on the line and that's where the real power of the country's economic engine lies.

For convenience, I have included a summary of the Industrial Gasification Initiative’s recommendations under Attachment 2 of my testimony.

Again, I thank you for the opportunity to share our concerns. And I thank you for the leadership you've already demonstrated on this important topic.