Energy Policy Act of 2005 Analysis

Key NGV-Related Provisions in the Energy Policy Act of 2005 (H.R. 6) and SAFETEA-LU (H.R. 3)

September 7, 2005

Tax Incentives

1. Credit for the Purchase of NGVs: Provides a tax credit to the buyer of a new, dedicated alternative fuel vehicle of 50 percent of the incremental cost of the vehicle, plus an additional 30 percent if the vehicle meets certain tighter emission standards. The amount of the credit is limited by caps on the incremental cost as follows: $5,000 for a vehicle up to 8,500 pounds; $10,000 for a vehicle of 8,500 pounds up to 14,000 pounds; $25,000 for a vehicle of 14,000 pounds up to 26,000 pounds; and, $40,000 for a vehicle above 26,000 pounds. These limits result in maximum credits ranging from $2,500 to $32,000 depending on the size of the vehicle. For non-tax-paying entities, the seller of the vehicle can take the credit. The credit is effective on purchases made after December 31, 2005 and expires December 31, 2010. (HR 6: Sec. 1341)

2. Credit for the Natural Gas Vehicle Fuel: Provides an excise tax credit (referred to as the Volumetric Excise Tax Credit for Alternative Fuels or VEETC) to the seller of CNG or LNG. The credit is 50-cent per gasoline-gallon-equivalent for CNG and 50-cents per liquid gallon for LNG for the sale of CNG and LNG for use as a motor vehicle fuel. The user of the fuel may be eligible for the credit if there is no sale of CNG or LNG prior to its use (e.g., customer owned-and-operated fueling). The credit begins on October 1, 2006 (delayed for budget reasons) and expires on September 30, 2009. Partially offsetting the value of the excise tax credit, however, is an increase in the motor fuels excise tax rate for both CNG and LNG. The CNG rate would increase from 4.3 cents per gge to 18.3 cents. The LNG rate would increase from 11.9 cents to 24.3 cents on a LNG gallon basis. The increased tax rate will go into effect on October 1, 2006. The credit will be paid to eligible recipients on a regular basis without regard to the actual amount of excise tax paid. (HR 3: Sec. 11113)

3. Credit for Installation of NGV Fueling Stations: Provides a tax credit to the buyer of natural gas refueling equipment, up to $30,000 in the case of large stations and $1,000 for home refueling appliances. For non-tax-paying entities, the seller of the fueling equipment can take the credit. The credit is effective on purchases placed in service after December 31, 2005 and expires December 31, 2009. (HR 6: Sec. 1342) The bill also repeals the existing $100,000 tax deduction for refueling property (Sec. 179A) after December 31, 2005. (HR 6: 1348)

Please note there are many issues related to the implementation of these credits that must be resolved through the rulemaking process. The NGVC will be an active participant in this process, but taxpayers are advised to obtain legal advice concerning the applicability of the credits in particular situations.

New Programs

Clean School Bus Program: Authorizes a program to provide grants to school districts and related organizations for the replacement, repower or retrofit of school buses, the purchase of alternative fuels for school buses and alternative fuel infrastructure. Under the program, EPA is directed to “achieve an appropriate balance” between spending for replacement buses, retrofitting existing buses and alternative fuels. For replacements, grantees may receive the following for the purchase of alt fuel and “clean diesel” school buses: (1) 50 percent of the cost of the new bus if they meet tight emission standards (namely: for MY2005 and 2006, 1.8 grams NOx plus NMHC and 0.01 PM; and for MY2007, 2008 and 2009, 0.2 NOx and 0.01 PM, i.e., the 2010 EPA emission standards); or (2) 25 percent of the cost of the new bus if they meet less strict emission standards (namely: for MY2005 and 2006, 2.5 grams NOx plus NMHC and 0.01 PM, which is the minimum standard for diesel engines; and for MY2007, 2008 and 2009, “regulatory requirements” by EPA, which is assumed to mean the phase-in requirement to 2010 which is 1.2 grams NOx and 0.01 PM). No state can receive more than 10 percent of the monies made available each year. (HR 3: Sec 6015)

Joint Flexible Fuel/Hybrid Vehicle Commercialization Initiative: Authorizes a research program to advance the commercialization of hybrid/flex-fuel vehicles and plug-in hybrid/flex-fuel vehicles. Flex-fuel is not defined in the legislation. The NGVC will be working during the regulation promulgation process to clarify that bi-fuel NGVs are flex-fuel vehicles for the purpose of this program. (HR 6: Sec. 706)

Advanced Vehicles Pilot Demonstration Program: Authorizes a competitive grant program to fund up to 30 geographically dispersed advanced vehicle demonstration projects. The goal of the program, which will be administered by Clean Cities, is to reduce emissions, displace fossil fuel, promote advanced technology vehicles and promote sustainable transportation options. Grant recipients will be limited to state and local government agencies and MPOs. No project can receive more than $15 million. Grant monies can be use to pay for advanced technology and alternative fuel vehicles (including NGVs) and fueling infrastructure. (HR 6: Sec. 721-723)

Diesel Truck Retrofit and Fleet Modernization Program: Authorizes a grant program for states to fund fleet modernization programs, with preference to be given to ports and other major hauling operations. Preference also will be given to proposals that “will achieve the greatest reductions in emissions” and “involve the use of EPA or CARB verified emission control technologies.” The NGVC believes that alt fuel technologies qualify and will work to clarify this during the implementation process. (HR 6: Sec. 742)

Railroad Efficiency Improvement Program: Authorizes a new cost-shared public/private program to develop and demonstrate technologies that increase fuel economy; reduce emissions and lower costs of operations for railroads. Natural gas engines are eligible under the program. (HR 6: Sec. 751)

Federal and State Procurement of Fuel Cell Vehicles and Hydrogen Energy Systems: Requires the head of any federal agency that uses a light-duty or heavy-duty fleet vehicle to lease or purchase fuel cell vehicles and hydrogen energy systems where appropriate beginning January 1, 2010. “Hydrogen Energy Systems” is not defined. HCNG vehicles may fall under this category. (HR 6: Sec 781-2)

Diesel Emission Reductions Program: Authorizes a program to make grants and loans available to State and local government agencies and non-profit organizations for reducing emissions from diesel engines. The program focuses on replacing/retrofitting engines in non-attainment areas and would require that at least 50 percent of the federal program funds be used on public fleets. EPA or CARB certified or verified technologies qualify. NGV repowers and replacements will be eligible. (HR 6: Sec. 791-797)
Freight Intermodal Distribution Pilot Grant Program: Authorizes and appropriates funds for a DOT grant program to facilitate and support intermodal freight transportation initiatives at the State and local levels and provide capital funding to address infrastructure and freight distribution needs at inland ports and intermodal freight facilities. The bill appropriates $5 million for each of six specific project located in Oregon; Georgia; the ports of Los Angeles and Long Beach, California; Fairbanks, Alaska; Charlotte Douglas International Airport, N.C.; South Piedmont Freight Intermodal Center, N.C. The monies will be allocated over the five-year period FY2005 through FY2009. Alterative fuel vehicles are not explicitly mentioned. However, they could play a key part as an emission reduction strategy in the creating or expanding these facilities. (HR 3: Sec 1308)
Biodiesel Engine Testing Program: Authorizes a biodiesel engine-testing program to determine the impacts of biodiesel use in advanced diesel engines with low sulfur diesel fuel, including “the impact of biodiesel on emission warranty, in-use liability, and anti-tampering provisions.” (HR 6: Sec. 757)

Set America Free: United States Commission On North American Energy Freedom: Authorizes a United States commission to make recommendations for a coordinated and comprehensive North American energy policy that will achieve energy self-sufficiency by 2025 within the three contiguous North American nation areas of Canada, Mexico, and the United States. (HR 6: Sec. 1421-1424)

Please note that all new programs “authorized” by the legislation must be implemented at the agency level and will require annual appropriations, which may be significantly less than the authorized levels.

Modifications to Existing Programs

I. Use of Alternative Fuel by Federal Dual-Fueled Vehicles: Requires federal agency dual-fueled vehicles acquired to satisfy federal fleet AFV purchase requirements to actually use alternative fuels unless they qualify for a waiver. Waivers would be granted if the fuel is not readily available or is too expensive. (HR 6: Sec 701)

II. Incremental Cost Allocation for Federal Vehicles: Requires GSA and other federal agencies that procure alternative fuel vehicles to spread the incremental cost across all vehicles. This will eliminate the current first cost disincentive (incremental price) for federal fleet managers to purchase NGVs. (HR 6: Sec. 702)

III. EPAct Alternative Compliance and Flexibility: Expands compliance options under EPAct by allowing fleets to choose a more flexible petroleum reduction path. Under the new path, fleets that reduce petroleum use by at least as much as if all AFVs that they otherwise would be required to purchase under EPAct used alternative fuel 100 percent of time would be permitted to opt-out of EPAct AFV acquisition programs. To comply with this new option, fleet operators cannot simply reduce the number of vehicles in their fleet. They can, however, purchase smaller vehicles, more petroleum efficient vehicles and alternative fuel vehicles. (HR 6: Sec. 703)

IV. EPAct Emergency Vehicle Exemption: Exempts from EPAct coverage “vehicles directly used in the emergency repair of transmission lines and in the restoration of electricity service following power outages, as determined by the [DOE] Secretary.” (HR 6: Sec. 707)

V. Use Of High Occupancy Vehicle Lanes: Permits states to allow petroleum hybrids in HOV lanes with only one passenger. This provision was not supported by NGVC. (HR 3: Sec 1121)

VI. Additions To CMAQ-Eligible Projects: Adds certified and verified diesel retrofit technologies to list of eligible technologies for coverage under the CMAQ program. The eligible diesel retrofit technologies would include natural gas repowers. Also permits the States of Missouri, Iowa, Minnesota, Wisconsin, Illinois, Indiana, and Ohio to use CMAQ funds to purchase biodiesel. (HR 3: Sec. 1808)

VII. Vehicle Labeling Requirements: Requires automobile manufacturers to put a label on all dual-fuel (bi-fuel and flex-fuel) vehicles to inform owners that the vehicle can be operated on an alternative fuel. Applies to all autos manufactured after September 1, 2006. (HR 6: Sec. 759)

VIII. Extension of Maximum Fuel Economy Increase for AFVs: Extends the CAFE credits received by automakers for producing dedicated, bi-fuel and flex-fuel vehicles. (HR 6: Sec 772)

Studies

Review of EPAct of 1992 Programs: Requires DOE to report to Congress within 180 days of enactment of the provision on the effect of EPAct’s AFV programs, incentives, etc. DOE is to measure benefits in terms of increased vehicles and fuels, as well as the cost of compliance. DOE shall make recommendations on changes to EPAct. Issues that DOE must address include the: (1) number of AFVs acquired by covered fleets; (2) amount of AF used in AFVs acquired under EPAct amount of petroleum displaced; (3) cost of compliance (including benefits of using AF and AFVs), and (4) existence of obstacles to increased use of alternative fuels and biodiesel blends. (HR 6: Sec. 704)

Mobile Emissions Reductions Trading and Crediting: Requires EPA to submit a report to Congress within 180 days of enactment on the trading of mobile source emission reduction credits with owners and operators of stationary source emission sources to meet emission offset requirements within a non-attainment area. (HR 6: Sec. 752)

Natural Gas Supply Shortage Report: Requires the DOE Secretary to study and develop recommendations for achieving a balance between natural gas supply and demand to, in part, facilitate the attainment of national ambient air quality standards under the Clean Air Act. In performing the study, the Secretary is directed to develop scenarios for decreasing natural gas demand and increasing natural gas supplies that compare the relative economic and environmental impacts of Federal policies that encourage or require the use of natural gas to meet air quality, carbon dioxide emission reduction, or security goals. (HR 6: Sec. 1818)

Alternative Fuels Reports: Requires the DOE Secretary to carry out a study on the potential for biodiesel and hythane to become major, sustainable, alternative fuels. The hythane report shall provide a detailed assessment of potential hythane markets and the research and development activities that are necessary to facilitate the commercialization of hythane as a competitive, environmentally friendly transportation fuel. (HR 6: Sec 1823)

Review Of Energy Policy Act Of 1992 Programs: Requires the DOE Secretary to carry out a study to determine the effect that titles III, IV, and V of the Energy Policy Act of 1992 have had on (1) the development of alternative fueled vehicle technology; (2) the availability of that technology in the market; and (3) the cost of alternative fuel vehicles. (HR 6: Sec 1831)

Study of Highway Fuels Used by Trucks for Non-Transportation Purposes: Requires the Secretary of the Treasury to undertake a study regarding the use of highway motor fuel by trucks that are not used for the propulsion of the vehicle. (HR 3: Sec. 11144)