BREAK IN TRANSCRIPT
By Mr. SPECTER:
S. 1325. A bill to amend the Internal Revenue Code of 1986 to permanently extend and modify the section 45 credit for refined coal from steel industry fuel, and for other purposes; to the Committee on Finance.
Mr. SPECTER. Mr. President, I have sought recognition to introduce legislation to make permanent a tax credit for the production of Steel Industry Fuel, SIF. SIF is used by the domestic steel industry as a feedstock for the manufacture of coke, which is coal that has been carbonized and is used as a fuel in steel making.
Last fall, Congress enacted a new tax credit under the refined coal provision of section 45 of the Internal Revenue Code for the production of this fuel product made from coal waste sludge and coal. This tax credit supports SIF projects that may not otherwise be viable due to materials, process, technology and other transaction costs. As originally enacted, the SIF credit provides for a one-year credit period.
There are numerous reasons that favor extending the tax incentives for SIF: it has significant energy, environmental, and economic benefits. First, SIF recaptures the BTU content of coal waste sludge; second, its production is the preferred method of coal waste sludge disposal and is done so in a manner approved by the Environmental Protection Agency, EPA; and third, it provides the economic and financial benefits of making our domestic steel industry more competitive by lowering production and operational costs.
The production of SIF is the most favorable method of disposing of coal waste sludge from an energy resource and environmental perspective. The disposal of coal waste sludge would otherwise be treated as a hazardous waste under applicable Federal environmental rules. The alternative methods of disposal are to transport the coal waste sludge off-site for incineration or to foreign countries for land-filling. Both options require the physical conveyance of a waste product, which is a dangerous, cumbersome, and expensive undertaking. The more obvious drawback is the failure to recapture the energy content of the coal waste sludge.
An extension of the SIF tax incentive is of critical importance in the current economic downturn, and its sunset would have a negative impact on the industry. Steel companies and coke plant operators are incurring losses as the demand for their product has dried up. There have been significant layoffs at the major domestic integrated steel producers, impacting thousands of workers in Pennsylvania, Illinois, Indiana, Michigan, Ohio, West Virginia, Kentucky, and elsewhere. Domestic steel manufacturers have been forced to operate at low capacity utilization rates and coke batteries have been placed on ``hot idle,'' a holding pattern to prevent the bricks that comprise the coke battery from cooling and damaging the battery. An extension of the SIF credit will enable these manufacturers to mitigate their losses while the economy recovers.
The current 1-year period for the SIF credit has been a significant hindrance in attracting the outside investment needed to finance SIF projects, especially in light of the prevailing economic conditions since the enactment of the credit. Steel industry fuel projects often involve lengthy negotiations to implement the transaction structure necessary to claim the SIF credit, which has effectively reduced the 1-year credit period to a lesser period for many projects. For this reason, the subsidy intended to be provided by the credit for the development of SIF projects requires a longer credit period.
Included in this legislation is an important clarification on an issue that has slowed negotiations with respect to SIF projects. It is expected that, for the convenience of the parties and for environmental safety, facilities producing SIF will typically be located on land leased from a steel company or other owner of a coking operation. Such a lessor will not be treated as having an ownership interest in the SIF facility because it leases land and related facilities, sells coal waste sludge or coal feedstock, and/or buys SIF so long as such person's entitlement to rent and/or other net payments is measured by a fixed dollar amount or a fixed dollar amount per ton, or otherwise determined without reference to the profit or loss of the facility. Similarly, a licensor of technology will not be treated as having an ownership interest in the SIF facility because it is entitled to a royalty and/or other payment that is a fixed amount per ton or otherwise determined without regard to the profit or loss of the facility. Such arrangements may also cause facilities that produce SIF to operate at a loss before the credit is taken into account; however, it is intended that the occurrence of such a ``pre-tax loss'' will not affect entitlement to this credit, regardless of whether such ``pre-tax loss'' is caused by the terms of the lease, license, supply or sales contracts between the parties. To that end, the bill provides necessary flexibility for varying circumstances of ownership interests and clarifies that the existence of such arrangements will not prevent the equity owner of a facility from receiving tax credits for its sales of SIF. This provision provides greater tax certainty to potential investors in SIF projects.
SIF is typically produced at facilities that are located on the premises of coke plants that are owned by integrated steel companies that are unrelated to the producer of such SIF. The SIF production facility is situated on or near conveyor belts that may be leased from the integrated steel company and production of SIF may occur while coal, and coal blended with petroleum coke, as described below, is transported on the conveyor belts. For commercial, liability, safety, environmental and other business reasons germane to the integrated steel companies that consume the SIF, SIF producers may purchase coal from the integrated steel producer, taking title and having risk of loss while such coal is transported on the conveyor belt, rather than directly purchasing the coal from the mine. The bill provides a safe harbor that establishes that the SIF producer shall be treated as the producer and seller of SIF that it manufactures from coal to which it has taken title. The bill further clarifies that the sale of SIF shall not fail to qualify as a sale to an unrelated party for purposes of the SIF credit solely because the sale is to a party that is also a ground lessor, supplier, and/or customer.
The bill also establishes that SIF may also be made using coal or coal that is mixed with some petroleum coke. Such ``pet coke'' has traditionally been used by steel companies/coke operators in a blend with coal as a feedstock for coke. The bill provides that its presence in SIF does not invalidate or otherwise reduce the credit.
SIF projects will expand our domestic energy resources by using what would otherwise be a hazardous waste of the coking process in a fuel product. The availability of the tax credit will attract outside investment to the steel and coke production industries and promote job growth in the domestic steel production industry and in related industries that service the steel and coke production industries. I urge my colleagues to support this legislation.
BREAK IN TRANSCRIPT