Synfuels Update and the Council for Energy Independence ,
 I am working closely with Ed Coast in the Tax Department on the IRS treatment of synthetic fuels (synfuels).  Bracewell Patterson, per our instruction, contacted PricewaterhouseCoopers to get an update and learn more about the Council for Energy Independence.  The contact was made confidentially and Bracewell did not reveal Enron's name as the interested party.

Update:

When Treasury issued the Revenue Procedure in April stating they would resume issuing Private Letter Rulings (PLRs), they indicated that they would impose a production limitation.  The industry under the guise of the Council for Energy Independence (see below) complained to the Deputy Assistant Secretary for Tax Policy Pam Olson.  (FYI - The Assistant Secretary has recused himself on synfuels).  Olson asked the industry to work with the IRS to find an acceptable production limit.  Even though there is no statutory authority or past regulatory guidance suggesting a production limit, the industry was willing to accept a production limit in return for certainty in the ruling process. The lawyers from Skadden Arps who were negotiating with the IRS were led to believe that the IRS was working towards a 2x or 2 1/2x nameplate limitation.  Most of the industry is producing 3x to 5x nameplate. The industry wanted 3x but would have accepted 2 1/2x. 

This week the IRS told the Skadden lawyers that it would provide favorable rulings only up to 1x nameplate.  The IRS told the lawyers that Treasury was on board with this extreme limitation. Also, we have learned that the IRS will require that a producer will have to show that it is producing a "synthetic fuel".  The problem here is that the IRC, under Sec. 29, does not define synthetic fuel, thus the auditors are given broad discretion in determining what is a produced synthetic fuel.  The IRS has indicated it will not officially release these new limitations, instead it will inform its auditors to approach audits with these new internal rules.

The Council for Energy Independence has contacted Deputy Assistant Secretary Pam Olson (who is on vacation until next week) to have Treasury react to the IRS actions.  Also, contacts have been made on Capitol Hill to push Olson to respond the IRS, but Congress is on its summer recess.  It is unclear how Deputy Assistant Secretary Olson will react to this.

The Council is considering seeking a legislative fix that would tie the hands of the IRS on the limitations in the Senate's energy bill.  The tax provisions of the Senate Energy bill will be considered in late September or October.

The Council for Energy Independence

The Council for Energy Independence (the "council") was founded by TECO Energy and now lists the following members:  A.J. Gallagher & Co., Carbon Resources Inc., Coal Capital Corporation, Covol Technologies Inc., Drummond Coal Sales, GE Capital, Koch Industries, Magellan Resources, Meridian Energy Corporation, PG&E National Energy Coporatiom, SCANA, Sempra Energy, and WPS Resource Corporation. 

The Council is represented before the IRS by Skadden Arps and on Capitol Hill by PricewaterhouseCoopers.  The Council members split the cost of the Skaden and PWC representation. Our contact at PWC estimated that the cost for the rest of the year to be $20,000-$25,000.  To join we need to contact Richard Lehvert at TECO Energy to get his approval. 

IMPORTANT:

1) It is unadvisable to seek a PLR at this time, because the IRS would likely include its recently announced limitations.

2)  We also believe it is unadvisable for Enron to independently contact/lobby Treasury, IRS or Capitol Hill as it would raise unwarranted attention.  Accordingly, we need to discuss membership in the Council.

3) Use of foreign coal would cause our friends on Capitol Hill from coal producing states to react negatively to us on this and other issues. The coal used in the production does not have to be domestic under the IRC. However, if the Treasury or Capitol Hill  were to learn that foreign coal is used, we feel certain that succesful efforts would be made to exclude foreign coal from receiving the credit.
kevin.mcgowan@enron.com, gary.justice@enron.com, richard.shapiro@enron.com, 