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That's what WPS Resources did in 2001. WPS bought a synfuel facility near Tuscaloosa, Ala., and moved it near a coal mine in Hopkins County, Ky. Naturally, the plant lost money. But it generated such bountiful tax breaks that before long, WPS could no longer take full advantage of the credit because it lacked sufficient income. In 2001 and 2002, for example, WPS claimed a total of $45 million in credits.
As WPS CEO Larry Weyers put it in remarks to shareholders: "What we've discovered is that the operation has tax-credit potential that exceeds our needs." In other words, the company had more credits it could use than taxes owed. So WPS did what other synfuel owners do in similar situations. It sold a portion of its operation to a third party for $40 million while benefitting from the leftover credit. The only losers were American taxpayers.
The IRS review of the synfuel industry has for the time being halted the buying and selling of credits. Congress could resolve the issue by ending the credit, but it has shown little inclination to do so. In fact, the pending energy bill preserves it. Although the credit is due to expire at the end of 2007, until then it's worth $5 billion to $10 billion. And there's always the possibility that Congress will extend it. On four different occasions friendly lawmakers have intervened to rescue itlawmakers like Orrin Hatch, the Republican Senator from Utah, where Headwaters is based. A longtime champion of the credit, Hatch told colleagues in 1998, "This is a very important tax credit for alternative fuels. It is an issue of fairness, not one of corporate welfare."
It is, of course, just that. Congress's idea of a synthetic-fuel industry is unlike any other business model: it doesn't make a profit and never will. The cost of treating the coal makes synfuel more expensive than conventional coal. Thus this new generation of synfuel plants makes no economic sense. Their only allure is the tax credit. To be sure, those who benefit from the tax credit dispute the notion that it is a windfall. They claim that it has increased the supply of low-cost coal, lowered electricity prices, improved the efficiency of coal-fired generators and been environmentally friendly. What's more, according to the Council for Energy Independence, the credit "has created new jobs in an otherwise shrinking business." Those jobs come with a stiff price: at least $200,000 from taxpayers for each one.
Beyond the drain on the treasury, the credit has destabilized coal markets because synfuel producers periodically undercut conventional coal producers in this country and abroad, which they can afford to do because of their tax credits. Coal associations in Canada and Australia have complained that the tax credit is nothing less than a government subsidy interfering with the free market.
To preserve the break, the synfuel industry is lobbying intensely in Washington. The industry's Council for Energy Independence, whose members include Headwaters, GE Capital, Pacific Gas & Electric and other utilities, investment firms and coal companies, has been meeting with officials from Congress and the IRS. Says Kies, a former chief of staff of Congress's Joint Committee on Taxation, who heads the effort: "There is a lot of energy being put forth on behalf of taxpayers to force the IRS to back off of this."