APGA Weekly Update January 7, 2016

01-07-2016 14:50

APGA Weekly Update, January 7, 2016

CFTC Approves Final Rule on Margin Requirements for Uncleared Swaps

On December 16, the Commodity Futures Trading Commission (CFTC) approved a final rule addressing margin requirements for uncleared swaps for swap dealers and major swap participants. APGA filed comments and met with CFTC staff on this rulemaking. Both the proposed rule and the final rule specifically exempt transactions with non-financial end-users—such as public natural gas systems—from margin requirements, which is a positive outcome for APGA members.

However, in its comments and in meetings with CFTC staff, APGA raised concerns regarding the potential impact of margin requirements imposed on certain transactions between two swap dealers or major swap participants. The issue of concern for APGA is that a back-to-back swap transaction is a component of a natural gas prepayment transaction—the use of tax-exempt financing for the long-term purchase of natural gas. The first half of the swap transaction would be between a public natural gas system or joint action agency and a swap dealer or producer, and as a result that swap would be exempt from margin requirements; the back end of the swap transaction would likely be between two swap dealers and therefore would not be exempt from having margin requirements imposed upon it.

The concern from APGA’s perspective is that if margin requirements are imposed on the back end of the swap transaction, those costs would ultimately be passed onto the public natural gas system or joint action entering into the prepay. APGA argued, among other things, that the swap associated with a prepay is a “tear-up” swap and there is not any market exposure to any of the counterparties.

The final rule approved by the CFTC is silent as to whether margin requirements would have to be posted on these back-to-back transactions at this time. However, the final rule did note that the CFTC considered the issue as the final rule states, "The Commission notes that capital requirements of Covered Swap Entities are outside the scope of this rulemaking and therefore is not addressing the capital implications of Municipal Prepayment Transactions at this time."

APGA will discuss this issue further at its upcoming committee meetings scheduled for January 25 and 26 in Tucson, Ariz. One specific concern will be how banks will handle prepay transactions in the future. For example, will banks require margin requirements on these transactions and what impact will this have on the cost of the prepay? A copy of the comments APGA filed with the CFTC are available on the APGA website at www.apga.org/correspondence. For questions on this article, please contact Dave Schryver of APGA staff by email at dschryver@apga.org or by phone at 202-464-2742.

DOE Releases Strategic Plan to Address Climate Change

On January 6, the Department of Energy’s (DOE) Office of Energy Efficiency and Renewable Energy (EERE) released their 2016–2020 STRATEGIC PLAN and Implementing Framework. The strategic plan will serve as the implementing framework for the President’s Climate Action Plan (CAP), a comprehensive strategy to address the mounting effects of climate change. In particular, the he plan will address areas of the CAP focusing on clean energy deployment, a modern transportation sector, improving energy productivity, and Federal leadership in clean energy. EERE’s vision is clearly biased towards increasing funding and the deployment of clean energy. Unfortunately, they do not consider natural gas as a clean fuel.

In order to realize its vision and achieve its mission EERE has created a set of strategic goals that are both sector specific and crosscutting.
These goals are:
1. Accelerate the development and adoption of sustainable transportation technologies;
2. Increase the generation of electric power from renewable sources;
3. Improve the energy efficiency of our homes, buildings, and industries;
4. Stimulate the growth of a thriving domestic clean energy manufacturing industry;
5. Enable the integration of clean energy into a reliable, resilient, and efficient electricity grid;
6. Lead efforts to improve federal sustainability and implementation of clean energy solutions; and,
7. Enable a high-performing, results-driven culture through effective management approaches and processes.
The plan does note that they need to reduce infrastructure and delivery cost for natural gas vehicles. Outside this mention, the rest of the transportation section is devoted to reducing the cost and expanding the availability of electric vehicles.

The other area of major interest is the goal of improving the energy efficiency of our homes, buildings, and industries. EERE has outlined seven success indicators:

1. By 2020 develop cost effective technologies capable of reducing a building’s energy use per square foot by 30 percent, compared to a 2010 baseline;
2. By 2030, reduce energy use per square foot in all U.S. buildings by 30 percent, compared to a 2010 baseline;
3. By 2025, reduce the energy used for space conditioning and water heating in single-family homes by 40 percent from 2010 levels;
4. By 2025, demonstrate approaches with market leaders in the commercial sector achieving 30 percent energy savings per square foot for existing buildings and 50 percent energy savings in new buildings relative to typical commercial buildings in 2010;
5. By 2020, demonstrate at scale market-based industrial programs and practices providing energy savings of 25 percent or more;
6. By 2025, introduce new industrial technologies and/or advanced materials that lower facility-level energy costs 50 percent or more, and/or provide 50 percent savings over targeted product lifecycles, compared to a 2010 baseline; and,
7. From appliance standards enacted from 2009 through 2016, realize energy savings to avoid at least 3 billion metric tons of carbon emissions cumulatively by 2030.

Their success indicators have specifically identified space heating, water heating and increasing their influence within the code development and adoption process. The other success indicator of serious note is the last one mentioned. This indicator clearly demonstrates the administration’s view of energy efficiency standards as an environmental compliance tool rather than an energy savings mechanism. This may indicate why they are so willing to propose rules that have negative life cycle and no economic justification.

However, within this same section they have identified the use of CHP as an area where they intend to increase funding and research.
For questions on this article, please contact Dan Lapato of APGA staff by phone at 202-464-2742 or by email at dlapato@apga.org.

Looking Back on Energy Legislation

On December 3, 2015 the House of Representatives passed the North American Energy Security and Infrastructure Act of 2015 (H.R. 8) despite strong Democratic opposition from members who labeled the bill “backward looking.” Passage of the bill came after a breakdown in negotiations between Republicans and Democrats who began by supporting the bill on a bipartisan basis as it was developed in the House Energy Committee. By the time the bill reached the floor, Democrats were largely opposed to the package.

For APGA members, key provisions of the House energy bill include:

- A provision to repeal the ban on the use of fossil fuels in federal buildings by 2030, which is Section 433 of the Energy Independence and Security Act, and replace it with protocol to establish energy saving goals based on the building type and location—similar to the Hoeven-Manchin Language in the Senate (an effort to strip out this language via amendment was defeated 179-246);

- The Blackburn-Schrader Energy codes language that addresses the manner in which model building energy codes are developed; and,

- The negotiated furnace rule language (Section 4123), which delays the Department of Energy’s (DOE) furnace rulemaking to allow stakeholders the opportunity to continue negotiations on a natural gas furnace efficiency standard.

Moving forward, it is very unlikely that H.R. 8 will become law. President Obama has threatened to veto the bill. The threat of a veto coupled with several controversial provisions in the bill will make it very unlikely that the Senate will consider this bill.

However, the Senate has several versions of energy legislation that have passed out of the Senate’s Energy and Natural Resources Committee. The Murkowski-Cantwell energy bill was approved by a vote of 18-4, with 10 Republicans and eight Democrats in support of reporting it for consideration by the full Senate.

The bill has a provision that would repeal the ban on fossil fuel-generated energy use in federal buildings (Section 1015). This language is identical to the language found in H.R.8. The bill contains provisions that would delay the final rule to eliminate non-condensing furnaces and is the same language as S. 1029, which Senators Hoeven (R-N.D.) and Alexander (R-Tenn) introduced last spring. The language would suspend the DOE proposed rule, require a study on a nationwide condensing standard and then require a negotiated rulemaking. This language is stronger than the language found in H.R. 8. Several energy efficiency organizations have already begun to apply pressure to have this language stripped out of the bill.
A third provision of note in the bill also includes language to further identify, explore, assess, and develop methane hydrate as a commercially viable source of energy. This language is not in H.R.8.

A fourth provision to highlight is Sen. Alexander’s Vehicle Innovation Technologies amendment language included during the mark-up debate. This language will direct more funding for the research and commercialization of new vehicle technologies. The natural gas vehicles market is specifically mentioned in the language. The Senate language does not contain the Blackburn-Schrader codes language; however, APGA is working with a coalition of stakeholders to have this language added.

Overall, the Murkowski-Cantwell energy bill is being touted as a way to improve electric reliability and energy efficiency; promote the development of hydropower, geothermal, and methane hydrates; enhance cybersecurity efforts; bolster mineral security; reform the federal permitting process; and, repeal a range of obsolete authorities currently within the U.S. code. The measure also reauthorizes the Land and Water Conservation Fund.

In addition to the Murkowski-Cantwell energy bill, the Portman-Shaheen energy bill has also been voted out of committee. The Portman-Shaheen energy bill is considered uncontroversial and has also been incorporated into the Murkowski-Cantwell energy bill. However, because the Murkowski-Cantwell energy bill is considerably larger and includes a wide range of energy titles, Chairman Murkowski agreed to let the Portman-Shaheen energy bill be considered concurrently by the full Senate. This is important because the repeal of Section 433 is written into both bills; so if the larger Murkowski-Cantwell energy bill bogs down in debate, there is still a second legislative opportunity with the Portman-Shaheen energy bill.

If the Senate passes its version of energy legislation, which is expected to be considered in early 2016, perhaps a House-Senate compromise bill could make it to the President’s desk. Whether or not that bill actually makes it into law depends on what provisions end up in the final bill and whether they are acceptable to the President. APGA will keep members informed of any developments with energy legislation.

For questions on this article, please contact Dan Lapato at dlapato@apga.org or Scott Morrison at smorrison@apga.org.

2015 Was a Strong Year for NGV Policies

2015 was a very successful year for natural gas vehicles (NGV) in terms of federal policy adoption. A number of industry and APGA-supported policies passed Congress and were signed into law by the President as a part of different bills throughout the year. These bills include a temporary extension of surface transportation in the summer, a permanent surface transportation bill at the beginning of December, and the Tax Extenders package at the end of December, all of which included key NGV policies.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (H.R. 3236), provided a short-term extension of the country’s funding for highways, transit programs, and other transportation provisions, as well as provisions to improve veterans’ health care. For APGA members, this legislation also included a critical APGA-supported provision—permanently fixing the inequity in the taxation of liquefied natural gas (LNG). Previously, LNG was taxed on a per gallon basis, which due to the lower energy content of LNG versus diesel, meant that LNG was being taxed 70 percent more than diesel, providing a significant disincentive for fleet managers to switch their trucks to LNG. This bill changed the method of taxation from a per gallon basis, to an energy-content basis, to match the taxation of compressed natural gas (CNG). This change lowered the effective tax on LNG from 41.3 cents/diesel gallon equivalent (DGE) to 24.3 cents/DGE, equal to the tax on diesel.

Surface transportation legislation was passed again in December providing a five-year extension of surface transportation programs when the Fixing America’s Surface Transportation (FAST) Act easily cleared both chambers. The bill provided long-term certainty for states and private businesses that rely on federal funding, but does not solve the fundamental problem of how to fund the country’s surface transportation programs, revenue for which is declining due to the gas tax being stuck at 18.4 cents/gallon of gas. Rather than raise the gas tax or institute some other road use tax, Congress patched together funding from the gas tax and other areas of the budget to pass this legislation.
However, critical for APGA members, the FAST Act contains some important industry and APGA-supported NGV provisions, summaries of which are below and were provided by our strategic partner, NGVAmerica.

- Weight exemption for NGVs on federal roads: provides that vehicles powered primarily by natural gas may exceed federal weight limits up to a maximum of 82,000 pounds based on additional weight of natural gas fueling systems and tanks.

- Fuel economy credits for NGVs: current regulations calculate fuel economy by assuming bi-fuel NGVs operate 50 percent of the time on gasoline instead of natural gas and therefore do not
fully reflect benefits of bi-fuel vehicles. This change would allow automakers to use a higher factor for natural gas operation when calculating fuel economy beginning in 2016 versus 2019 as in current law.

- Expansion of Congestion Mitigation Air Quality (CMAQ) program: the bill amends the CMAQ program to among other things clarify that port facilities qualify for funding if located in areas that are non-attainment for particulate matter (PM) 2.5. The amendment incudes on-road and non-road vehicles. The PM 2.5 priority allocations continue to include priority consideration for projects proven to reduce PM 2.5 and specifically calls out diesel retrofits. The amendments do not specifically call out alternative fuel projects as had been proposed in the House version but alternative fuel projects have historically qualified under the diesel retrofit program.

- Extension of HOV lane access for NGVs: the current ability of states to provide exemptions for alternative fuel vehicles access to HOV lanes expires September 30, 2017. This language extends authority until September 30, 2025. Amendments drop the references to Inherently Low Emission Vehicles and the exemption language refers to dedicated alternative fuel vehicles, such as NGVs, and plug-in electric vehicles. Hybrid and fuel efficient vehicles are phased out of the program in 2019.

- Alternative fuel infrastructure corridors: the bill creates alternative fuel infrastructure corridors including natural gas fueling stations along major national highways, and requires initial designations be done in consultation with communities to identify priorities, and establish aspirational deployment goals
Last and certainly not least, on December 18, Congress passed Tax Extenders legislation, titled the Protecting Americans from Tax Hikes Act of 2015, which was bundled together with an omnibus government funding bill. Tax Extenders legislation is an annual collection of expired tax breaks for a wide spectrum of industries that Congress passes at the very end of the year.

Two noteworthy NGV provisions that were included in the Tax Extenders package are the Alternative Fuel Vehicle Refueling Property Credit and the 50 cent Alternative Fuel Excise Tax Credit for sales of CNG/LNG for use in motor vehicles. It is worth noting that the excise tax credit for LNG will be given on an energy content rather than volumetric basis to ensure symmetry with the recent change to taxation of LNG based on energy content that occurred earlier this summer. Both credits are retroactive for 2015 and are extended through all of 2016, a proposal which APGA, AGA, NGVAmerica, and many other NGV proponents pushed for throughout the year.

2015 was a very successful year for NGV policy, but more work lies ahead for 2016 to ensure NGVs achieve policy parity with other transportation technologies. For questions on this article, please contact Scott Morrison of APGA staff by phone at 202-464-2742 or by email at smorrison@apga.org.

EIA Reports Storage Decrease of 113 Bcf to Put Working Gas Storage at 3,643 Bcf

Here is the weekly EIA Summary Report issued on Thursday, January 7, 2016, which reports the week’s storage report highlights for Friday, January 1, 2016. A 113 Bcf decrease has been reported.

Working gas in storage was 3,643 Bcf as of Friday, January 1, 2016, according to EIA estimates. This represents a net decline of 113 Bcf from the previous week. Stocks were 535 Bcf higher than last year at this time and 464 Bcf above the five-year average of 3,179 Bcf. At 3,643 Bcf, total working gas is above the five-year historical range.

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