The Ghost of Energy Crisis Past

Take a ton of coal dust, spray on a binder of latex or tar, and turn it into briquettes. Then call it a synfuel and sell it for $20 to a utility. That's for less than the cost of production, but you'll still reap a fortune: The federal government will give you a tax credit that can exceed $26.

Thank Congress and the Carter administration for such a sweet deal. In the midst of the '70s energy crisis, the federal government came up with a scheme to encourage the development of synthetic fuels. Known by the bland name Internal Revenue Code Section 29, the program hands out tax credits for synfuels. It languished on the books for 20 years until companies figured out a way to mine it. Now plenty of companies are cleaning up on the credits, including General Electric, insurance broker Arthur J. Gallagher & Co., and such utilities as Progress Energy and ScottishPower. One company, the Tampa-based TECO Energy, used its two synfuel plants to reduce its income tax rate by 57 percent.

Another winner is Headwaters Inc., of Salt Lake City, a 13-year-old outfit that changed its name six times and lost money growing alfalfa and trading bank notes. Thanks to the royalties it collects on its eight synfuel patents, Headwaters experienced a sixfold gain in revenue to $46 million in fiscal year 2000, earning its first profit. Almost half of the 55 IRS-certified coal synfuel plants use Headwaters' IRS-approved process.

Resource Data International, an energy consulting firm in Boulder, Colorado, believes coal synfuel production tripled last year to 10 million tons, and expects it to increase another fourfold by 2003. Synfuel operators could gain $1 billion in tax abatements by then. One company alone estimated it could generate up to $240 million a year in Section 29 credits.

Yet Section 29 is hardly reducing the nation's dependence on oil, since it's displacing already plentiful coal. And some suspect that synfuel operators are using otherwise marketable coal instead of recovering true coal waste. "You can spray anything you want on it, so long as the facility is blessed by the IRS," notes Forrest Hill, an Annapolis, Maryland-based consultant.

But perhaps not for long. Last October, the Treasury Department, at the behest of traditional coal producers, three members of Congress, and the governor of Kentucky, suspended certification of additional synfuel plants until it could make such a determination. Defending the synfuel operators: a political A-list that includes Sens. Orrin Hatch and Robert Bennett of Utah and Sen. Bob Graham of Florida.