WV Interim Session October 2017 A Position Paper to Benefit All Mountaineers

A BIPARTISAN SOLUTION for STATE REVENUES, JOBS, AND ENERGY RATES Reduce Rates for WV Utility Bills Replacement for WV Business Inventory Tax $250 Million Revenue From Other States Lower Cost For In State Energy Use Attract Industry and Jobs

Stephen McElroy 232 West Olive St Bridgeport, WV 26330 304-842-2602 [email protected]

#1

PROVIDING CHEAP ENERGY For over 100 years West Virginia has exported its natural resources to drive the U.S. economy. [1] If WV were a country we would be one of the top 10 energy producers in the world! [2] [5] West Virginia would be one of the wealthiest nations on earth! Yet West Virginia remains one of the poorest states in the nation. [3] History is set up to be repeated with gas. The situation is even more dire with natural gas. Coal is labor intensive. The peak production years of coal employed 120,000 miners, plus thousands of employees in the trucking, railroad, and river transportation industries to bring the coal to market. [4] When the gas pipelines are complete, there will be no need for the thousands of transportation jobs. Even if wells continue to be drilled for decades and continue to employ 2000 to 3000 workers in drilling operations, there is no need for workers to extract the gas once a well is producing. This paper will present a bipartisan solution to compliment and add to actions being considered by the legislature, to enhance the ability for West Virginia and Mountaineers to finally truly benefit from our natural resources.

#2

Severance Tax % 10 States produce 87% of U.S. Natural Gas [5] OH and PA Governors desire 6.5% to 10% severance tax [6] [7] [8]

Chart Production information [9] Chart Severance Tax information [10]

#3

HOW MUCH IS THE WV SEVERANCE TAX? The WV State Treasurers Office lists the 10% of the Oil and Gas Severance Tax that is allocated to the counties and municipalities by code. Those amounts for the past few years are: [11] 2014 $13,471,327.54 2015 $15,869,841.15 2016 $10,318,221.21 Doing the math gets us the total severance tax collected for those years. 2014 $134,713,275.40 2015 $158,698,411.50 2016 $103,182,212.10 The U.S. ENERGY Information Authority (EIA) reports West Virginia production as [5] 2014 1.067 billion Mcf 2015 1.315 billion Mcf 2016 1.375 billion Mcf Despite increases in production reported by the gas industry to the Federal Government, the severance taxes paid to West Virginia have been less every year. Gas prices at the well head have been depressed due to a lack of pipe line capacity. 2016 was a 20 year record low for prices. [22] Recently the price has rebounded and production has increased due to some pipeline expansions coming on line to relieve the bottleneck that depressed prices. [13] New Pipe Lines Allow Production Increase Severance tax revenues will rise due to increased production and increased prices. The July 2017 record production figures, exceeding 138 million Mcf per month, [12] even if no additional pipelines come on line, would indicate a 12 month production of over 1.675 billion Mcf. More than a 20% increase over 2016. [5] Over the next few years, pipe lines coming on line will allow WV gas production to double as the EIA reports of pipeline projects show a total of 16 billion Mcf per day benefitting WV and the surrounding states. 4 billion Mcf per day of the 16 [13] are proposed to be dedicated to WV production exports only.

#4

WV GAS PIPELINE PROJECTS Recently pipelines have come on line allowing West Virginia production to exceed 4 million Mcf/day [12] which is a 14% increase year to date and, of course, record production. Over the next few years projects coming on line will quickly allow WV production to double. Pipeline capacities in million cubic feet per day

Downloadable Chart Information [13]

#5

ANECDOTAL ARGUMENTS AGAINST SEVERANCE TAX WHERE ARE THE FACTUAL STUDIES AND DATA? Unable to refute the truth Despite financial and data access, the anti-severance tax special interests have not even attempted to disprove studies that find severance tax levels have very little effect on production. Several studies were presented to the legislature by The West Virginia Center on Budget and Policy. [14] These are proven by actual data and analysis that severance taxes have little if any effect on production. Only anecdotal information even from institutions In the Pennsylvania efforts to institute a severance tax, here is an example of the anecdotal information used by the gas industry to prevent severance taxes: Even a usually data driven analysis group The Allegheny Institute On Public Policy presents only anecdotal information to argue against a severance tax, without presenting any data to show that a severance tax would harm production. Their strongest argument is that the proposed severance tax is not enough to solve the overspending in the state so why do it? [15] The West Virginia Coal association commissioned a study [16] that was soundly debunked as flawed. [17] [18] Only anecdotal information from industry representatives In a March 2016 column in the Register-Herald, [19] arguing for a coal severance tax decrease, Chris R. Hamilton, Senior Vice President of the West Virginia Coal Association and Chairman of the West Virginia Business & Industry Council wrote "Here’s the math: The states of Pennsylvania, Illinois and Indiana have no severance tax on coal production, and incidentally, all show recent gains in productivity." RESPONSE to Mr. Hamilton With all due respect, Mr. Hamilton, "Here's the math:" According to the U.S. Government Energy Information Administration (EIA) in their latest weekly report of states' production for week ending 9/2/2017, in all time frames, WV consistently out produces PA by nearly 2 to 1! [20] In fact, comparing year to date changes in production of the 3 states with little or no severance tax, using Mr. Hamilton's analysis, as demand increased, we would expect all 3 of these states, PA, IL, and IN to leave WV in the dust as they dramatically increase their relative production due to no severance taxes. According to EIA: [20] as of July 2017, year to date, PA production is up 19.9%, IN is up 9.7%, and IL is up 3.6%. So how poorly has WV done due to its high severance tax? WV's production is up 18.6% year to date. Sorry, Mr. Hamilton, your theory does not hold water. These are examples of anecdotal misinformation and deception from the special interests, attempting to get people to believe and Legislators to vote for severance tax decreases that are not what is best for the people and the state but are what is best for their special interests.

#6

REBATE GAS SEVERANCE TAXES FOR IN STATE USE Attract industry and jobs Mr Hamilton's additional comments (applied to coal but having the same effect for gas users) make the point for rebating 100% of severance tax for all instate use: “Additionally, the savings from lowering severance taxes would directly benefit electric rate payers and West Virginians generally. With lower costs, West Virginia coal and coal-fired electricity would be more economical and be elevated on the “economic dispatch” from the grid. The dollars saved from a lower tax rate would not be returned to producers but rather would work to the advantage of state residents.” [20] Why not 100% for all in state use? A September 23, 2015 analysis for rebating severance taxes for in state production of Natural Gas Liquids (NGL) A Win-Win Marcellus Shale Tax Incentive by The WV Center on Budget and Policy [21] “By increasing the severance tax on natural gas liquids, and issuing a credit for in-state use, the state would encourage chemical manufacturing industry to locate here. It would also generate much-needed additional revenue, ensuring West Virginia enjoys some benefits from its natural resources, even when these resources are taken out of the state.” Reduce utility rates for ALL Mountaineers Reduce Gas rates for all West Virginia rate payers. When we get our gas bill how would it feel to see a credit on the bill for the amount of the 10% severance tax? Why should any Mountaineer using gas in state pay for any of the severance tax? Residential or industrial? In fact, West Virginia royalty owners are required to pay the gas lease purchasers 5% of their severance tax liabilities. Royalty owners should also be able to get a refund of this severance tax. No Mountaineer should have to pay any severance tax. All severance tax money to the state should come from exported gas.

#7

BUSINESS INVENTORY TAX REVENUES = $250 MILLION Some in the Legislature are looking for a way to replace the business inventory tax revenue. They have several ideas as to how to rearrange what Mountaineers pony up in order to make West Virginia more business friendly. Doubling the severance tax with a 100% rebate/prebate for all instate use is absolutely what is best for the people and the state. As gas production increases with more pipelines coming on line in the next 1-3 years, West Virginia production will more than double and severance tax revenues will also. Industry projections for the price of gas are in the $3 to $4 per Mcf range [22] for perhaps several decades.

A GRADUATED SEVERANCE TAX MAY NEVER INCREASE THE SEVERANCE TAX RATE Since projections are for gas prices to remain relatively low for some time, a graduated approach will not significantly increase revenues.

#8

SUMMARY There is no silver bullet or Holy Grail to attract industry and jobs. The State government realizes this. They are reported to be ready to implement all ideas to help make that happen. A severance tax rate of 10% with a 100% rebate/prebate for in state use will absolutely help. Over 90% of all gas production in West Virginia is exported. Since all credible studies show severance taxes have very little effect on production, there is no reason why the severance tax could not be doubled to 10%. At current production rates and current prices, even with the rebate, severance tax revenues in the first year could easily be over $250 million. As gas lines come on line over the next 1 to 3 years, West Virginia's gas production will easily double. Severance tax revenues will also double to over half a billion dollars annually. The West Virginia Center On Budget and Policy The West Virginia Center On Budget & Policy has been pounding the severance tax drum for at least 6 years. Their facts and the studies presented have never been debunked as it is the truth. The anecdotal information presented by special interests have dominated the conversation. Their campaign contributions have also muddied the swamp waters. 1. 2. 3. 4.

This is definitely what is best for the people and the state. Lowering Utility Rates. Replacement Revenue for the Business Inventory Tax. $250 Million and More in Revenue From Other States. Lower Cost for Feed Stock and Energy Use to Help Attract Industry and Create Jobs.

All by simply increasing the severance tax rate to 10% and extending rebates for in state use. I am confident that the vast majority of our legislators will do what is actually best for the people.

Foot notes [1] National Coal Heritage Area & Coal Heritage Trail http://www.coalheritage.wv.gov/coal_history/Pages/default.aspx [2] The World Energy Council (WEC) https://www.worldenergy.org/data/ [3] CNBC WV Now 50th economy and for business https://www.cnbc.com/2017/07/11/west-virginia-americas-worst-state-for-business-in-2017.html https://www.cnbc.com/2017/07/11/top-states-for-business-50-west-virginia.html [4] National Coal Heritage Area & Coal Heritage Trail http://www.coalheritage.wv.gov/coal_history/Pages/default.aspx [5] U.S Energy Information Administration https://www.eia.gov/dnav/ng/ng_prod_sum_a_epg0_fgw_mmcf_a.htm Natural Gas Gross Withdrawals and Production [6] Marcellus Drilling News http://marcellusdrilling.com/2015/03/oh-gov-kasich-the-bully-accept-my-6-5-tax-or-risk-a-10-tax/ OH Gov Kasich the Bully: Accept My 6.5% Tax or Risk a 10%+ Tax [7] The Times-Tribune http://thetimes-tribune.com/news/wolf-proposes-6-5-percent-severance-tax-1.2151924 PA Governor Wolf proposes 6.5% Severance Tax [8] Keystone Politics http://www.keystonepolitics.com/2014/03/pagov-mccord-calls-10-severance-tax/ Former PA gov McCord calls for 10% Severance Tax [9] U.S Energy Information Administration https://www.eia.gov/dnav/ng/ng_prod_sum_a_epg0_fgw_mmcf_a.htm Natural Gas Gross Withdrawals and Production [10] Council of State Governments – CSG http://knowledgecenter.csg.org/kc/system/files/7.15%202016.pdf State Severance Taxes pdf Most up to date listing – 2016 [11] West Virginia State Treasurers Office http://www.wvtreasury.com/Banking-Services/Revenue-Distributions/Oil-and-GasSeverance [12] EIA Natural Gas Monthly Report https://www.eia.gov/naturalgas/monthly/ [13] EIA accumulation of pipeline reports https://www.eia.gov/naturalgas/data.php#pipelines [14] West Virginia Center on Budget and Policy 11/15/2011 Presentation Finance Subcommittee B http://www.wvpolicy.org/downloads/severance_taxes_and_natural_gas111511.pdf Citing several studies showing severance taxes have little effect on production. [15] Senate Passes Severance Tax for Unconventional Well Gas http://www.alleghenyinstitute.org/wp-content/uploads/2017/09/Vol17No36-1.pdf [16] Feb. 15, 2016 Economic Impacts From A Reduction In West Virginia Coal Severance Tax Rate A Study Commissioned By WV Coal Association (can no longer find on their web site) Here is a link to a downloadable copy of the study. https://www.scribd.com/doc/299353090/WVCoal-Tax-Relief-Economic-Impact-FINAL-02-14-2016-1 [17] West Virginia Center on Budget and Policy http://www.wvpolicy.org/wv-coal-association-severance-tax-study-ignores-everything-we-knowabout-severance-taxes/ "The numbers in the Coal Association’s report are entirely unrealistic, which is probably why, . …...despite their report, they don’t deny that a severance tax cut probably won’t help."

[18] West Virginia Environmental Council http://wvecouncil.org/coal-association-uses-flawed-study-to-justify-tax-cut/ Coal Association uses flawed study to justify tax cut [20] Passage of Severance Tax Cut Means Coal Jobs and Tax Dollars – Register-Herald http://www.register-herald.com/opinion/columns/passage-of-severance-tax-cut-means-coal-jobsand-tax/article_a78cdb7e-dcc9-54a5-832f-4d4651b1aaec.html [21] A Win-Win Marcellus Shale Tax Incentive by The WV Center on Budget and Policy http://www.wvpolicy.org/wp-content/uploads/2015/09/NGL-policy-brief.pdf [22] Data to convert from BTU to Mcf .917 EIA Report Jan 13, 2017 “Natural gas prices in 2016 were the lowest in nearly 20 years” https://www.eia.gov/todayinenergy/detail.php?id=29552 2016 average $2.49 / MMBtu = $2.28 / Mcf