With some exceptions, the 21st Century version of synthetic-fuel plants uses competing coal-altering processes developed by a handful of companies, which make money by licensing their technology. One is Earthco, a mysterious Las Vegas enterprise whose technology is used in 10 plants in six states. An Earthco founding principal was Jerry W. Slusser, 57, who has been involved in a string of curious businesses. In 1998 a Commodity Futures Trading Commission judge found that Slusser and two of his companies "pilfered millions of dollars from customers using the commodities market to carry out their scheme." Some of the money was funneled through accounts of Slusser's Sterling International Bank Ltd., which existed as a post office drop on the Caribbean island of Montserrat. The commission barred Slusser and his firms from trading commodity futures and assessed a $ 10 million penalty, the largest ever in an administrative hearing. A U.S. appeals court, while acknowledging there had been "multiple frauds," reduced the fines to $ 600,000, which Slusser has again appealed.
The investor's home in a gated country-club community just off the Las Vegas strip is also the official address of more than 80 Slusser-related business ventures with names like 481TL LLC, CCHDDNV Inc., N15SB LLC and QEAT4 LLC. With their principals scattered across the country, the companies have the appearance of being tax-avoidance devices, just like the synfuels scheme. What, if anything, does Earthco's synfuel process do? Calls for information to Earthco and its employees were fruitless. When TIME reached Slusser, he promptly hung up the telephone after hearing the writer identify himself. A call to Earthco's office in Las Vegas proved equally unproductive. A woman who identified herself as Susan Trimboli said any questions would have to be answered by a Jim Scott in Sacramento, Calif. He turned out to be James Scott, who works out of Earthco's Las Vegas office. He is the president of Mid-Power Service Corp., another Las Vegas energy business. Until two weeks ago it was in bankruptcy court. Scott did not return calls, but Mark Davis, a Sacramento attorney and Scott associate, did. Asked about Slusser's current connection with Earthco, Davis replied, "The answer is zero. Neither as a shareholder, officer--no capacity whatsoever." But Davis declined to discuss Slusser's earlier involvement, the nature or origin of Earthco's technology or how it has reduced American dependence on foreign oil. "That's really all I have to say," he said.
Startec Inc., like Earthco, has a proprietary process for turning coal into synthetic fuel. The Dublin, Ohio, penny-stock company (last week's closing price: 35[cents]), whose formula is used by nine plants in four states, started life in 1990 as Sports International Inc., owner of Ohio's Columbus Thunderbolts arena-football team. That lasted only a year. The team was sold in 1991, and Sports International transformed into Startec, hoping to cash in on the technology boom. Among its announced ventures was a plan to convert tires to energy. That didn't turn out either, but somewhere along the line, Startec latched onto a synthetic-fuel process that other companies would license.
At one point, it forged a working alliance with yet another penny-stock company, WasteMasters Inc., one of the fringe enterprises that flit in and out of the synfuel industry. Two former top WasteMasters operatives, a Dallas father-and-son team, are under federal indictment on charges of securities fraud, money laundering, assisting in the preparation of false tax returns and conspiracy--all unrelated to synthetic fuels. As was the case with Earthco, officials at Startec were unavailable for interviews.
Another company that licenses its technology, Headwaters Inc. of Salt Lake City, Utah, was the only company willing to discuss the business in general terms with TIME. So exactly what kind of synthetic fuel is produced? The kind that meets the IRS definition of changing coal's chemical composition. "The tax code does not require you to show a change in the coal's performance," says Headwaters spokesman John Ward, whose company's processes are in use in 20 synfuel operations in nine states. "For the tax credit, you just need to show there has been a substantial chemical change." Ward said that Headwaters' latex reagents produce a "chemical change that is verified by a number of different laboratory tests." Ward said that "tests show that not only are the molecules different but that the coal also behaves differently. Coal products treated with our reagent show an increased level of combustion efficiency, which translates into reduced environmental impact."
Whenever there's a billion dollars to hand out to special interests, influential members of Congress--Democrats and Republicans--are always lurking in the background. After the IRS decided in June to take a closer look at the coal that is being called synthetic fuel, the synfuels industry turned to its old friends on Capitol Hill. In a rare public display of congressional meddling in a tax investigation, industry supporters persuaded a House Appropriations subcommittee to introduce a bill to call off the industrywide audit. It failed to pass in an 8-to-8 vote. Since then, the campaign has moved behind the scenes. The IRS has questioned the legitimacy of the synfuels in the past and then backed off after lawmakers intervened. In many ways, the IRS has created the dilemma. Some years ago, it ruled that any significant change in the chemical makeup of the coal would be sufficient to qualify for the credit. The agency then promptly issued to all the synthetic-fuel facilities so-called private-letter rulings stating that they qualified for the credit. Now it is debating whether to revise its standard.
Kenneth Kies, a Washington lawyer who represents the Council for Energy Independence, a synfuel coalition, said the group is "outraged" by the IRS review. On three previous occasions, Kies said, the IRS has reviewed the program and set rules for claiming the credit. "How many times do you get to do this?" Kies asks. "Good tax administration says that if the service has set up a series of rules and taxpayers adhere to them, they ought to be able to rely on that. And Congress, if they don't like what is happening, should come back and amend the statute." At the same time, Kies acknowledges the importance of the tax break. "People only do this because of the tax credit." In short, when it ends, so does the synfuel industry.
The credit is so generous that some investors can't take full advantage of it each year because they don't pay enough taxes on their other income. Rather than let the credit go to waste, they sell a portion of their synfuel operations to another group of investors who are looking for ways to reduce their taxes--a sort of perpetual tax-avoidance machine that never stops giving.
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."
But if common sense prevailed, Congress would scrap the entire program. In a critique to the IRS three years ago, Jack Workman, a West Virginia coal man, said the credit as used "has made good coal producers bad and has messed over the general economy of the coal industry." Alas, for that matter, it has messed over taxpayers and energy consumers in all 50 states as well.
