Global Project Finance > Tax Equity Telegraph > A Camel’s Nose under the Tent: MLP Legislation

A Camel’s Nose under the Tent: MLP Legislation

12 Mar '13

The oil and gas industry benefits from the master limited partnership (MLPs) rules.  Those rules provide that oil and gas businesses (and certain other businesses) may raise equity in the public markets but without liability for corporate income tax.  MLPs enable the oil and gas industry to raise capital from retail investors at tax advantaged rates.

Advocates for the renewable energy industry point out that the Internal Revenue Code requires that 90 perecent of an MLP’s income to come from qualified sources (e.g., oil or gas operations) and income from renewable energy projects is not a qualified source.  Thus, the advocates suggest that Congress should amend the definition of qualified sources to include income from renewable energy projects.

The next phase of the conversation is that the industry’s most significant problem is a lack of tax equity providers.  And merely making renewable energy eligible for MLP treatment would not address that shortage, because the investors that buy units in the MLP would be mostly individuals: individual investors would still be subject to the passive activity loss rules and the at-risk rules that would prevent them from using the tax credits and accelerated depreciation in an efficient manner.

Senators Chris Coons (D-Del.) and Jerry Moran (R-Kan.) in 2012 introduced a bill to amend the MLP rules to make income from renewable energy projects “qualifying income.”  However, it does not address the passive activity loss rules or the at-risk rules, so it would not enable MLPs to be tax equity providers.  That is, MLPs under this amendment would only provide cash equity or debt to renewable energy projects.

That leads to the question of whether the renewables industry should support the Coons-Moran bill or hold out for a bill that also fixes the passive activity loss rules and the at-risk rules.  Fixing those rules is difficult, because they were enacted in the 1980s in response to allegedly abusive tax shelters sold to the public.  The tax lawyers that serve on Congressional staffs do not want to risk a return to aggressive tax shelters sold to retail investors.  Thus, they cling to those rules like a security blanket, and tell their bosses in Congress not to support any dilution of them.  (See page 14 of the Summer 2012 Project Perspectives.)

The renewables industry should vigorously support the Coons-Moran bill.  First, a liquid supply of cash equity and debt could do much to lower the cost of capital.  Developers, rather than seeking equity infusions from private equity funds demanding double digit returns, could raise equity from the public at far lower rates.  Further, MLPs could be buyers of renewable energy projects that have exhausted most of their tax benefits: generally five years for solar and 10 years for wind.  Thus, MLPs could provide developers with a viable exit strategy.

Finally, the change to the MLP rules is a camel’s nose under the tent.  If the renewables industry behaves itself and shows an ability to exercise prudence in structuring deals, it could over time persuade Congress that it can loosen the grip on the security blanket and make a renewable energy exception to the passive activity loss and at-risk rules for investments made through an MLP.