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.