Senate Hearing on Extending the MLP Rules to Renewables

Senator Coons is reported to have said that the bill “has the potential to bring a significant wave of private capital off the sidelines”. ¹ His written testimony provides the following: “In summary, access to low-cost financing will define our nation’s energy future. It will determine how, when, and which energy sources emerge as the central players in the American energy marketplace in the long term.”²

Senator Moran is reported to have noted that the oil and gas industry raised more than $23 billion in equity in 2012 using MLPs.³ His written testimony provides the following: “It is important to note that the MLP does not represent a ‘tax break’… . Rather, it is a tax simplification structure that concentrates tax at the investor level, avoids double taxation, and significantly broadens the potential investment base.”⁴ The spirit of this testimony is admirable, but how does the senator define “tax break” if it does not include avoiding the corporate layer of income tax? Or is a “tax break” only a reduction in taxes advocated by one’s opponents? 

Here are some highlights from Senator Stabenow’s written opening remarks:

• “We need a ‘do it all’ approach when it comes to energy production … But we can’t have a true ‘do it all’ approach if we support one technology with 100-year-old tax credits⁵ while ignoring emerging clean energy technologies.”
• “China is spending over $178 million per day on clean energy technologies.”
• “There are 8,000 parts in a wind turbine, … and we can make every one of them here.  During 2012, wind energy became the number one source of new U.S. electricity generating capacity, providing 42% of all new generating capacity and supporting 75,000 jobs nationwide. The solar industry employs 119,000 people - up 13% from 2011 -representing one of the fastest growth rates for any industry.  Solar prices have declined by 60 percent since 2011.”
• “We must engage in the global race to lead the world in these new technologies, or risk falling further behind other countries.  We need to seize the opportunity before it is too late.  And tax reform is that opportunity.”⁶

The bill should be enacted but not as a trade for production or investment tax credits. Dan Reicher of Stanford Law School acknowledged this in his testimony: “I want to emphasize strongly that my support for MLPs and REITs should in no way signal that I endorse an immediate phase-out of PTC or any weakening of the current ITC.  The PTC and ITC have been critical catalysts in the growth of U.S. renewables” (emphasis in the original).⁷ It would have been helpful if Mr. Reicher could have made this point in the June 1, 2012, New York Times editorial that he co-authored that advocated for MLPs.⁸ That editorial appears to have spawned the idea in the Washington consciousness that MLPs (or real estate investment trusts (REITs)) were a fair trade for the tax credit regime.

The bill will provide two critical improvements for the renewables industry: (1) it will enable private-equity-fund-backed developers to trade their private equity investors for less expensive retail investors and (2) a liquid market for renewable energy projects that are beyond the tax benefit period (e.g., beyond the five year recapture period for investment tax credits or the 10-year production tax credit period).

Further, it is important to keep in mind that the bill does not solve the industry’s largest challenge - a shortage of tax equity. MLPs, as contemplated by this bill, will not be able to effectively pass through tax credits or accelerated depreciation to their unit holders who are individuals due to the passive activity loss rules and the at-risk rules in the Internal Revenue Code. Therefore, the low cost of capital of MLPs will not be competition for the small cadre of tax equity investors that currently set the market for tax equity, but it will compete with sponsor/developer capital providers.