Master Limited Partnerships: Useful Tool or Green Finance Gimmick?
Advocates of renewables have been successful for decades in winning generous government subsidies. In the 1980s, investment tax credits for wind machines resulted in a boom in investment in wind projects, particularly in California. But many of those turbines were erected simply to provide tax havens, and didn’t produce electricity. So the Internal Revenue Service shut them down and recaptured some of the tax benefits from the investors.
The result: renewable energy financing dried up.
In 1992, Congress recognized the problems of rewarding just investment and created the renewable production tax credit (PTC), usable only if a project actually produces energy. Originally intended as a short-term (two years, initially) aid, Congress has consistently renewed the PTC every time it appears to ready to expire. Renewable interests have pushed, unsuccessfully so far, to make the PTC permanent. The PTC has proven to be a successful mechanism in attracting investments in wind and solar energy projects, particularly for large corporate and individual investors with big tax bills that they want to minimize.
But many renewable energy entrepreneurs fear that Congress will eventually kill the PTC. They are looking for some other way to attract capital. In addition, green energy advocates would like to attract a larger volume of smaller investors, or aggregations of smaller investors, to their projects, giving them a broader financial and political base, and a more liquid financial structure.
An Old Tool Is New
Enter the master limited partnership (MLP). What is an MLP? According to Forrest Milder of the Nixon Peabody law firm, “An MLP is a limited partnership that is publicly traded on a securities exchange. It combines partnership-style sharing of a business’s tax items with the liquidity of a publicly-traded stock. The notion is that the ability to easily join and leave the entity, along with the ability to receive a share of the tax benefits while you are a partner, makes this a flexible investment with great appeal to investors used to investing in the stock market. They can acquire a readily-tradable interest, then hold or sell it, as their personal situation may warrant, without the stickiness and risk associated with the longer-term investment normally associated with renewables.”
Master limited partnerships grew out of the oil and gas business, where they have been very successful. The first MLP was formed in 1981 by Apache Oil Company, which took advantage of provisions in the Internal Revenue Service Code aimed at fostering “publicly traded partnerships.” They spread like kudzu, showing up as financing mechanisms for hotels and motels, amusement parks, and the Boston Celtics professional basketball team. Facing growing tax chaos, Congress in 1987 amended the section of the tax code governing the partnerships by limiting them to a specified list of industries that qualified for the tax treatment. Congress amended the code again in 2008 to adjust the list of eligible partnerships. These were mostly companies dealing in depleting commodities, such as fossil fuels, but excluding renewables (except for geothermal).
In 2012, during the debate on the pending PTC expiration (which, of course, did not die), Sen. Chris Coons (D-Del.) introduced legislation to allow renewable projects to organize as master limited partnerships. The bill failed.
But Coons, joined by Sens. Jerry Moran (R-Kan.), Lisa Murkowski (R-Alaska), and Debbie Stabenow (D-Mich.) introduced a new bill (S.3275) to provide MLP treatment for renewable energy investments. Similar legislation has been introduced in the House by Reps. Ted Poe (R-Texas), Christ Gibson (R.-N.Y.), Mike Thompson (D-Calif.), and Peter Welsh (D-Vt.).
In a Senate colloquy with Murkowski, ranking Republican on the Senate Energy and Natural Resources Committee, Coons said,
For nearly 30 years, traditional sources of energy have had access to a very beneficial tax structure called Master Limited Partnerships. This is a financing arrangement that taxes projects like a partnership, a pass through, but trades their interests like a corporate stock. This prevents double taxation and leaves more cash available for distribution back to investors.
This allows limited partners and general partners to come together and invest capital in a Master Limited Partnership and form an operating company. For the last 30 years, that has been used in natural gas, oil, and coal mining, predominately in pipelines but also in fossil fuels.
Not surprisingly, this structure means MLPs have had access to private capital at a lower cost, and that is something capital-intensive projects, such as oil pipelines, badly need. Frankly, it is something alternative energy projects in the United States need more than ever.
A Tough Road Ahead
Critics of renewable energy subsidies—and they exist—will focus on whether the intention is to include MLPs on top of tax benefits, particularly the PTC, not available to other energy investments. They will charge the renewable interests with overreaching. For example, after Coons introduced his latest bill, Nathanael Greene, Natural Resources Defense Council renewable energy policy director, blogged, “MLPs are not a substitute for other clean energy programs such as the PTC, the ITC or accelerated depreciation. Without these incentives, MLPs alone would result in less, not more clean energy deployment, which would undermine the very goal of this legislation. Further, sound national energy policy must also end the suite of ongoing subsidies to Big Oil and other mature fossil fuels that are driving dangerous climate change and diverting taxpayer resources to some of the most powerful, wealthy industries in the world.”
A conservative criticism of MLPs on top of existing tax benefits for renewables quickly emerged. Heritage Foundation energy analyst Nicolas Loris wrote, “There is already too much congressional favoritism for preferred activity in the tax code, and numerous targeted tax credits for all energy sources exist beyond MLPs.” He concluded, “All energy projects, including renewable and nuclear, should be able to form MLPs, but that is only one step to bring parity to the energy tax code. Congress should also remove economically unsound tax credits and lower the corporate tax rate permanently. Congress should extend immediate expensing to all businesses to remove a sizeable impediment in the way of new investment.”
Opponents of MLPs also exist among green energy advocates. John Farrell, energy analyst for the Washington-based Institute for Local Self Reliance, argues that extending MLPs to renewables is “likely to reinforce centralized, corporate control of the energy system. Right now, renewable energy—particularly solar—is transforming the energy system.” He adds that conventional electric utilities are likely to take advantage of a push for MLPs for solar and wind by turning it into a push for MLPs for all new generating resources. He predicts that “many powerful, regulated industries…would love a bite at this apple, like the existing electric and gas utilities. The cost to taxpayers from letting these hogs get to the trough is likely much, much larger than the opportunity for renewable energy. These big industries—with huge lobbying budgets—are not likely to miss the opportunity.”
Given the current state of Congress, enmeshed in controversial issues including immigration reform and politically stalled with divided control of government, and a president battered by alleged scandals—a situation New York Times columnist Maureen Dowd dubbed “the sound and fury and battle for clicks”—the prospects for modifying the tax code to make MLPs available to renewable energy investors are cloudy. But the concept has fully surfaced and should get a thorough review and analysis in the days ahead.
—Kennedy Maize is MANAGING POWER’s executive editor.