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Commentary: Why Master Limited Partnerships are a lousy policy for renewables, and taxpayers

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance

John Farrell directs the Energy Self-Reliant States and Communities program at the Institute for Local Self-Reliance

Cross-posted from the Institute for Local Self-Reliance

By John Farrell

If you follow the renewable energy industry and haven’t been sleeping, then you’ve probably heard about one of the few pieces of federal legislation purported to help clean energy that’s actually moving: expanding Master Limited Partnerships (MLPs) to cover wind and solar energy. (H.R.1696)

This is not a good thing.

MLPs originated in 1986, when Congress decided that to allow certain businesses (oil and gas pipelines) to avoid paying corporate income tax. These partnerships function a lot like publicly traded corporations, with publicly traded stock, but don’t pay income taxes.

Most folks who’ve touted expanding MLPs to include renewable energy projects see this move as “leveling the playing field.” And it will, allowing big energy corporations to avoid paying taxes on their renewable energy projects just like they do for pipelines.

But that’s not the worst. Several years after the MLP was created, the federal agency responsible for setting the prices to use these oil and gas pipelines (the Federal Energy Regulatory Commission) allowed the not-paying-corporate-income-tax companies to charge rates for access as though they DID pay the corporate income tax. Including this phantom tax payment in rates amounted to a 75% increase in after-tax profits for pipeline companies.

This policy wasn’t even set in a public forum (such as a docket with public hearings), but through a shadow “policy statement” released after private meetings with the oil and gas industry (and after a federal judge had previously struck down the absurd notion that users of pipelines should have to pay phantom taxes).

This makes two big problems in adding renewable energy companies to the list of eligible Master Limited Partnerships.

First, there are many powerful, regulated industries that 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.

But even more important, the extension of MLPs to renewable energy is likely to reinforce centralized, corporate control of the energy system. Right now, renewable energy – particularly solar – is transforming the energy system. It’s turning energy consumers into producers, re-routing energy dollars back into community economies, and giving cities and towns more control over their energy future. Half or more of new solar power in the U.S. is being put on the rooftops of homes and small businesses. New community solar policies (like one just adopted in Minnesota!) are giving even more Americans a chance to have skin in the energy game and share in the profits of a transition to renewable energy.

The average American isn’t going to be a shareholder of a Master Limited Partnership, but they probably will pay a share of phantom taxes in their electric and gas rates if MLPs are expanded to other energy industries. Even if Congress miraculously limits the MLP expansion to just the renewable energy industry, subsidiaries of most of the large corporations in the energy business (Shell, BP, Exxon) are building wind and solar projects. These subsidiaries would certainly be reorganized as MLPs, giving them a tax advantaged opportunity to crowd out competitors (like community solar or other distributed generation) AND make larger profits off their renewable energy business.

There are many ways the federal government could improve its policy toward renewable energy. A CLEAN Contract or feed-in tariff could supplant tax credits that act as a barrier to production-based payment for energy and avoid paying for panels that don’t produce power. The feds could remove ridiculous bonus incentives for long-distance, high-voltage transmission that gives electric companies an incentive to build power lines for 20th century power plants instead of distributed solar and wind power. They could set a federal distributed renewable energy standard that requires utilities to procure energy from places close to where people use it.

But let’s not expand a tax loophole to big renewable energy companies. This is one playing field best left unmoved.

(most of this article is based on a book, The Fine Print by former New York Times writer David Cay Johnston)

The ILSR is a member of RE-AMP, which also publishes Midwest Energy News.

Comments (4)

I think that I understand your perspective but I disagree with your conclusion. In my view, inclusion of renewable energy within the MLP eligibility criteria corrects an obvious advantage afforded “dirty” energy relative to renewable energy. Inclusion will also allow the high net worth investor market to begin to invest in renewable energy, a market segment that is currently precluded from investing due to another tax policy quirk that does not allow individuals to deduct tax incnetive-based losses from personal tax returns. And finally, tax policy that increases investment in renewable energy, whether from corporates or individuals, is a positive. Corporates will find tax-based investments in order to manage down their tax liability, let’s give them a reason to make those investments in renewable energy projects.

By Jeff Phillips on May 31, 2013

I haven’t seen anything that prevents a community from setting up an MLP as well. MLPs may well may be able to bring myriad opportunities to communities.

In crusading against “big”, don’t overlook the fact that economy of scale is what helps makes renewable energy affordable and competitive in the market

It should also be understood that currently much of the PTC value is diverted from cost reduction to the transaction costs that many developers must incur to use the tax appetite of those same “big” entities

By Ron Rebenitsch on May 31, 2013

Mr. Farrell, What guarentees are there in the new MN solar law that will make it any more “‘community” or “locally” owned than “Community Based Energy Development” of Big Wind? That was supposed to be local ownership and local profit – and there is little to none under current CBED law. Enel/ Geronimo’s recent application for 100MW non-rooftop solar makes me think the new MN solar law will profit foreign corporations (Enel – Italy) and Wall Street just as Geronimo/ Enel’s Prairie Wind (JP Morgan sindicate) and other industrial wind project do.

By Kristi on May 31, 2013

@Jeff
I think you make some very good points about making renewable energy as attractive an investment for rich folks as fossil fuel companies that are currently MLP-eligible. I guess my perspective is that if we have giant tax loopholes, it’d be better to level the playing field by closing them rather than widening them, even if “good” industries get in the loophole. I also think it’s a potential Pandora’s box and that it’s unlikely that only renewable energy industries get in the door.

@Ron
From my view on community renewable energy projects, if it requires a lawyer, that’s a barrier. The more we can develop policy that simplifies the process of gathering community capital and sharing the economic output, the better. I don’t see MLPs doing that.

@Kristi
Great question. There’s a set-aside for 20 kW and smaller solar projects in the law (10% of the total standard) with incentives for the same. I think focusing on scale rather than ownership helps avoid the ‘Goodhue problem,’ (whether or not something really is a community project) and will result in a fair amount of community based development. The community solar gardens provision in the law will also significantly improve the opportunity for community owned projects. To get any better, we would have needed a points system for community projects like they use in Ontario, but I don’t think we had the legislator appetite for it.

By John Farrell on Jun 4, 2013