Consumer Energy Report is now Energy Trends Insider -- Read More »

By Robert Rapier on May 29, 2014 with 10 responses

The MLP Parity Act is a No-Brainer for Renewable Energy

Tags:

Introduction to MLPS

A Master Limited Partnership (MLP) is a publicly traded partnership with a tax structure that enables it to attract low-cost capital. The main attraction of an MLP from an investor’s point of view is that MLPs don’t pay corporate income tax. Profits are passed directly to unitholders via regular distributions. Profits from conventional corporations are taxed at the corporate level, then a second time via the personal income tax on distributed dividends. In contrast, MLP distributions are taxed just once, at the individual level.

But MLP distributions aren’t immediately fully taxed either. In fact most of the distribution — typically 80 to 90 percent — is classified as a return of capital under the depreciation allowance, which subtracts capital depreciation from net income to account for the fact that assets like pipelines and wells lose value over time.

The depreciation allowance lowers the immediate tax bill but also the cost basis of the MLP investment, resulting in a larger capital gain when the MLP is sold. Over time the tax-deferred income can be invested elsewhere, allowing investors to compound returns that would have otherwise been taxed, while also earning a steady stream of income. This has made MLPs an extremely popular income investment.

The partnerships, in turn, gain access to a broader pool of stable capital to finance projects. There are currently more than 100 publicly traded MLPs representing some $445 billion in capital. Approximately $400 billion has gone into qualifying energy and natural resource projects, and much of that — perhaps 80 percent — into midstream projects such as oil and gas pipelines. These midstream MLPs usually derive most of their income from fee-based businesses, insulating them from the volatility of the commodity markets and allowing them to maintain a predictable income stream.

Master Limited Partnerships Parity Act

A little over a year ago, legislation was introduced to expand the universe of MLPs to include a number of renewable energy technologies. The Master Limited Partnerships Parity Act (MLPPA) was sponsored in the Senate by Sen. Chris Coons (D-DE) and in the House by US Rep. Ted Poe (R-TX).

The summary of the MLPPA (S.795, H.R.1696) reads:

Master Limited Partnerships Parity Act – Amends the Internal Revenue Code, with respect to the tax treatment of publicly traded partnerships as corporations, to expand the definition of “qualifying income” for such partnerships to include income and gains from renewable and alternative fuels (in addition to fossil fuels), including energy derived from thermal resources, waste, renewable fuels and chemicals, energy efficient buildings, gasification, and carbon capture in secure geological storage.

The bill seeks the same tax treatment for renewable energy partnerships as that given to fossil fuel partnerships. When Congress legislated the rules for publicly traded partnerships in 1987 it required that at least 90 percent of an MLP’s income must come from qualified sources, such as real estate or natural resources. Section 613 of the tax code requires qualifying energy sources to be depletable resources or their derivatives such as crude oil, petroleum products, natural gas and coal.

Recent case-by-case Internal Revenue Service rulings have expanded the range of activities qualifying for MLP treatment. The MLP Parity Act would further expand the definition of “qualified” sources to projects involving wind and solar power, as well as closed and open loop biomass, geothermal, municipal solid waste, hydropower, marine, fuel cells, and combined heat and power.

The bill has bipartisan support, but some Republicans have indicated they would only support the MLPPA if certain renewable energy subsidies — namely the current Production Tax Credit (PTC) and the solar Investment Tax Credit (ITC) — are eliminated. The ITC is a 30 percent federal tax credit for solar systems on residential and commercial properties, in effect through the end of 2016. The PTC is a tax credit paid for each kilowatt-hour (kWh) of renewable electricity produced. The PTC provides 2.3 cents per kilowatt-hour (¢/kWh) for wind, geothermal, and closed-loop biomass systems, and 1.1¢/kWh for other eligible technologies (typically through the first 10 years of operation).

Republicans argued that the MLPPA would merely place another layer of subsidy on top of these tax breaks. Senator Coons opposed eliminating the PTC and ITC in exchange for support on the MLPPA, and the bill has been stuck in committee since (which is where the previous incarnation of this bill died after being introduced in the 112th Congress).

MLPPA Benefits

Now the Union of Concerned Scientists (UCS) — one of the 235 groups urging passage of the MLPP — has weighed in with an analysis that estimates the bill would expand the investor base for renewable energy and lower the cost of financing projects by 40 percent or more. The analysis further estimates that lower financing costs would reduce the all-in cost of generating electricity from wind projects by 1.2 cents per kilowatt-hour, or about 40 percent of the value of the PTC for wind power.

Citing a 2012 study by the National Renewable Energy Laboratory (NREL) that estimates that $50 billion to $70 billion per year in capital investment would be required to increase non-hydro renewables to 30 percent of US electricity generation by 2025, UCS estimates that this level of funding could be achieved with a shift of 0.7 to 1 percent of the total portfolio of the $15 trillion US mutual fund market and the $11 trillion U.S. defined-benefit pension market.

Projects with attractive, long-term power purchase agreements (PPA) could work well as MLPs, similar to a midstream pipeline operator with long-term fee-based contracts. Solar, wind, geothermal, biomass combustion — all of the current commercially available renewable power production options — could benefit greatly from MLP status.

Under the scenario modeled by the UCS, if approximately 20 percent of all MLPs were renewable energy MLPs, that would provide the estimated capital needed to make the shift to 30 percent renewable US electricity generation over the next decade. This is an ambitious target to be sure, but an approach that is preferable in my view to the current system of arbitrary and inconsistent subsidies.

Conclusions

While this bill would seem to be a no-brainer, the prognosis for passage isn’t good. The odds of passage got even longer when Sen. Coons left the Senate Energy and Natural Resources Committee for the Senate Appropriations Committee. The bill still has a champion in Senate Finance Chairman Ron Wyden (D-Ore.), but he has to weave together a compromise between those who want existing subsidies to be removed, as well as with those who want to eliminate the MLP structure altogether.

But it’s going to require Congress to come together and compromise. One obvious compromise is to phase out the PTC and ITC over the next decade, or reduce them in exchange for support for the act. Allowing this bill to die in committee — as the previous Congress did — isn’t an acceptable outcome. This is a simple way, that already has bipartisan support, to give renewable energy projects the same access to cheap capital that some fossil fuel companies enjoy. Democrats should love the renewable piece of this, while Republicans should love the fact that it is being paid for by lowering taxes.

It is a no-brainer. If you agree, express your support for this bill to your representatives.

Link to Original Article: The MLP Parity Act is a No-Brainer

You can find Robert Rapier on TwitterLinkedIn, or Facebook.

  1. By Forrest on May 30, 2014 at 8:36 am

    Looks good. The taxing of corporation profits then again taxing the same money per dividends should be illegal. Taxing business in general just a back handed way to tax consumers, but gins up a lot of political empowerment. Citizens feel they are getting free money, but don’t realize they only achieve higher price of products. Removing the PTC should be a requirement, as it stacks federal goodie on top of goodie. The solar investment credit may be o.k. as that can assist homeowner.

    This brings up a red flag of such wonderful solutions. Citizens notice the corporatization of America. Farms, stores, health care, education, housing, manufacturing and the rest taken over by ever bigger corporations or institutions. Some of it could be from efficiencies of scale such as utilizing one Lawyer or CEO but, technology and internet has taken most of that advantage away. It comes down to influence upon D.C. politics. Washington is becoming the number one concern of business. Corporations must focus mightily on the power of federal government to destroy their business or empower it. This is also the reason CEOs receive astronomical pay….personal influence. They are buying a well connected executive as much as talent. Also, citizens complain of rich getting richer and demand higher tax rates. Well, if they can simply write off income, their is less income to tax. Our politics have perpetuated a jealousy or hatred of income aka profit. Folks, having more decimals upon your bank account is not a bad thing. It probably means a smart, capable, person just improved our economy and job status. Conversely, spending money a good zone to tax, maybe high tax on luxury and sin products?

    I’ve seen this phenomena first hand over the years. Farmer’s care more of accountant than agricultural agent. Rental housing has drastically changed over the years. Mom and Pop businesses once a popular choice for elderly to maintain retirement incomes, mostly gone. Replaced with subsidized federal housing whereupon the magic of government deficit spending makes private enterprise look pathetic. Regulations, inspections, codes, liability, legal costs all savage small business. Corporations not deterred from such problems as they hire a lawyer and accountant to do the work and have much income to spread the cost, besides these problem remove the pesky highly competitive small businessmen from the marketplace. Thank you government. In a near by college town, many small investors within housing market got whacked per corporations once investment news leaked of a good market. These new businesses could build huge, modern, and beautiful complexes as they had cheap funding per the MLP. They enjoy receiving wealthy investor money and in turned handed them a slip of paper whereupon investors could enjoy accelerated depreciation write offs. Most probably achieved a 40% return on write offs. There was a time when governmental politics made sure small business was exempt from costly regulations and received favorable IRS code to mightily compete. These politicians, finally dummed up and realized these small business have no deep pockets nor ability to propel their career. Even citizens turned on small business after watching to much TV shows depecting easy wealth and write offs.

    [link]      
    • By Forrest on May 30, 2014 at 10:12 am

      You notice that these grand schemes to solve societal problems always involve much federal control and resources. That they work to empower large corporations. No fed solution to empower diy solutions to energy concerns. In fact governments will mostly fight inexpensive easy solutions that are cost effective as these solutions embarrassed those who claim only federal bureaucracy could accomplish such a feat. The bureaucrats scared that flying drones can go forth without federal control, regs, inspections, oversight, announcing a new fed division of drone control, as they look mightily for a problem to offer such solutions. What if normal business and citizens didn’t need their service? Back yard farming practices more popular, but it’s a fight all the way. Home schooling had the same obstacles. Private sector home business of child care and elder care are always accosted by those desiring more expensive solutions. Same with small business of home based education, even when run by certified teachers. Were learning almost every day of the ineffectiveness of federal social welfare to change lives. Same with foreign aid. These cost effective solutions just to caustic to business as usual solutions that empower politics, federal employees, and ever expanding federal control…you can’t be to safe. LOL, I noticed the Charlie Rose news show had their staff scientist that usually supports the general thoughts of Left leaning NYC crowd. They asked him why the country would turn to Space X private company for space travel needs. He sheepishly replied that private enterprise unlike bureaucracies work to lower cost. Funny, he didn’t mention that factoid when reporting on health care.
      But, to your general intent of post, since the need for alternative energy will be expensive and since the petrol and housing sector already receives such fed perks..it does make sense.

      [link]      
  2. By shecky vegas on May 30, 2014 at 1:14 pm

    You notice the Republicans seem to have no problems with Big Oil, Coal, and Gas benefitting from multiple tax breaks and subsidies.

    [link]      
  3. By Benjamin Cole on June 1, 2014 at 10:51 pm

    Excellent blogging.

    [link]      
  4. By Tom G. on June 6, 2014 at 11:33 am

    Oh my goodness, the silence here is deafening. So why is this topic not getting much traction. I mean most of the time Roberts posting get from 10-50 comments. So why the silence on this MLP topic? Is it because:

    1. No one has any money to invest. Not very likely,

    2. Is it because most Republicans don’t want any money taken away from their cash cows the oil, coal and gas industries?

    3. Maybe its because most people with money go where they can earn the highest possible rate of return with the least amount of risk, and;

    4. How many conservatives believe renewable energy is not really needed since Global Warming and Climate Change is nothing but a bunch of bologna?

    O.K. those 4 points should be enough to generate some comments. But I think there is far more at play here than these four [4] comments.

    What about the social aspect of potentially massive amounts of funding MLP’s might provide to the renewable energy industry? What effect will that have on society?

    What about the consequences to our utility industry and the regular dividend payments our seniors depend on to supplement their retirement?

    What about the effects MLP’s might have on our tax structure and government revenues? Are MLP’s a good thing or a bad thing for “we the people”?

    And finally; are MLP’s good for our American way of life [capitalism] or not?

    O.K. there you have it boy and girls. Lets get those keyboards jumping. I want to hear what everyone else thinks. Is this a big deal or not? Is it worth more of our efforts to ensure passage? Is it time for us to write to our congressional representatives or not?

    Thank you and have a great day.

    [link]      
    • By Robert Rapier on June 6, 2014 at 8:08 pm

      “Oh my goodness, the silence here is deafening.”

      In my experience, people’s eyes glaze over when you mention MLPs. Either because they don’t understand them, or just don’t know what a huge tax advantage they offer.

      [link]      
      • By RBM on June 7, 2014 at 3:20 pm

        Huge tax advantage ?

        Not at the bottom of the income pile.

        [link]      
  5. By Forrest on June 6, 2014 at 7:58 pm

    Currently, the MLP is restricted to natural resources per the risk of tax loss to government. That was in the day when fossil fuels the only such resource, but presently that resource extends to sun, wind, biomass, hydro, and geothermal. The MLP business structure, currently, attract 80% of the money per pipeline financing as per Roberts info on the need of predictable income and yes the PPA should provide the same financial environment. Problem may be that pipelines save a ton of money where renewable energy can only be profitable per legislation. Meaning the pipeline is a wealth generator and renewable energy is attempting to financially survive. Would there be as much income to offset by depreciation? The wealthy tax bracket investors most attracted to MPL as the depreciation write off value is increased per high tax brackets. So, the cost of money to renewable investment is 40% less, because the typical investor hedges 40% income tax. Meaning it’s just a backdoor way to utilize government money. If these investors are within the top income tax bracket, the eventual recapture of selling price as profit will not be any more damaging than usual. This isn’t true with low bracket investors whom haven’t experienced being hammered by government. Per my info the profit is not taxed at capital gains rate. One would not put a MLP in an retirement account as these accounts have the tax advantage already. Also, the IRS schedule K-1 is complicated; why burden your retirement investment . Investors on the hunt for attracted stable rates of income would need to specialize if deciding on MLP investments and become proficient, as the they are relatively new and one would need to commit to complicated tax reporting. REITS are in the same category, attractive financial tools hard to understand by common folk. I don’t understand the buying and selling of the units. When you sell who establishes the selling price? Mutual Funds specializing in this will take some of the risk away, but you still need to understand the market to avoid bad investments. Would this financial tool be a better way to run a utility company? Michigan splits up utility power between distribution companies and power generators. The MLP would bestow preferred status investor to utility and they would receive higher percentage of return for operations. This would make utilities more responsible to time value of capital and market vs the typical crony political utility route. Finally, phasing out or lowering the PTC and ITC is common sense.

    [link]      
    • By Tom G. on June 6, 2014 at 11:17 pm

      Good posting Forrest and I found this portion of your comment very interesting. Finally, phasing out or lowering the PTC … is common sense.

      You must not live in the U.S. There is no common sense in our Congress ;-) .

      Have a great day.

      [link]      
  6. By Forrest on June 7, 2014 at 8:13 am

    On the industry side, MLP’s provide much needed capital per attracting long term conservative investors. The cost of money is stable per avoiding the stock market speculators.

    On the investor side, the investment is limited to small portion of businesses. The consumer information not as well dispersed. Most investors are from the energy sector specialty. Your investment has better return for longer time periods. The quarterly dividends are taxed as regular income, but most of it offset per depreciation. Sale of units will result in capital gains per recapturing the depreciation write off. Some of this income is capital gain rate and the rest regular income. Utilizing mutual funds specializing within the MPL investments not nearly as lucrative per the high fees. Direct purchase of MPL units preferred, but requires much knowledge within the industry and the particular investment. Investments within high earning pay the most. Meaning, just like every investment it’s about earning capability of the money. MLP were popular in 70′s, then faded, and once again popular per petrol industry growth and new found wealth of the industry. I did read that the MLP issuer can hurt your investment by selling more units, dilution of wealth. Meaning you invested within 1,000 units or 1/1,000 the loan and percentage of ownership of the project only to find out the issuer sold another 1,000 units to raise more capital but now that takes your ownership to 1/2,000. Also, the investment will succumb to the whims of regulators, i.e. pull the plug on credits. The income tax reporting is horrendous per the k-1 form and need to file in every state where the MPL does business. I did read in Forbes that a MPL established per a natural gas to fertilizer company. I have a friend in that industry. He is blown away at the profit and lack of competition. When farmers had big gain in income per spike in corn prices, he said the fertilizer company would get their share and would not allow farmers to profit as much. He was right. Also, read a MPL established in the funeral business. Another outrageous profitable business sector, where market competition apparently does not exist. You would think our benevolent politicians would be on top of this market collision and apply what ever force needed to instill maximum market force. Appears this same phenomena is upon us for health care, drugs, and a whole bunch more. Small business loses out per such tactics.

    [link]      
Register or log in now to save your comments and get priority moderation!