GreentechMedia, June 13, 2013
Aside from the NSA surveillance program and vacations, it’s nearly impossible to find something both parties in Congress can agree on. But we may just have another such policy: master limited partnerships, or MLPs.
MLPs help energy project developers and investors avoid getting hit with double taxes. They are publicly traded entities that are allowed to act like traditional corporations, but are not required to pay corporate income taxes. Instead, after raising capital for projects through the public markets, MLPs pass income down to shareholders who pay personal income taxes.
Traditionally, MLPs have been limited only to fossil fuel companies, mostly those developing pipelines. But a simple 600-word bill in Congress could soon allow renewable energy companies to create these partnerships.
Lawmakers may not agree on what specific tools should be used to subsidize energy (or even what types of energy to subsidize), but they love to use the tax code to do it. According to the Energy Information Administration, 44 percent of U.S. government spending on energy in 2010 was through the tax code.
MLPs, which are just another tweak to the tax code, are seen by pretty much everyone as a way to give renewables the same tax benefits for project development that oil and gas companies have enjoyed. At a time when lawmakers puff up nearly every issue as controversial, MLPs are a decidedly vanilla-flavored incentive with a real shot at passing through Congress this year.
However, there are still some who are not convinced that MLPs are a magical fix that will level the playing field for renewables.
As we reported last month, there are a lot of private concerns in the wind industry and among renewable energy advocates that MLPs will be used as a bargaining chip for ending the production tax credit or investment tax credits. But those who worry about the tradeoff are still supportive of MLPs generally.
Then there are people like John Farrell of the Institute for Local Self Reliance who want to change the paradigm entirely. Farrell sees MLPs as yet another opportunity for large energy companies to dominate the market and prevent community-owned renewables from flourishing.
“It’s a devil’s bargain. I think it ultimately undermines our opportunity to change the ownership model by simply allowing big companies to avoid paying taxes,” said Farrell, who has been trying to inject his passion for small-scale renewables into the conversation around MLPs.
Farrell’s other concern is one written about by former New York Times journalist David Cay Johnston. In his 2012 book The Fine Print, Johnston explained that the Federal Energy Regulatory Commission had allowed MLPs — again, entities that don’t pay corporate income taxes — to charge users for access to energy infrastructure as if they did pay those taxes. Johnston reported that this increased after-tax profits by as much as 75 percent for some entities.
“This just sets up another trough for the hogs to feed,” said Farrell. “I just think we should be more cautious about what we’re doing. If we are creating tax-advantaged structures for investing in renewable energy, it may help shift from fossil fuels to renewables, but it will likely keep the profits in the hands of the same players who were making the initial investments.”
As a staunch advocate of localized renewables, Farrell worries that MLPs will create “path dependency” toward large, centralized projects.
“There’s a consequence every time you encourage one style of investment over another,” he said. “For example, if you build a transmission line, you’re more likely to build a central power plant. The same goes for policies like this. I think there’s a limit to how much we can do both.”