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Monday, June 10, 2013

Master Limited Partnerships for Renewable Energy: A Point/Counterpoint

In Midwest Energy News John Ferrell comments on the potential expansion of Master Limited Partnerships (MLPs) to cover wind and solar energy providers. Ferrell asserts that including wind and solar companies in MLPs and thus allowing them to avoid paying corporate income tax would simply provide another tax loophole to big business rather than evening the playing field between renewable and conventional energy sources. In the counterpoint below Attorney Michael Allen of Energy Law Wisconsin identifies three primary reasons why the extension of MLPs to include wind and solar business will encourage more investment dollars to come into the renewables marketplace.
I write in response to John Farrell’s recent commentary on Master Limited Partnerships (MLPs) in Midwest Energy News.  Bottom Line: I don’t entirely agree with Mr. Farrell’s pessimistic point of view. Here are a few areas where I respectfully disagree.
The first is while it is technically correct for Farrell to say that MLPs don’t pay corporate income tax, this statement is somewhat misleading, as it suggests that  that the income generated by Master Limited Partnerships avoids taxation.  It does not.  MLPs, just like the LLCs who comprise many of the members of the Midwest Renewable Energy Association, do not escape income taxation on the money they earn.  Rather, their income flows through to their owners who pay the tax on this income at their own tax rates.  Renewable Energy MLPs would offer an advantage to persons who wanted to raise large amounts of money for renewable energy because the entities would get the best of both the partnership and corporate forms of doing business.  Like corporations they are publicly-traded, so many people, even small investors, would be able to invest and with a broader potential owner base they should be able to raise funds at more favorable rates.   In addition, they get the same favorable pass through tax treatment as an LLC because, unlike publicly traded corporations, their profits would not be taxed twice -- first at the corporate level and again when dividends or profits are distributed to the shareholders. 

Farrell may have a valid criticism of the FERC regulation of Master Limited Partnerships in the oil and gas industry in that FERC may be allowing them overly generous rate recovery --treating them as if they were subject to “double taxation” of profits and dividends when they are not.  However, if true, this is a criticism of FERC regulation that should be corrected at the FERC and avoided if Renewable Energy MLPs become a reality.  It is not an inherent defect with the MLP form of doing business.  It is unclear to me to what extent this would be an issue for renewable energy MLPs.  FERC regulation would apply if they were selling electricity in interstate commerce.  However one can imagine an MLP that would not be regulated by FERC because it focused on developing PV systems or micro grids serving business parks or subdivisions within states.

Farrell raises two other concerns with MLPs.  First, he claims they will enable large regulated utilities to get to the tax-saving “trough”. Second, he believes MLPs will reinforce centralized control of the energy system, and counter the trend of distributed local generation on rooftops, thereby taking ownership of the renewable energy system away from the “little guy”, who is unlikely to be an investor in a renewable energy MLP. 

I think Mr. Farrell’s view that these features make MLPs lousy policy for renewables is debatable.

First, plenty of “little guys” hold shares in regulated utilities, so I don’t know what would prevent them from being investors in renewable energy MLPs should they be utilized by utilities (For example -- my 84 year old mother holds units in Cedar Fair, the amusement park MLP).  Locally if you go to an MGE annual meeting you will see thousands of small investors.  In addition, if individual investors want to buy stock cheaply, they can do so in just about any utility and many other publicly-traded corporations and existing MLPs through low cost services that allow shareholders to buy as little as one share and reinvest their dividends or make additional modest investments through Dividend Reinvestment Plans and Direct Investment Plans.  Renewable Energy MLPs actually have the potential to open up ownership of renewables to people who, like the small investors who have flocked to Solar Mosaic, can’t afford to put a PV system on their own home and don’t have sufficient taxable income to be a major investor in a renewable energy project to get the tax credits, but can afford to invest a $1,000 or less in a renewable energy project.

Second, if utilities or other big industry players really want to get into renewables in a big way, they already can – they don’t need the MLP.  Look at Warren Buffett, or Duke Energy or MEMC, which purchased Sun Edison and just adopted its name.  They just need to find the right renewable investments in the right markets.  I think it is unlikely that it is the lack of the MLP form of doing business that is holding them back.

Finally, it is not cheap to set up an MLP and utilities can already raise money through their existing corporate structure (assuming the local state regulatory commission lets them do so).  I don’t think it is a certainty that they will be the ones to jump into the MLP game.  If you want to anticipate which financial heavyweights might use the MLP renewables structure, my sense it would be more likely to be the major oil companies (as Farrell notes) or the investment banks, who underwrote the fossil fuel and pipeline MLPs.

Ultimately, I think Mr. Farrell is making an argument that renewables are done best with local control and not by large centralized owners.  There are certainly benefits to the local approach, including increased responsiveness to local community concerns and perhaps, in some circumstances, even local grid security.  However, there are drawbacks too, including loss of potential economies of scale making renewables development more expensive than it needs to be and risk of inadequate depth of expertise to serve the needs of customers.  In addition, as noted above, one could even argue that MLPs, by offering an opportunity for small investors to invest in renewables via MLP unit ownership, may have a democratizing effect on renewables by opening up greater opportunity of ownership to small investors, even if ownership of renewable energy assets are concentrated in larger companies. 

Nothing is black and white, but I come down on the side of favoring MLPs, because I believe they will encourage more investment dollars to come into the renewables marketplace. And the clinching consideration that sways me in this direction is that if the Earth’s atmosphere obtains relief from GHG emissions due to increased development of renewables, I think the atmosphere doesn't care much whether these renewables are locally or centrally owned. 


Michael J. Allen

Energy Law Wisconsin
1500 West Main Street, Suite 300
P.O. Box 27
Sun Prairie, WI 53590


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