The Master Limited Partnerships Parity Act
A bill to level the playing field by giving investors in renewable energy projects access to a decades-old corporate structure with a tax advantage currently available only to investors in fossil fuel-based energy projects
U.S. Senator Chris Coons
At a time when the United States needs to increase domestic energy production and leaders of both political parties say they support an "all of the above" energy strategy, Congress should level the playing field and give all sources of domestic energy — renewable and non-renewable alike — a fair shot at success in the marketplace.
The federal government should not be in the business of picking winners and losers in the energy market, but for nearly 30 years, that's exactly what it has been doing with a provision in the tax code that authorizes the formation of master limited partnerships (MLPs). An MLP is a business structure that is taxed as a partnership, but whose ownership interests are traded like corporate stock on a market.
By statute, MLPs have only been available to investors in energy portfolios for oil, natural gas, coal extraction, and pipeline projects. These projects get access to capital at a lower cost and are more liquid than traditional financing approaches to energy projects, making them highly effective at attracting private investment. Investors in renewable energy projects, however, have been explicitly prevented from forming MLPs, starving a growing portion of America's domestic energy sector of the capital it needs to build and grow.
The Master Limited Partnerships Parity Act is a straightforward, powerful tweak to the federal tax code that could unleash significant private capital into the energy market.
The legislation would level the playing field between traditional and new energy businesses by helping energy-generation and transmission companies form master limited partnerships, which combine the funding advantages of corporations and the tax advantages of partnerships.
By allowing additional forms of energy development to access this market tool, we can go beyond political rhetoric and start delivering an all-of-the-above energy strategy.
An MLP is a business structure that is taxed as a partnership, but whose ownership interests are traded like corporate stock on a market. Whereas profit from publicly traded C corporations is taxed at both the corporate level and the shareholder level, income from MLPs is taxed only at the shareholder level because it is treated as a partnership for tax purposes.
An MLP consists of limited partners (investors) and general partners (managers). The limited partners — who can number in the thousands — provide capital and receive quarterly required distributions generally equivalent to shareholder dividends in a C-corporation. They play no role in the operation of the MLP, while the general partners manage the MLP's daily operations. General partners can take the form of another company or a group of individuals, typically holding a small percent ownership stake.
Writing in the New York Times on June 2, 2012, Dan Reicher and Felix Mormann of Stanford University's Steyer-Taylor Center for Energy Policy and Finance described the appeal of MLPs: "Master limited partnerships carry the fund-raising advantages of a corporation: ownership interests are publicly traded and offer investors the liquidity, limited liability and dividends of classic corporations. Their market capitalization exceeds $350 billion. With average dividends of just 6 percent, these investment vehicles could substantially reduce the cost of financing renewables."
Because MLPs are so attractive to investors, they have been proven to bring new capital into American energy projects. This is especially important in the case of renewable-energy generation, where it is harder for investors to see as quick a return as compared to fossil fuel-based energy generation, for which much of the processing and transportation infrastructure was built decades ago. Critical infrastructure for renewable energy sources will take time and investment, so the MLP Parity Act levels the playing field and helps address that problem.
An MLP must generate at least 90 percent of its income from qualified sources, such as real estate or natural resources, including crude oil, natural gas, petroleum products, coal, timber, and other minerals. Currently, the federal tax code specifically requires qualifying energy sources to be "depletable" resources – meaning we are working against our own goal of an "all of the above" energy strategy that includes additional homegrown renewable energy sources.
The MLP Parity Act simply expands the definition of “qualified” sources to include clean energy resources and infrastructure projects. Specifically included are those energy technologies that qualify under Sections 45 and 48 of the tax code, including wind, closed and open loop biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells, and combined heat and power.
The legislation also allows for a range of transportation fuels to qualify, including cellulosic, ethanol, biodiesel, and algae-based fuels, as well as energy-efficient upgrades for buildings, electricity storage, carbon capture and storage, renewable chemicals, and waste-heat-to-power technologies.
The MLP Parity Act does not affect any current MLP entity. All projects currently eligible to structure as MLPs would continue to qualify exactly as they would under existing law.
The first MLP was created in 1981 to attract capital by offering small investors a partnership investment in a liquid security. The success of the Apache Oil Company MLP led to other oil and gas MLPs, as well as MLPs formed for other capital-dependent enterprises.
Congress first established rules for master limited partnerships in 1987 legislation that introduced Internal Revenue Code Section 7704 and, for the first time, defined “publicly traded partnerships.” The MLP structure was limited to businesses deriving 90 percent of their income from specific sources, including dividends, rents, interests, capital gains, and mining and natural resources income identified in Section 613 of the tax code. This definition allowed oil and gas extraction and transportation activities access to the MLP structure, but excluded other energy sources.
In 2008, the Emergency Economic Stabilization Act (P.L. 110-343) expanded the definition of qualifying income to include transportation and storage of certain renewable and alternative fuels (ethanol, biodiesel, and a series of liquefied fuels), as well as industrial-source carbon dioxide.
The National Association of Publicly Traded Partnerships estimates there are around 140 MLPs currently being traded on major exchanges, primarily focused on energy-related industries and natural resources. Of the estimated $565 billion in MLP capital currently in the market, approximately $467 billion (over 80 percent) has gone into qualifying energy and natural resources. Of that, 85 percent has gone into midstream oil and gas pipeline projects.
Dan W. Reicher, Executive Director, Stanford University Steyer-Taylor Center for Energy Policy and Finance & Interim President and CEO, American Council on Renewable Energy (ACORE): “The MLP Parity Act is one of those rare birds on Capitol Hill: a bill with broad bipartisan support, a deep policy rationale, and serious potential for both economic and environmental benefits.”
Richard Kauffman, Chair of Energy and Finance, New York Governor Andrew M. Cuomo: “The MLP Parity Act helps clean energy compete on a level playing field with other industries that use stock and bond markets. Let’s evolve our financing to match our innovative energy economy.”
Phyllis Cuttino, Director, Clean Energy, The Pew Charitable Trusts: “The Master Limited Partnerships Parity Act would expand a tax incentive that is currently available only to oil and gas projects to include clean energy sources as well. By opening up low-cost financing to a broader range of technologies, this legislation would help grow our domestic energy industry and increase the United States’ competitiveness. Thank you to Senators Coons and Moran and Representatives Poe and Thompson for their leadership on this legislation.”
David Terry, Executive Director, National Association of State Energy Officials: "We thank Senator Coons for strongly supporting key options for financing renewable energy projects, including master limited partnerships. This continues the trend of the Senator providing thoughtful leadership in the energy arena."
Barry Granger, Vice President for Government Affairs, DuPont: “We appreciate Senator Coons thoughtful and supportive legislation to encourage investment in cellulosic ethanol and advanced biofuels by extending the tax-efficient Master Limited Partnership structure to investments in these forms of energy. These tax policies have proven effective in encouraging investment in oil and gas infrastructure and can similarly provide a much needed incentive for further developing the domestic renewable fuels industry.”
James C. Greenwood, President and CEO, BIO: “The MLP Parity Act will help level the playing field between renewable fuels and fossil fuels in tax policy that shapes private investment decisions. We are especially pleased that this legislation also covers renewable chemicals, for the first time establishing tax parity for this growing biotech sector. This will clear a path for increased industrial biotechnology innovation and commercialization activities that drives employment and economic growth and reduces dependence on foreign oil.”
Brooke Coleman, Executive Director, Advanced Ethanol Council: “The advanced and cellulosic ethanol industry strongly supports the efforts of Senators Coons and the other co-sponsors of Master Limited Partnership Parity Act to level the playing field for advanced technologies when it comes to MLPs. The MLP Parity Act would take a meaningful inequity out of the federal tax code, allow advanced technologies to compete for financing on a more level playing field, and put the country in a better position to create jobs and compete in the emerging $2 trillion global clean energy marketplace. Oil and gas producers are essentially using MLPs to access the retail investment market more quickly and efficiently, which in turn makes it easier to finance new oil and gas projects. It makes no sense for the federal government to continue to offer this financing vehicle to fossil fuels only. We commend this bipartisan group for tackling this issue.”
John Prunkl, President and CEO, Primary Energy Recycling Corporation and Chair, Heat is Power Association: “We own and operate one of the largest waste heat to power projects in the U.S. for the benefit of a large steel producer in the Midwest. The economic and environmental benefits of this project are undeniable and have helped position our customer as a low cost producer of steel in the region while helping them produce their product with a smaller environmental impact. The MLP Parity Act would lower the cost of capital for waste heat to power projects like ours, making these projects easier to finance and more attractive to a broader range of customers, while supporting jobs and the local economy. We applaud the sponsors' efforts to level the playing field for energy generation resources like ours that improve the competitiveness of our nation’s industrial sector and generate power with no additional fuel, combustion or emissions.”
Kateri Callahan, President, Alliance to Save Energy: “We applaud Alliance Honorary First Vice-Chair Senator Chris Coons and Senator Jerry Moran, sponsors of the Master Limited Partnerships (MLP) Parity Act, for this common sense bill encouraging private investment in energy efficiency projects. Bringing parity between investors in clean energy and investors in oil, natural gas, coal extraction, and pipeline projects makes sense. The MLP Parity Act will help to bolster energy productivity, create jobs, and save consumers and businesses money.”
Kurt Waltzer, Managing Director, Clean Air Task Force: "The Clean Air Task Force strongly supports the MLP Parity Act. In order to address climate, we need to have several affordable low and zero carbon technology options. This bill is particularly important for Carbon Capture and Storage - a critical path technology for addressing climate change that is in the early stage of its deployment. Having MLP financing available for CCS would help reduce the financing costs of early-mover projects. Reducing financial barriers for early projects is a necessary step for getting more steel in the ground, and thereby driving down costs through learning and innovation.”
Brad Crabtree and Patrick Falwell, Co-Directors, National Enhanced Oil Recovery Initiative: “On behalf of participating energy, industrial, and technology companies, labor unions, environmental organizations, and state officials, the National Enhanced Oil Recovery Initiative applauds the MLP Act’s sponsors for expanding MLP eligibility to increase private investment in carbon capture and storage projects. Capturing carbon dioxide from power plants and many other industrial facilities for use in enhanced oil recovery produces more American oil, creates good-paying jobs, generates net new revenue for the federal treasury, and reduces CO2 emissions.”
Mike McAdams, President, Advanced Biofuels Association: "We are grateful for Senator Coons' leadership at a critical point for America's domestic biofuels industry as we are moving from the beaker to the barrel, in record time. The legislation provides an innovative financial mechanism that could significantly reduce the cost of financing as companies are reaching a game-changing milestone. Substantial investments by private companies in research and development have been the catalyst for today's success in bringing advanced biofuels to commercial markets, but stable and consistent public policies are crucial to encourage and allow additional investment dollars that will help get us across the finish line. By creating a new and more appealing option for investors, the bill helps level the playing field and ultimately promotes a more cost competitive advanced biofuel alternative to conventional fuel."
Matt Carr, Executive Director, Algae Biomass Organization: “The members of the Algae Biomass Organization applaud Senator Coons for his work to create a more level playing field for investment in renewable energy projects through the MLP Parity Act. Algae-derived fuel producers are confident that when the tax code and other federal programs are applied blindly to renewable and traditional energy projects, renewable energy will see a significant increase in private investment, making renewable energy more cost competitive. The increased competition will help drive down energy bills for all ratepayers. Senator Coons' MLP Bill is essential to creating fair competition in the energy market.”
Robert P. Thornton, President & CEO, International District Energy Association: “When Super Storm Sandy hit in 2012 and knocked out power to 8.1 million people in 21 states, the need for more robust and resilient energy infrastructure became alarmingly obvious and urgent for cities, communities, campuses, industry and healthcare. Today, mayors and CEO’s alike are seeking public/private partnerships to accelerate capital investment in district energy and combined heat & power microgrids to deliver more efficient and sustainable local energy solutions. The Master Limited Partnership Parity Act offers significant potential to catalyze growth of these community-scale clean energy resources. By providing a new source of liquid private capital, the Act can play a vital role in strengthening the infrastructure of our nation’s cities, communities, institutions and military bases.”
Steve Clemmer, Director, Energy Research and Analysis, Union of Concerned Scientists: “Giving renewable energy projects access to low-cost financing available from publicly-traded MLPs would help level the playing field with fossil fuels and give all Americans the opportunity to invest in the transition to a cleaner, low-carbon economy. This innovative financing tool would expand the investor base and lower the cost of financing renewables projects by roughly 40 percent, addressing an existing market barrier currently inhibiting development. Such a change means more clean energy projects being built and continued economic benefits in this growing sector.”
Joe Keefe, President & CEO, Pax World Mutual Funds: “We’re looking for exposure to clean energy opportunities throughout our $3.8 billion portfolio. The ability to invest in clean energy infrastructure is particularly interesting. However, like many investors, we invest through the capital markets and are thus not in a position to finance individual renewable energy and energy efficiency projects. Smart changes, like those proposed for Real Estate Investment Trusts and Master Limited Partnerships, could provide opportunities for investment by firms like Pax as well as individual investors.”
George Gay, CEO, First Affirmative Financial Network: “Investments like those possible through clean energy MLPs are exactly the type of investments our clients want to make. Like many Americans, they want to support projects that provide clean energy and create jobs domestically. Our typical client already has a large portion of their investment portfolio dedicated to energy projects through Master Limited Partnerships. They are investments we know and trust and their use for clean energy could be a great way to fund clean energy projects, spark job creation, catalyze economic growth, and provide investment opportunities for responsible investors.”
Lowell Miller, Founder, President/CIO, Miller/Howard Investments Inc.: “There is no apparent logic to the current exclusion of renewable energy companies from the ability to form publicly traded partnerships. A large part of the intent in permitting energy companies to become MLPs was to encourage the development of domestic energy resources and infrastructure. Entity-level taxation was eliminated, and enabled a greater pass-through of revenues to shareholders, thus creating a “yield” vehicle and an additionally attractive feature of the entity’s equity. To fail to include renewable energy is, in effect, to say that the government and its tax system wants to implicitly encourage carbon-based energy development and to discourage—or not encourage—renewable energy development. It’s doubtful that a poll of citizens would agree with this standpoint.”
Rhone Resch, President and CEO, SEIA: “Today, solar is the fastest-growing source of renewable energy in America, employing 174,000 workers at 8,000 U.S. companies. Senator Coons' MLP proposal would help to build on this tremendous success by leveling the playing field between clean, renewable energy and long-entrenched energy sources in America. SEIA applauds Sen. Coons for putting forward an idea that has the potential to attract private sector investment for critically-important solar projects.”