The MLP Parity Act: Leveling the playing field for clean, renewable energy companies creates opportunities for investors
Yesterday, Senator Coons (D-DE) and co-sponsor Senator Moran (R-KS) introduced the Master Limited Partnership Parity Act. NRDC strongly endorses the Act, which would help level the playing field for clean, renewable energy by reducing costs of development and increasing private investment in these projects.
The tax code currently enables the well-established fossil fuel industry to have this financing advantage while denying its use for the newer, cleaner forms of energy that Americans want and need to encourage. That makes no sense. Master Limited Partnerships (MLPs) should be one of the tools available to develop clean, renewable energy. MLPs provide a low risk way for Main Street to invest in renewable energy. This will create jobs and new investment opportunities while reducing pollution. The Senators are right to propose this forward-looking and fair-minded step to ensure that the today's clean, renewable energy sources have the same opportunities to succeed as the fossil fuel sources of the past.
What are MLPs?
As discussed in detail by Dan Reicher and Felix Mormann in the the New York Times and in a recent paper by Josh Freed and Mae Stevens of Third Way, a Master Limited Partnership is a business ownership structure under the Internal Revenue Code that was created by Congress decades ago to allow companies in certain key sectors, such as energy, to avoid a layer of taxation and access the benefits of low cost stock market finance.
The default business ownership structure for companies that “go public” (i.e. companies whose ownership interests are sold into and trade on stock markets) is typically called the C-corporation. A C-corporation pays corporate taxes on its income and its shareholders also pay taxes on income received from the C-corporation in a phenomenon known as “double taxation”. In the 1980s, to incentivize certain strategic sectors like oil and gas that needed to attract additional investment, Congress created the possibility for companies in these sectors to access cheaper capital by eliminating a layer of taxation. They did this by allowing businesses in those sectors to form MLPs which, under the Internal Revenue Code, may access the stock market without being subject to corporate-level taxes. However, Congress denied this benefit to the renewable energy industry, which was in its infancy, and has never rectified the imbalance.
Now, in recognition of the growing importance of renewable energy to our energy security, environment and economic development, the MLP Parity Act removes the disparity between the financing of clean, renewable energy and fossil energy.
Who will benefit from MLPs?
Selling stock in a corporation to the ordinary retail investor or “going public” in some ways is the holy grail of corporate finance. This is the case because capital markets are highly efficient in the sense that the benefits of accessing low cost finance are spread widely across the economy as a whole relative to a privately financed transaction.
Without the opportunity to access the stock market, renewable energy companies have limited access to finance and pay more for the finance they do obtain.
In addition, existing renewable energy investors may not be able to easily exit their investments because the number of potential buyers is artificially constrained as compared to oil and gas investors in MLPs.
Furthermore, without MLPs, only corporations, institutional investors, high net worth individuals and other entities (such as various types of funds), will be able to profit from America’s dynamic clean energy companies. Ordinary people with small amounts of money to invest will continue to be largely shut out of these investment opportunities. This is manifestly unfair and makes no sense. In a recent paper, Credit Suisse demonstrates that MLPs (the majority of which own oil and gas assets) have consistently and significantly outperformed similar investments since 1996. Renewable energy assets fit the profile of assets currently in MLPs, so similar returns are likely. All investors should have the opportunity to participate in the steady returns produced by renewable energy technologies.
Most importantly for the United States as a whole, the savings in financing costs from accessing the capital markets will result in more renewable energy at lower prices. More renewable energy means more jobs and increased investment.
Are MLPs enough to maximize the potential of clean energy?
No. MLPs are no substitute for the Production Tax Credit, the Investment Tax Credit or the other state and federal programs supporting mature and/or innovative clean energy technologies. While the costs of these technologies are declining and are expected to continue to do so in the future, fossil energy still benefits from the market’s failure to fully price in the long term costs of fossil fuel price volatility and carbon, air and water pollution. The full price of fossil energy is nevertheless paid by all of us in losses to human health and productivity as well as the depletion of the ecosystem services (e.g. clean air, clean water, biodiversity and carbon sequestration) that sustain us.
Nevertheless, MLPs will begin to level the playing field in terms of financing costs, and will allow small investors to vote with their investment dollars to support a healthy, vibrant clean energy future.