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.
Regards,
Michael
