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Bipartisan Group of Legislators Reintroduces Master Limited Partnerships Parity Act

by Ari Peskoe

On April 24, four Republican legislators and four Democratic legislators reintroduced the Master Limited Partnership Parity Act in the House and Senate. Master Limited Partnerships (MLP) provide tax advantages to energy project developers but are currently limited under the Tax Code to resources subject to depletion, such as oil and gas, and transportation and storage of certain fuels. The Act would expand the definition of qualified projects to include a range of clean energy resources and infrastructure projects. 

An MLP is a business structure that is taxed as a partnership, but whose ownership interests can be traded like corporate stock on a market. Congress enacted legislation in 1987 that allowed entities that earn at least 90 percent of their income from “qualified” sources to be treated as MLPs. Qualifying income includes “income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource.” In 2008, Congress expanded the definition of qualifying income to include income from the transportation and storage of certain renewable and alternative fuels, such as ethanol, biodiesel and industrial-source carbon dioxide.

As we reported last June, legislators first introduced the MLP Parity Act last year. The Act would have expanded the definition of qualifying income purposes to include income from wind, biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells and combined heat and power projects, as well as certain renewable transportation fuels.  Those bills were referred to the Senate Finance Committee and House Ways and Means Committee but never advanced. The updated MLP Act introduced on April 24, also includes carbon capture and storage, waste heat to power, renewable chemical and energy efficient building projects.    

In public statements, Senators Coon (D-DE) and Murkowski (R-AK), two of the Act’s sponsors, have emphasized that the MLP Parity Act attempts to “level the playing field” by providing renewable energy projects with the same tax benefits that fossil fuel projects have enjoyed. Although the rhetoric should be appealing to both sides of the aisle and the Act is backed by a range of industry groups that would benefit from the legislation, it’s fate in Congress is unclear. 

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Sequestration to Result in Across-the-Board 8.7 Percent Reduction of 1603 Grant Payments

by Melissa Dorn

The United States Department of the Treasury released a notification on March 4, 2013 clarifying how sequestration will affect payments awarded under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 for specified energy property in lieu of tax credits. Treasury stated that it will reduce the amount of each final award issued from March 1, 2013 through September 30, 2013 by 8.7 percent, regardless of when the application was received by Treasury.  The 8.7 percent sequestration rate is subject to change following September 30, 2013.

For more information please contact your regular McDermott lawyer of Phil Tingle at +1 305 347 6536 or ptingle@mwe.com.

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Is There Bipartisan Support for an Energy Security Trust?

by William Friedman

President Obama proposed in his State of the Union creating an Energy Security Trust to invest in research and technology that will “shift our cars and trucks off oil for good.”  Oil and gas lease revenues, estimated at $150 billion over the next decade, would fund the Trust.  The idea of the Trust is more than 30 years old and was recently endorsed by the ranking Republican on the Senate Energy and Natural Resources Committee.  While predicting what Congress will do is a fool’s errand, there is some reason to think that an Energy Security Trust could become a reality.

President Carter in 1979 asked Congress to pass a windfall profits tax on oil company revenues in order to establish a trust that would be used to “protect low income families from energy price increases, to build a more efficient mass transportation system, and to put American genius to work solving our long-range energy problems.” More recently, Energy Security Trust Fund bills were proposed in 2007 and 2009.  The 2009 bill, entitled “America’s Energy Security Trust Fund Act of 2009,” proposed an excise tax on “carbon substances” including coal, petroleum products and natural gas.  The tax would have collected $15 per ton of carbon dioxide content in taxable substances sold by manufacturers, producers or importers and would have escalated at a base rate of $10 each year.  The proposed trust fund would have been used to finance research in clean energy technology, assist industries negatively affected by the bill, and provide payroll tax relief to individual taxpayers.  Neither the 2007 bill nor the 2009 bill, (both proposed by Rep. John Larson (D-CT.)) passed in Congress.

Unlike these previous proposals, President Obama’s proposal does not rely on tax revenues and instead resembles a recent energy policy blueprint put forward by Sen. Lisa Murkowski (R-AK), the ranking Republican on the Energy and Natural Resources Committee.  Senator Murkowski’s plan, “Energy 20/20: A Vision for America’s Energy Future,” calls for an Advanced Energy Trust Fund that would be funded by rents, royalties, bonus bids and corporate income taxes.  Murkowski also advocates opening up federal lands like Arctic National Wildlife Refuge (ANWR) and other offshore resources and using those revenues to fund a trust.  The Advanced Energy Trust Fund would be administered by the Department of Energy and used to pay for advances in renewable energy, energy efficiency, alternative fuels and advanced vehicles.

The White House has not released details yet on how the proposed Trust would be funded or administered. Unlike Senator Murkowski, the President is unlikely to support opening ANWR for drilling, which environmental groups have long opposed.  Yet, some version of an Energy Trust has support on both sides of the aisle.

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Changing Qualification Requirements for PTC Could Have Big Impact for Wind

by Martha Groves Pugh and William Friedman

The wind industry is pushing for an extension of the renewable energy production tax credit (PTC), which is currently scheduled to expire at the end of the year.  The PTC has helped spur investment in wind by providing a tax credit of 2.2 cents per kilowatt hour of wind energy produced.  It has been successful in growing the industry, but new wind projects have slowed this year to due uncertainty over the PTC’s extension. Historically, when Congress declined to extend the PTC, new wind projects fall drastically.  

Despite the political battles surrounding the tax credit, the Senate Finance Committee voted 19-5 to extend the PTC as part of a proposed tax extender package.  The bill, called the Family and Business Tax Cut Certainty Act of 2012, would extend the wind production tax credit for one year, through December 31, 2013.

The bill also contains a change to the qualification requirements for wind facilities, which has received little attention despite its important implications.  Previously, wind facilities had to be placed in service before they could qualify for the PTC.  Under the proposed extension, facilities will be eligible for the tax credit so long as construction begins before January 1, 2014.

The new qualification requirement would extend the impact of the PTC beyond 2013 by providing an incentive to begin construction during the year regardless of when the facility becomes operational.  The change would also provide certainty to new wind projects.  Under the old qualification requirement, a wind facility had to meet an operational deadline on the back end of their construction schedule.  The new qualification requirement front ends the relevant date, providing greater certainty that the facility will be able to take advantage of the tax credit.  The new qualification requirements have the potential to reinvigorate the wind industry.

Extending the PTC has implications for job growth, a critical issue in November’s election. One recent study by the Natural Resources Defense Council predicts that extending the PTC could create 17,000 new jobs, while letting it expire could cost 37,000. Despite the impacts on job creation, the House and Senate will likely consider the tax legislation, including the extension of the PTC for wind facilities, after the November election.

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Senator Bingaman Introduces Clean Electricity Standard

by Ari Peskoe

Senator Jeff Bingaman of New Mexico, Chairman of the Energy and Natural Resource Committee, introduced the Clean Energy Standard Act of 2012 on March 1.  If passed by Congress, the legislation would require electric utilities to procure an escalating percentage of the electricity that they sell to consumers from “clean energy” sources beginning with24 percent in 2015 and rising to 84 percent by 2035.  The legislation would also establish a national trading program for clean energy credits that could be used by utilities to demonstrate compliance.

Clean energy, as defined by the Act, can come from a range of sources.  Clean energy includes electricity generated by a source placed in service after December 31, 1991, that uses natural gas, hydro, nuclear, qualified waste-to-energy, qualified biomass or renewables (solar, wind, geothermal, current, wave, tidal or ocean).  Clean energy also includes any generation source placed in service after the enactment of the Act whose carbon intensity is less than .82 metric tons of CO2 equivalent per megawatt-hour, or that is qualified combined heat and power.  Nearly all currently operating nuclear plants would not generate clean energy under the Act because they were placed in service prior to 1992.

A generation source with zero carbon emissions would earn one credit for each megawatt-hour generated.  A generation source with a carbon intensity greater than zero but less than .82 would earn credits at a rate proportional to its intensity divided by .82.  Electricity generated by nuclear or hydro sources put in service prior to 1992 is not included in the quantity to which the percentage requirement applies.  As an example, if an electric utility sells 10 million megawatt-hours of electricity in 2015, 4 million of which is generated by nuclear reactors placed in service prior to 1992, that utility would be required to hold 1.44 million clean energy credits (6 million x .24).

Bingaman’s previous national energy standard legislation introduced in 2010 focused exclusively on renewables and would have required all utilities to procure 11 percent of their electricity from renewable sources.  Bingaman’s 2012 legislation tracks a proposal President Obama made in his 2011 State of the Union address when he said, “[b]y 2035, 80 percent of America’s electricity will come from clean energy sources. Some folks want wind and solar.  Others want nuclear, clean coal and natural gas. To meet this goal, we will need them all…”  Although neither the President nor Senator Bingaman said so explicitly, both proposals effectively mandate a reduction in coal-fired generation.  Nearly all non-coal generation sources qualify as “clean” with the caveats that under Bingaman’s 2012 proposal a source qualifies as clean only if it was placed in service after 1991, and Obama did not define whether “clean coal” requires carbon capture technology, which does not currently exist commercially in the U.S.

Applying the legislation’s requirements to current state-by-state data on electricity generation shows that 19 states would currently fall short of the 24 percent requirement.  It is likely that many utilities in [...]

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Welcome to McDermott’s Energy Business Law Blog

Welcome to McDermott’s Energy Business Law Blog.  Our objective in this forum is to provide our readers with insights into the evolving regulatory, business, tax and legal issues affecting the U.S. and international energy and commodities markets.  Contributions to this blog will be a collective effort of lawyers and professional staff that are part of McDermott’s broad-based energy practice, with ten U.S. and seven European offices, and a strategic alliance in China.  We will bring to bear our experience across the global energy sector, which spans exploration and production, oil, gas and refined products pipelines, storage and processing facilities, liquefied natural gas, refining and petrochemicals, electric power generation and transmission, renewable and alternative energy (including wind, solar, biofuels and others), trading and regulatory, carbon and emissions, metals and agriculture. 

We hope you find our energy blog to be an informative resource.  Please feel free to provide us any feedback on how we might improve our offerings.

Blake H. Winburne
Global Head, Energy Advisory Practice

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