Considering a Green New Deal

Will 2019 bring a "Green New Deal" for the U.S. or individual states?

President Franklin D. Roosevelt championed the original "New Deal" in the 1930s, as a series of federal reforms and measures designed to lift the U.S. economy out of the Great Depression. The First New Deal included banking and securities law reforms, funding for emergency relief operations by states and cities, and a Civil Works Administration. Later in the Roosevelt administration, a Second New Deal included labor law reforms, significantly increased federal employment through the Works Progress Administration jobs relief program, and the Social Security Act, among other measures.

More recently, the notion of a "Green New Deal" has emerged from a variety of sources. While the details of what constitutes a Green New Deal vary depending on the proponent, the basic concept most proposals have in common is a significant investment in clean energy to spur employment and revenue. For example:

• Mark Hertsgaard's 1998 book Earth Odyssey culminated with his vision of a "Global Green Deal" to transform global economies based on the New Deal.
• New York Times columnist Thomas Friedman has been credited with coining the "Green New Deal" phrase in a pair of opinion pieces in 2007. At the time, Friedman envisioned the government as "not funding projects, as in the original New Deal, but seeding basic research, providing loan guarantees where needed, and setting standards, taxes and incentives" to spawn business opportunities in clean power.
• In his 2008 presidential campaign, President Obama proposed addressing the nation's economic crisis by using green investments to promote new jobs, and the 2009 stimulus act included substantial measures along these lines which have been called a Green New Deal.
• In 2009, a United Nations program published a report calling for a "Global Green New Deal," again seeking transformation of global economies through investment in clean energy, systems and infrastructure.

The idea of a Green New Deal has again found some traction in 2019, although the details of what might be included remain unclear, as does the likelihood of its adoption. In 2018, as part of her successful campaign, now-Representative Alexandria Ocasio-Cortez proposed a federal "Green New Deal" to address climate change. While the concept does not appear to have been fully embraced by Congress, state legislation proposing state-level Green New Deals has started to arise. For example, Maine state Representative Chloe Maxmin has proposed a bill whose title has been published as LR 1034, "An Act To Establish a Green New Deal for Maine."

Whatever ultimate fate these proposals meet, the concept of stimulating the economy and improving environmental performance through investment in clean energy and other green infrastructure projects will likely remain on the table for the foreseeable future. Legislatures and policymakers will be faced with challenges and opportunities in crafting measures that will succeed, in terms of both enactment and actually making a difference. If nothing else, 2019 will bring continued discussion across all levels of government about how best to move the U.S. and individual states forward.

FERC disallows MLP pipelines' recovery of income tax allowance

U.S. energy regulators have revised their policies, and will no longer allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover an income tax allowance in their cost-of-service rates. The Federal Energy Regulatory Commission issued its Revised Policy Statement on Treatment of Income Taxes following a 2016 federal court order addressing the topic.

At issue is the Commission's policy on how MLP pipelines may set their cost-based rates. As described by the Commission, an MLP is a partnership form in which units are traded on exchanges much like corporate stock. To be treated as an MLP for Federal income tax purposes, an MLP must receive at least 90 percent of its income from certain qualifying sources, including natural gas and oil transportation.

MLP pipelines are not corporations, but are pass-through entities. This means that MLPs are not taxed at the pipeline level; instead, for tax purposes, the partnership agreement allocates to each partner a share of the partnership’s taxable income, and each partner is personally responsible for paying income taxes on the partnership’s net taxable income.

From 2005 until a 2016 court ruling, the Commission's 2005 Income Tax Policy Statement allowed all partnership entities (including MLPs) to recover an income tax allowance for the partners' tax costs, much like a corporation receives an income tax allowance for its corporate income tax costs. Alongside this income tax policy, the Commission has used a discounted cash flow (DCF) methodology to determine the rate of return regulated entities need to attract capital.

In 2008, a pipeline MLP named SFPP, L.P. filed a cost-of-service rate increase to increase the rates for a line running between California and Arizona. Shippers protested the filed rates, including the interaction between (a) the Commission’s policy permitting an income tax allowance policy for partnership business forms (such as SFPP) and (b) the Commission’s DCF methodology used to determine a cost-of-service rate of return. The Commission eventually issued orders addressing issues in the case including the income tax allowance issue, which were challenged in court.

On appeal, in 2016 the United States Court of Appeals for the District of Columbia Circuit issued a decision known as United Airlines, Inc. v. FERC, 827 F.3d 122 (2016). In that case, the D.C. Circuit held that because both the partnership income tax allowance and the DCF ROE may include investors’ tax costs, permitting both may result in a double recovery, and remanded the case back to the Commission for further action.

This week, the Commission took that further action. It issued an order in the SFPP case denying that MLP an income tax allowance. More holistically, the Commission concurrently issued a Revised Policy Statement on Treatment of Income Taxes. In the revised policy statement, the Commission found that "an impermissible double recovery results from granting a Master Limited Partnership (MLP) pipeline both an income tax allowance and a return on equity pursuant to the discounted cash flow methodology."

FERC acts on 2017 tax cuts

Federal utility regulators have taken a portfolio of actions in response to recent changes to U.S. tax law which reduced the tax rates applicable to many electric utilities and pipeline companies. Some rates for use of infrastructure will be reduced automatically, while regulators prompted others to explain why they should not be reduced to reflect the tax law changes. At the same time, regulators have opened an inquiry and proposed a rulemaking to address further aspects of the 2017 federal tax law change.

Late last year, Congress enacted the Tax Cuts and Jobs Act of 2017. That law amended U.S. tax law in a variety of ways. Among other things, the 2017 tax law changes reduced the federal corporate income tax rate from a maximum 35 percent to a flat 21 percent rate, effective January 1, 2018.

Many electric utilities and natural gas and oil pipeline companies stand to benefit from this tax reduction in the form of reduced income tax expense going forward, as well as a reduction in accumulated deferred income taxes on the books of rate-regulated companies. Where tax expense decreases, so does the cost of service.

Rates for use of some federally regulated energy infrastructure are set based on cost of service. On March 15, 2018, the Federal Energy Regulatory Commission took a series of actions to address the effect of the tax law changes on its regulated industries including electric transmission companies, interstate natural gas pipelines, and oil pipelines. According to the Commission, its actions “recognize the specific regulatory and operating parameters that must be addressed differently for each of the industries it regulates.”

Transmission rates for most FERC-regulated utilities automatically adjust with changes in the tax rates based on a formula whose inputs are updated annually or on some other regular cycle. For these utilities, a reduction in corporate income tax means a reduction in rates, although the ratemaking process means there can be a lag in time before rate reductions take effect.

But in some cases, utility tariffs provide for rates are either stated as a fixed number, or the formula includes a fixed tax rate. The Commission identified 48 companies whose transmission tariffs specifically reference tax rates of 35 percent. In a pair of show-cause orders issued under the Federal Power Act -- one for utilities with stated rates, and one for utilities with formula rates referencing 35 percent -- the Commission directed these companies to propose revisions to their transmission rates or show why they should not do so. It also issued two waivers allowing certain utilities mid-year rate adjustments to reflect the new tax law.

Interstate natural gas pipelines typically have stated rates for their services. These rates are approved by the Commission in a rate proceeding under Natural Gas Act sections 4 or 5 and remain in effect until changed in a subsequent section 4 or 5 proceeding. To revise its practices with respect to natural gas pipelines, the Commission issued a Notice of Proposed Rulemaking that would allow it determine which pipelines under the Natural Gas Act may be collecting unjust and unreasonable rates in light of the corporate tax reduction and the Commission’s recently revised policies on income tax allowance. Under the rule proposed by the Commission, interstate pipelines would need to file a one-time report called “FERC Form No. 501-G” describing the rate effect of these changes. In addition to filing the one-time report, each pipeline would have four options: a pro rata rate reduction, a rate settlement or case, an explanation why no rate change is needed, or merely filing the FERC report and letting the Commission decide if further action is required.

While cost-of-service ratemaking typically applies to public utilities and interstate natural gas pipelines, most oil pipelines set their rates using indexing. With respect to oil pipelines regulated by the FERC, the Commission said it will address tax changes in the 2020 five-year review of the oil pipeline index level.

Concurrently, the Commission opened an inquiry into the effect of the Tax Cuts and Jobs Act of 2017 on all jurisdictional rates, including whether the Commission should address certain changes relating to accumulated deferred income taxes and bonus depreciation. In a presentation to the Commission, staff described this Notice of Inquiry as "a vehicle to help the Commission build a record to determine whether additional action is needed."

In a separate policy statement and order issued on March 15, the Commission revised its policies to disallow income tax allowance cost recovery in MLP pipeline rates.

Federal tax credits drive renewable power, CO2 reduction

A report by the U.S. Energy Department's National Renewable Energy Laboratory found that recent extensions to tax credits for wind and solar energy will drive a net peak increase of 48-53 gigawatts in installed renewable generation capacity in the early 2020s.

NREL is the U.S. Department of Energy's primary national laboratory for renewable energy and energy efficiency research and development.  NREL is operated for the Energy Department by The Alliance for Sustainable Energy, LLC.

In its February 2016 report, Impacts of Federal Tax Credit Extensions on Renewable Deployment and Power Sector Emissions, NREL examined the potential impact of recently extended federal tax credits on the deployment of renewable generation technologies and related U.S. electric sector carbon dioxide (CO₂) emissions.

At issue are federal tax credits for renewable energy: the wind production tax credit (PTC) and the solar investment tax credit (ITC).  Congress acted in December 2015 to extend by 5 years the expiration dates for these tax credits, with a phaseout or ramp down of tax credit value over time.

The NREL study examined two key questions, under models with high and low natural gas prices:

1.  How might renewable energy deployment in the contiguous United States change with these recent federal tax credit extensions?
2. How might this change in renewable energy deployment impact CO₂ emissions in the power sector?

Under both sets of natural gas assumptions, the NREL study found that tax credit extension scenarios show greater renewable technology investments through the early 2020s than scenarios without extensions:

The study found that scenarios with tax credit extensions also show lower CO2 emissions from the U.S. electricity system:

Cumulative emissions reductions over a 15-year period (spanning 2016-2030) as a result of the tax credit extensions are estimated to range from 540 to 1,400 million metric tons CO₂.

In all scenarios, nearly all of the estimated growth in renewable energy capacity was primarily comprised of new solar and wind capacity, as opposed to biopower, geothermal, or hydropower technologies.

The NREL study concludes that tax credit extensions can have a "measurable impact" on future renewable energy deployment and electric sector CO2 emissions under a range of natural gas price assumptions.

Master Limited Partnerships for clean renewable energy

An organizational structure called Master Limited Partnerships has the potential to increase private-sector investment in clean energy. Master Limited Partnerships, or MLPs, benefit from a tax structure under which investors are taxed as partners but can trade their ownership stakes on securities exchanges much like corporate stock. Newly proposed federal legislation could extend this treatment to clean energy technologies.

MLPs offer their investors an attractive combination of tax advantages and liquidity. Profit from most publicly traded corporations is taxed twice, at both the corporate level and the shareholder level. By contrast, income from MLPs is taxed only at the shareholder level because it is treated as a partnership for tax purposes. Like Real Estate Investment Trusts or REITs, MLPs thus combine the tax benefits of a limited partnership with the liquidity of publicly traded securities.

Under federal law, MLP treatment is limited to enterprises generating at least 90 percent of their income from qualifying sources. These generally involve the use of natural resources, such as the production, processing or transportation of petroleum, natural gas, coal, timber, and other minerals. Since 1981, the use of the MLP structure has grown; estimates suggest that over 100 MLPs are currently being traded on major exchanges, with a total market valuation of about $445 billion.

Yesterday Congress introduced proposed bipartisan legislation that would extend this tax structure to clean energy technologies. The Master Limited Partnerships Parity Act, formally known as S.795: A bill to amend the Internal Revenue Code of 1986 to extend the publicly traded partnership ownership structure to energy power generation projects and transportation fuels, and for other purposes, is sponsored by Sen. Chris Coons, D-Del., along with co-sponsors Sens. Jerry Moran; R-Kan., Debbie Stabenow, D-Mich.; and Lisa Murkowski, R-Alaska. It has been referred to the Senate Committee on Finance.

The Master Limited Partnerships Parity Act would significantly broaden the scope of projects eligible for MLP treatment to include clean energy resources and infrastructure projects. These projects would include any energy technologies that qualify for the federal production tax credit or investment tax credit, such as wind, closed and open loop biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells, and combined heat and power. The bill would also open the MLP structure to advanced transportation fuels such as cellulosic, ethanol, biodiesel, and algae-based fuels, as well as energy-efficient buildings, electricity storage, carbon capture and storage, renewable chemicals, and waste-heat-to-power technologies.

Proponents hope that the act would stimulate investment in clean energy projects much as it has worked for other extractive natural resource infrastructure. At the same time, concern over the federal budget calls for serious consideration of measures that would reduce federal tax revenues. So far, the bill seems to have broad support and little outspoken opposition. If enacted, it could lead to an influx of investment capital into renewable and clean energy technologies.

IRS reverses tax ruling on wind PPAs

The U.S. Internal Revenue Service has reversed its previous position on how it will treat power purchase agreements from wind energy facilities. 

Earlier this year, IRS issued a private letter ruling addressing a tax issue arising when a taxpayer purchases wind energy facilities operating under facility-specific power purchase agreements.  Under Section 167 of the Internal Revenue Code, which establishes how depreciation works under tax law, the computation of an adjusted basis for an asset is essential to calculating tax values and liabilities.  What happens when a taxpayer purchases a wind project that operates under one or more PPAs?  Should the purchase price affect the basis of the facilities, or should part of the purchase price be allocated to the PPAs?

In January 2012, in Private Letter Ruling 201214007, the IRS concluded that the purchase price should be included in the adjusted basis of the facilities, rather than allocating any portion of it to the PPAs.  Last week, the IRS issued Private Letter Ruling 201249013, which revokes its previous private letter ruling.  According to the new ruling, "the Service has determined that Private Letter Ruling 201214007 is not in accord with the current views of the Service."  Rather, the IRS now holds that the portion of the purchase price paid by the taxpayer that is attributable to the PPAs is to be allocated to the PPAs and not to the wind energy facilities.

While private letter rulings are directed to the specific taxpayers involved and may have limited precedential value, the ruling indicates a shift in the IRS's thinking about the tax treatment of transactions involving operating renewable energy generation projects.

USDA funds energy projects

Businesses are taking advantage of incentives to reduce their consumption of energy from the utility grid through both energy conservation and distributed renewable generation.  A number of programs provide grant funding for part or all of these projects, on top of other incentives like tax benefits.

The U.S. Department of Agriculture runs several energy incentive programs under the Rural Energy for America Program (REAP).  These programs take different shapes; some offer payments or grants, while others offer loans and loan guarantees.  All are designed to promote the development and commercialization of renewable energy sources including wind, solar, geothermal, hydrogen, ocean waves, hydroelectric, biomass, and biofuel (ethanol, biodiesel, etc.)

REAP’s Renewable Energy Systems/Energy Efficiency Improvement grant program is one funding source for farm and commercial projects.  REAP conducts periodic solicitations for project proposals, and awards grants on a competitive basis.  Grant winners can receive up to 25% of their total eligible project costs, capped at $500,000 per project for renewable energy systems and $250,000 per project for energy efficiency improvements. 

When USDA published its Notice of Funds Availability for REAP this spring, an estimated $70 million in REAP funding was expected this year, based on the allocations in the 2008 Farm Bill.  In response to the request for applications, projects were proposed and selected in every state.

In August 2011, the USDA announced $183,339 in grant funding for 8 Maine projects.  Most of these grant awards were for solar energy projects; two projects included solar and energy efficiency, while one focused on a biomass project.  For example, the Bancroft Contracting Corporation in South Paris won $40,000, split between a rooftop solar array expected to produce 270,050 kilowatt-hours per year and energy efficiency improvements.

USDA’s REAP program is one tool businesses can use to help finance innovative and cost-effective energy efficiency and renewable energy projects.

4/9/10: an in-depth look at the rate impacts of Ontario's feed-in tariff and green energy policies

Today I'm taking a more in-depth look north of the border at what one Canadian province is doing to encourage green electricity generation -- and at the electric rate impacts of this policy.

As you may know, Ontario plans to eliminate its coal-fired power plants by 2014 and replace them with cleaner energy sources. In October, Ontario unveiled the Green Energy Act, which includes a set of feed-in tariffs that guarantee renewable generators fixed, above-market prices for 20 years to feed their production into the electricity grid. Yesterday, the province has announced 184 contracts for green energy projects, totalling 2,500 MW.

Minister of energy and infrastructure Brad Duguid said these contracts will generate 20,000 direct and indirect "green jobs" and attract $9 billion in private investment. In addition, Ontario is seeing interest in local siting of manufacturing facilities to produce the products and components needed to site renewable generation. In the last three months, Ontario has received commitments from both South Korea’s Samsung C&T Corp. and Germany’s Bosch Solar Energy to site manufacturing facilities in the province. It is assumed that the feed-in tariffs and contracts are required to incentivize this economic development activity.


But at what cost? The Globe and Mail has a good article detailing how Ontario is poised to face the highest electricity prices in Canada, replacing PEI as the province with the most costly power. Projections show that residential customers in Ontario were already facing a 25% rate hike, paying $300 more a year on average for electricity by the end of 2011. The green energy contracts will add another 5%, or $60 a year by 2012. Consumers' total cost, including distribution, may rise to 14.54 cents in 2011, while the average residential rate in the United States will rise just 2 per cent to 11.74 cents next year.

Simultaneously, a "smart grid"-related initiative will raise most residential rates even further. Ontario is introducing time-of-use billing, charging 9.3 cents per kWH during peak periods and 4.4 cents during off-peak periods. One forecast suggests this will result in a $50 a year increase for the average residential ratepayer. Of course, those ratepayers who can successfully shift their load to off-peak hours -- whether through careful management, or investment in appliances and technology systems that do the management for them -- might be able to reduce their costs through this move.

On top of all this, the province -- like many U.S. states -- is exploring tax hikes and broadening of the tax base to raise funds. In Ontario, a new harmonized sales tax will add 8 per cent to everyone’s bill starting July 1, or $98 a year for the average bill.

It will be interesting to watch as Ontario policymakers pursue these initiatives. Will there be ratepayer backlash? Or will ratepayers take the rate increases in stride, and feel like they're getting something -- freedom from coal-fueled power plants and their environmental impacts -- for their money? Time will tell.