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Sweeping US tax reform bill a win for power, natural gas sectors



The Trump administration: A Platts news and analysis feature

By Jasmin Melvin, Kate Winston

Published online 21 December 2017



A historic overhaul of the US tax code cleared by Congress on December 20 is shaping up to be a win-win for the power and natural gas industries even though some reservations remain over the impact the reforms will have on financing for renewable energy projects.


The $1.5 trillion sweeping tax overhaul package is headed to President Donald Trump's desk and expected to be signed in the coming days.


A procedural snafu required the House to revote on the measure after the Senate stripped certain provisions that did not comply with its budget rules in a 51-48 vote down party lines December 19.


The House's 224-201 vote December 20 marks the first major legislative GOP victory under the Trump administration.


Final language in the tax-cut bill steered away from proposals by the House to reduce the value of the production tax credit used by wind developers and to repeal a permanent 10% investment tax credit for commercial and utility-scale solar power projects.


Analysis continues below...



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The final bill leaves the PTC and ITC untouched and on track to be phased out on a schedule reached as part of a bipartisan legislative compromise in 2015.


The legislation keeps intact a base erosion anti-abuse tax, but revised the measure in an effort to eliminate some of the unintended consequences to wind and solar projects.


The BEAT tax aims to discourage companies with foreign operations from shifting profits in a manner that reduces their tax obligations by imposing a minimum 10% tax on income.


Wind and solar projects often rely on these multinational companies for financing, in return handing over the tax credits they receive for the project.


Under the original BEAT provision, the monies earned from the PTC and ITC would in turn be taxed, potentially canceling out the subsidies' value to investors.



BEAT TAX REPAIR POSITIVE BUT MORE CHANGES SOUGHT


Under the final bill, 80% of an ITC's or PTC's value could be used to offset up to 80% of the BEAT tax through 2025.


Because "the 80% repair applies only through 2025, [it] ... devalues the later years of the 10-year wind PTC," Gregory Wetstone, president and CEO of the American Council on Renewable Energy, said in a statement. "In addition, we are uncertain how the marketplace will react to the fact that more multinational firms may now be covered by the BEAT, and tax credits may not all be usable in any given year."


The Solar Energy Industries Association backed the bill's inclusion of the ITC, but sees work ahead on the BEAT provision.


"Given the complexities of the BEAT, we look forward to working with our congressional allies to modify the provision to allow unused tax credits to be used in future tax years," SEIA said in a statement.


A research note from Fitch Ratings contended that while the reduction in the corporate tax rate from 35% to 21% is expected to increase after-tax profits for companies, it complicates tax equity financing for wind and solar projects.


"Lower taxes will lower the value of the tax credits and depreciation to investors, which will likely reduce the amount of tax equity available to finance new renewables projects," a research note said.



'MEASURED VICTORY' FOR RENEWABLES


The bill maintains a $7,500 electric vehicle tax credit, a positive for the renewables sector, and eliminates the corporate alternative minimum tax, also seen as a victory for renewables because they are often able to significantly reduce their tax liability from the statutory rate.


The AMT required businesses to calculate their tax burdens under the regular corporate income tax and under the AMT, and pay the higher of the two to ensure some minimum amount of taxes was paid.


But industry groups including the US Chamber of Commerce considered it to be counter to pro-growth policies.


In a paper ACORE published December 20, the group called the final tax bill "a measured victory for renewable energy." Wins for the rest of the energy sector were more apparent.


"Most of the existing tax breaks for the energy industry stay on the books, plus they now enjoy a lower corporate tax rate further benefiting them," Ryan Alexander, president of the budget watchdog Taxpayers for Common Sense, said in an email December 20.


She noted that the oil and gas industry came out particularly well, holding onto a "majority of their century-old lucrative tax breaks."


These industry-friendly tax breaks include deductions for intangible drilling costs, percentage depletion, or amortization of geological and geophysical costs.


An earlier House version of the bill had proposed eliminating a credit for producing oil and natural gas from marginal wells and an enhanced oil recovery credit. Industry groups were not fighting the change since those credits were so rarely used, but congressional negotiators kept them in anyway.



MLPs KEEP TAX ADVANTAGE


The final bill also provides for a 20% pass-through deduction, impacting master limited partnerships -- a tax structure that has helped encourage investment in pipeline projects.


A prior version of the Senate tax bill included a pass-through provision that would have disadvantaged MLPs relative to real estate investment trusts.


The final provision preserved the current law's parity between REITs and MLPs under the Senate's new pass-through regime, keeping in place a level playing field that allows each to access lower-cost capital in the public markets to meet the country's capital-intensive infrastructure needs.


Meanwhile, the Interstate Natural Gas Pipeline Association of America also got part of what it wanted.


The group was concerned with the way the bill calculates the amount of interest that can be deducted from a company's taxable income.


The bill ended up only taking INGAA's preferred approach for four additional tax years, after which it transitions to a stricter method of calculating the interest deduction.


Natural gas infrastructure projects "often require capital investments in the billions of dollars, and as a result, significant debt must be incurred to finance these investments," INGAA said in a recent letter to lawmakers on the issue. "This is why the continued detectability of interest is so important to our membership."


The power industry also had much to beam about with the tax overhaul. Edison Electric Institute President Tom Kuhn hailed the bill, calling it "a win for America's electricity customers and for investment in critical energy infrastructure."


EEI, which represents investor-owned utilities, is particularly pleased that the bill maintains the federal income tax deduction for interest expense for regulated electric companies.


This interest deduction is a critical part of the cost of capital, and it helps electric companies invest in infrastructure, EEI said.


The bill also retains the federal income tax deduction for state and local taxes.


This is a big deal, EEI said, because electric companies are typically the largest property taxpayers in most states, and those taxes are reflected in customers' rates.


The bill mainly held the course for publicly owned utilities, according to the American Public Power Association.


"I was hoping there was a way to improve municipal finance," said John Godfrey, senior government relations director at APPA. "On the other hand, they have for the most part done no harm, and given how much harm they could have done, that's a substantial victory."


The most important thing for APPA is that the bill preserves the tax exemption for municipal bonds, Godfrey said.


This means that investors do not pay tax on the interest they are paid from municipal bonds, so investors are willing to accept a lower interest rate for these bonds, Godfrey said.



IMPACT ON CONSUMERS' BILLS TO BE SEEN


The administration and congressional Republicans have insisted that the bill will bring financial relief to the middle class, while critics charged it would simply make the rich richer.


What this all means for consumers and their gas and utility bills is hard to determine at this point.


The American Gas Association contended that provisions in the bill that keep the tax burden on natural gas utilities at a reasonable level by reducing the costs of installing and maintaining pipeline infrastructure would, in turn, benefit natural gas utility customers.


Others were less certain of the benefits to consumers.


"Many corporate leaders have said lower tax rates will benefit shareholders first, so it is difficult to draw a straight line to consumer benefits," Taxpayers for Common Sense's Alexander said. "Lower tax rates for energy companies increase profits, but will not encourage energy companies to lower their prices if doing so would lower their profits (or even keep them at the levels they are now)."


She contended that the sweeping legislation "is a missed opportunity to simplify the tax code and eliminate special interest tax breaks and loopholes, in particular those that sit on the books without sunset."







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