The United States went to the polls on November 4. The news organizations described the election results as a Republican sweep. The Republicans now control both houses of Congress. They are likely to end up with 53% or 54% of the seats in the US Senate. They increased their majority in the House to 56% of that body. There are now more Republican governors at the state level: 62% of states will now have Republican governors compared to 58% before.
Four veteran Washington lobbyists for power companies talked 34 hours after the polls closed about what the election results mean for the US renewable energy and independent power markets.
The four are Richard Glick, a former top aide to the US Secretary of Energy in the Clinton Administration and currently head of the Washington office for Spanish utility Iberdrola, which owns the number two wind company in the United States as well as a group of regu- lated utilities in the Northeast, Jonathan Weisgall, head of the Washington office for Berkshire Hathaway Energy, the holding company for three US utilities — MidAmerican, PacifiCorp and NV Energy — and a prominent player in the US wind, solar and geothermal markets, John Stanton, former chief lobbyist for the Solar Energy Industries Association and now executive vice president for policy and markets at SolarCity, a rapidly growing US solar rooftop company, and Joe Mikrut, formerly tax legislative counsel for the US Department of the Treasury under President Clinton and, before that, on the staff for the Joint Committee on Taxation in Congress and currently a partner in Capitol Tax Partners, a prominent lobbying shop in Washington. The moderator is Keith Martin with Chadbourne in Washington.
MR. MARTIN: Joe Mikrut, will tax extenders be pushed into 2015 or will Congress deal with them before adjourning later this year?
MR. MIKRUT: It is possible they will be pushed into 2015, but unlikely. The most likely scenario will be some compromise in 2014 between the Senate version of tax extenders, which is a two-year extension of just about every expiring tax provision, and the House version, which is a permanent extension of a limited number of provisions. The most likely outcome will be a two-year extension of most everything, with some of them made permanent.
The Republican win makes corporate tax reform more likely.
If those negotiations break down, then you are probably looking at a one-year extension of just about everything, with Congress taking another look in 2015. It is hard to see action on extenders being postponed until 2015.
MR. MARTIN: Is there anyone on this panel who believes Congress will deal in the time that remains this year only with spending authority for the government to keep operating past December 11 and not much else? [Silence.]
Then Joe Mikrut, sticking with you, will the final tax extenders package include an extension of the construction-start deadline for wind, geothermal, landfill gas, biomass, incremental hydro and ocean energy projects and, if so, will it be a simple date change to the end of 2015 with only a one-year extension to the end of 2014 as a fallback?
MR. MIKRUT: I think the production tax credit will be included. The PTC has clearly become a bit more controversial over time, but I think the group of extenders will ride together so that, if one gets extended, then they all will be extended. I think every- thing will be simple date changes. That is usually what happens in a lame-duck session as the old Congress winds down and time is short.
MR. MARTIN: Rich Glick, you are with a prominent wind company. Do you think the PTC will be extended?
MR. GLICK: I do. I put the likelihood at 75%. There is a lot of momentum behind tax extenders. I don’t think it is very likely that there will be no action on extenders in the lame-duck session because extenders are important to lots of key members of Congress for a variety of reasons. Undoubtedly, the House will take as its starting position in negotiations with the Senate that we need either to get rid of the PTC or dramatically reduce its value. The PTC is a very high priority for both the White House and the Senate. I think the time pressure to wrap up the session so that Congress can adjourn will work in the Senate’s favor in the negotiations.
MR. MARTIN: So two votes “yes” for a PTC extension in late November or December. Jon Weisgall, your company is also heavily into wind. Yes or no?
MR. WEISGALL: Yes. I think the PTC will be extended. It is not a slam dunk, but the odds of an extension are better than 50-50. You have very prominent Republicans — Mitch McConnell, the Senate Republican leader, Orrin Hatch, the senior Republican on the Senate tax-writing committee — stating publicly that they want to see tax extenders done. This is not just a Democratic play. I think that the next time the subject of any extension comes up in late 2015 or 2016, it will be time to start looking at a phase out, but a simple extension is the most likely outcome in 2014.
MR. MARTIN: Let’s be clear that the extension is measured from the end of 2013. So when people talk about a two-year extension, they mean a project can qualify for tax credits if it is under con- struction by the end of 2015. And a one-year extension . . .
MR. MIKRUT: A one-year extension would require a project be under construction by the end of 2014 which, for the renewable energy companies and a lot of other folks who are concerned with extenders, would not allow much time to act.
MR. MARTIN: Right. John Stanton from Solar City, will the current deadline for solar projects to be completed by December 2016 to qualify for a 30% investment tax credit be changed to a deadline merely to start construction by December 2016 as part of the lame-duck tax extenders bill?
MR. STANTON: There is a chance if the Senate Finance extend- ers package is reopened or if floor amendments are allowed in the Senate. However, if Senate leaders stick to the existing package and defend it from amendment on the Senate floor, then there will not be an opportunity to make that change.
If a manager’s amendment in the nature of a substitute is offered in the Senate in which changes are made in the extenders package reported last April by the Senate Finance Committee, then I think Democratic leaders will try to get parity of treatment for solar, fuel cells, micro turbines and combined heat and power with respect to the construction-start rules.
MR. MARTIN: So in play, but a heavier lift. Joe Mikrut, how do you handicap the solar provision?
MR. MIKRUT: As with any policy change, it is very difficult when you get to the end of the session and when leadership is making the decisions rather than leaving them to the tax com- mittees. I agree with John Stanton. It depends on the process, but lame duck sessions generally are not the place to make policy changes.
MR. MARTIN: Richard Glick and John Weisgall, do you agree?
MR. GLICK: I tend to agree, but just keep in mind that convert- ing the deadline for solar into a deadline merely to start construc- tion is a priority for Harry Reid. He is still the majority leader until the end of the year. You never want to count Senator Reid out, but it is an uphill battle.
MR. WEISGALL: I agree. The difficulty getting a construction- start deadline for solar in 2014 is the ITC for solar has another two years to run. Congress has a tendency to put off decisions until the deadline.
MR. MARTIN: Joe Mikrut, will the 50% depreciation bonus be extended?
MR. MIKRUT: I think it will also be in the mix. The Senate Finance Committee voted last April to extend it. The House voted in July to make it permanent. This created an expectation that companies can rely on it. It will be difficult to back away from that expectation.
MR. MARTIN: So there is an expectation that the 50% deprecia- tion bonus will be part of the extenders package. Does anyone disagree? [Silence.]
MR. MARTIN: Let me ask a large question. There is a split among Washington insiders about whether we are headed for two more years of gridlock or to a short period, before the 2016 elections take center stage, when Congress and the President will find common ground. Rick Glick, in which camp are you?
MR. GLICK: I am in the camp that says the gridlock will con- tinue. Certainly at the beginning of the next Congress, there will be a concerted effort by both political parties to try to work together and pass relatively uncontroversial items, such as patent reform. There may even be efforts on the Keystone XL pipeline and things like that, but when it comes to major legislation, the bigger concern is not whether the Democrats and Republicans will be able to work together, but whether the House and Senate will be able to find common ground.
I do not see House Republicans willing to compromise on major issues so that bills can get through the Senate. So my prediction is for some initial restorative action early on, but then back to the same old gridlock.
MR. MARTIN: So your gridlock is good for the news media; it is Republicans versus Republicans, House versus Senate. Jon Weisgall, in which camp are you, gridlock or a post-election Congress that will get something done?
MR. WEISGALL: Put me in the camp of Charlie Brown and “Lucy, don’t pull that ball away.” I have hope in the face of experience that leaves little ground for optimism. I do not expect action on immigration or other big issues. I see a greater chance for action in the energy field.
The Republicans are going to feel an obligation to show they can get something done while they are in charge. They will have a tough time retaining control of the Senate in the 2016 elections. Seven Republican Senators will be up for reelection in 2016 in states that Obama carried. Six of those seven are freshmen who were elected in a mid-term election in which low voter turnout tends to favor Republicans. Now they will be running in a presi- dential election year when higher voter turnout and demograph- ics will favor the Democrats.
The House and Senate will still have trouble working together.
I agree with Rich Glick that the greatest challenge Congress faces in trying to function will be the dynamic within the Republican party. The party will have to contend with Ted Cruz, Mike Lee and a vocal Tea Party faction that does not believe in compromise.
Despite all of that, I can see a modest energy bill with energy efficiency provisions, streamlining of regulation, approval of the Keystone pipeline, expediting approvals to build new LNG export terminals, and authorization for crude oil exports. Something like that could actually pass.
MR. MARTIN: So we have one gridlock, and one Charlie Brown willing to try again to kick the football despite the inevitable disappointment when Lucy pulls the ball away. John Stanton, I think you are also Charlie Brown.
MR. STANTON: My sense of it is that the Republican caucus wants to show that it can govern, especially now that Harry Reid and the Democrats will no longer be standing in the way. The challenge will be for House leaders to send bills to the Senate that are not inherently antagonistic.
Probably the first real bill coming out of the House will be an energy bill. That energy bill will have as its centerpiece authoriza- tion for the Keystone pipeline. How that bill is packaged will be an early indication whether House Republicans are willing to write bills that will be acceptable to the Senate or are just designed to trigger an allergic reaction.
There is plenty of room for consensus on energy. Plenty of Democrats support Keystone. This will be an early sign whether any break in the gridlock is pos- sible. I am optimistic despite recent history.
MR. MARTIN: Joe Mikrut, more gridlock or a Congress that can get something done?
MR. MIKRUT: The last Congress set such a low bar in terms of getting things done that it is hard to do any less, so I predict things will be a little more active. I agree with Rich Glick that the real friction will be between the House and Senate, and I agree with the other points that were made that a few things will pass at the margins.
All of the Above
MR. MARTIN: Rich Glick, the national Republican party says it favors an all-of-the-above energy policy. What will that mean in practice over the next two years?
MR. GLICK: I am not a fan of that term. It is like saying you are for motherhood and apple pie. Jon Weisgall listed earlier some of the modest items that might be packaged together in an energy bill. They are a group of relatively uncontroversial items plus the Keystone XL pipeline.
I have to believe that if President Obama does not sign off on the Keystone pipeline relatively soon, then the Republican Congress will pass a bill requiring him to approve it. We may see some legislation promoting LNG exports, essentially expediting the approval process for export facilities. There may be some- thing on energy efficiency. These are all what I would consider relatively minor energy issues. They make some difference here or there, but for the most part, even the efficiency bill is incred- ibly modest. The fact that it could not pass the Senate this year despite bi-partisan support was a prime example of the gridlock in the current Congress.
I do not see any action on significant measures that would move the country in one direction or the other, whether it is pro oil or pro renewables.
MR. MARTIN: Jon Weisgall, you already gave us your list of what energy measures you think are likely to move in the next Congress. You heard Rick Glick just give a list. Do you have any- thing to add?
MR. WEISGALL: Streamlining federal permitting to accelerate construction or upgrading of energy infrastructure, geothermal projects and maybe public lands bills. We may see Congress authorize more drilling for oil and gas on public lands, although the issue is complicated because a whole new industry has grown up around the shale revolution that probably feels there is already enough drilling. Congress could try to extend the dead- line to 2020 to comply with the new Environmental Protection Agency regulations that reduce carbon and other greenhouse gas emissions from existing power plants that use fossil fuels.
Let’s remember that the last major energy bill, the Energy Policy Act in 2005, had something like 18 separate titles that threw in something for everybody. You could call that a mish mash or Congress’s version of a comprehensive energy policy. I think it is possible to get something modest in the next two years.
MR. MARTIN: John Stanton, apart from a tax credit extension, the renewable energy industry has been unable to advance its agenda in Congress since 2010. Is it now clear that that will remain the story through 2016, and was there any more agenda, other than another tax credit extension, to advance in any event?
MR. STANTON: Keith, going back to your point about an all-of- the-above energy policy, I think it is worth mentioning that the modern solar investment tax credit can be traced to a Republican, Bill Thomas, who was chairman of the House tax-writing com- mittee and who tried to get a two-year solar tax credit into the Energy Policy Act in 2005. And when the solar credit was last extended in 2008, the extension was supported by both political parties in both chambers.
US action on global warming is less likely.
On the Senate side, you had Gordon Smith, a Republican, and Maria Cantwell, a Democrat. On the House side, you had David Camp, a Republican, and Nancy Pelosi, a Democrat. Both the original tax credit and the extension were signed into law by George W. Bush.
The Republican caucus, especially in the House, has gotten a lot less moderate. One would like to think there will be an oppor- tunity for a balanced energy bill that does not just double down on traditional incumbent fossil energy interests but rather looks forward and says “all of the above” also means new technologies like wind and solar, micro turbines and combined heat and power that should be part of America’s energy future and deserve the same type of favorable tax treatment that is accorded to tradi- tional energy interests.
Once again, that’s an optimistic view, but at least as of today — two days after the election — Kevin McCarthy and the rest of the House leaders have vowed to lead with energy and to do so in a way that will not cause a knee-jerk rejection by the Senate.
MR. MARTIN: Rich Glick, is there any more to the renewables agenda in Congress besides extending tax credits at this point?
MR. GLICK: Not really, but two points.
First, no industry achieved its legislative agenda after 2010, so the renewable energy industry is not alone on that. The gridlock has been all encompassing.
Second, let’s not forget that there is more than just legislation when it comes to policy making. Most of the policy making in the last few years has been before the regulatory agencies. Look at the Environmental Protection Agency regulations to limit not just carbon emissions, but also mercury, nitrogen oxide and sulfur dioxide emissions. The Federal Energy Regulatory Commission has issued a number of rulemak- ings and orders that encourage construction of new transmis- sion lines to bring renewable energy from remote areas to population centers. It issued other rules that will help inte- grate intermittent renewable resources, such as solar and wind, into the utility grid.
This is how the renewable energy agency has been advanc- ing in this country. The regula- tory arena rather than the legislative arena will remain the primary focus over the next two years.
MR. MARTIN: So is it a big deal that the Republicans took control of Congress if there was not really a renewables agenda that people were trying to advance in Congress anyway?
MR. GLICK: Tax incentives are still an extremely important element of the renewables agenda. The big question going forward is what will the new Congress do about extenders and fundamental corporate tax reform. I am optimistic about an extension of the tax credits in the lame-duck session before the new Congress takes office. I am pessimistic about the chances of any action on renewable energy incentives in the new Congress that takes office in January and runs through 2016.
MR. WEISGALL: Can I jump in on that point?
We do not have a federal energy policy. We have a federal tax policy, and we have a federal environmental policy. We have never had a comprehensive energy policy. I am not sure we ever will. We are just too big a country. We have so many interests, whether it is hydro in the Northwest or coal in the Midwest or natural gas or nuclear east of the Mississippi.
The three biggest drivers for renewable energy in the United States are tax incentives, indirectly EPA regulations — especially the section 111(d) rule on greenhouse gas emissions from exist- ing power plants — and renewable portfolio standards at the state level.
Inaction at the federal level has led some states to take more of a leadership role. Some of the most significant drivers of this industry going forward will be state actions, not just renewable portfolio standards but also other policies to support new technologies.
MR. MARTIN: Obama seemed to give up on Congress four years ago acting on renewable energy and global warming, so he moved earlier this year to limit carbon emissions from existing power plants by regulation. Rich Glick and Jon Weisgall both mentioned that. Will that effort remain on track or will it now be derailed by a Republican Congress by perhaps denying spend- ing authority to implement the regulations?
MR. WEISGALL: It is a concern. There are lots of ways that a Republican Congress could impede implementation. The easiest and the least successful track would be to bar implementation of the section 111(d) rule. I doubt that would pass the Senate.
So what tools do opponents have? They have authorization and appropriations bills, oversight hearings and maybe the Congressional Review Act. There will probably be an attempt to cut off spending on EPA implementation. The form of attack that is most likely to succeed is a bill delaying implementation until 2020. I suspect that is what Republicans will go for since it would have the best chance of bipartisan success.
I think stopping the Environmental Protection Agency in its tracks on the separate new source performance standards will not succeed.
MR. MARTIN: John Stanton, Obama has been pushing the Department of Defense and other federal agencies to buy renew- able energy. Is there any chance that could be derailed?
MR. STANTON: The issue with federal procurement is the current insistence by the Office of Management and Budget that, apart from the Department of Defense realm, if the federal government wants more renewable electricity, it essentially must own the underlying hardware. That sets the bar higher than it needs to be because ownership requires a large upfront outlay. That means the agency must get an appropriation from Congress.
It would be far better if the federal government just entered into power contracts. This would allow use of the same third- party ownership models that are propelling the solar rooftop industry to 100% annual growth rates in the private sector. The OMB position that the federal government must own the equip- ment is not required by law. It puts up an unnecessary barrier to greater use of renewable energy by the federal government.
MR. MARTIN: Is anyone following the travails of the US Export- Import Bank? The bank has authority to operate only through June. There is a split in the House Republican caucus about whether to shut down the bank. Will the bank be around past June?
MR. WEISGALL: The mainstream Republican leadership wants to see the bank remain in business. This will be a moderates- versus-Tea-Party struggle within the Republican caucus. How this issue is decided will be a sign of whether the Republican party can move back into the mainstream.
MR. MARTIN: And since it was the mainstream wing of the Republican party that seemed to have prevailed in elections for Senate seats, that is at least an early positive indicator.
MR. WEISGALL: That’s right. Every other country has some- thing like it. We would really be shooting ourselves in the foot to get rid of it.
MR. MARTIN: Rich Glick, House Republicans have been critical of the Department of Energy loan guarantee program. Do you foresee any effort to shut it down?
MR. GLICK: There are two separate loan guarantee programs. One was adopted under the Energy Policy Act in 2005. The other was adopted in early 2009 as part of the Obama stimulus, the American Recovery and Reinvestment Act. The 2009 loan guar- antees have pretty much expired. The original loan guarantee program remains and is being used to help finance big nuclear power plants that are being developed down south. There is a lot more support among House Republicans for that program than there was for the other loan guarantee program that was used mainly to promote renewable energy.
I do not expect Congress to spend a lot of time on the loan guarantee program because it is not as good a political issue for the Republicans as it was a couple years ago.
MR. MARTIN: Joe Mikrut, Congress must increase the federal borrowing limit by next March, although the US Treasury usually finds ways of pushing its borrowing authority out to the summer. Do you foresee any drama around the next debt-ceiling vote?
MR. MIKRUT: No. We had drama around the debt limit and the government shutdown before. I think the last Congress learned its lesson. The public does not like government shutdowns. There is no better way to signal government dysfunction than to shut down the government.
MR. MARTIN: Demand for electricity in this country has been growing at a paltry rate. Demand increased by 0.7% a year in the last decade. It is expected to increase at a 0.9% annual rate going forward. John Stanton, solar rooftop companies like yours are making things a little worse for the utilities by making inroads into utility market shares in some states. However, some big utility CEOs and market analysts see hope for the future in that widespread adoption of electric vehicles could cause electricity demand to shoot up.
Do the election results make electrification of the transporta- tion sector more or less likely?
MR. STANTON: The elections were a neutral factor. The low growth in demand for electricity is not due to installation of rooftop solar panels but to widespread adoption of energy effi- ciency measures. For example, one simple step, like ordering that incandescent light bulbs be phased out in favor of more efficient light bulbs, offset several years of growth in electricity demand. Solar is 0.3% of electricity generation in this country. It is just not a significant factor.
Turning to electric vehicles, one would think that the utilities would embrace them to a greater degree than they have to date. Our sister company, Tesla, has an amazing product. We think that the future for electric vehicles is very, very bright, but the election results will not affect how widely they are adopted, and I don’t see the utilities doing much to stimulate that market.
MR. MARTIN: Jon Weisgall and Rich Glick, both of you work for utilities. Do either of you think the election will affect support for electric vehicles?
MR. WEISGALL: I don’t see an effect. This is largely a state issue. The state public utility commissions could play more of a role in promoting installation of charging stations, but they have not been particularly active to date, and I see a lot of challenges for states going forward to try to advance that market.
MR. GLICK: It is not a policy issue at the federal legislative level. The barriers have more to do with technology and consumer choice. As consumer demand increases for electric vehicles, then I think utilities will certainly embrace them and they are embrac- ing them somewhat now. The biggest technology issue that still needs to be addressed is batteries that will allow electric vehicles to travel longer distances between charging stations.
MR. MARTIN: Joe Mikrut, Congress must restore the highway trust fund. It has run out of money. The trust fund is how we pay for highways in this country. Republican orthodoxy is to oppose any new taxes. There has been talk about allowing US companies with earnings trapped in offshore holding companies to repatri- ate the earnings, pay the tax at a low rate and then have the taxes collected go into the trust fund. How do you see the trust fund being replenished?
MR. MIKRUT: I don’t think the repatriation tax will be the answer. Congress will continue to struggle with a longer-term solution. Taxes on gasoline are used currently to fund the trust fund, but because autos are getting higher mileage per gallon, the gas tax is no longer an adequate source of funding. I doubt Congress will find a permanent solution by the middle of next year when it has to act. My bet is it will continue to kick the can along the road until someone comes up with a solution that is tied to highway transportation.
MR. MARTIN: A fix that Congress can call a user fee rather than a tax?
MR. MIKRUT: People are more accepting of highway taxes dedicated to highway use than tax increases for general spending.
Corporate Tax Reform?
MR. MARTIN: I have been thinking of the prospect of corporate tax reform like a hurricane that hits the east coast. It has the potential to sweep all tax incentives out of the US tax code in order to allow the tax rate to be reduced. Maybe that is a carica- ture of what would actually happen, but do you foresee major corporate tax reform in 2015 of 2016?
MR. MIKRUT: Introduced? Yes. Enacted? Maybe. Will it becomprehensive? No.
Touching the individual side of taxes is sort of a third rail. The administration would like to get the deficit under control by increasing taxes on higher-income individuals. The Republicans clearly do not want to do that. So I think individual taxation is off the table.
But there can be a resolution between a Republican Congress and the Obama administration on either business taxes broadly or perhaps just corporate taxes or at least international taxes. And that could be labeled tax reform. And it could move forward within the next two years. which tax bills are scored to measure the potential revenue effects in a way that could make tax reform easier to achieve.
Congress could force a delay in implementing new emissions limits for existing power plants.
MR. MARTIN: Kevin Brady and Paul Ryan, two House Republicans, are vying to head the House tax-writing committee. Brady, who is from Texas, would pick up with a tax reform bill that the current committee chairman, Dave Camp, released in February. Any idea what Ryan would do?
MR. MIKRUT: I think Messrs. Brady, Ryan and Camp are all working from a similar set of principles. They all want a simpler and fairer system, presumably with a broader base.
They think the top rate should be 25% percent. They want to do international tax reform. Camp demonstrated when he released a discussion draft of a comprehensive corporate tax reform bill earlier this year how difficult it will be to get there. I think Ryan, assuming he takes over as chairman, will be looking at the same product and making changes, but using the Camp draft as a starting point. So would Brady. (For a discussion about how the Camp bill would affect power companies, see the February 2014 NewsWire starting on page 9.)
Ryan is already talking about changing the baseline against which tax bills are scored to measure the potential revenue effects in a way that could make tax reform easier to achieve.
MR. MARTIN: If corporate tax reform moves forward, is it clear that accelerated depreciation will be repealed?
MR. MIKRUT: It is very difficult to do tax reform without looking at accelerated depreciation. MACRS is the single largest domestic tax preference in terms of revenue effect. The discus- sion draft that Dave Camp released earlier this year would have reduced the corporate rate from 35% to 25% over several years.
The rate reduction would cost $680 billion in lost revenue over 10 years. Camp would have repealed MACRS and replaced it with a form of straight-line depreciation that is indexed for inflation. That would have raised $270 billion. So 40% of the revenue lost by reducing the corporate tax rate can be recovered by elimi- nating MACRS and moving to a different form of depreciation. (For more on how depreciation might be calculated after tax reform, see the December 2013 NewsWire starting on page 12.)
It is very, very difficult to think seriously about tax reform without also thinking seriously about accelerated depreciation.
MR. MARTIN: If accelerated depreciation is repealed, will companies that are depreciating existing assets be affected?
MR. MIKRUT: Unlikely. Traditionally, any depreciation changes have been prospective.
MR. MARTIN: There has been a move in the corporate sector to find ways to operate without having to pay corporate income taxes. Examples of this have been the wave of corporate inver- sions, where US companies merge with smaller foreign compa- nies and relocate offshore, the spinoffs of buildings and other assets by casinos, prisons, data centers, and telephone and bill- board companies into real estate investment trusts, and the interest in yield cos and master limited partnerships. These are all variations on the same theme. The Camp discussion draft in the House would have rolled back use of real estate investment trusts to the original form as vehicles for individual investors to pool capital to invest in buildings. Camp proposed taxing master limited partnerships like corporations except for those involved in minerals and natural resources.
Where do you see this going? Will any tax reform bill enacted affect existing REITs and MLPs?
MR. MIKRUT: There are two issues. First, it is very difficult to do corporate tax reform without at least asking what type of entities should pay entity-level corporate taxes. Should the cor- porate tax be viewed as a toll charge for access to the public markets? Should all entities be subject to corporate taxes once they reach a certain size? Many MLPs and REITs, as well as some privately-held partnerships, are very large businesses. Should Congress draw lines based on the activities in which the entities are engaged? Should it draw lines based on whether they are active businesses or merely vehicles for holding passive investments?
Second, if we only do corporate tax reform and leave the individual tax system alone, then the corporate tax rate may be driven down as low 25%. The individual rate will remain at 39.6% with all the add-on taxes for health care, etc. That would drive a lot of entities out of the flow-through regime back into the cor- porate regime to take advantage of the lower tax rate on corpo- rations, notwithstanding that corporate earnings are subject to two levels of taxation.
MR. MARTIN: So the effect of a corporate tax reform bill could be a mass exodus away from partnerships back to corporations.
MR. MARTIN: Jon Weisgall, you watch the states. Tax credits at the federal level and renewable portfolio standards at the state level have been keys to growth of the renewable energy industry in this country. Several conservative groups have been fighting to roll back state renewable portfolio standards, but so far with only limited success. Ohio froze its target for two years. Have the elections made roll backs more likely?
MR. WEISGALL: State capitals across the country will be more Republican than at any time in nearly 100 years. Republicans will have sole control of 29 state legislatures. That means both state chambers of state legislatures (and Nebraska where the legisla- ture is unicameral) and the governors’ mansions. That will be the largest level of Republican control since 1928.
The trend has been for states to go more conservative. Two states — Massachusetts and Maryland — that historically have been among the most liberal just elected Republican governors. The Democrats did not take over any legislative chambers that were held previously by Republicans.
Therefore, it is reasonable to believe we will see more pressure to roll back programs for renewable energy. You are right: the roll-back movement had one partial victory in Ohio this year. Efforts were made in the last three years to roll back renewable portfolio standards in 14 other states and every one of them failed. I suspect there will be renewed efforts in those states.
MR. STANTON: I agree with that. These RPS mandates were originally passed over the objection of the incumbent energy suppliers. What happened in Ohio was telling. The state froze the RPS target, which had been scheduled to increase, for two years. Then, on the heels of that, it sought to unwind the deregu- lation compact by allowing American Electric Power, the domi- nant utility, to put two coal-fired power plants into its rate base and get cost recovery for them from ratepayers even though the units are owned by an unregulated subsidiary of AEP.
The story in Ohio was not just let’s freeze the RPS target, but let’s also double down on our support for traditional energy interests. Unfortunately, I think that we will see more of that. Truth be told, renewable energy interests just do not have the power that fossil and traditional incumbents have.
MR. MARTIN: There was not much federal leadership during the Bush administration on renewable energy and global warming. It led a number of states to act on their own. Perhaps it will happen again, although it sounds less likely than before because of the shift to Republican control.
John Stanton, are there other issues in play at the state level that could be affected by the elections?
MR. STANTON: Actually, I think the Bush administration did its part to promote renewables. They just wanted to do it in a very Republican way, which was to lower levels of taxation. The solar investment tax credit was extended to 2016 in 2008 with admin- istration support.
MR. MARTIN: Jon Weisgall, are there other issues in play at the state level that could be affected by the elections?
MR. WEISGALL: The only thing that comes to mind is it is now quite clear there will not be any federal legislation on fracking. The industry probably should recognize that this makes it more likely that individual states will step in. Frankly, states have their fingers on the pulse of fracking politics and local concerns. That is the only one that comes to mind.
MR. GLICK: The Illinois and Kansas gubernatorial elections might have an effect on renewable energy.
In Kansas, Republican Governor Sam Brownback, who was narrowly reelected, had been a very strong supporter of the state renewable portfolio standard. However, because it was such a close race and the Koch brothers put a lot of money behind his reelection effort, he has backed off somewhat from his earlier support, and another effort will almost certainly be made to repeal the state target.
Illinois also elected a Republican governor. Legislation is expected in Illinois about how Exelon can be compensated for the cost of its nuclear power plants. It is possible that the same bill could modify how the state pursues renewable energy targets. This will not be a roll back, but the modifications are not expected to help. The new governor is a blank slate on renew- ables. We are not sure what position he will take. He replaced a Democrat who was an Obama ally. ¥