The mighty U.S. pipeline and coal industries are turning out to be dependent on tax subsidies in one case and regulatory favoritism on the other, according to two separate reports this month by the Bloomberg organization.
In mid-March, pipeline stocks had their worst day in two years after the Federal Energy Regulatory Commission ruled against preferential tax treatment for master limited partnerships (MLPs), an investment vehicle that has been famously popular with fossil financiers. All FERC had to do was rule that MLPs can’t receive financial credit for income taxes they don’t pay.
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The agency said it was forced to act after a court ruled that its previous policy could allow the partnerships to incur costs once but recover them twice. “The court did not mince its words,” said FERC Chair Kevin McIntyre. “Granting an income tax allowance to master-limited partnerships results in ‘inequitable returns.’ This very clear language amounts to very clear marching orders for us.”
Portfolio manager Jay Hatfield of InfraCap MLP said the ruling was “definitely a negative, but it’s not Armageddon for MLPs.” Bloomberg said it was most likely to affect operators of interstate pipelines, in a story that listed Williams Cos., Kinder Morgan, Energy Transfer Partners, and Dominion Energy Downstream Partners as companies that could see the greatest impact. The policy change takes effect this summer for natural gas pipelines, and in 2020 for oil.
Earlier this week, meanwhile, Bloomberg New Energy Finance concluded that scarcely half of U.S. coal plants made enough money last year to cover their operating expenses. “The problem is particularly bad in Florida, Georgia, and elsewhere in the Southeast, where the distance from major coal mines drives up prices,” Bloomberg Markets reports.
But those plants are managing to “shield themselves from economics,” the news agency states. “About 95% of those with operating expenses exceeding revenue operate in regions where regulators set rates, the study found. Instead of allowing market forces to determine their fate, regulators and utilities often keep struggling plants open to ensure stability on their grids.”
“We find ourselves awestruck by the resilience of U.S. coal,” wrote report authors William Nelson and Sophia Liu. “Plants persist even when they cost more to run than replace.”