Sane Energy Project team member, OTP leader, and cinematographer par excellence, Owen Crowley,* has written an insightful analysis of how market forces and loopholes encourage investment in pipelines, using an invention called "MLPs." Spectra has been out front in using this particular tax dodge, and now, Williams is getting in the game too. This is such an important story that we are reproducing the blog post in its entirety here in the newsletter as well. This is information activists need to know, and make sure others know.

PS: To share this information, please use the "forward" button at the bottom of this email, or this website link, to avoid your email address being accidentally unsubscribed by a friend of yours. (The way our mail program works, if they decide they've been spammed and click the "unsubscribe" button, they'll remove YOU, not themselves, from our list.)

*PPS: Happy Anniversary! Sane Energy Project's newsletter and website were launched three years ago this month, both owing to the technical expertise and generosity of Mr. Crowley. Our thanks go out to Owen for his deep tolerance of panicked questions by those less intrepid.

Market Realist recently ran an excellent, must-read investor’s guide to Spectra Energy Corporation. This report describes Spectra’s corporate structure and details Spectra energy (SE) and affiliates’ plans to build out gathering, storage and transmission infrastructure across the USA and Canada. It provides a fact base for understanding the frothy exuberance about Spectra & friends among energy investment boosters.

To fully appreciate Market Realist’s report, however, you need to understand how Spectra Energy Corp attracts capital investment. The two main dimensions are Spectra’s revenue model, and a tax loophole.

Spectra’s revenue derives from transmission fees rather than commodity pricing. This means Spectra’s distribution affiliates make money as long as gas, natural gas liquids (NGLs) or oil go from anywhere to anywhere. Commodity price volatility—risky to commodity investors—presents an opportunity for Spectra’s distribution arm to make more money as gas, NGLs and oil move due to price arbitrage.

But the real kicker is that Spectra’s distribution arm in the USA is a “master limited partnership” or MLP. After Spectra builds a pipeline, it immediately “drops down” the pipeline asset into an MLP it controls, Spectra Energy Partners (SEP). MLPs have a very special status under US tax law. They are fictitious “partnerships”, which means they avoid income tax on earnings as long as they distribute their earnings every year.

This tax dodge is available to fossil fuel transporters but not sustainable energy transporters, and is in effect a subsidy for fossil fuel distribution. The result is a roughly 30% boost in investment returns, compared to the same activities were they conducted by a non-MLP. Distributions on established MLPs range from 2 to 4 times market averages, and can be even greater for exploration companies. Distributions such as this are taxable income for investors.

There a is privileged class among MLP stakeholders—the general partner. The general partner actually manages the MLP, and holds “incentive distribution rights”—entitling the general partner to receive a higher percentage of the distributions. Spectra Energy Corp is the general partner of Spectra Energy Partners.

The general partner can skim as much as 50% off the top as distributions increase, with the result that all other investors get less. In addition, the general partner, unlike other investors, can treat these distribution as capital appreciation.

This means that in addition to avoiding corporate tax, the general partner pays much lower capital gains tax, and then only at some future date. When estate law is factored in—for example, inheritance tax loopholes—a general partner may avoid tax altogether. Tax subsidies such as the ones that selectively benefit MLPs cost society dearly, not only by incentivizing destructive energy, but also by making everyone else pay more tax. (This is why tax loopholes are also known as “tax expenditures.”)

Of course, all “good” things must come to an end. The big risk around MLPs—one that funds managers desperate to project growth may choose to overlook—is that the moment an MLP's
revenue falters, the value of investors’ stakes in the MLP falls off a cliff. This stems from the fact that there is no capital appreciation on MLP stakes.

To avoid tax, MLPs distribute all their earnings every year (or more commonly, every quarter). Industry insiders—including general partners like Spectra Energy Corp—will see this coming and will be the first to avoid losses by heading for the exit. But municipal and pension funds that invest in these MLPs will not be able to move as quickly.

All the more reason for such funds to divest from such assets and all fossil fuels.

Aside from terrifying corporate malfeasance, we've got reports on recent and upcoming events right here. Catch up on: The radon bill's progress and last Saturday's Wind Run, plus Wednesday's important City Council hearing on pipelines, and the fun No-Impact Picnic on Wednesday night. And come see us this weekend at the Clearwater Festival, all day Saturday and Sunday!

One of the ways you can enlarge our ability to research and outreach about important news like this is to support Sane Energy Project with gifts of your time, or the thing that is our favorite color (because we like all things green ;) To volunteer your time, drop us an email at contact@SaneEnergyProject.org. And many thanks for all forms of donations!