Oil & Gas Severence Taxes on Tap in Ohio & Pennsylvania in 2015

Joe McMonigle
Senior Energy Analyst

The energy industry has fought off oil & gas severance taxes in Pennsylvania and Ohio in the past few years but their luck is coming to an end. In Ohio, Governor John Kasich, who holds a 30-point lead in his reelection bid, has told editorial boards he will push for a ballot initiative for a minimum 4 percent severance tax if the legislature does not take action. The Ohio Oil & Gas Association opposes the move and helped to pass in May a 2.5% tax in the Ohio House of Representatives, which Kasich opposed as “puny.” We hear that some energy companies would be fine with Kasich’s approach but the industry association is gearing for a political battle. In Pennsylvania, the severance tax has become a big issue in the Governor’s race with Governor Tom Corbett opposed to one while his Democratic opponent Tom Wolf, who has a big lead in the polls, proposes a 5 percent severance tax. Wolf, a former Secretary of Revenue under former Governor Ed Rendell, wants to use the proceeds for education spending. Regardless of the election outcome, most political observers in Pennsylvania believe a severance tax is inevitable. Former Republican Governor Tom Ridge who chaired the Marcellus Shale Coalition at its inception, told a conference that he expects a severance tax after the election. The state senate’s top Republican leader also was quoted in the press as saying it’s coming sooner or later.

With the Senate at Stake, Democrats Can’t Shake One Very Big Albatross

INTO THE HOME STRETCH:  Democrats are doing surprisingly well in generic polls, and they’re hanging on in several crucial states — Alaska, Arkansas, North Carolina — that are crucial to retaining the Senate.  But Republicans are now favored to take the upper chamber, so Democrats are trying to play what they think is a trump card: the economy, which clearly is healing.  The recession officially ended in 2009, yet nearly 50% of all Americans think the country is still in one — why? Read the Full Research Report Here.


Are MLP’s the New Inversion? Washington Renews Focus on Corporate Structure

Joe McMonigle
Senior Energy Analyst

Master Limited Partnerships (MLPs) have returned to the Washington spotlight, thanks to the $44 Billion Kinder Morgan deal announced August 10th to consolidate Kinder MLPs into a new entity.

As we are seeing with so-called corporate inversions, the Obama Administration is in hot pursuit of lost tax revenue. MLPs were already under the Treasury microscope and a top target of comprehensive tax reform in Congress. But now, following the Kinder Morgan deal, investors are contemplating if MLPs are the new inversion.

The Treasury Department announced on August 11th that it was reviewing the tax implications of MLP transactions. In addition, the IRS commissioner told Congress in April that the agency had paused issuing MLP approvals while it studied the broader policy effects. MLPs, however, are popular in Congress as an effective financing mechanism for oil and gas infrastructure. There is even talk about extending it to renewable energy, which would broaden the appeal.

In a longer note for clients, PRG provides more detailed analysis of MLPs and the potential risks ahead, including:

  • Potential executive action from the Administration on MLPs similar to inversions:
  • The different politics of MLPs and inversions;
  • Energy implications of potential tax extenders legislation;
  • Perhaps the biggest threat to MLPs in Congress.

For the detailed client note on MLPs and/or to schedule a call with Joe McMonigle, please contact Jessica Tou at jtou@potomacresearch.com or 617-682-7347.

Also related: The Potomac Energy Conference on Sept. 22nd in NYC. More information, click here.

Top 5 Energy Policy Trends

Joe McMonigle
Senior Energy Analyst

First the encouraging developments – the Department of Energy (DOE) finally gave an overdue conditional approval for the Oregon LNG project, and the Federal Energy Regulatory Commission (FERC) issued its final approval for Freeport LNG with noteworthy speed. However, two recent announcements from the DOE and EPA have ominous signs for LNG exports. In its conditional approval of Oregon LNG, DOE stated that going forward it would consider the effects of increased gas production on greenhouse emissions if FERC chose not to do so. EPA has also filed critical comments at FERC that the agency must consider greenhouse gas emissions as well. It’s starting to remind us of the Administration’s position on Keystone XL.

Senate races and ethanol politics are impacting the EPA’s upcoming final 2014 Renewable Fuel Standard (RFS) due in the late summer or early fall. The White House has given the impression that there will be “higher number,” but we view this as spin. There may be a marginal increase in this year’s ethanol number, but the final number will still be a cut from 2013 and significantly lower than the 2014 RFS goal.

The Administration and The Department of Transportation (DOT) have punted on real decisions for rail transport of crude rail by creatively proposing three options for a standard instead of a single proposed standard. Ultimately, we expect the final outcome to be generally positive for the oil and gas industry with a phased-in flexible standard. However, some refiners with older legacy tank cars will have more exposure. Tank car manufactures are big winners with a backlog of new tank car orders. Railroads also prevailed as the proposed rule did not include speed limits or additional personnel requirements.

Contrary to media reports, there has been no policy shift in lifting the ban on crude oil exports. Our timeline for any policy decisions remains near the end of the year or mid-2015. It is very unlikely the Administration or Congress would lift or create exceptions to the ban before the November election. Perceived impact on gasoline prices looms large. But Washington is “studying” the issue while keeping an eye on a potential crude supply glut that could force its hand.

EPA’s timeline to complete its carbon regulation for the power sector is already behind schedule. We are certain to see multiple-year delays, and the policy will ultimately be left to President Obama’s successor. The final rule for new power plants, due in June, has not yet been released, probably because it will surely trigger lawsuits. Additional new signs of legal risks appeared in August as more states joined forces to litigate the carbon rule.

Also related: The Potomac Energy Conference on Sept. 22nd in NYC. More information, click here.

Supreme Court Disconnects Aereo

Paul Glenchur, Senior Telecom-Cable Analyst
June 25, 2014

As we expected (Supreme Court Hears Aereo Case, April 22, 2014) , the Supreme Court ruled in favor of broadcasters in their challenge to Aereo, a service that retransmits broadcast signals to subscribers over the Internet.  The broadcaster victory removes Aereo’s technological threat to rising retransmission consent revenues, a boost for the likes of CBS, NBC-Comcast, ABC-Disney, Twenty-First Century Fox, Gannett, Sinclair Broadcast, Media General, LIN Media, Tribune, Nexstar and others. The Court, in a 6-3 opinion authored by Justice Stephen Breyer, concluded Aereo’s online retransmissions of broadcast programming are substantially similar to the traditional cable television retransmissions for which Congress imposed copyright liability in the mid-1970s.  Although Aereo uses individual antennas and user-dedicated copies for its retransmissions, these technical distinctions, the Court said, are insufficient to make a legally cognizable difference.  The service is a “device or process” (key language in the relevant statute) to transmit public performances of copyrighted broadcast programs.

Cloud-based Services: Also, as we expected, the Court emphasized that its decision is not intended to compromise the availability of remote-storage DVRs and cloud-based media services.  The Court’s majority acknowledged that it cannot fully insulate such services from legal uncertainty because such technologies were not squarely at issue in the Aereo case.  But the Court noted that cloud services are not primarily purchased or used by subscribers for the transmission of content; they are used primarily for storage.  Moreover, the Court noted, the use of cloud-based services could be protected by the fair use doctrine, the same legal basis for allowing traditional VCR time-shirting of copied programs. Accordingly, the opinion does create modest uncertainty for network DVRs and cloud-based media services, but, as anticipated, the Court’s majority is doing all it reasonably can to signal that such services will be distinguishable from Aereo, a bit of reassurance for cable operators (Cablevision, Comcast, Cox) that have deployed or will soon roll out premium network DVR services.  This is also helpful to equipment vendors like Arris.  Google, Amazon, Apple and others continue to build on their cloud-based offerings as well.

The Dissent:  Justice Antonin Scalia, joined by Justices Clarence Thomas and Samuel Alito, dissented.  They agreed that Aereo instinctively raises concerns about its legitimacy under copyright laws and policies, but they would have affirmed the lower court ruling in favor of Aereo because the text of the applicable copyright law, in their view, does not adequately address the unique circumstances of Aereo’s technology.  According to the dissenters, this is a matter that Congress needs to address.

Further Mischief Ahead?  Perhaps more importantly, the dissent raises the prospect that Aereo or similar services could dodge the impact of the majority’s ruling by making modifications that build greater distance between new technology-enable services and traditional pay television offerings.  For example, Justice Scalia wrote, imposing a service mandate that prohibits the viewing of desired programming until it has completed its live broadcasting airingmight avoid the majority’s basic rationale — that Aereo is not sufficiently different from traditional cable television services that retransmit broadcast signals.  Currently, Aereo allows its subscribers to watch copied programs on a virtually live basis by imposing a delay of just a few seconds from the over-the-air commencement of the desired program. Still, today’s ruling creates broad conceptual limits to services that attempt to establish a new “device or process” to communicate or transmit copyrighted material to the public regardless of when or where such content is consumed.  Based on today’s decision, any system that attempts to work around the basic protections for broadcast transmissions is likely to have a difficult time surviving judicial challenges.

Congress is Off the Hook:  Today’s Supreme Court decision in favor of broadcasters obviates the need for lawmakers to address the consequences of an adverse ruling.  This reinforces the likelihood that Congress will ultimately pass a fairly clean extension of DBS distant signal authority before such authority expires at the end of this year.  As we noted, however, Congress may nonetheless include language that moderates some of the adverse impact of recent FCC rules restricting the use of joint sales agreements. Broadcasters, without needing a fix to an adverse Aereo court decision, can continue their full and undiluted opposition to the efforts of pay television operators to push legislative reforms to existing retransmission consent laws.

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Wall Street Journal Reports Tonight US “Loosens Four Decade Ban On Oil Exports”

But Processed Condensate Exports Not New & Already Allowed Under the Law

Joe McMonigle
Senior Energy Analyst

The Wall Street Journal created waves in the energy sector tonight with a hyped article implying that “the Obama Administration has quietly cleared the way for the first exports of unrefined American oil in four decades.”  You can read the WSJ article here.

Don’t take the bait. The article’s main focus is about companies being able to export processed condensate, which is not new and already allowed under the law.

The article cited an unnamed industry executive who explained that the Commerce Department issued a “private rule” to two companies to export condensate to foreign buyers. The companies, Pioneer Natural Resources (PXD) and Enterprise Products Partners (EPD), “confirmed they had received the rulings.”

But the article is misleading. First, to be clear, the US has not lifted the crude export ban and has not created an exception for condensates. (The WSJ has since updated its article late tonight with slightly less hype but the revised article is still misleading.)

There is no real news here. What the article describes as “the companies have improved the processing of the crude in a way that qualifies it for export” has always been allowed under the law.  In fact, other companies have slightly “processed” oil using a splitter to get around the export ban.

So why the confusion? While it’s not exactly clear what prompted the WSJ to publish the article, here is our best guess. Despite already being allowed to export in this way, we think the companies were seeking advance government approval of their specific method to process the condensate just to be sure.

We have been following the crude export ban issue closely and believe it is very unlikely the Administration would lift the ban before the November election. In the next few weeks, we will be writing a more in-depth note on the topic.  In the meantime, one preview is that we do believe the Administration will have to take action sooner rather than later (post-election), and it will be in the form of some redefinition of crude under the ban to allow exports of condensate. But even this measure just buys time and is a long way from lifting the crude export ban.

Flickers of Life for Democrats in Senate Races; Keystone Fallback; Postal Workers Protest

FRESH POLLS support our our view that it’s too early for Republicans to anticipate a takeover of the Senate this fall.  There could be methodology problems with some of these polls (registered voters vs. likely voters) but they appear to show that Sen. Mark Pryor (D) leads in Arkansas, Kay Hagan (D) is roughly even in North Carolina, and Mary Landrieu (D) is ahead in Louisiana.  All three are considered highly vulnerable.

MEANWHILE, Sen. Mitch McConnell (R) may be facing a surprisingly close race in Kentucky; his approval rating has risen a little, but it’s still in dangerous territory for an incumbent.  And we continue to think that voters in Georgia may rebel against the gun nuts and the “personhood” advocates and support Michelle Nunn (D), which could give the Democrats a pickup.

Read the Full Research Report Here

Supreme Court Hears Aereo Case

April 22, 2014

Supreme Court arguments in the Aereo case just ended.  We continue to lean toward the broadcasters in this dispute, anticipating that the Court will conclude Aereo implicates the public performance rights of broadcasters and is obligated to pay licensing fees for its Internet retransmission service.  Aereo has said a ruling against it would likely shut the service down.

Our view is based on the overall tenor of the argument.  We sense the Justices were not particularly sympathetic to Aereo but struggled to find sufficient distinctions that would protect legitimate cloud-based media services and remote storage DVRs from incurring copyright liability based on the Court’s decision.  We caution that it is difficult to make outcome predictions based on oral arguments.

Broadcasters contend that Aereo is similar to a cable system by capturing over-the-air signals on micro antennas and streaming content to subscribers over the Internet.  Congress, the broadcasters argue, modified the Copyright Act in 1976 to ensure such retransmissions, by any device or process, were treated as public performances and subject to copyright infringement liability.  Broadcasters are concerned that a Supreme Court defeat could unleash Aereo or Aereo copycats, derailing the retransmission consent gravy train, a revenue stream of roughly $4 billion for broadcasters.

Aereo argues that it only allows users to watch free local signals, streaming the programs from user-dedicated copies.  Aereo says it is only providing the equipment (antennas and copying facilities) and the users are selecting the programs and watching them as private — not public — performances.

For the most part, the individual Justices did not provide clear indications of their various dispositions although we think Justice Ruth Bader Ginsburg was the most vocal critic of Aereo’s position, and Chief Justice John Roberts — and Justice Antonin Scalia to a lesser extent — were implicitly critical of Aereo by suggesting its individual antennas and copies are inefficiently deployed simply to avoid paying copyright fees.

Justices Stephen Breyer, Sonia Sotomayor, Anthony Kennedy, Elena Kagan and Samuel Alito were clearly trying to find principled limits that would prevent a ruling for broadcasters from upsetting innovation in web media services.  Justice Clarence Thomas did not ask any questions or interact with the lawyers arguing the case.

There is a reasonable risk the Court could rule against Aereo and create some uncertainty regarding the future application of its decision to cloud-based services.  As much as the Court would like to strike a perfect balance in its opinion, cloud-based media (“digital locker”) services and network-based DVRs were not squarely before the Court.  If the Court rules for broadcasters, we would expect cautious statements about the decision’s reach to insulate cloud services as much as possible, but some level of new uncertainty is probably inevitable.

On the other hand, if the Court goes the other way and rules in favor of Aereo, TV networks and station groups will head to Capitol Hill, lobbying for a fix as part of pending legislation to renew DBS distant signal authority, a “must-pass” bill in the current legislative session.  Given the retransmission consent fights between pay television operators and broadcasters, a consensus may be difficult to achieve.  For now, broadcasters simply hope the Supreme Court will take care of its Aereo problem.

We expect a ruling around the end of June as the Court completes its current term.


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Barack Obama and John Boehner Face the Legacy Issue

AFTER THIS FALL’S ELECTIONS, Barack Obama and John Boehner essentially will be focusing on their legacies; Obama will have about two years left in office and Boehner is widely expected to step down, perhaps even sooner.  So an intriguing question arises: what “legacy” issues will they pursue?

Read the Full Research Report Here.

The Democrats’ Wish List — Three Major Issues

GOVERNMENT SHUTDOWN:   Just as the politicians abandon confrontation, here comes a government shutdown today as a major storm hits the East Coast.  Janet Yellen’s second day of testimony has been cancelled, along with just about everything else.  So this might be a good time to check in on the Democrats’ retreat . . .

A SHORT WISH LIST:  Democrats at their Eastern Maryland offsite are focusing on three major issues.  Here’s our take: … Read the Full Research Report Here

Morning Bullets: Obamacare Delay; Debt Ceiling Dance; Sequester Forever?

LOSE-LOSE: We’ll defer to our colleague Paul Heldman on the health care implications of the latest White House delay in the ACA for businesses.  But our take is still another arbitrary change in the law is a negative for the administration politically and economically…. Read the Full Research Report Here.

EM Crisis Unlikely to Affect Fed, Don Kohn Says; Obama’s Pen; The Monica Lewinsky Factor

THE EMERGING MARKET CRISIS is “worrisome,” former Fed Vice Chairman Don Kohn told PRG clients on Friday, but it’s unlikely to deter the FOMC from a $10 billion step-down in asset purchases this week.  The Fed traditionally views EM crises “through the prism of how they affect the U.S. economy,” Don said, and the outlook here is still for GDP growth of about 3% in 2014… Read the Full Research Report Here

Something for Everyone in Massive Spending Bill; A Sure Sign the GOP Will Keep the House

OMNIBUS SPENDING BILL — SOMETHING FOR EVERYONE: There were cuts and increases, silliness and surprises, as House-Senate appropriators unveiled their 1,582 page 2014 budget last night. No one can possibly digest it all before the present continuing resolution expires tomorrow night, so Congress will pass a three-day continuing resolution today. There will be grumbling, especially among House conservatives, but the measure should pass in a few days. Read the full report Here

A Contrarian Take on the GOP – Declare Victory

Analysis ThumbOVERVIEW:  After absorbing repeated blows in an exceptionally partisan inaugural address, Republicans seem stymied by low approval ratings and internal divisions.  In fact, their agenda has prevailed on several fronts, as we detail in this morning’s Bullets.  On three key issues, the Republicans should declare victory. See the full story here.