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

Joe McMonigle, Senior Energy Analyst
October 7, 2014

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

Greg Valliere, Chief Political Strategist
October 2, 2014

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
August 26, 2014

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
August 19, 2014

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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