Locke Lord QuickStudy: FERC Takes Major Action On Tax Matters

Locke Lord LLP
March 16, 2018
On March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued several far-reaching items related to the tax allowance that is permitted to be included in the jurisdictional rates of natural gas pipelines, oil pipelines and electric transmission companies.

No Tax Allowance for Master Limited Partnerships (MLPs)
In Docket No. PL17-1-000, in response to a remand order from the U.S. Court of Appeals for the D.C. Circuit in United Airlines, Inc., et al. v. Federal Energy Regulatory Commission, 827 F.3d 122 (D.C. Cir. 2016), FERC issued a Revised Policy Statement on Treatment of Income Taxes wherein FERC will no longer allow companies that are structured as MLPs to have an income tax allowance in their jurisdictional rates. FERC stated that it was bound by the Court’s finding that allowing MLPs both an income tax allowance and a return on equity calculated using the discounted cash flow (DCF) methodology was an unlawful double recovery. FERC also stated that while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, FERC will address the application of its new policy to non-MLP partnership forms as those issues arise in subsequent proceedings.

Interstate Natural Gas Pipelines
In Docket No. RM18-11-000, “Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate,” FERC issued a Notice of Proposed Rulemaking that proposes a procedure under which FERC would determine whether pipelines are collecting unjust and unreasonable rates in light of the reduction in the corporate tax rate to 21 percent and FERC’s new policy disallowing an income tax allowance for pipelines structured as MLPs. 

Comments on the proposed rule are due 30 days after publication in the Federal Register.

The proposed rule would require interstate pipelines to (a) file a one-time report, called FERC Form No. 501-G, that would provide financial information from the pipeline’s 2017 FERC Form 2; and (b) select from one of four options based on such information:

  1. make a limited Natural Gas Act (NGA) section 4 filing to reduce its rates by the percentage reduction in its cost of service shown in its FERC Form No. 501-G;
  2. commit to file either a prepackaged uncontested rate settlement or a general NGA section 4 rate case by December 31, 2018, in which case FERC would not initiate a NGA section 5 investigation of the pipeline’s rates;
  3. file a statement explaining why no change in rates is required; or
  4. take no other action, with FERC then considering based on the filed FERC Form 501-G whether to initiate a NGA section 5 investigation.

Intrastate Pipelines Under NGPA Section 311
In Docket No. RM18-11-000, FERC also proposed separate procedures for intrastate natural gas pipelines performing interstate service pursuant to section 311 of the Natural Gas Policy Act of 1978 (NGPA) and Hinshaw pipelines performing interstate transportation pursuant to a limited jurisdiction certificate.  Under the proposed rule, these pipelines would have to file a new rate election for interstate service if their rates for intrastate service are reduced to reflect the tax rate reduction.  

Oil Pipelines
FERC stated that it will address the tax rate reduction to 21 percent and the denial of a tax allowance for pipelines having a MLP structure in its 2020 five-year review of the oil pipeline index level, which will set a new index level for July 1, 2020 based on a comparison of 2014 costs to 2019 costs.

In addition, oil pipelines are required to update Form 6, Page 700, and FERC stated that its audit team will look closely at such filings.

Electric Transmission Companies 
FERC issued two Federal Power Act show-cause orders in Docket Nos. EL18-72-000 and EL18-62-000, et al. involving 48 companies whose transmission tariffs specifically reference a tax rate of 35 percent or use stated rates and, unlike tariffs with formula rates, will not automatically adjust for the reduction in the corporate tax rate to 21 percent.  The orders direct such companies to propose revisions to their transmission rates to reflect the tax rate reduction or show why they should not do so.  Responses are due in 60 days. 

FERC also issued two waivers that allow Public Service Company of Colorado and certain transmission owners within the MISO to make mid-year rate adjustments to reflect the new tax law.

Accumulated Deferred Income Taxes and Bonus Depreciation 
FERC issued a generic Notice of Inquiry in Docket No. RM18-12-000 that seeks comments on other effects of the Tax Cuts and Jobs Act on the FERC-jurisdictional rates of natural gas pipelines, oil pipelines and electric transmission companies, including (1) accumulated deferred income taxes, which are the dollar amounts of taxes collected from customers in anticipation of paying the Internal Revenue Service, that may not accurately reflect current tax liability due to the tax rate reduction; and (2) changes to bonus depreciation under the Tax Cuts and Jobs Act. Comments on the Notice of Inquiry are due 60 days after publication in the Federal Register.