On March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued important orders regarding two significant tax-related rate matters affecting interstate oil and natural gas pipelines. The action eliminated tax allowances for master limited partnership (MLPs) pipelines and proposed natural gas pipeline rate reviews based on the federal corporate income tax reduction mandated by P.L. 115-97, formerly known as the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act).

MLP Tax Allowances

In United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016), the US Court of Appeals for the District of Columbia Circuit held that FERC had failed to demonstrate that no double recovery of income taxes resulted from permitting SFPP, L.P., an MLP oil pipeline, to recover both an income tax allowance and a pre-tax return on equity determined by the discounted cash flow (DCF) methodology. On remand, FERC initially conducted a Notice of Inquiry (NOI) concerning the tax allowance issue (Docket No. PL17-1).

After considering the comments filed in response to the NOI, FERC issued a “Revised Policy Statement on Treatment of Income Taxes.” The Revised Policy Statement responded to the DC Circuit’s United Airlines remand decision by eliminating an income tax allowance in cost of service rates for MLP interstate oil or natural gas pipelines. In considering whether to revise its tax allowance policy, FERC found that NOI comments supporting the continuance of an income tax allowance for MLP pipelines failed (a) to undermine the conclusion that a double recovery results from granting an MLP both an income tax allowance and a pre-tax DCF return on equity (ROE), or (b) to justify preserving an income tax allowance notwithstanding such a double recovery.

According to the Revised Policy Statement, while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the application of United Airlines to non-MLP partnerships will be addressed as those issues arise in subsequent proceedings. The Revised Policy Statement will be effective on the date of publication in the Federal Register.

Unlike the industry-wide approach to rate reviews described below for natural gas pipelines, FERC did not initiate a similar process for existing crude oil or liquids pipeline rates regulated under the Interstate Commerce Act. Instead, FERC (i) directed those pipelines to include in their annual FERC Form 6, page 700 filings an income tax allowance consistent with United Airlines and the Revised Policy Statement, and (ii) stated that it would incorporate the effects of both its Revised Policy Statement and the 2017 Tax Act on industry-wide pipeline costs in the 2020 five-year review of the oil pipeline index level.

2017 Tax Act Income Tax Rate Reduction

A. Natural Gas Pipeline Notice of Proposed Rulemaking

In light of the recent reduction in the federal corporate income tax rate from 35% to 21%, FERC also issued a Notice of Proposed Rulemaking (NOPR) directed to interstate natural gas pipelines. The NOPR’s proposals are intended to allow FERC to determine which pipelines may be collecting unjust and unreasonable rates in light of both the corporate tax rate reduction and the change in income tax allowance policies adopted in response to United Airlines. The proposal would require interstate pipelines to file an abbreviated cost and revenue study under a one-time report, designated “FERC Form No. 501-G,” in light of the new tax law and income tax allowance policy changes.

In addition to filing the one-time report, each pipeline would have four options to voluntarily make a filing to address the changes to the pipeline’s recovery of tax costs, or explain why no action is needed:

(i) 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.

(ii) Commit to file either a prepackaged uncontested rate settlement or a general NGA section 4 rate case if it believes that using the limited section 4 option will not result in a just and reasonable rate. If the pipeline commits to do this by December 31, 2018, FERC would not initiate a section 5 investigation of its rates prior to that date.

(iii) File a statement explaining why it does not believe it has to change its rates.

(iv) File the new FERC form without taking any other action.

If a pipeline does not choose either of the first two options, the Commission will consider, based on the information in Form No. 501-G and comments by interested parties, whether to issue an order to show cause under NGA section 5 requiring the pipeline either to reduce its rates to reflect the income tax reduction or explain why it should not be required to do so.

The NOPR proposes staggered dates for pipelines to file Form No. 501-G. Interstate natural gas pipelines with cost-based rates will be split into four groups with the due date for the first group 28 days from the effective date of a final rule, and the due date for each subsequent group will be 28 days from the previous group’s due date.

The NOPR also would require 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 to file a new rate election if their rates for intrastate service are reduced to reflect the 2017 Tax Act’s income tax reduction. Comments on the NOPR will be due 30 days after publication in the Federal Register.

B. Generic NOI

Consistent with its mandate to ensure just and reasonable rates, FERC also issued an NOI seeking comments regarding other effects of the 2017 Tax Act on all FERC jurisdictional rates for public utilities, interstate gas pipelines and oil pipelines. FERC intends the NOI as a vehicle to build a record on whether additional action is needed. The NOI is requesting comments on these topics and specifically the 2017 Tax Act’s impact on accumulated deferred income taxes and bonus depreciation. Comments on the NOI are due 60 days after publication in the Federal Register.

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