United States: Testimony Of Brattle Principals Contributes To DC Circuit Court Ruling Limiting Income Tax Allowance For Partnership Pipelines

The DC Circuit Court of Appeals recently ruled that the Federal Energy Regulatory Commission's (FERC) Income Tax Allowance (ITA) policy for partnership pipelines, when applied in tandem with its Discounted Cash Flow Rate of Return on Equity (DCF ROE) methodology, results in inequitable rates of return for partnership pipelines. As a result, the Court recognized, partners in a partnership pipeline receive a windfall when compared to shareholders in a corporate pipeline.

Brattle Principals Matthew O'Loughlin and Daniel Arthur provided extensive written and oral testimony on this and other topics on behalf of shippers in the underlying 2009 FERC proceeding regarding petroleum products pipeline SFPP, L.P. (Docket No. IS08-390-002). Notably, the Brattle witnesses demonstrated two of the key insights ultimately relied upon by the Court, namely (i) the DCF ROE is a before-investor-taxes required rate of return, regardless of whether the pipeline is a partnership or corporation, and (ii) an ITA inappropriately provides a greater after-tax return to a partner in a partnership pipeline relative to a shareholder in a corporate pipeline of equivalent risk.

This is the third Opinion issued by the Court over the past several years on the matter of an ITA for partnership pipelines. While the Court acknowledged that it had previously approved FERC's granting of an ITA to partnership pipelines, it clarified that the issue of double recovery caused by the interaction of the DCF ROE methodology and the ITA policy for partnership pipelines had not been previously addressed. The Court found that FERC failed to meet its obligation under the Supreme Court's ruling in Hope Nat. Gas Co., 320 U.S. at 603 (to provide returns to partnership pipelines that are commensurate with returns in other firms having similar risks) when it provided partnership pipelines with an ITA in conjunction with the DCF ROE.

Brattle was retained by Richard E. Powers, Jr. and Steven A. Adducci of Venable LLP to provide economic analysis in both the original FERC proceeding and the Court of Appeals matter.

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