The Federal Energy Regulatory Commission ("FERC") will no longer allow partnership oil and natural gas pipelines owned by a master limited partnership ("MLP") to recover an income tax allowance in cost-of-service rates. FERC is reassessing its policy regarding income tax allowances in cost-of-service rates for other types of pass-through entities providing transmission or transportation services. FERC also took several actions to ensure that federal income tax rate reductions under the Tax Cuts and Jobs Act are passed through in certain jurisdictional cost-of-service rates.
As described in a Cadwalader memorandum, FERC made these revisions following a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit in a case brought by United Airlines Inc. against FERC. In this case, certain shippers on SFPP, LP, a subsidiary of an MLP, argued that FERC's income tax allowance for the partnership pipeline coupled with a discounted cash flow return on equity resulted in the partners' double recovery of taxes. The appeals court found that FERC "ha[d] not adequately justified its tax allowance policy for partnership pipelines," and remanded to FERC to address the double recovery issue.
On remand, FERC removed the income tax allowance from SFPP's cost-of-service, which eliminated double-recovery issues. FERC also issued a revised policy statement to apply this decision to oil and natural gas MLP-owned partnership pipelines going forward.
In addition, FERC proposed revising its natural gas pipeline regulations to reflect the Tax Cuts and Jobs Act and FERC's revised MLP tax policy. The Tax Cuts and Jobs Act lowered the federal corporate income tax rate to 21 percent on January 1, 2018, resulting in a lower income tax expense and reduced accumulated deferred income taxes ("ADIT"). FERC received numerous requests to ensure that the tax cuts would be reflected in utility rates. FERC proposed the following revisions:
- requiring a one-time report for interstate natural gas pipes to file on the effects of the tax cut and FERC's revised MLP tax policy revision;
- allowing interstate natural gas pipelines to submit either a limited NGA section 4 filing or choose from three alternatives, in order to reflect the tax cut and FERC's revised MLP tax policy revision; and
- requiring Natural Gas Policy Act section 311 and Hinshaw pipelines, if they change their rates for intrastate service to reflect tax changes, to modify their rates for interstate service also.
FERC also issued a Notice of Inquiry, requesting comments on the following:
- ADIT and bonus depreciation treatment in light of the Tax Cuts and Jobs Act;
- the reduction in the federal corporate income tax rate;
- the effect on ADIT from the elimination of the income tax allowance for MLPs; and
- bonus depreciation-related issues and effect on the Tax Cuts and Jobs Act.
The Revised Policy Statement will become effective on March 21, 2018. Comments on FERC's Notice of Inquiry are due by May 21, 2018, and comments on the proposed natural gas pipeline regulations are due 30 days after publication in the Federal Register.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.