FERC Acts On Income Tax Allowance And Implements The Tax Cuts And Jobs Act

by Husch Blackwell LLP
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The Federal Energy Regulatory Commission (FERC) took swift action to respond to the recent United Airlines v. FERC decision regarding income tax allowances, as well as to implement changes stemming from the Tax Cuts and Jobs Act “to ensure that the economic benefits related to the reduction in the Federal corporate income tax rate are passed through to customers.” Specifically, FERC revised its income tax allowance policy for Master Limited Partnership (MLP) pipelines, with implications for other pass-through entities. In addition, it acted to implement federal income tax rate reductions and ordered changes affecting all FERC regulated entities.

MLP Pipelines – Tax Allowance Eliminated 

FERC issued the Revised Policy Statement on Treatment of Income Taxes (“Revised Policy Statement”) (Docket No. PL17-1) at its regular public meeting on March 15, 2018, in response to a remand from the U.S. Court of Appeals for the D.C. Circuit in United Airlines, Inc., v. FERC, 827 F.3d 122 (D.C. Cir. 2016).  The Revised Policy Statement is based on FERC’s finding on remand that MLP pipeline rate recovery of both an income tax allowance and a return on equity calculated pursuant to the discounted cash flow (“DCF”) methodology results in an impermissible double recovery. The Revised Policy Statement eliminates the income tax allowance from oil and gas MLP pipelines’ cost of service “on a going-forward basis.”

For interstate natural gas pipelines, FERC referenced a newly issued Notice of Proposed Rulemaking (“NOPR”) (Docket No. RM18-11), discussed below, that FERC issued to implement the Trump Administration’s Tax Cuts and Jobs Act (“Act”). The Act lowered the corporate income tax rate from 35 percent to 21 percent. The NOPR proposes a process for interstate natural gas pipelines to file information so that FERC can evaluate the impact of the Revised Policy Statement and the Tax Cuts and Jobs Act on interstate natural gas pipelines’ revenue requirements. For oil pipelines, FERC will address the tax issues in Form No. 6, page 700 filings and use that information in the 2020 five-year review of the oil pipeline index level.

Interstate Natural Gas Pipeline – Revenue Requirements Under Scrutiny

In keeping with its focus on income tax, FERC concurrently issued the above-mentioned NOPR to address the effects of the Tax Cuts and Jobs Act on interstate natural gas pipeline rates. The NOPR sets forth FERC’s proposal to require interstate natural gas pipelines to file a one-time, voluntary informational report to allow FERC to evaluate the impact of the Act and the Revised Policy Statement on interstate natural gas pipelines’ revenue requirements.  Interstate natural gas pipelines would have four options for reporting:

(1)        File a limited rate reduction to reflect the reduced corporate income tax rate under Natural Gas Act (NGA) Section 4;

(2)        Commit to file a general NGA Section 4 rate case in the near future;

(3)        Explain why a rate adjustment is not necessary; or

(4)        Take no action other than filing the one-time report.

If a pipeline selects options three or four, FERC will consider whether to issue a NGA Section 5 Order to Show Cause why the pipeline should not be required to reduce its rates to reflect the corporate income tax rate reduction. Clearly, FERC has the legal authority to issue such an order under NGA Section 5 at any time.  And there is no threshold showing required for FERC to institute such a proceeding, i.e., FERC doesn’t need “probable cause” or any other reason to take such action.

Serious questions exist as to whether the Commission has the legal authority to mandate options (1) or (2). See Public Service Comm. of N.Y. v. FERC, 866 F.2d 487 (D.C. Cir. 1989). Therefore, tying options (3) and (4) to failure to implement options (1) or (2) may afflict options (3) and (4) with the same legal infirmity.

The NOPR Comment deadline is 30 days after publication in the Federal Register, which is forthcoming.

Other Pass-Through Entities – Tax Allowance Potentially at Risk

The Revised Policy Statement expressly states that it does not address non-MLP partnerships or other pass-through entities. However, it states:

While all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the Commission will address the application of United Airlines to non-MLP partnerships or other pass-through business forms as those issues arise in subsequent proceedings.

Accordingly, other pass-through entities in all FERC-regulated industries should be aware that their income tax allowance could be scrutinized when they submit a rate filing under Federal Power Act (FPA) Section 205, or if they are the subject of a Complaint challenging the justness and reasonableness of their rates under FPA Section 206.

Other Effects of the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act will also affect electric utilities that have stated tax rates. FERC has issued two Orders to Show Cause pursuant to its FPA Section 206 authority requiring certain electric utilities to propose revisions to their stated rates or formula rates with fixed tax rate line items to reflect the lower corporate tax rate or show cause why they should not be required to do so. 162 FERC 61,224 (2018); 161 FERC 61,225 (2018). FERC stated that it would consider proposals to review such rate filings on a single-issue basis. Electric utilities with formula rates that do not contain stated tax rates are not included in these Orders to Show Cause.

Finally, FERC issued a Notice of Inquiry (RM18-12) seeking comments on how FERC should address changes relating to Accumulated Deferred Income Tax (ADIT) and Bonus Depreciation for FERC jurisdictional rates in light of the corporate income tax rate reduction. The Notice of Inquiry Comment deadline is 60 days after publication in the Federal Register, which is forthcoming.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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