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

by Husch Blackwell LLP

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.

© Husch Blackwell LLP | Attorney Advertising

Written by:

Husch Blackwell LLP

Husch Blackwell LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.