Originally posted on Troutman Sanders’ Washington Energy Report
On March 13 and March 15, 2018, FERC took actions to address tax law changes resulting from the Tax Cuts and Jobs Act of 2017 for electricity, natural gas, and oil companies. In addition, on March 15, 2018, in response to a federal court remand, FERC stated that master limited partnership (“MLP”) interstate natural gas and oil pipelines will no longer be allowed to receive an income tax allowance in cost of service rates.
The Tax Cuts and Jobs Act of 2017, among other things, lowered the federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018. FERC addressed this tax rate change by issuing separate orders for electricity, natural gas, and oil companies. First, the Commission issued two show-cause orders, pursuant to section 206 of the Federal Power Act, for 48 electricity companies whose current transmission tariffs include fixed rates that may have been based on the outdated tax rate. Both orders direct the electric companies to propose tariff revisions to adjust their transmission rates in accordance with the new tax rate or otherwise, show why they should not be required to do so.
Second, FERC issued a Notice of Proposed Rulemaking (“NOPR”) that proposes to allow FERC to determine which natural gas pipelines are collecting unjust and unreasonable rates under the Natural Gas Act (“NGA”) in light of the tax reduction and the Commission’s newly revised income tax allowance policies. The NOPR proposes to require interstate pipelines to file a one-time report, known as “FERC Form No. 501-G”, on the impact of changes in the tax law and the Commission’s tax allowance policy. In addition to the report, interstate pipelines will be given the choice between: (1) making a limited NGA section 4 filing to reduce rates by the percentage reduction in its cost of service shown in its FERC Form No. 501-G; (2) committing to file either an uncontested rate settlement or a general NGA section 4 rate case before December 31, 2018 (or else the Commission will institute a NGA section 5 rate investigation before the end of the year); (3) filing a statement explaining why the pipeline does not need a rate change; or (4) take no further action. If an interstate natural gas pipeline opts for the third or fourth option, the Commission will determine whether to institute a NGA section 5 rate investigation based on the information in the One-time Report and comments by interested parties.
Third, the Commission opted to respond to tax law changes for oil pipelines in the 2020 five-year review of the oil pipeline index level.
In addition, FERC issued an order on March 15, 2018 in response to the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) decision in United Airlines, Inc. v. FERC. The D.C. Circuit found that FERC failed to show that permitting certain partnership types, among them MLPs, to recover both an income tax allowance and a return on equity based upon the discounted cash flow methodology did not result in a double recovery of income tax costs. On remand of the D.C. Circuit decision, FERC decided to no longer allows MLPs to recover the income tax allowance. To reflect this change, FERC committed to revising its 2005 Policy Statement for Recovery of Income Tax Costs so that it will no longer allow MLPs to recover an income tax allowance in the cost of service. Notably, the Commission indicated that application of the D.C. Circuit decision to all other types of non-MLP partnerships will be addressed as the double-recovery issue arises in subsequent proceedings.