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FERC disavows tax policy drama behind pipeline MLP shake-ups

With natural gas pipeline companies citing the burden of proposed federal tax changes in pulling their master limited partnerships off the field of play, the chairman of the Federal Energy Regulatory Commission said it will make its final decision on the tax policy based on law, with no preference for a certain corporate structure.

Enbridge Inc. and Williams Cos. Inc. announced May 17 that they plan to absorb their pipeline master limited partnerships, citing the FERC tax changes and declines in the market fortunes of MLPs. FERC Chairman Kevin McIntyre responded to the announcements by saying the commission would listen to comments on its proposed tax policy but would not go out of its way to preserve the MLP structure. He also said the restructuring of major players in the pipeline business would not affect an effort to update its pipeline application process.

"The reasons for the actions we took in connection with the tax issues are spelled out in the respective orders that we issued on those topics," McIntyre said after the FERC monthly meeting May 17. "And neither I nor, I'm sure, any of my colleagues would presume to suggest a particular business or corporate structure model for any participant, MLP or otherwise. And I don't think that is a driving force behind our decision-making in the tax area or any other issue, for that matter. It is up to the individual market participant to make that decision."

McIntyre was also asked whether FERC saw a need to provide clarity with the Enbridge and Williams news and with other pipeline companies saying the proposed tax policy changes were creating a lot of uncertainty. "We have [a notice of proposed rulemaking] comment process," McIntyre said. "We will look forward to reviewing all of the comments that are submitted and take very seriously all the concerns that are raised through those comments. We will base our decision on our review of the comments and our thinking about whether it is appropriate to move forward on the issue."

Many pipeline companies considered reorganizing after FERC announced a proposed tax policy change March 15, under which pipeline MLPs would no longer be able to recover an income tax allowance in their cost-of-service rates, and after a 2017 overhaul of federal taxes that dropped the corporate income tax rate from 35% to 21% and reduced the tax benefits that made MLPs attractive. FERC announced its proposal after a federal appeals court found that the agency failed to prevent the double recovery of income tax costs when it allowed a Kinder Morgan Inc. liquids pipeline to recover both an income tax allowance and a return on equity determined by discounted cash flow methodology.

In announcing its decision to absorb its MLP Williams Partners LP, Williams said it could take years for the industry to convince FERC to ease up on the MLP tax policy, even if it could be done.

Marc Spitzer, a former FERC commissioner who is now a partner with Steptoe & Johnson LLP, agreed that it could take a long time. FERC is unlikely to take back its proposal, and pipeline shippers would challenge any such move in federal appeals court. But Spitzer sided with the pipeline companies in pointing out problems with the new tax policy, which he said is inconsistent with his understanding of how federal tax law and the regulation of utilities should work.

"The bottom line is, disallowance of income tax as an expense to the partnership that operates a pipeline conflates the income tax liability with the actual payment of tax," said Spitzer, who has taught courses on income tax litigation and federal tax law for the state bar of Arizona and lectured on tax law at universities.

Donald Santa, president and CEO of the Interstate Natural Gas Association of America, said the FERC tax proposal created challenges for pipeline companies organized as MLPs. "On point, the statement by Enbridge announcing its corporate restructuring highlighted the risks created by FERC's revised income tax policy statement as a principal driver for this proposal," he said.

"Pipelines and their parent energy holding companies make decisions based on their particular circumstances and their judgment about what will best enable capital attraction and create shareholder value," Santa said. "Still, because the energy pipeline business remains subject to economic regulation, the regulatory climate is a factor in making such decisions."