The Federal Energy Regulatory Commission issued new income tax rules that would affect oil and gas pipeline companies and master limited partnerships, but the companies told investors that the changes would have little impact on their balance sheets.
After its monthly public meeting on March 15, FERC announced that it will no longer allow interstate natural gas and oil pipelines operating as MLPs to recover an income tax allowance in their cost-of-service rates, stripping many pipelines of a mechanism that had boosted the amount of pretax income passed through to unit holders.
The announcement came after a federal appeals court ruled in 2016 that the agency failed to demonstrate that there had not been "double recovery" of income tax costs when it allowed a Kinder Morgan Inc. liquid pipeline company, SFPP LP, to recover both an income tax allowance and a return on equity that was determined by the discounted cash flow methodology. FERC launched a notice of inquiry on the subject of tax allowances and rate-of-return policies in December 2016.
In initial notes, some analysts said the new policy would likely have a significant impact on MLPs, especially when coupled with write-downs driven by a recent reduction in the corporate tax rate. The new federal tax law enacted by President Donald Trump in December 2017 reduced the corporate income tax rate from 35% to 21% beginning in 2018. But SL Advisors LLC Managing Partner Simon Lack said in an email that there are "many reasons" to expect that the FERC policy would have a limited impact to MLPs. For one thing, the commission's decision does not affect other parts of partnerships' businesses, such as gathering, processing, storage, LNG and other sectors. Lack also noted that many interstate pipeline contracts are negotiated based on market rates, rather than cost-of-service rates.
During the same March 15 meeting, FERC also proposed a new rule that would put in place a process that would allow the commission to see which interstate gas pipelines might be collecting "unjust and unreasonable rates" after the changes in FERC's income tax allowance policies and the reduction in the corporate tax rate.
Under the rule, pipelines would be required to file a one-time report, called a FERC Form No. 501-G. The report would detail effects on pipeline revenue requirements from the new tax law. The report would be part of the FERC effort to prevent double recovery of tax costs in pipeline rates.
FERC staff said if the rule is passed, the cost of service for wholesale customers would decrease, because tax expenses, which are recovered in cost-of-service rates, would also go down.
"I think the actions we take here today will ensure that the benefits of [the tax act will] flow to ratepayers," Commissioner Neil Chatterjee said. "Put simply, that means lower electric and natural gas bills."
The announcement of the FERC policy changes caused the bellwether Alerian MLP Index to fall 4.6% on March 15 and share prices to drop for companies such as Williams Cos. Inc., Energy Transfer Partners LP and Spectra Energy Partners LP.
The MLPs moved to reassure investors that the new tax accounting policy would not substantially impact their balance sheets. Enterprise Products Partners LP said it does not expect the FERC revision to materially impact earnings and cash flow, even if they are party to cost-of-service rates.
