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FERC asks stakeholders to 'chime in' on double tax recovery by pipelines

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Essential Energy Insights - September 17, 2020

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FERC asks stakeholders to 'chime in' on double tax recovery by pipelines

FERC wants to hear from a broad range of parties as it considers adjusting its income tax allowance and rate-of-return policies to avoid double recovery of tax costs in the rates charged by pipeline companies and partnerships.

FERC put out the call for comments because a court-ordered review of the relationship between FERC policies on income tax and return on equity could have a "significant and widespread effect ... upon oil pipelines, natural gas pipelines, and electric utilities subject to the commission's regulation," FERC said in a draft notice of the inquiry. Initial comments are due within 45 days of the notice being posted in the Federal Register.

Shippers have complained that current FERC policy allows pipelines to receive an income tax allowance even though the master limited partnership structure frequently used by such companies means they themselves do not get hit with the tax bill but instead pass on tax liability to partner-investors who are able to use deductions to largely offset taxable income.

Commissioner Colette Honorable emphasized the broad nature of the FERC effort after a presentation by staff at the commission's monthly meeting Dec. 15.

"I believe that the resolution of this docket could in fact have wide-ranging implications in terms of how we address potential issues of double recovery [and] how we address certain ratemaking functions, including the setting of ROEs," Honorable said. "And I encourage any number of stakeholders, who may be not only interested but concerned about tax liability issues and ratemaking matters, and in particular how to aid us in achieving this proper balance ... to please chime in."

In the staff presentation, Glenna Riley of the FERC Office of General Counsel said the commission is looking for any proposed methods to adjust its income tax allowance and rate of return policies. FERC asked stakeholders to suggest methods that would allow regulated entities to earn a sufficient return but would not result in a double recovery of investor-level tax costs for partnerships or similar pass-through entities.

FERC explained in the notice that its income tax and return-on-equity polices evolved over the past two decades to address the emergence of partnerships in the industries that FERC regulates, and especially the MLPs that own oil and gas pipeline assets.

ClearView Energy Partners LLC in a Dec. 15 note said a current FERC policy that could be changed is the inclusion of MLPs in distributed cash flow proxy groups to set oil and gas pipeline returns.

FERC took up the review of its policies after receiving instruction from the U.S. Court of Appeals for the District of Columbia Circuit in a review of rate case decisions by the commission. In a July 1 decision in the case, which pitted United Airlines Inc. and other shippers on Kinder Morgan Inc.'s Santa Fe Pacific oil pipeline against the commission, the D.C. Circuit found that the commission failed to demonstrate that there was no double recovery of taxes for the partnership pipeline as a result of FERC policies when a discounted cash flow methodology was used. The court listened to the shippers, which had argued that double recovery occurred because FERC allowed a partnership entity with pass-through taxation to receive an income tax allowance.

The court remanded the decisions to the commission to develop mechanisms "for which the commission can demonstrate there is no double recovery" of partnership income tax costs. The court told the commission that it could consider removing duplicate tax recoveries for partnerships directly from the discounted-cash-flow return on equity or eliminating all income tax allowances and setting rates based on pretax returns. The court asked the commission to "ensure parity between equity owners in partnership and corporate pipelines," FERC said. (FERC docket PL17-1)