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US FERC set to address tax reforms' impact on power, gas rates at next meeting

Washington — With consumer advocates, utility customers and natural gas shippersclamoring to ensure companies offer appropriate rate reductions in lightof the historic overhaul of the US tax code, the US Federal EnergyRegulatory Commission is slated to initiate separate gas and electricrulemakings on the matter at its upcoming meeting March 15.

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A meeting notice posted Thursday indicates that the commission willproffer notices of proposed rulemaking to inquire about the effect of theTax Cuts and Jobs Act on FERC-jurisdictional electricity rates (RM18-12)and to consider natural gas pipeline rate changes tied to the federalincome tax rate (RM18-11).

The $1.5 trillion sweeping tax reform package signed into law byPresident Donald Trump December 22 reduced the federal corporate tax rateto 21% from 35%. This triggered calls by states and others for FERCintervention to ensure utility customers do not end up overpaying forelectric and gas service as a result of the tax reforms.

While some utilities and state public utility commissions have alreadytaken steps to ensure that rates are in line with the new realitiesconcerning companies' tax liabilities, a number of state agencies andattorneys general in a January 9 letter said FERC should "take action atthe federal level to ensure that all charges on customers' bills are justand reasonable."

Acting now to revise formula or stated rates "rather than waiting totrue-up later would ensure that customers promptly receive the fulleconomic benefit of the tax reduction," the letter contended.

The 19 signatories of the letter represent 16 states. They include theattorneys general for California, Connecticut, Illinois, Kentucky,Massachusetts, Maryland, Nevada, New York, North Carolina, Rhode Island,Texas and Virginia, as well as state agencies and consumer advocateoffices for Connecticut, Florida, Maine, Nevada, New Hampshire, RhodeIsland and Vermont.

American Public Gas Association President Bert Kalisch made a similarpitch focused on oil and gas pipeline transportation rates. In a January3 letter to FERC, he asked the commission to take immediate action tomake all interstate natural gas pipelines under its jurisdiction adjusttheir recourse rates to reflect changes in the corporate income tax. SHOW-CAUSE PETITION NOT ON AGENDA

Further, a broad coalition of trade groups and companies that rely onservices provided by natural gas pipelines and storage companies onJanuary 31 petitioned (RP18-415) FERC "to take immediate action toinitiate show cause proceedings to demonstrate that [pipeline andstorage entities'] existing jurisdictional rates continue to be just andreasonable following the passage" of the new tax law.

The pipeline industry, on the other hand, has cautioned against toohastily requiring rate reductions based on one cost component inisolation of other cost elements.

The January 31 petition, however, has not been queued up for action atthe next commission meeting.

Chairman Kevin McIntyre said last month at a state utility regulators'conference that the commission was "trying to figure out the mosteffective and efficient way to advance the ball ... so that we can getsome tax relief that consumers really need and deserve." But he stressedthat it would not be a simple task.

"On the natural gas pipeline side, so many of the rates that are chargedby the interstate pipelines that we regulate are subject to black boxsettlements," he noted. "There is no line item you can look up and say,'There's the tax rate, we just need to tweak this number.'"

And while the electric side is generally more transparent due to theincreased prevalence of formula transmission rates, "it's not astraightforward matter in many cases because of timing differences,annual true-up processes, and in some cases there is a stated tax figureyou can look up in a formula and in other places it's more of aplaceholder," McIntyre said. FERC TACKLED SIMILAR RATE ISSUES IN THE 1980S

Still, the commission has some experience dealing with tax changes, mostnotably concerning its work in 1987 to address rates following passage ofthe Tax Reform Act of 1986 that also brought a dramatic reduction incorporate income tax rates.

The commission, at the time, issued a final rule (RM87-4) establishing anabbreviated rate filing procedure to encourage electric utilities tovoluntarily file rate reductions reflecting the decrease in their taxrate. The rule did not apply to gas pipelines as they already had taxtrackers in their rate settlements, and FERC opted to deal with oilpipeline rates on a case-by-case basis.

Analysts with ClearView Energy Partners said in a research note Thursdaythat the commission may "take a hybrid approach to both electricity andnatural gas rates," encouraging "voluntary rate reductions to capture thego-forward decrease in the corporate tax rate, and [leaving] the morecomplicated deferred tax balances for future action as it did after the1986 Tax Reform Act." DOUBLE RECOVERY OF TAX COSTS ALSO TEED UP

FERC is also set to take action at its March 15 meeting on a notice ofinquiry (PL17-1) it issued in December 2016 seeking a broad range ofcomments on how to address any double recovery of tax costs that resultfrom its income tax allowance and rate of return policies forpartnerships or similar pass-through entities, according to the meetingnotice.

Pass-through entities are not subject to corporate income taxes, but theowners face taxes individually on the entity's income.

The NOI responds to the DC Circuit Court of Appeals' July 2016 vacatur ofFERC's 2005 tax allowance policy (United Airlines v. FERC, 11-1479). Thecourt reviewed a series of orders involving the pipeline SFPP and foundFERC's rate policies could allow oil pipelines set up as partnerships tounfairly profit from their tax structure.

A number of dockets tied to the underlying SFPP rate case and rehearingrequests on other SFPP rates are also on the agenda for the March 15meeting.

FERC's next steps on remand to address the double recovery issue couldhave wide-ranging implications for energy investments not only in oil andnatural gas pipelines but also possibly for electric utilities amid thegrowth of real estate investment trusts.

ClearView said "it is possible that the commission may reopen the NOI onthe tax allowance policy to address recently enacted tax reform."

ClearView added: "We expect whatever proceedings the commission announceson [March 15] are likely to move on a relatively quick pace given thatthe changes to the tax code went into effect on January 1." -- Jasmin Melvin, jasmin.melvin@spglobal.com

-- Edited by Rocco Canonica, newsdesk@spglobal.com