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US FERC takes first steps to tackle tax reforms' impact on power, gas, oil rates

Washington — The US Federal Energy Regulatory Commission took significant actionThursday toward ensuring that the benefits of last year's historic taxoverhaul flow to consumers.

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At its open meeting, it outlined how it intends to ensure the rates ofelectric utilities, as well as natural gas and oil pipelines remain justand reasonable in light of the Tax Cuts and Jobs Act.

Recognizing the regulatory and operating differences among the industriesit regulates, the commission offered distinct solutions for the way taxexpense decreases would be reviewed among electric transmission, gas andoil pipeline rates.

The $1.5 trillion sweeping tax reform package, which President DonaldTrump signed into law December 22, reduced the federal corporate tax rateto a flat 21% from a maximum 35%.

Because the income tax allowance included in FERC-jurisdictionalcost-of-service rates charged by electric, gas and oil companies wasdecreased by the change in the tax code, states and others were quick toseek FERC intervention to prevent utility customers and pipeline shippersfrom overpaying for service.

Commissioners on Thursday applauded staff for their expeditious responseto the change in income tax rates, with Chairman Kevin McIntyre jokingthat the mere 83 days taken to turn around a batch of orders on thematter "clobbered" the 246 days the commission took to address ratesfollowing passage of the Tax Reform Act of 1986 that also brought adramatic reduction in corporate income tax rates. BROAD NOI SEEKS ELECTRIC, GAS, OIL SECTORS' INPUT

That batch of orders includes a broad notice of inquiry (RM18-12) seekingcomment from the electric, gas and oil sectors on the effect of the taxreforms on their FERC-jurisdictional rates.

Accumulated deferred income taxes -- monies companies collect fromcustomers in anticipation of paying the Internal Revenue Service -- andbonus depreciation, a tax incentive offered to companies to encouragecertain types of investment, are among the key topics on which FERC isinterested in getting feedback, Kristen Fleet, a staffer in the Office ofEnergy Market Regulation, said during the open meeting.

"Due to the tax rate change, the current balance of accumulated deferredincome taxes does not accurately reflect the current tax liability," shesaid of the commission's interest.

Because the tax reforms bar "the use of bonus depreciation for assetsacquired in the trade or business of the furnishing or sale of electricalenergy, water, or sewage disposal services; gas or steam through a localdistribution system; or transportation of gas or steam by pipeline," FERCasked for comments on the effect of this change "and whether, and if sohow, it should take action to address bonus depreciation-related issues,"Fleet said.

Interested parties will have 60 days to comment on the NOI after it ispublished in the Federal Register. SHOW-CAUSE ORDERS SENT TO 48 UTILITIES

As for the sector-specific approaches FERC unveiled Thursday, 48 electricutilities were directed, within 60 days, "to propose revisions to thetransmission rates under their [tariffs] to reflect the change in thefederal corporate income tax rate, or to show cause why they should notbe required to do so," Jonathan Taylor from FERC's Office of the GeneralCounsel said.

The utilities named in the show-cause orders (EL18-62, EL18-72, et al)either rely on stated transmission rates or transmission formula rates inwhich the federal corporate income tax component is a fixed line item of35%. Under both rate structures, absent revision, "the reduced tax ratewould not be reflected in a public utility's transmission revenuerequirement," Taylor said.

Most other utilities have formula rates that annually adjust the costsassociated with paying the corporate income tax, and "therefore, nofiling would need to be made to change the corporate income tax rate" fortheir transmission revenue requirements, Taylor said. NOPR GIVES GAS PIPELINES OPTIONS

For natural gas pipelines, FERC issued a notice of proposed rulemaking(RM18-11) that would require interstate gas pipelines to submit aone-time informational filing intended to aid the commission's review ofwhether unjust and unreasonable rates are being charged.

Specifically, the filing called FERC Form No. 501-G would includefinancial information needed to evaluate the impact on stated rates ofthe new tax code as well as FERC's revised policy on tax allowance costrecovery for master limited partnerships.

That policy (PL17-1), also unveiled Thursday, would no longer allow oiland gas pipelines organized as MLPs to recover an income tax allowance incost-of-service rates.

Adam Eldean, a staffer in the Office of the General Counsel, elaboratedthat FERC Form No. 501-G is an abbreviated cost and revenue study thatuses 2017 data from FERC Form No. 2 and 2A to "estimate the percentagerate reduction on each pipeline's cost-of-service resulting from the TaxCuts and Jobs Act and the revised policy statement."

That report would also estimate a pipeline's actual return on equitybefore and after enactment of the new tax law and implementation ofFERC's revised policy statement impacting MLPs.

Once companies have assessed the impact of these tax changes on theirrates, under the proposed rule, they would have four options: "file alimited Natural Gas Act Section 4 filing to reduce the pipeline's rates;make a commitment to file a general [NGA] Section 4 rate case in the nearfuture; file a statement explaining why an adjustment to its rates is notneeded; or take no action other than filing the informational filing,"Eldean said during the meeting.

"The one-time report will also assist the commission in determiningwhether to use its authority under Section 5 of the [NGA] to requirepipelines who do not voluntarily modify their rates to either reducetheir rates to reflect the income tax reduction or explain why theyshould not be required to do so," Eldean asserted.

Comments of the NOPR are due 30 days after Federal Register publication.If the rule is finalized, the commission anticipates that the one-timeinformational filings would be due in late summer or early fall. OIL RATES TO BE REVIEWED UNDER REGULAR INDEXING PROCESS

The commission relies primarily on an index ratemaking methodology toadjust oil pipeline rates.

That method involves the use of an index level to calculate annualchanges to interstate oil pipeline rate ceilings. The index is reviewedevery five years to ensure it corresponds to industry-wide oil pipelinecost changes.

The index ratemaking methodology allows oil pipelines to change theirrates in compliance with the rate ceiling, which changes every July 1based on the index level, rather than submit cost-of-service filings.

"Under currently effective requirements governing the schedule forindexing changes, the commission will reassess the oil index again in2020 based on cost changes between 2014 and 2019," Eldean said. "Thus,because the cost data for the 2014-2019 period will reflect the effectsof the Tax Cuts and Jobs Act and revised policy statement, the commissionis not taking an industry-wide action regarding oil pipeline rates atthis time." -- Jasmin Melvin, jasmin.melvin@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com