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FERC softens MLP tax allowance stance, issues final rule on pipeline tax savings

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FERC softens MLP tax allowance stance, issues final rule on pipeline tax savings

Washington — The US Federal Energy Regulatory Commission eased up slightly on its moves to bar tax allowances for pipelines organized as master limited partnerships, adjusting its policy to suggest that companies owned by corporations are eligible for an allowance.

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The agency also sided more closely with pipelines over shippers on how to handle deferred taxes, saying refunds to customers would violate prohibitions on retroactive ratemaking.

The shifts could provide relief to a number of pipeline companies that expected to lose the tax allowances.

FERC in mid-March rattled some pipeline stocks when it announced it no longer intended to allow oil and natural gas pipelines organized as master limited partnerships to recover an income tax allowance in cost-of-service rates. At the same time it also issued a notice of proposed rulemaking seeking to reflect in interstate natural gas rates the corporate incomes tax cut that took effect January 1 as well as the tax allowance change.

On Thursday, the commission issued a final order on rehearing on the tax allowance policy, as well as issuing a final rule setting procedures for deciding which natural gas pipelines are collecting unjust and unreasonable rates following the tax changes.

Several pipeline stocks saw gains Thursday. For instance, Dominion Energy Midstream Partners closed up 23.44%.

Among key changes in the orders, FERC clarified that pass-through entities are eligible for a tax allowance if their income or losses are consolidated on the federal income tax return of their corporate parent.

FERC REJECTS PUSH FOR ADIT REFUNDS

Pipelines and their customers had sparred over the timing of flowing back to customers accumulated deferred income tax -- the monies collected from customers in anticipation of paying the Internal Revenue Service. In a decision more favorable to pipelines, the commission provided guidance that if an MLP or other pass-through pipeline eliminates its income tax allowance from its cost of service, ADIT will similarly be removed from the cost of service, instead of flowing the balances to ratepayers. FERC ultimately found that it was prohibited from making such retroactive ratemaking under the Natural Gas Act.

Shippers nonetheless welcomed FERC's final rule to encourage savings under the Tax Cuts and Jobs Act to be passed along to consumers.

"Overall, we're very pleased that FERC took action on the pipeline rates issue," said Casey Gold, director of regulatory affairs for the Natural Gas Supply Association, adding the group is pleased the commission is acting promptly to pass along savings under the Tax Cuts and Jobs Act to shippers and ultimately to consumers. The final rule is effective 45 days after publication in the Federal Register.

FERC Chairman Kevin McIntyre said it was imperative that when pipelines are over-recovering that tax reduction benefits are flowed to customers as soon as possible because the NGA prevents retroactive ratemaking. The final rule provides the regulatory certainty needed and the proper incentives to encourage pipelines to voluntarily reduce rates, he said.

MORATORIUM INTENDED TO SPUR RATE FILINGS Along those lines, Andrew Eldean of FERC's Office of General Counsel said the regulation creates an incentive for pipelines to proceed with a limited NGA Section 4 rate filing to more quickly pass along tax savings by guaranteeing that FERC will not for three years initiate a Section 4 rate probe of a pipeline that makes such a filing. That is provided there is a showing on a new FERC form filing of a return on equity of 12% or less.

Commissioner Cheryl LaFleur, who wrote a joint concurring opinion with Commissioner Richard Glick, said while she hoped the order struck the proper balance, the commission's ability to fully protect shippers and their consumers is compromised by FERC's lack of refund authority under Section 5 of the NGA. Glick hoped Congress "can remedy the situation as soon as possible." He worried there remained a powerful incentive for pipeline companies to continue to over-recover and drag out litigation.

FERC Commissioner Robert Powelson praised the rule's adoption of a new reporting form for pipelines, Form 501-G, calling it an important financial transparency tool, reflective of the current pipeline marketplace. According to FERC staff, annual filing of the form is intended to provide information to help FERC decide whether rates are unjust and unreasonable in light of the tax changes.

ClearView Energy Partners, in an alert, said it would characterize FERC's shift on the MLP tax allowance policy "from what appeared to be a categorical 'no' in March to 'maybe some.'" It added, "between the two orders, we believe FERC has opened the door to retaining income tax allowances in pipeline rates in cases where a corporation owns MLP partnership units, as we thought possible."

Height, in a note, said the change "would be constructive for pipelines with ownership arrangements like Dominion Midstream (DM) and Dominion (D) as it suggests that Dominion's ownership arrangement of DM entitles DM to claim a tax allowance beyond the three-year grace period, ostensibly in perpetuity." --Maya Weber, maya.weber@spglobal.com

--Edited by Gail Roberts, gail.roberts@spglobal.com