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DC Circuit again upholds FERC stance on pipeline income tax allowance

Highlights

Rebuffs oil pipeline request for rehearing en banc

Nixes shippers' bid for reversal on tax account refund

Washington — The full DC Circuit Court of Appeals has stuck by a ruling accepting the Federal Energy Regulatory Commission's approach to limiting certain oil and gas pipelines' recovery of an income tax allowance in cost-of-service rates.

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In one-paragraph orders Nov. 19, the court denied rehearing en banc requested by pipeline companies as well as a separate request to rethink another aspect of the ruling filed by a long list of shippers (SFPP v. FERC, 19-1067).

The oil pipeline SFPP Sept. 14 filed the rehearing petition, contending a DC Circuit panel ruling, with enormous impacts on energy and capital markets, on July 31 improperly upheld FERC's unjustified refusal to reopen the underlying record in SFPP's rate case and relied on factual contradictions and inconsistent rulings.

Unless corrected by the court, they argued the pipeline industry would be seriously aggrieved and billions of dollars in pipeline infrastructure would be undermined.

"Whether [master limited partnerships] are permitted an income tax allowance implicates the entire oil and gas pipeline industry and the capital markets that invest in energy infrastructure: therefore, this is an issue of profound public importance that necessitates review by the court en banc," they wrote.

Customers of the pipeline, in a separate request for rehearing, by contrast wanted the court to reconsider whether FERC acted unlawfully when it approved SFPP's elimination of accumulated deferred income tax balance retroactive to 1992. They argued the retroactive action inflated prospective rates effective Aug. 1, 2008.

In their view the panel did not rule on the matter and FERC failed to even address the issue let alone provide a reasoned explanation.

Key policy shift

At issue was a rate case that fed into FERC 's consequential policy shift in 2018 that rocked pipeline sector stocks and prompted some master limited partnerships to alter their structures.

FERC's major policy change on income tax allowances grew out of the DC Circuit ruling in United Airlines v. FERC, an earlier case involving SFPP rates. The court in United Airlines found the commission failed to show why granting an income tax allowance for a pipeline organized as an MLP in addition to a return on equity calculated via FERC's discounted cash flow methodology doesn't result in a double recovery of tax costs.

In a policy shift announced March 15, 2018, FERC said it would no longer allow MLPs to recover an income tax allowance in their cost of service. It denied an SFPP tax allowance the same day, saying it would result in a double recovery. Multiple pipeline companies already have altered their corporate structures in response to FERC's altered approach, and FERC somewhat eased its stance in its final policy to clarify that passthrough entities are eligible for a tax allowance if their income or losses are consolidated on the federal income tax return of their corporate parent.