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FERC Orders on Income Tax Allowance for MLPs and the Tax Cuts and Jobs Act of 2017: What You Need to Know

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V&E Update, April 27, 2018

RM18-11 Notice of Proposed Rulemaking

On April 25, multiple pipelines, shippers, and other industry organizations submitted comments to the Federal Energy Regulatory Commission’s Notice of Proposed Rulemaking (“NOPR”) regarding rate changes relating to the federal income tax rate and the proposal to require certain interstate natural gas pipelines to file a Form 501-G and election with respect to a voluntary rate filing.  Multiple pipelines and industry organizations filed comments seeking clarification or modification of the proposed rule or to limit the application of the proposed rule to certain pipelines.  Pipelines and industry organizations requested that issues interrelated with the NOPR process, such as the Commission’s policies on the income tax allowance and treatment of accumulated deferred income taxes after recent tax law changes, be resolved prior to reaching a final rule in the NOPR proceeding, or that those issues be excluded from the NOPR proceeding entirely.  These commenters also requested, among other things, that the proposed Form 501-G should be designated an informational filing only, not to be used against pipelines in subsequent proceedings, and that the Commission revise the proposed NOPR process for addressing cost of service changes to ensure pipelines do not under-recover costs and retain their rights pursuant to section 4 and section 5 of the Natural Gas Act.  A number of natural gas shippers and industry organizations filed comments in support of the Commission’s proposed rule and requesting certain clarifications or expansions of the proposed rule to provide the Commission with additional information regarding pipelines’ rates in light of the Tax Cuts and Jobs Act and the Commission’s Revised Policy Statement.

Each of those comments is available in their entirety here. (Insert “RM18-11” in the Docket Number).

Comments to the Notice of Inquiry are due on May 21, 2018.

PL17-1 Revised Policy Statement

On April 27, 2018, the Commission issued a tolling order in Docket No. PL17-1-001 granting additional time for consideration of the matters raised or to be raised on rehearing of the Commission’s Revised Policy Statement.  The Commission stated rehearing is granted for the limited purpose of further consideration, and timely-filed rehearing requests will not be deemed denied by operation of law. 

V&E Update, April 24, 2018

Beginning in late March, multiple MLPs (or their corporate sponsors) and other industry organizations submitted Requests for Rehearing on the Revised Policy Statement. The requests covered a myriad of issues, but consistently claimed FERC failed to engage in reasoned decision-making, misinterpreted the Court’s Order, departed from the important policy goals underpinning its prior policy, did not adequately consider the multiple forms of MLP structures and ownership, failed to assess the overall impact on the industry, and was too broad-reaching in impact. Each of those comments is available in their entirety  here. (Insert “PL17-1” in the Docket Number)  

Comments to the Notice of Proposed Rulemaking are due on April 25, 2018 and comments on the Notice of Inquiry are due on May 21, 2018.

V&E MLP Update E-communication, March 16, 2018

On March 15, 2018, the Federal Energy Regulatory Commission (“FERC”) announced actions to address the income tax allowance component of regulated entities’ cost-of-service rates. The FERC issuances addressed the change in the income tax rates stemming from the Tax Cuts and Jobs Act of 2017, which will impact regulated assets held by both corporations and pass-through entities, as well as a reversal of the Commission’s policy allowing master limited partnerships (“MLP”) to recover an income tax allowance in cost-of-service rates (“Revised Policy Statement”).

These new FERC directives to regulated public utilities, natural gas companies, and oil pipelines are specific to the regulatory regime and ratemaking structures applicable to each industry — electric, oil and refined products, and natural gas — that FERC regulates. In addition, the effect on each of the individual regulated entities and their parent companies cannot be determined uniformly across any one industry. It is important to remember that the income tax allowance is only one of many components used to calculate cost-of-service rates. Although one component decreases, if the regulated entity has a net increase due to other rate components, the newly calculated rate would be an increase overall. 

Most FERC-regulated entities do not charge cost-of-service rates for all of the services they provide.  Revenues from negotiated rates and market-based rates do not change, and discount rates may not change, when the cost of-service rates are updated.

This diversity of facts for each regulated entity and the collection of regulated entities in each MLP or other organization must be analyzed on a case‑by‑case basis to understand what impact, if any, the March 15th issuances will have on any given company. Furthermore, final orders and implementation deadlines are not yet established and may take many months to fully develop and become effective.

Income Tax Rates 

As noted in the introduction, and generally consistent with the actions of many state jurisdictions across the country, FERC analyzed the regulatory regimes and the standard industry practices for rate setting to determine how each industry — electric, oil and refined products, and natural gas — must take into account the changes in income tax rates. FERC did not issue an industry‑wide rulemaking for public utilities or for oil pipelines, but did issue an industry-wide proposal for natural gas pipelines.

Electric Transmission. Finding that most public utilities use transmission formula rates with an input that automatically adjusts with tax changes, FERC did not issue an industry‑wide rule for electric transmission entities. For those entities that have fixed rates or formula rates with a fixed income tax line item, FERC issued show‑cause orders directing those companies to propose revisions to their transmission rates or show why they should not have to do so.

Oil and Refined Products Pipelines. Oil and refined products pipelines have a generally applicable ratemaking methodology that allows oil and refined products pipelines to change their rates annually based on an indexing method, subject to certain ceiling levels, as opposed to making cost‑of‑service filings. Every five years, FERC reviews data to measure changes in oil and refined products pipeline costs and sets the index level to be used for the next five years. FERC found that oil and refined products pipelines will be required to reflect in their annual reports to FERC updated data to reflect the tax rate change and the Revised Policy Statement. Thereafter, the next indexing review will account for this changed component and be reflected in the pipeline rates through the indexing methodology. The next index level review will occur in the year 2020 to establish the index level for the July 1, 2021 to June 30, 2026 time period.

Natural Gas Pipelines. FERC issued a notice of proposed rulemaking (“NOPR”) introducing a process for determining whether jurisdictional natural gas pipelines may be collecting unjust and unreasonable rates in light of the recent reduction in the corporate income tax rate and the Revised Policy Statement. The proposed rule is neither final nor immediately effective, will go through a public comment process, and may change in substance. The proposed rule would require all interstate natural gas pipelines, with a few limited exceptions, to make a one-time informational filing with FERC to provide financial information to allow FERC and other interested parties to analyze the impacts of the tax change and Revised Policy Statement. In addition to filing the information, each interstate natural gas pipeline would be required to select one of the following four options:

a. file a limited filing to reduce the pipeline’s rates; 
b. make a commitment to file a general rate case in the near future; 
c. file a statement explaining why an adjustment to its rates is not needed; or 
d. take no action other than filing the informational filing. 

FERC divided natural gas companies into four groups and proposed specific timelines for each group to make the informational filing. The timelines express FERC’s desire to implement these changes as soon as possible — due dates for the four groups were 28, 56, 84, and 112 days, respectively, after the effective date of a final rule issued as a result of the NOPR proceeding. Any natural gas company whose rates are currently being examined in a general rate case or investigation, or companies that file a general rate case or an uncontested settlement of their rates before their respective FERC informational filing deadline, would not be required to make the informational filing. 

With respect to intrastate natural gas pipelines performing interstate service pursuant to section 311 of the Natural Gas Policy Act of 1978 and Hinshaw pipelines performing interstate transportation pursuant to a limited jurisdiction certificate under § 284.224 of the Commission’s regulations, FERC proposes to require these pipelines to file a new rate election with FERC if the pipeline’s rates for intrastate service are reduced to reflect changes from the Tax Cuts and Jobs Act.

Notice of Inquiry 

In an issuance related to the tax rate change and the Revised Policy Statement, FERC requested comments from each of the three — electric, oil and refined products, and natural gas — industries seeking whether, and how, they should address other changes resulting from the Tax Cuts and Jobs Act of 2017, specifically including the effect on accumulated deferred income taxes (“ADIT”) and bonus depreciation. ADIT balances are accumulated on the regulatory books of regulated entities and arise from the differences between the method of computing taxable income for reporting to the IRS and the method of computing income for regulatory accounting and ratemaking purposes. FERC specifically asked for comments on treatment of excess ADIT accrued due to the tax rate reduction for entities that will continue to have an income tax allowance component in their rate calculation and treatment of ADIT for entities impacted by the elimination of the income tax allowance. Further, FERC seeks input on whether, and how, FERC should take actions to address the changes to bonus depreciation from the Tax Cuts and Jobs Act of 2017, specifically what type of action and whom should FERC target with the proposed action. FERC also requested comments on any other effects of the Tax Cuts and Jobs Act of 2017 and whether, and if so how, FERC should address those effects. Comments will be due within 60 days after this Notice of Inquiry is published in the Federal Register. It is uncertain what, if any, and when, a final rule from this Notice of Inquiry would issue and become effective.

Revised Policy Statement on Treatment of Income Taxes  

FERC issued an Order on Remand (Opinion No. 511-C) to SFPP, L.P. following the decision of the U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc., et al. v. F.E.R.C. Accordingly, based on the findings in the Order on Remand, FERC simultaneously issued the Revised Policy Statement reversing a long‑standing Commission policy that allowed MLPs to recover an income tax allowance in their cost of service. The United Airlines decision stated that the discounted cash flow methodology “determines the pre-tax investor return required to attract investment.” FERC found that since the return is a pre-tax investor return, permitting MLPs to recover both an income tax allowance for the partners’ tax costs and a discounted cash flow return on equity leads to a double recovery of income tax costs. With respect to non-MLP partnerships and other non-MLP pass-through entities, FERC stated that such entities seeking to recover an income tax allowance will also need to address the double recovery issue, but that FERC would address the application of United Airlines to those non-MLP entities in subsequent proceedings on a case-by-case basis as the issue arises.  

Visit our website to learn more about V&E’s Master Limited Partnerships practice. For more information, please contact Vinson & Elkins lawyers David OelmanJay SeegersAnita WilsonSuzanne Clevenger, or Damien Lyster.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.