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Pipelines, Shippers, Producers Weigh In On FERC's Income Tax Recovery NOI

The comment period closed Wednesday for a FERC notice of inquiry (NOI) regarding how the commission should address any double recovery of income tax cost resulting from the its current income tax allowance and rate of return policies [PL17-1].

The Federal Energy Regulatory Commission should revise its income tax allowance policy to eliminate the current double recovery of tax costs, according to a quintet of natural gas indicated shippers commenting on the NOI. The five companies -- Chevron Natural Gas, ConocoPhillips Co., Cross Timbers Energy Services, Fieldwood Energy LLC and Petrohawk Energy Corp. -- said FERC should "adjust its policy for the recovery of income tax costs to eliminate the double recovery of income taxes that partnerships currently enjoy by eliminating the income tax allowance in a pipeline's cost of service when the first publicly-traded owner of the pipeline is a partnership (or similar income pass-through entity)."

Eliminating the income tax allowance for partnerships and other pass-through entities would ensure that FERC provides commensurate returns to equity owners in businesses with corresponding risks, they said, but some companies should continue to be permitted to take the allowance.

"Pipelines owned by publicly-traded corporations should be permitted to retain the income tax allowance in their cost of service. The Commission should implement this policy on a case-by-case basis, as each pipeline company files (pursuant to Section 4 of the NGA [Natural Gas Act]), or is required to file (either pursuant to a Section 5 of the NGA proceeding initiated by the Commission or other interested party, or a rate case filing requirement set forth in a settlement) new rates that would take effect after implementation of the new policy."

The Interstate Natural Gas Association of America (INGAA) said it wants master limited partnership (MLP) pipelines to retain the income tax allowance. Ten of INGAA's 26 member companies operate pipelines organized as publicly-traded MLPs that would be directly affected by the outcome of the NOI.

"The Commission should continue to allow MLP pipelines to recover in their jurisdictional rates an income tax allowance based on the income tax liabilities of MLP unitholders that are attributable to the MLP's taxable income from providing jurisdictional pipeline services," INGAA said. "The tax allowance is comparable to the tax allowance that the Commission permits on the taxable income of corporate-owned pipelines and is necessary to provide parity between the equity owners of MLP and corporate pipelines."

The NOI, approved by FERC in December, seeks comments regarding any proposed methods to adjust FERC's income tax allowance or rate of return policies to resolve any double recovery of tax costs. It involves the relationship between FERC's income tax allowance and return on equity policies, which evolved over the past 20 years in response to the emergence of partnership entities, particularly MLPs that own oil and natural gas pipeline assets, in FERC-regulated industries.

The Canadian Association of Petroleum Producers, which represents upstream oil and natural gas companies, recommended in its comments that FERC "make any income tax allowance an affirmative measure, to be applicable in deriving the cost of service only for entities that incur or are subject to such costs. This would obviate a more complex, cumbersome and unnecessary approach, such as manipulating the DCF [distributable cash flow] methodology or results to accommodate the granting of an allowance to other entities, including pass-through entities that are not subject to taxation."

The NOI follows a decision of the U.S. Court of Appeals for the District of Columbia Circuit in United Airlines v. FERC(827 F.3d 122 [D.C. Cir. 2016]), which held that FERC failed to demonstrate that there is no double-recovery of taxes for a partnership pipeline as a result of the agency's income tax allowance policy and discounted cash flow methodology used to determine return on equity. The court remanded the case to FERC and instructed it to develop a mechanism "for which the Commission can demonstrate that there is no double recovery" of partnership income tax costs.

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