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Natural Gas Pipelines Want Rehearing on FERC's Tax Policy Changes

Several of the nation's largest natural gas pipeline companies have asked FERC for a rehearing over its final rule to address various tax issues raised by last year's passage of a comprehensive federal tax reform bill, arguing that the Commission exceeded its authority under the Natural Gas Act (NGA).

Entities of Enable Midstream Partners LP, Kinder Morgan Inc. and Spectra Energy Partners LP filed requests Friday for rehearing with the Federal Energy Regulatory Commission.

At issue is a final rule the Commission unanimously adopted in July. Order 849 called for modifying a notice of proposed rulemaking FERC issued in March in response to passage last December of a $1.5 trillion comprehensive tax reform bill. The companies also had in their crosshairs FERC's decision in March to eliminate income tax allowances for midstream master limited partnerships (MLP).

Under the rule, interstate gas pipelines are required to file a one-time report, Form 501-G, on the rate of the new tax law and changes to FERC's income tax allowance policies.

But the pipelines argued that the Commission exceeded its legal authority under the NGA "by forcing pipelines to submit a flawed Form 501-G that produced an indicative cost of service reduction and a distorted view as to whether the pipeline's rates remain just and reasonable." They said FERC also erred when it required certain criteria on the form, including a 10.55% indicative return on equity (ROE) and a hypothetical capital structure.

Although FERC provided a three-year moratorium on any Commission-initiated NGA Section 5 rate investigations for pipelines that choose the option of reducing their rates by filing a limited Section 4 rate reduction, the companies argue the option isn't fair because one of the conditions necessary to qualify for the moratorium is an ROE of 12% or less.

"As has been reiterated by the courts time and time again, only a pipeline is empowered to propose such a change in its rates on its own terms under NGA Section 4," the companies said. "And if FERC wants to propose such reduction in a pipeline's cost of service and resulting rates that is different from the pipeline's filed rate, it may only do so under NGA Section 5.

"By requiring pipelines to file the Form 501-G with a contrived indicated rate of return on equity in a docketed proceeding that will allow for protest and comment, FERC is turning the NGA on its head."

Separately, Enable subsidiaries said FERC erred when it asserted that a pipeline organized as an MLP and indirectly owned in part by corporate unitholders should not receive an income tax allowance, while pass-through entities that are subsidiaries of a corporation are eligible.

Enable said FERC relied on one sentence from a 2004 ruling by the U.S. Court of Appeals for the District of Columbia Circuit in the case BP West Coast Products LLC v. FERC in making the determination on MLPs. That in turn led the Commission to misinterpret the scope of the same court's ruling in a 2016 case, United Airlines Inc. v. FERC, which preceded changes to the Commission's income tax allowance policies.

Two consumer groups also requested a rehearing, albeit for different reasons. The Process Gas Consumers Group (PGC) and the American Forest and Paper Association (AFPA) made a separate filing also last Friday [RM18-11, RP18-415].

PGC and AFPA argued that FERC erred when it didn't adjust rate base by accumulated deferred income tax balances. The consumer groups said that goes against the Commission's policy that early tax savings would be temporary and that future reductions to rate base would ensure the tax savings ultimately benefit ratepayers, not shareholders.

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