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FERC Seeks Comments on Income Tax Recovery Policy

FERC on Thursday approved a notice of inquiry (NOI) seeking comments regarding how to address any double recovery of income tax cost resulting from the its current income tax allowance and rate of return policies [PL17-1].

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 the Federal Energy Regulatory Commission failed to demonstrate that there is no double-recovery of taxes for a partnership pipeline as a result of FERC's income tax allowance policy and discounted cash flow methodology used to determine return on equity. The court remanded the case to FERC, instructed it to develop a mechanism "for which the Commission can demonstrate that there is no double recovery" of partnership income tax costs.

The underlying proceeding to the decision in United Airlines v. FERC, according to Glenna Riley of FERC's Office of General Counsel, "began when an oil pipeline filed to increase its rates and the Commission permitted the pipeline to receive an income tax allowance. As a partnership entity, the pipeline did not incur entity-level taxes, but instead its tax liability flowed through to the partner investors. The Commission applied its policy of allowing partnerships to recover an income tax allowance, provided that the owners can show an actual or potential income tax liability to be paid on income from the regulated assets. Shipper parties to the proceeding argued that permitting a partnership entity with pass-through taxation to receive an income tax allowance results in a double recovery."

The NOI 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. Comments are due 45 days from the date of publication in the Federal Register.

"The Commission recognizes the potentially significant and widespread effect of this holding upon the oil pipelines, natural gas pipelines and electric utilities subject to the Commission's regulation," according to the NOI. "The importance of the income tax policy for partnership entities extends well beyond the particular interests of the parties to the United Airlines proceeding. The Commission also recognizes that additional industry comment may provide further insight into the relationship between a partnership's income tax allowance and the Commission’s DCF [discounted cash flow] methodology."

The NOI involves the relationship between FERC's income tax allowance and return on equity (ROE) policies, which evolved over the past 20 years in response to the emergence of partnership entities, particularly master limited partnerships that own oil and natural gas pipeline assets, in FERC-regulated industries. 

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