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Pipeline Project Sponsors Begin Filing Revised Rate Calculations Based on New Tax Reform Law

Sponsors of uncompleted pipeline projects have begun filing responses to data requests from FERC to recalculate proposed rates to reflect provisions of the Tax Cuts and Jobs Act of 2017, which took effect this month.

FERC had broadcast a slew of requests earlier this month, noting the act includes a reduction in the federal income tax rate and also would allow certain investments to receive bonus depreciation treatment. These are expected to result in lower rates for pipeline customers and energy consumers.

In the multiple letters sent, sponsors were asked to “please explain how these changes impact the proposed project cost of service and the resulting initial recourse rate proposal. Provide an adjusted cost of service and recalculated initial incremental rate.”

One of the prompt responses came from Williams unit Transcontinental Gas Pipe Line (Transco). It said tax law’s impact on Transco’s Northeast Supply Enhancement project would result in a reduction to the proposed cost of service and the resulting initial reservation recourse rate.

“Specifically, the elimination of bonus depreciation and the change in the federal income tax rate from 35% to 21% causes a reduction in rate base accumulated deferred income taxes, and the change in the federal income tax rate...causes a reduction in the pre-tax return used to calculate the incremental cost of service,” Transco said.

Transco used the pretax return for the project underlying its approved settlement rates (Nos. RP01-245-000, et al). It calculated its revised cost of service at more than $164.97 million, down from $177.62 million, with a pretax return at 13.09%, down from 15.34%. The project’s incremental daily reservation rate would fall from $1.21655 to $1.12995. There is no impact to the incremental cost of service or initial commodity rate because variable costs were not affected by the tax change.

The major pipeline industry group, the Interstate Natural Gas Association of America, has cautioned the Federal Energy Regulatory Commission on how it handles the new tax breaks, particularly regarding rates of major pipelines established through negotiations or settlements, which include many trade-offs and may have binding moratoriums to freeze rates.

Noting that rate schedules for about 70% of  Kinder Morgan Inc.’s pipelines fall into the category of negotiated/discounted rates or rates approved in the give and take of an overall settlement, CEO Steven J. Kean suggested that “the potential flow-through of tax rate changes to shippers on our systems is mitigated and will be spread out over time.” Kean responded to questions about the impact of the tax law during the fourth quarter conference call.

“We do not believe that the FERC can or should isolate the tax law change for some separate immediate action. We also have many systems that have rates under blackbox settlements where all we agreed to is the final rates, we didn't agree on the individual cost of service components.

“So we think it’s very well established that neither the pipeline itself, nor the Commission can selectively adjust one element of the cost of service without considering the overall cost of service. Our view on it is that this plays itself out over time through periodic Section 4 and Section 5 proceedings and settlements,” the Kinder Morgan executive said.

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