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FERC NOPR Addresses Income Tax Rate Changes for Pipelines, Electric Utilities

In a series of votes Thursday, FERC addressed changes in income tax rates for natural gas pipeline companies, electric transmission and master limited partnerships (MLP).

The Federal Energy Regulatory Commission’s actions, taken in response to the $1.5 trillion Tax Cuts and Jobs Acts bill signed by President Trump in December, “recognize the specific regulatory and operating parameters that must be addressed differently for each of the industries it regulates,” FERC said.

FERC issued a notice of proposed rulemaking (NOPR) that would allow the Commission to determine which pipelines under the Natural Gas Act (NGA) may be collecting unjust and unreasonable rates in light of the corporate tax reduction and changes to FERC’s income tax allowance policies following the United Airlines v. FERC (827 F.3d 122 [D.C. Cir. 2016]) case.

The NOPR would require interstate gas pipelines to file a one-time report (FERC Form 501-G) on the rate of the new tax law and changes to FERC’s income tax allowance policies. In addition, FERC said pipelines would have four options:

  • Make a limited section 4 filing to reduce rates by the percentage reduction in cost of service shown in FERC Form No. 501-G;
  • Commit to file either a prepackaged uncontested rate settlement or a general NGA section 4 rate case if using the limited section 4 option will not result in a just and reasonable rate;
  • If it does not believe it has to change its rates, file a statement explaining why; or
  • File the new form without taking any other action.

FERC said it will address tax changes for oil pipelines it regulates in the 2020 five-year review of the oil pipeline index level. In a separate but interrelated action, FERC said Thursday it will no longer allow MLP interstate natural gas and oil pipelines to recover income tax allowances in cost of service rates.

On the electricity side of the ledger, FERC issued two Federal Power Act show-cause orders involving 48 companies whose transmission tariffs specifically reference tax rates of 35%. The orders direct the companies to propose revisions to their transmission rates or show why they should not do so. And FERC issued two waivers that allow Public Service Company of Colorado and some transmission owners to allow for mid-year rate adjustments to reflect the new law.

The body of orders, put together by FERC in less than 90 days since the tax reform bill was signed, “include a component on how best to address flow-through ultimately to consumers the benefits of this historic and dramatic reduction in the corporate income tax rate from maximum 35% to a flat 21% level,” said FERC Chairman Kevin McIntyre.

“I certainly support the orders. I believe they do an appropriate job of addressing the nuances and the different situations of the different types of entities that we regulate…a core part of our mission has always been to ensure reliable services at reasonable rates through appropriate regulatory and market constructs. These orders that we address today, which address various types of entities under the Commission’s jurisdictions, will help us to ensure just and reasonable rates – which is to say, help us to do our statutory job.”

The Commission is seeking comments on accumulated deferred income taxes, which are the dollar amounts of taxes that public utilities, interstate natural gas pipelines and oil pipelines collected from customers in anticipation of paying the Internal Revenue Service (IRS).

“Because of the Tax Cut and Jobs Act lowering the tax rate, the amounts owed by public utilities and pipelines to the IRS are now lower,” said FERC’s Jim Yu of the Office of Enforcement.  “Accordingly, the incremental piece of the amounts that were already collected from customers, by the public utilities and pipelines, we believe are considered excess accumulate for income taxes, and those amounts should be flowed back to customers.”

The impact of the orders “appears significant” for natural gas pipelines, ClearView Energy Partners LLC said Thursday. The information in the new forms would be public, so shippers (or FERC) could challenge rates of entities that appear to be overearning.

“We expect complex rate cases over the course of the next year, but the Commission has sent a clear message today; tax reform and United Airlines will be lowering rates across electricity, natural gas and liquids pipeline sectors,” ClearView said.

Some companies that operate FERC-regulated pipelines said they didn’t foresee major financial impacts from the MLP proposal. Andeavor Logistics said the ruling was likely to have less than a $10 million impact on its annual earnings.  Enterprise Products Partners said it does not expect the revisions to materially impact its earnings and cash flow.

The Natural Gas Supply Association (NGSA) said it supports FERC’s proposal.

“NGSA continues to support appropriate rates of return for interstate pipelines in order to incentivize the construction of new pipeline infrastructure and we believe that FERC has taken an important step in ensuring that pipelines, their shippers and their customers are protected,” said NGSA CEO Dena Wiggins.

Kinder Morgan Inc. said it was “pleased by FERC’s inclusion of an option for companies to file a statement with the FERC explaining why an adjustment to rates to reflect the Tax Act impact is not necessary.

“The competitive environment in which interstate natural gas transmission companies operate is vastly different from the historic ‘franchised utility service territory’ that is still prevalent for traditional utilities.

“As a result, many of our rates are set pursuant to negotiated rate arrangements that we believe should not be subject to adjustment due to changes in tax law. Also, many of our current transactions are provided at discounted rates that are below maximum tariff rates, many of which would not be impacted by a change in the maximum tariff rate..”

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