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Comment Period Ends Wednesday For FERC's Pipeline Income Tax Rate NOPR

Nearly a dozen utilities, state regulatory agencies and other entities have filed motions to intervene, seeking clarification or rehearing of FERC's recently proposed changes in income tax rates for natural gas pipeline companies, electric transmission and master limited partnerships (MLP).

The public comment period is due to end Wednesday for the Federal Energy Regulatory Commission's notice of proposed rulemaking (NOPR) on the issue, which was proposed last month [RM18-11]. Concurrently with issuing the NOPR, FERC issued a revised policy statement on treatment of income taxes.

In response to the $1.5 trillion Tax Cuts and Jobs Acts bill signed by President Trump in December, FERC issued the NOPR to allow it 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, 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 would not result in a just and reasonable rate;
  • If it does not think it has to change its rates, file a statement explaining why; or
  • File the new form without taking any other action.

FERC said it would 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 it would no longer allow MLP interstate natural gas and oil pipelines to recover income tax allowances in cost of service rates.

Any impact from FERC's action is likely to be "mitigated and spread over time," according to Kinder Morgan Inc. (KMI) CEO Steven Kean.

"We intend to use everything at our disposal to mitigate the negative effects of the actions and to spread their effects over time," Kean said during a conference call with analysts last week. "We have quantified the impact of the tax rate change in isolation and believe that the incremental impact of that change to our outlook is about $100 million a year if fully implemented, which again we would expect would be delayed."

FERC must take into account "fundamental justice and reasonableness" as it considers how to pursue rate cases, Kean said.

"Pipelines do not have protected franchises. Most rates are set in the competitive market, and many systems under-recover a regulated cost of service with no effective opportunity to raise rates given the competitive market environment that the Commission policy has created. It's neither just nor reasonable to ignore the industry's competitive structure and selectively apply the other half of the regulatory compact, rate regulation, to some systems without enabling other systems that under-recover to recover their cost of service."

Based on the filings in the NOPR docket and comments by FERC commissioners during a congressional subcommittee hearing last week, analysts with ClearView Energy Partners LLC said a full reversal of the revised policy statement is unlikely.

Still, "FERC might be persuaded to consider the possibility of limited tax allowances for MLPs owned by corporations when setting cost-of-service rates, rather than denying them altogether," ClearView said in a note to clients Tuesday.

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