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Former Commissioner Slams FERC over MLP Tax Decision

FERC's decision in March to eliminate income tax allowances for midstream master limited partnerships (MLP), which on Thursday led to a restructuring overhaul by Williams and Enbridge Inc., was a mistake, according to a former commissioner.

Washington, DC-based attorney and former tax law practitioner Marc Spitzer discussed the Federal Energy Regulatory Commission’s ruling during an interview with NGI earlier this month. He was nominated by President George W. Bush and was on the Commission until mid-2011.

FERC’s revised MLP policy followed a decision by the U.S. Court of Appeals for the District of Columbia Circuit (United Airlines v. FERC (827 F.3d 122 [D.C. Cir. 2016]).

FERC Chairman Kevin McIntyre during a recent House congressional committee hearing said regulators’ hands were tied by the ruling. However, Spitzer thinks the court got it wrong.

"Saying that you should not get an income tax allowance because you don't pay any tax at the entity [corporate] level offends me as a tax lawyer,” Spitzer said.

Along with the widespread environmental opposition to pipeline development nationwide, the decision also could hurt future prospects for pipeline development, he said.

"It is hard to build pipes in California and the Northeast," he said. "They've never liked pipes there and they never will; people in those parts of the country don't view energy as something important to them; it's a cultural thing."

Spitzer thinks FERC’s analysis of the United decision was incorrect.

"I have read the decision several times, and I think the court gave various options," he said. "One option was to eliminate the tax allowance, and another was to do a pure after-tax return." He said the argument made by shippers in the court case was appropriate that there is a conflict between an income tax allowance, which is pre-tax, and a discounted cash flow methodology, which is an after-tax rate.

Spitzer said the appeals court decision raised some concerns about the pre-tax/post-tax conflict. "That needs some discussion and explanation," he said. "FERC selected the option of eliminating the tax allowance for MLPs, and I don't think that was the only option it had. I don't think the allowance was ordered eliminated by the court.”

Referring to a 2007 case before the U.S. Court of Appeals for the DC Circuit involving ExxonMobil Corp., Spitzer said “FERC is free to exercise its discretion to allow or disallow an income tax allowance for passive entities, in this case MLPs, and in the Exxon case it allowed an income tax allowance.”

At issue is the difference between MLPs and traditional corporations, known as C-Corps. The major difference is that an MLP’s earnings are not taxed at the partnership level as taxes are passed to the unitholders, which pay taxes at their marginal tax rate.

Opponents of providing tax allowances to passive entities such as MLPs confuse tax accruals with taxes paid, Spitzer said. "This is what the opponents of granting income tax allowances neglect," he said.

Spitzer acknowledged that the tax issue and MLPs are arcane and not easily digested in the political sector.

"There is a good reason” that Kinder Morgan Inc. created an MLP in the 1990s” as it was “tax efficient," he said. The move came after the 1986 tax reform in which Congress repealed the general utilities' doctrine, meaning there was a double-level of tax on C-Corps. "I don't think there is any legal principle saying tax efficiency is bad, and certainly investors would always like to pay less taxes rather than more."

In the United  court decision, Spitzer said the ruling incorrectly concluded that FERC was giving a preference to MLPs over C-Corps. But that was not the case, he said.

"That may have been the end result,” but "that was a consequence of the tax code, not the regulation." The decision to allow pipelines to be operated by publicly traded MLPs was an act of Congress, not FERC, he noted.

Spitzer said he is supportive of FERC and added that President Trump has appointed "four quality people and they are doing a good job, following the law and acting independently."  He also is supportive of FERC's move to unanimously reject Energy Secretary Rick Perry's controversial proposal to subsidize the coal and nuclear industries.

"I agreed with that decision,” Spitzer said of FERC rejecting Perry’s proposal. “It was independent, but the March 15 MLP order I don't agree with.”

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