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Majority Support Continued Recovery of Income Taxes in Rates of Partnerships

Majority Support Continued Recovery of Income Taxes in Rates of Partnerships

A number of natural gas and electricity companies last week called on FERC to continue to allow full corporate income tax allowances in cost-of-service rates for regulated pipelines and utilities that are partnerships.

The Federal Energy Regulatory Commission began an inquiry in December after the U.S. Court of Appeals for the District of Columbia Circuit last July vacated and remanded an agency decision that provided for an income tax allowance in the rates of SFPP LP, an oil pipeline limited partnership. FERC allowed the tax recovery even though partnerships, such as SFPP, typically do not have any income tax liability. The court returned the case, BP West Coast Producers LLC vs. FERC, for a Commission determination regarding the proper tax allowance.

As part of its inquiry, FERC solicited industry comments on whether the court's ruling applies only to the specific facts of the SFPP LP proceeding, or also extends to other capital structures involving partnerships and other forms of ownership in the regulated oil, natural gas and electricity industries (see NGI, Dec. 6, 2004 ).

"The outcome of the Commission's inquiry in this proceeding must be an unequivocal declaration that it will continue to permit full corporate income tax allowances in the jurisdictional cost of service of regulated pipelines and utilities that are partnerships held entirely within a single, consolidated corporate group," Kern River Gas Transmission told FERC [PL05-5].

The court ruling in BP West Coast "does not and should not extend to all partnerships or other non-corporate entities that are subject to the Commission's rate regulation," the pipeline said.

Hardy Storage Co. LLC, which seeks to build a storage field and related facilities in West Virginia, believes a change to FERC's policy for tax treatment of partnerships would retard investment in the energy industry. "The recent decision in BP West Coast threatens the ability of joint investment arrangements created specifically to develop natural gas storage assets from forming as an LLC [limited liability company] or limited partnership form."

The company believes that the "ratemaking and related tax implications of the BP West Coast decision, if applied to all affected 'pass-through' entities would severely harm those entities' owners, and, in turn, impede expansion of this nation's natural gas infrastructure." Hardly is owned by Columbia Hardy Corp., an indirect subsidiary of NiSource Inc. and Piedmont Hardy Storage Co. LLC.

If FERC moves to adopt the court ruling, "a limited partnership's or LLC's owners would be forced to absorb the tax expense associated with the project (without recovering that expense in the rates of the FERC-jurisdictional LLC, in the case of Hardy) and the resulting reduction in the owners' net income would necessarily erode the overall rate of return attributable to the joint venture project," Hardy Storage said.

The American Public Gas Association (APGA), which represents municipal distributors, was a minority voice. It urged FERC to require each regulated gas company that exists in an ownership form under which it incurs no income tax liability to eliminate the existing income tax allowance in its current rates and to reduce the rates accordingly.

"Numerous members of APGA pay the rates of interstate pipelines that include an increment for 'phantom' income taxes and, therefore, have been and continue to be charge excessive rates," the group said.

It noted that the Commission "appears not to grasp the court's core holding [in the BP West Coast decision]: regulated entities may not include phantom costs (taxes or otherwise) in their rates."

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