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FERC Issues Policy Statement on Income Tax Allowance

FERC last Wednesday adopted a policy statement allowing regulated energy companies, such as interstate natural gas pipelines and public utilities, that are partnerships to reflect actual or potential income tax liability in their cost-of-service rates.

The draft order concludes that a "tax allowance should be allowed for all entities, including partnerships and limited liability corporations, generating public utility income provided there is an actual or potential income tax liability on that public utility income," said John Robinson of FERC's Office of General Counsel during the regular agency meeting.

"Thus, if a partnership meets this standard, the operating entity would be permitted an income tax allow in proportion to the partnership interests that have an actual or potential income tax liability," he noted.

The Federal Energy Regulatory Commission began an inquiry into the issue in December after the U.S. Court of Appeals for the District of Columbia Circuit in July 2004 vacated and remanded an agency decision that provided for an income tax allowance in the rates of SFPP LP, an oil pipeline limited partnership. At issue was whether partnerships, such as SFFP, should be allowed tax recovery even though they typically do not have any 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 the inquiry, FERC asked industry whether it believed the court's ruling applied only to the specific facts of the SFPP proceeding, or whether it also extended to other capital structures involving partnerships and other forms of ownership in the regulated oil, natural gas and electricity industries. The Commission last week concluded that the court's opinion has broader implications for other cases and other FERC-regulated entities.

Last week's order departs from the court's remand order on the central point of whether an operating entity, such as a public utility partnership, must actually pay the taxes itself in order to obtain an income tax allowance, Robinson said. Based on the record in this case, the order concludes that income taxes are a cost of the partnership's operations that are paid by the partners, he noted.

As a result, the court's assumption that partnerships have phantom income taxes was incorrect, the order said. "Partnerships and other pass-through entities would be granted an income tax allowance if the holders [partners] of such interests have an actual or potential income tax liability. Whether such an income tax liability exists would be decided in individual rate proceedings," according to Robinson.

Denying partnerships the ability to reflect income tax liability in their cost-of-service rates "would chill much needed investment in additional infrastructure," said Commissioner Suedeen Kelly. She noted that partnerships have a prominent role in the energy marketplace. The Coalition of Publicly Traded Partnerships said there currently are 20 publicly traded partnerships trading on major exchanges that own and operate oil and natural gas pipelines, and that the market capitalization of publicly traded partnerships was $47.3 billion in 2004, she noted.

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