The Federal Energy Regulatory Commission last Thursday began an inquiry into its treatment of income tax allowances in cost-of-service ratemaking proceedings involving limited liability partnerships.

The inquiry and a companion order, also issued Thursday, address a July 20 decision by the U.S. Court of Appeals for the District of Columbia Circuit, which held that the Commission’s justification for its income tax allowance policy was inadequate. Specifically, the court ruled that FERC erred by including an income tax allowance in a regulated limited partnership’s cost-of-service computation. If limited liability members cannot include tax expenses in their cost of service, some contend it will lead to the demise of the limited liability ownership model.

The appellate ruling, BP West Coast Producers LLC vs. FERC, was an outgrowth of an appeal in an oil pipeline rate case involving SFPP LP. FERC’s inquiry seeks 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 ownerships” in the regulated oil, natural gas and electricity industries.

The notice of inquiry (NOI) asks industry members to address whether the court’s reasoning applies to partnerships in which 1) all the partnership interests are owned by investors without intermediary levels of ownership; 2) the only intermediary ownership is a general partnership; 3) all the partnership interests are owned by a corporation; and 4) the corporate ownership of the partnership interests is minimal [PL05-5].

Two prominent limited partnerships in the natural gas industry are Kinder Morgan Energy Partners LP and Northern Border Partners LP, which owns or has interests in Northern Border Pipeline, Guardian Pipeline, Viking Gas Transmission and Midwestern Gas Transmission. Others include Magellan Midstream Partners (formerly Williams Energy Partners) and Enterprise Products Partners LP, which is in the process of buying GulfTerra Energy Partners (formerly El Paso Energy Partners).

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