United States: FERC Affirms Policy On Income Tax Allowance For Gas Pipelines

On July 18, 2018, FERC affirmed its Revised Policy Statement on Treatment of Income Taxes ("Revised Policy Statement"), where FERC stated that it will generally not permit master-limited partnerships ("MLPs") to recover income tax allowance in their cost of service. In doing so, FERC dismissed requests for clarification and rehearing of its Revised Policy Statement, reiterating that tax pass-through entities (including MLPs) that recover an income tax allowance in addition to a return on equity ("ROE") based on the discounted cash flow ("DCF") methodology double recover investors' tax costs. FERC did however explain that while pass-through entities may eliminate previously-accumulated sums of accumulated deferred income tax ("ADIT") from their cost of service, they did not need to refund those ADIT balances to ratepayers.

Previously, the U.S. Court of Appeals for the District of Columbia Circuit held in its 2016 decision, United Airlines v. FERC, FERC failed to demonstrate that there was no double recovery of income tax costs when FERC permitted an MLP pipeline to recover both an income tax allowance and an ROE based on the DCF method. In response, on March 15, 2018, FERC issued the Revised Policy Statement (see March 20, 2018 edition of the WER). Notably, the Revised Policy Statement did not provide guidance regarding the implications of the United Airlines decision for other partnership and pass-through business forms that are not MLPs.

Also, on March 15, 2018, FERC issued a Notice of Inquiry on the effects of the Tax Cuts and Jobs Act of 2017 on jurisdictional rates, seeking comment on, among other things, the treatment of ADIT for MLP pipelines (and potentially other pass-through entities) to the extent that the income tax allowance is eliminated from cost-of-service rates following FERC's Revised Policy Statement. Among other things, FERC asked whether previously accumulated sums in ADIT should be eliminated altogether from cost of service or whether those previously accumulated sums should be placed in a regulatory liability account and returned to ratepayers.

In its July 18, 2018 order on rehearing, FERC dismissed requests for rehearing while providing guidance that an MLP pipeline (or other pass-through entity) no longer recovering an income tax allowance may also eliminate previously-accumulated sums of ADIT from cost of service instead of flowing these previously-accumulated ADIT balances to ratepayers. FERC reasoned that if MLPs are required to provide ADIT refunds to their ratepayers, this "would raise retroactive ratemaking concerns." While FERC recognized that this guidance on ADIT does not establish a binding rule, it nevertheless served as notification to entities of the course of action FERC intends to follow in future adjudications.

In a separate concurrence, Commissioners LaFleur and Glick expressed "frustration" that the rate benefits that customers and shippers would otherwise receive because of the Revised Policy Statement would be significantly reduced because of FERC's lack of refund authority under the Natural Gas Act. For these reasons, Commissioners LaFleur and Glick strongly urged a legislative fix that would make FERC "better equipped to protect customers."

FERC's order, along with the concurrence, can be found here.

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