United States: FERC Questions Recovery of Income Tax Costs by Partnerships and Other Pass-Through Entities

On December 15, 2016, FERC issued a Notice of Inquiry ("NOI") requesting comments regarding how FERC can ensure that partnerships that own and operate jurisdictional pipelines or public utilities, or similar pass-through entities (collectively, "Partnerships"), are not receiving "a double recovery of [income] taxes" based on FERC's current income tax allowance ("ITA") and return on equity ("ROE") policies. FERC's NOI comes in response to United Airlines, Inc. v. FERC, 827 F.3d 122 (2016), where the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") held that FERC had not "adequately justified" its current policy of granting such Partnerships an ITA – that is, the authority to recover from their ratepayers as a "cost" the income taxes paid by partner-investors on their shares of partnership income.

In the NOI, FERC "recognizes the potentially significant and widespread effect of [the D.C. Circuit's] holding upon oil pipelines, natural gas pipelines, and electric utilities subject to the Commission's regulation." FERC "also recognizes that additional industry comments may provide further insight into the relationship between a partnership's income tax allowance and the Commission's DCF [discounted flow] methodology."

The NOI requests comments on numerous related issues, including whether Partnerships or their investors are receiving a "double recovery" of income taxes stemming from the combined operation of FERC's policies regarding ITA and ROE. In this regard, FERC seeks comments regarding whether the ROE is already adjusted to account for income taxes, such that also providing recovery of income taxes through the ITA (given that the Partnership itself, unlike a corporation, pays no income tax) results in a double recovery. The NOI further requests comments on whether, if double recovery is occurring, it is the ROE, or the ITA, or both policies, that need adjusting, and by how much. To the extent the comments include any proposed changes to these policies, FERC also asks in the NOI that the commenters describe "the practical application" of their proposals.

Comments in response to FERC's inquiry will be due within 45 days of the NOI's publication in the Federal Register, while reply comments will be due within 65 days. A copy of the NOI can be found here.

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