FERC on March 15 said that it is addressing changes in the income tax rates for the electric transmission and natural gas and oil pipeline companies that it regulates, stemming from the Tax Cuts and Jobs Act of 2017.
As noted in a March 15 staff presentation, the Tax Cuts and Jobs Act, which was signed into law by President Donald Trump on Dec. 22, 2017, reduces the federal corporate income tax rate from a maximum 35% rate to a flat 21% rate, effective Jan. 1, 2018. That means that all public utilities, interstate natural gas pipelines, and oil pipelines subject to federal corporate income taxes will compute those taxes owed to the Internal Revenue Service based on a flat 21% tax rate, staff said.
Some of the FERC-jurisdictional rates charged by public utilities, interstate natural gas pipelines, and oil pipelines are set using cost of service, which includes an income tax allowance, staff said. Thus, when the tax expense decreases, so does the cost of service, staff noted.
FERC said in its statement that because most of the FERC-regulated electric transmission companies have transmission rates that automatically adjust with changes in the tax rates, the adjustments for much of the industry are already taking place. However, FERC has issued two Federal Power Act show-cause orders involving 48 companies whose transmission tariffs specifically reference tax rates of 35%. FERC added that the orders direct the companies to propose revisions to their transmission rates or show why they should not do so.
Also, FERC issued two waivers that allow Public Service Company of Colorado and certain transmission owners within the Midcontinent ISO to allow for mid-year rate adjustments to reflect the new law.
FERC also said that it issued a Notice of Proposed Rulemaking (NOPR) that would allow it to determine which pipelines under the Natural Gas Act may be collecting unjust and unreasonable rates in light of the corporate tax reduction and changes to FERC’s income tax allowance policies following a decision in the United Airlines, Inc. v. FERC court case.
The proposal requires interstate pipelines to file a one-time report, called FERC Form No. 501-G, on the rate effect of the new tax law and changes to FERC’s income tax allowance policies. FERC added that in addition to filing the one-time report, each pipeline would have four options, including that each pipeline could make a limited section 4 filing to reduce its rates by the percentage reduction in its cost of service shown in its FERC Form No. 501-G.
According to FERC’s March 15 order in Docket No. RM18-11-000, in United Airlines, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) held that FERC failed to demonstrate that allowing SFPP, L.P. (SFPP), a Master Limited Partnership (MLP), to recover both an income tax allowance and the discounted cash flow (DCF) methodology rate of return does not result in a double recovery of investors’ tax costs. Accordingly, the D.C. Circuit remanded the underlying rate proceeding to FERC for further consideration. While the D.C. Circuit’s decision directly addressed the rate case filed by SFPP, the United Airlines double-recovery analysis referred to partnerships generally, FERC added in its order. Recognizing the potentially industry wide ramifications, FERC issued a Notice of Inquiry in Docket No. PL17-1-000, soliciting comments on how to resolve any double recovery resulting from the rate of return policies and the policy permitting an income tax allowance for partnership entities.
FERC added that concurrently with the issuance of the NOPR, it is issuing an order on remand in the SFPP rate case and a revised policy statement in Docket No. PL17-1. That statement explains that a double recovery results from granting an MPL an income tax allowance and a DCF ROE. Accordingly, FERC added, FERC will no longer permit MLPs to recover an income tax allowance in their cost of service. The revised policy statement also explains that while all partnerships seeking to recover an income tax allowance in a cost-of-service rate case will need to address the United Airlines double-recovery concern, FERC will address the application of United Airlines to those non-MLP partnership forms as those issues arise in subsequent proceedings.
In its March 15 statement, FERC noted that it also started two investigations under section 5 of the Natural Gas Act to determine whether the rates currently charged by Dominion Energy Overthrust Pipeline LLC and Midwestern Gas Transmission Company are just and reasonable.
Of oil pipelines, FERC said it will address tax changes for the pipelines it regulates in the 2020 five-year review of the oil pipeline index level.