Reed Smith Client Alerts

In concurrent orders issued on July 18, 2018, the Federal Energy Commission (FERC or Commission) established new tax policies for interstate natural gas pipelines that address double recovery and tax allowance questions raised by the United States Court of Appeals for the District of Columbia Circuit in United Airlines, Inc. v. FERC1 and the rate implications of the 2017 Tax Cuts and Jobs Act.2

Authors: Colette D. Honorable Regina Y. Speed-Bost Debra Ann Palmer Justin J. Mirabal

Interstate natural gas pipelines are authorized to charge their customers “just and reasonable” rates to recover specified cost of service items, including federal tax expenses.  However, the Commission is quickly adapting its tax policies in light of recent judicial developments concerning Master Limited Partnership (MLP) pipelines and sweeping legislative measures that slashed the marginal federal corporate income tax rate from 35 percent to 21 percent.

First, in its Order on Rehearing in Docket No. PL17-1-000, the Commission dismissed requests for hearing and clarification of the Commission’s March 15, 2018, Revised Policy Statement on Treatment of Income Taxes.3 Prompted by the D.C. Circuit’s remand in United Airlines and Commission Opinion No. 511-C,4 the Revised Policy Statement concluded that an impermissible double recovery of investors’ tax costs results when an MLP pipeline collects both an income tax allowance and a return on equity (ROE) based on the discounted cash flow (DCF). Therefore, the Commission precluded MLP pipelines from recovering both an income tax allowance and a DCF-calculated ROE.

While the Revised Policy Statement addressed the question of double recovery, it did not explain how MLP pipelines should treat Accumulated Deferred Income Tax (ADIT) balances that accrued before the Revised Policy Statement’s effective date.  ADIT records the amount of income taxes that the pipeline collects in advance and which it will eventually owe the federal government.  In the Order on Rehearing, the Commission clarified that “when an MLP pipeline’s income tax allowance is eliminated from cost of service, previously accumulated ADIT balances may also be eliminated.”5 Under these circumstances, an MLP pipeline is not required to refund such ADIT to shippers, nor does the ADIT have to be removed from the pipeline’s rate base.