Breaking: Tax Cut Issues Raised by Liquids Pipeline Shippers

How will last year's tax cut impact the rates charged by interstate pipelines transporting crude oil, refined products, and natural gas liquids (NGL)? We may know soon.

We have previously quantified the impact of the tax cuts on natural gas pipeline assets, and have been closely following the comments made by natural gas shippers regarding their views of the impact of the Tax Cuts and Jobs Act (Act) on tariff rates charged by natural gas pipelines. Most of the discussion has focused on when the other shoe will drop -- when liquids pipeline shippers would file similar requests with FERC for an immediate reduction in rates. Yesterday, that shoe dropped.

A group of crude oil and NGL pipeline shippers in the U.S. and Canada, the Liquids Shippers Group (LSG), which includes Pioneer Natural Resources, Anadarko Energy, and six others, asked FERC to adjust its indexing policies to recognize the Act's industry-wide impact on oil pipelines' costs, and prevent any unjustifiable indexed rate increases that would otherwise result. The LSG noted that the changes it proposed would not require modification of the Commission's regulations, given that the Commission's existing tests to evaluate indexed rate increases are not in the regulations, but rather are a matter of policy established in ongoing cases. As the 2018 indexed rate increase can be implemented on July 1, 2018, the LSG requested that the FERC act expeditiously on its request.

In particular, the LSG requested that the FERC:

1. Require oil pipelines seeking an indexed rate increase in 2018 to submit a revised 2017 Form No. 6 Page 700 that adjusts the income tax component of the Page 700 cost-of-service downwards to reflect the new tax rates;
2. Permit protests and complaints to utilize the Revised 2017 Page 700 cost-of service that reflects currently effective tax rates; and
3. Establish a policy under which the Commission, after a protest or complaint, will investigate any 2018 indexed rate increase filing, and thereafter, when that pipeline's revenues for the year in question exceed the Page 700 costs for that year by five percent or more.

Interestingly, the five percent over-recovery test proposed by the LSG is in response to the FERC's Notice of Proposed Rulemaking to seek Comments on Potential Changes to Oil Pipeline Rate Index methodology issued in January 2017. The LSG holds that five percent is a reasonable over-recovery threshold for triggering the existing "substantially exacerbate test" to investigate a pipeline's indexed rate increase, rather than the FERC's proposed 15 percent over-recovery threshold.

This is, of course, the first salvo in a fight that will undoubtedly be joined by the oil pipelines. Once we have seen the responses filed by others to this petition, we will provide our view of the  path that FERC  will likely follow and, based on LawIQ's liquids pipeline data, how FERC's actions may impact individual pipelines.