FERC Tax Rule Comments Are In - What to Expect

While the Trump administration celebrated the passage of the Tax Cuts and Jobs Act (TCJA) as a success, the legislation did little more than cause uncertainty for the energy industry, as well as volatility in the markets. A topic of frequent discussion on this quarter's earnings calls for MLPs and their owners has been FERC's revised income tax allowance (ITA) policy in response to the United Airlines decision (as we discussed in Dominion Questions FERC's MLP Policy Change), and particularly the ITA for pipelines owned by MLPs. In conjunction with the ITA policy, FERC issued a rulemaking requiring interstate natural gas pipelines to file a "One-time Report on Rate Effect of the Tax Cuts and Jobs Act" or Form 501-G. The comment period has ended and some key issues merit watching. The most important issue for the markets may be how FERC responds to the industry's objection to the manner in which the form incorporates the new ITA policy. We analyze this issue, identify other key industry comments, and provide our view as to how FERC will ultimately address the issues.

FERC's Proposal

While the form is titled "One-time Report on Rate Effect of the Tax Cuts and Jobs Act," the proposed rule indicates that it is designed to estimate the change in the pipeline's cost of service and ROE before and after the reduction in corporate income taxes under the TCJA and the implementation of FERC's new ITA policy. The rule also allows interstate pipelines to voluntarily reduce their rates to reflect only the impact of these changes through a "limited" NGA section 4 rate filing, or else risk a more general investigation by FERC into the reasonableness of their rates. Alternatively, an interstate pipeline may commit to file, by December 31, 2018, either a "prepackaged" uncontested rate settlement or a general NGA section 4 rate case if the limited NGA section 4 option will not result in a just and reasonable rate.

Industry Players Weigh In

Over 40 organizations, representing pipelines, shippers and government agencies, responded to FERC's proposed rule. While some broadly disagreed with the FERC's approach, others generally expressed support. One of the main concerns voiced by the Interstate Natural Gas Association of America (INGAA) and other pipeline companies involved FERC's attempt to address both the United Airlines decision and the tax rate change in the same proceeding. INGAA suggested that any attempt to implement FERC's new ITA policy should be removed from the form completely, and that the tax rate should only be adjusted for changes made by the TCJA. On the other hand, the Texas Railroad Commission noted that it intended to respond to the tax rate changes when evaluating the cost of service rates it regulates for intrastate Hinshaw and NGPA section 311 pipelines.

Negotiated Rates Threatened?

Following passage of the TCJA and the adoption of FERC's new ITA policy, many pipelines and stakeholders took comfort in the fact that negotiated rate agreements would not be impacted by any FERC actions.

However, some shippers took issue with the pipelines' ability to shield revenue derived from negotiated rates. The Independent Oil and Gas Association of West Virginia noted that "in the Final Rule, the Commission should inform pipelines that decline to file under one of the section 4 options that it reserves the right in a section 5 investigation to look at all rates, not just recourse or incremental rates set out in the tariff, but also negotiated rates." And other commenters representing the shipper community called for either the review of all negotiated rate agreements or for FERC to implement a negative surcharge that would apply to all negotiated rate agreements to reflect the reduction in taxes.

LawIQ Analysis of Tax Cut Comments