Oil Pipelines Acknowledge Being MLPs and Report 2017 Cost of Service

When FERC determined that it would no longer allow Master Limited Partnerships (MLP) to include an Income Tax Allowance (ITA) in their cost of service rates, it found that there was no basis for an MLP pipeline, such as Kinder Morgan's SFPP, L.P.,to claim an ITA in the summary Form No. 6, page 700 cost of service for the 2016 or 2017 data listed in the forms to be filed on April 18, 2018. The results are in. Over 44% of all pipelines that reported having interstate revenue for 2017 have zeroed out their ITA -- thus acknowledging that they are MLPs. The elimination of their ITA, which will result in a reduction in their cost of service, means that some of these companies may now be overearning to such an extent that challenges could be brought that would seek to reduce their tariff rates.

FERC's Directive to Oil Pipelines

With regard to oil pipelines, FERC instituted its new ITA policy through a directive requiring all MLP-owned oil pipelines to report an ITA consistent with the new policy. Essentially, FERC required each MLP-owned pipeline to reflect a zero ITA for the years 2016 and 2017 on page 700 of the Form 6 that was to be filed in April 2018. While this directive seemed clear, FERC found that it did not have an adequate record for addressing the appropriate ITA for the innumerable partnership and other pass-through business forms "that are not MLPs like SFPP." For these entities that were not "like SFPP," FERC indicated that it would apply its new policy to those entities as those issues arose in subsequent proceedings.

Because FERC provided no definition for the phrase, "like SFPP," there have been a number of requests for rehearing, clarification or reconsideration of its decision, with groups primarily arguing that FERC's blanket denial of an ITA to some, but not all, pass-through entities is arbitrary and capricious. On April 27, FERC issued an Order Granting Rehearings, commonly called a "tolling order," which gives the Commission more time to address the requests, while delaying any appeal of its order until such rehearing requests are addressed in a subsequent order.

The first broad indicator of how the industry interpreted the phrase "like SFPP" can be seen in the Form 6 filings made in April by oil pipelines. Given the pending rehearing requests filed by trade groups such as the Association of Oil Pipelines and the Master Limited Partnership Association, as well as from pipeline owners such as SFPP, Enbridge, TransCanada and Kinder Morgan, many expected oil pipelines to disregard the FERC directive by continuing to claim an ITA on the basis that they were not "like SFPP." Interestingly, and quite ironically, one key pipeline that took this approach was SFPP itself, which continued to report an ITA for both 2016 and 2017. Other pipelines, while following the directive, indicated that they were reserving the right to amend the filing to reflect the final outcome of any challenge to FERC's new policy. By continuing to claim an ITA, pipelines such as SFPP would be able to justify higher revenues without exposing themselves to claims that they were overearning.

Top Oil Pipelines Acknowledge Being MLPs

Our review of the Forms 6 filed by the oil pipelines shows that a substantial number of the oil pipelines essentially followed the directive to report a zero ITA on Page 700 of the Form 6. A total of 71 pipelines that have filed their Form 6 so far this year reported a zero ITA for 2017, even though they had reported a positive ITA in 2016. These 71 pipelines represent approximately 41% of the total revenue for all pipelines that filed a Form 6 so far in 2017. The following companies were the ten largest pipelines by revenue to report a zero ITA on their Form 6 for 2017.

Is There A Risk for the Self-Acknowledged MLP Pipelines?

A possible reason that many pipelines may have been willing to follow the FERC directive, despite pending rehearing requests, is because they do not believe there to be much immediate risk from such an acknowledgement. In FERC's new policy statement, it stated the change in reporting on the page 700 would be incorporated into the 2020 five-year review of the oil pipeline index level, which will not take effect until 2021. Based on this circumstance, making the change now while still objecting to the new policy does not appear to be a high risk position.

But many think otherwise, including some of the country's largest shippers who created the Liquid Shippers Group (LSG) several years ago and began an effort to ensure reporting requirements are more transparent, so they could better assess whether the rates charged are just and reasonable. As we discussed recently, the LSG has been pushing FERC in several proceedings to prohibit pipelines from increasing their rates this July if the page 700 shows that the pipeline is overearning by more than 5% of its total costs. This same group has also been advocating for a reduction in the threshold that will trigger a rate investigation, such that rate investigations would be expanded to pipelines that are overearning by at least 15%.

Based on the filings of the pipelines that have reduced their 2017 ITA to zero, the following companies are the ten largest pipelines whose filing for 2017 show that they are now overearning by at least 15% for 2017 after adjusting their ITA to zero.