Rate Case Rulings Clarify Which Pipelines Are Entitled To An Income Tax Allowance

The income tax allowance (ITA) is a key element in the cost of service used to calculate a tariff rate for a pipeline that has cost-based rates. This week, two unanimous FERC decisions (Chairman McIntyre recused himself from one) in Section 4 rate proceedings clarify FERC's new ITA policy. Specifically, these decisions explain that if a pipeline is 100% owned by an MLP, then such a pipeline will no longer be entitled to include an ITA in its rates, regardless of who owns the interests in the MLP. While FERC's July 18 decision regarding the treatment of Accumulated Deferred Income Taxes (ADIT) provides some relief to MLP-owned pipelines, any pipeline owned 100% by an MLP, even if the MLP is owned by a related C-corporation, should no longer expect to include even a partial ITA in rates for the near term.

Our team will account for these recent decisions as we complete the FERC's new Form 501-G for all of the gas pipelines that will file the form on October 11, November 8, and December 6, 2018. LawIQ's version of the 501-G will give pipelines, shippers and investors an early window into the impact the filing may have on a pipeline's rates and revenues, including the pipeline's ability to roll that impact up to the public company level. Pipelines will be able to compare their anticipated rate reduction and calculated ROE to those of other pipelines before they are required to file their own form. The industry should watch the other Section 4 and Section 5 cases pending before FERC for other clues as to how FERC is interpreting its new ITA policy.

FERC's New ITA Policy

In March, when FERC issued its revised ITA policy, we noted in Dominion Questions FERC's Tax Policy Changes that it appeared to leave more questions unanswered than it answered. The only real policy that FERC established was that MLPs "like SFPP" would no longer be allowed to include an ITA in their cost of service. FERC decided that it would address ITA issues involving non-MLP partnership forms in subsequent proceedings. Some MLPs sought immediate clarification of FERC's new policy, as the market prices of MLPs owning gas pipelines fell precipitously.

The Master Limited Partnership Association (MLPA) helpfully provided eleven simplified ownership structures for a pipeline company and its understanding of the result under FERC's policy as a demonstration of the lack of reasoned decision-making exhibited in the new policy. This week's two new decisions show that even the certainty that the MLPA believed it saw in the new policy wasn't there, as FERC has now at least questioned whether an ITA is allowed in two of those structures where the MLPA felt the answer was clear.

Source: FERC docket Docket No. PL17-1  accessed here: https://elibrary.ferc.gov/idmws/file_list.asp?accession_num=20180413-5295

And, just last month, FERC denied all of the clarification and rehearing requests regarding its policy, thus leaving open major questions regarding what FERC means by the phrase "MLPs like SFPP." FERC similarly restated its preference to decide this issue and others on a case-by-case basis, meaning during rate proceedings. The two decisions handed down this week are the first two such cases decided under the new ITA policy.

Enable MRT Decision is Most Instructive

As noted in our daily alerts, on June 29, Enable Mississippi River Transmission, LLC (MRT) filed a Section 4 rate case as required under a previous rate case settlement. MRT stated that it is a limited liability company that is wholly-owned by an MLP, Enable Midstream Partners, LP (Enable). MRT proposed to include an ITA in its cost-of-service based rates based on the income tax liability incurred by Enable's interest holders that are C corporations and which hold approximately 86% of the tradeable limited partner units in Enable.

In a unanimous decision from which Chairman McIntyre recused himself, FERC did not reject MRT's filing, but rather summarily denied MRT the right to include in its rates any ITA, because to do so would violate the new ITA policy. According to the decision, FERC denied an ITA to SFPP, L.P. (SFPP), a wholly owned subsidiary of an MLP, and "like SFPP," MRT is a wholly owned subsidiary of an MLP. Thus, FERC concluded that it would be inconsistent with Commission precedent to permit MRT to recover an ITA.

We now know that one feature of being "like SFPP" is having 100% of the pipeline's equity interest held by a publicly traded MLP, and that it is irrelevant if that MLP is primarily owned by a related C-corporation. Because MRT is 100% owned by the MLP, there is still an open question as to whether a pipeline that is only partially owned by an MLP will be entitled to an ITA.

Trailblazer Pipeline Lives to Fight Another Day

Like MRT, Trailblazer Pipeline Company LLC also filed a Section 4 rate case, as it was required to do under a previous rate case settlement. Trailblazer is indirectly owned 54.79% by Tallgrass Energy GP, LP, which elected and received authorization to be taxed as a C-corporation in June 2018, and indirectly owned 45.21% by private equity owners of Tallgrass Equity, LLC. Trailblazer asserted that it is entitled to an ITA in its cost of service because a majority of its interests are held by an entity taxed as a C-corporation and the double recovery concern under FERC's new ITA policy does not apply to the minority ownership interests. Some of Trailblazer's shippers disagreed with this conclusion.

FERC chose to establish a paper hearing on the issue of whether to allow an ITA for Trailblazer. According to the decision, FERC's ITA policy does not permit MLP pipelines "like SFPP" to recover an ITA in their cost of service. However, Trailblazer is not "like SFPP" because it is no longer owned by an MLP and therefore may be entitled to recover an ITA. FERC directed the parties to provide written arguments on this issue of "first impression" under its new ITA policy that should be focused on the extent to which the double recovery concern addressed in the new ITA policy applies to each of Trailblazer's ownership classes.

We are continuing to monitor these rate proceedings and the other proceedings pending before FERC to help our customers understand how FERC's new ITA policy may impact other companies. Rulings from FERC on these proceedings will be incorporated into our analysis of the Form 501-Gs that will be filed in three waves before the end of the year.

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