Rate Cases Settle, But FERC Struggles With Impact of Its MLP Ruling
We noted in Seven Billion in Annual Revenue Under Review by FERC, that 2019 would be a busy year for pipeline rate cases at FERC. The past two weeks have seen a lot of movement for some of those cases, but not for others. A complicating factor in many that remain may be FERC’s decision to disallow an income tax allowance (ITA) for master limited partnerships (MLPs), which FERC coupled with its decision to eliminate any accumulated deferred income taxes (ADIT) for such MLPs.
Today, we discuss how FERC has been addressing the ITA/ADIT issue and then provide an update on the rate cases pending before FERC, a number of which have been recently resolved. From where it stands now, there appears to be the potential for some upside for MLPs that have converted to a C corporation structure since the beginning of 2018, which includes a number of companies, including Enbridge, Boardwalk, and Dominion.
ITA/ADIT Won’t Go Away
For a very brief refresher of the disappearing ADIT issue, FERC’s final tax rule adopted in July of 2018 held that “if an MLP or other pass-through pipeline eliminates its income tax allowance from its cost of service pursuant to the post-United Airlines policy, the Commission anticipates that ADIT will similarly be removed from the cost of service,” and that “an MLP pipeline (or other pass-through entity) no longer recovering an income tax allowance . . . may also eliminate previously-accumulated sums in ADIT from cost of service instead of flowing these previously-accumulated ADIT balances to ratepayers.”
The elimination of the ADIT was a benefit to those entities that could no longer claim an ITA because it offset some of the potential downside risk from the disallowance of the ITA. However, FERC’s decision also created the potential for an even bigger benefit for a pipeline that could eliminate its ADIT balance entirely, causing an increase in its rate base, if such a pipeline then converted to a C-corporation to continue to benefit from an ITA as well. That potential upside is what FERC has been struggling with in response to an accounting request filed by Enbridge’s Spectra Energy Partners LP (SEP) and as it resolves some of the 501G cases.
SEP Simplifies and Eliminates
In a letter dated September 10, 2018, SEP, on behalf of Algonquin Gas Transmission, Big Sandy Pipeline, East Tennessee Natural Gas, Maritimes & Northeast Pipeline, Ozark Gas Transmission, Saltville Gas Storage Company, and Texas Eastern Transmission requested approval from FERC’s Chief Accountant to essentially eliminate each pipeline’s ADIT balance because, at that time, they were all owned by SEP, a publicly traded MLP.
Chief Accountant Takes Time to Rule
Before the Chief Accountant approved SEP’s request, Enbridge Inc. closed a corporate simplification transaction on December 17, 2018, whereby Enbridge, on behalf of itself and certain of its wholly owned U.S. subsidiaries, acquired all of the outstanding equity securities of SEP, not beneficially owned by Enbridge. Since the closing of this transaction, all of the income generated by each of the SEP affiliates, with the exception of Maritimes & Northeast Pipeline, has been treated as income of Spectra Energy Corp, a Subchapter C corporation.
Chief Accountant Seeks More Information
In the face of numerous comments by shippers on the SEP pipelines, the Chief Accountant sent a data request on April 2, 2019, to SEP asking it to provide a current corporate ownership chart for each of the pipelines, a narrative discussion of all the ownership changes since the September 10, 2018 filing, an explanation of how SEP believes those changes impact the pipeline’s rights to an ITA, and whether the pipelines’ current rates include an ITA. SEP provided its response on April 22 and the key statement in that response is SEP’s position that it believes that “since the closing of the corporate simplification transaction on December 17, 2018, the respective costs of service for each SEP affiliate includes corporate income tax costs and, therefore, each such company is entitled to an income tax allowance.”
Shippers Complain
The shippers on the SEP pipeline objected to the answers filed by SEP, but really didn’t challenge the underlying theory for SEP’s key assertion. Thus, if the accounting treatment request is granted, each of those companies would be able to completely eliminate their prior ADIT balances accumulated while they were owned by an MLP, which would increase each pipeline’s rate base, but each company would still be entitled to an ITA going forward. Further, according to SEP, the companies would only be required to accrue new ADIT “when these companies place into effect rates in the future that are designed to recover income tax costs.”
Rate Case Decisions
Similar issues have come up in some of the objections filed in response to the Forms 501G filed by pipelines with more complicated structures. In general, FERC has tried to avoid making any precedent-setting decisions regarding ITA/ADIT as it resolves those cases. It has done this by granting a clarification, when requested, that the “order accepting the pipeline’s Form 501-G . . . [does] not control the outcome of any future rate proceeding and [does] not prejudice any parties’ position on the merits of any tax, normalization, or rate making issues.” However, there have been a few of these decisions where such language was not included and which addressed aspects of the ITA/ADIT issue.
Boardwalk’s Texas Gas Transmission was, until July 18, 2018, owned by a publicly-traded MLP. According to Texas Gas’ filings regarding its Form 501G, Boardwalk completed a corporate transaction on that date in which Texas Gas’s ultimate parent, Loews Corporation , which owned approximately 50 percent of the outstanding units of Boardwalk prior to the transaction, purchased the remaining approximately 50 percent of the outstanding public units not held by Loews.
FERC Decision
Regarding Texas Gas’s Form 501G, Texas Gas sufficiently supported the reductions to ADIT reported in its Form 501G addendum. Specifically, in recognition that the July 18, 2018 corporate restructuring was a taxable event, Texas Gas extinguished a portion of its ADIT.
At a minimum, when an MLP ceases to be owned by the public in a taxable corporate transaction, a pro-rata portion of the ADIT balance can be eliminated.
IMPACT TO TGT: - 50% reduction in ADIT balance, which increases rate base by $155 million
Dominion Energy Carolina Gas Transmission (DECG) is a subsidiary of Dominion Energy Midstream Partners, LP (DEM). On January 28, 2019, Dominion Energy, Inc. and DEM announced the completion of their merger pursuant to which Dominion Energy acquired all of the outstanding common units of DEM not already owned by Dominion Energy and its affiliated C-corporations. It is not clear whether this transaction was a taxable event, but, if so, it seems that DECG would be entitled to eliminate at least some of the ADIT balances equal to the percentage of DEM owned by the public.
FERC Decision
Given that the corporate restructuring has been completed and DECG is now owned by a C-corporation, DECG’s adjustments to the Form 501G to receive an income tax allowance and restore its ADIT was acceptable.
IMPACT TO DECG: Maintain ITA of $6 million
If SEP wins on its accounting ruling, the potential upside for all of the companies that have reorganized their corporate structure to eliminate their MLPs after FERC first announced its change in ITA policy in March of 2018, is,that they would be able to eliminate their previously accrued ADIT while still being allowed to include an ITA in rates.
Most Cases Settle
Most rate cases settle. For example, the last rate case to be fully litigated was El Paso Natural Gas’s 2010 section 4 proceeding. In the last month, ten cases have been settled, including the much anticipated filing by Tennessee Gas Pipeline, as discussed in Kinder Morgan Settles Two Major Rate Cases & Is Pipeline Age a Cost Driver?, which requires a reduction in Tennessee’s rates by 13.5% in four steps starting on November 1, 2019 through November 1, 2022, and a rate moratorium through November 1, 2022.
Eight other cases continue to slowly work through the settlement process at FERC, with settlement conferences scheduled over the next few months:
Current Cases
Within the last two weeks, FERC approved settlements in five cases for Iroquois Gas Transmission System, El Paso Natural Gas Company, Tuscarora Gas Transmission Company, Saltville Gas Storage Company, and Empire Pipeline. All five cases either continued an existing moratorium or included a new moratorium against future rate changes, with the longest one stretching through July 31, 2022 for Tuscarora.
Two more pipelines recently filed for FERC approval of their proposed settlements. Mississippi Canyon Gas filed a settlement on April 30, 2019 that reduces rates and contains an eight year moratorium.The next day, Tallgrass Interstate filed a settlement that is effective June 1, 2019 and provides a 12.1% reduction in recourse rates and a rate moratorium through May 31, 2023. Two other pipelines, MoGas Pipeline and East Tennessee Natural Gas, filed notices with FERC that they had reached settlements in principle with their shippers and expected to file formal agreements shortly.
There are three cases still pending that are no longer participating in the settlement process: Trailblazer Pipeline Company, Enable Mississippi River and WBI Energy Transmission. All three are on schedules that do not call for an initial decision until 2020.
If you would like to have specific information about any of the settlements, please let us know.
Insights Coming Soon
- Operating costs by company
- Update on oil and gas policy matters in Colorado and Texas