Special Report: Impact of Tax Cut on Pipeline Rates

The tax cut passed yesterday by Congress will likely lead the Federal Energy Regulatory Commission -- as discussed in our recent report -- to establish a process for adjusting the tariff rates for pipelines. In this update, we dive into what FERC may do by (i) looking back at what FERC did in 1986, when the corporate tax rate was last cut, and (ii) examining provisions in recent or pending pipeline settlements.
Our friends at Wright & Talisman, P.C., a Washington, D.C.-based energy law firm, recently reviewed the process that FERC used in 1986, when the corporate rate was cut from 46% to 34%. In a situation somewhat analogous to yesterday's tax cut, FERC adopted a formula for adjusting tariff rates based on the extent of the tax rate reduction and certain entity-specific variables. For entities that were not the subject of a rate moratorium under an approved settlement, FERC generally allowed the company the following options:

• Use the limited rate adjustment process to voluntarily reduce rates
• Enter into settlement discussions with customers to adjust rates more generally
• File a full rate case to adjust rates based on all changes since the last full rate proceeding
• Take no action on the basis that after the tax reduction, the tariff rate remained just and reasonable -- but companies taking no action would be at risk that FERC might otherwise initiate a general rate review.

For those entities that were subject to a rate moratorium from a prior settlement, FERC indicated that such entities could file to adjust their rates, but that FERC would delay the effective date of the revised rate until the date the moratorium ended. There are significant differences between 1986 and yesterday:

1. In 1986, Congress passed the tax cut over 8 months prior to the date that the rate reduction was to take effect, giving FERC time to prepare for the reduction. Yesterday's tax cut takes effect in just 11 days.
2. In 1986, the process for rate reductions was applicable only to electric utilities because most gas pipelines had tax rate trackers. In general, such trackers no longer exist.

This means that FERC will be under pressure from the shipper community to implement a process that promptly provides rate relief to pipeline customers. The challenge for FERC will be to implement a process that is timely, but which also accounts for the myriad situations governing tariff rates for pipelines based on prior settlements between the pipelines and their customers. This challenge can be understood by looking at the specific provisions contained in pending or approved rate settlement agreements for the following four natural gas pipelines.

Eastern Shore Natural Gas

In January 2017, Eastern Shore filed a full rate proceeding. In a settlement filed on December 13, 2017, Eastern Shore included a detailed chart that adjusted the settlement rates based on a final corporate tax rate between zero and 35%. Based on the final tax rate of 21%, the Settlement Tariff Rate would be between 3% to 9% lower than it would have been if the corporate tax rate had not been reduced, depending on the class of service, a reduction comparable to the one LawIQ estimated for NEXUS in our prior report. Eastern Shore agreed to make a limited section 4 filing to adjust the Settlement Tariff Rates to reflect such a change, to be effective upon the effective date of the new tax rate. While not self-implementing, this provision establishes the effect of the tax cut on the pipeline's rates .

Great Lakes Gas Transmission

In March 2017, Great Lakes filed a full rate proceeding. In a settlement filed on October 30, 2017, Great Lakes agreed that it would comply with any FERC-mandated, industry-wide requirement to modify existing rates to reflect (i) statutory changes in corporate income tax rates, and/or (ii) Commission policy with respect to recovery of income tax allowances for master limited partnerships and/or pass-through entities. This provision is not self-implementing and simply requires Great Lakes to respond to any FERC-mandated requirement. Therefore, unless FERC issues such a mandate, it appears that Great Lakes has no obligation to reduce its rates as a result of the tax change prior to the general rate case it agreed to file in 2022.

Columbia Gas Transmission

In December 2015, Columbia Gas filed a petition with FERC seeking approval of a comprehensive settlement reached with its shippers. Under the settlement, Columbia Gas reset its base tariff rate effective as of January 1, 2016, and both Columbia Gas and its shippers agreed not to seek any change in the rates under the settlement prior to February 1, 2022, subject to certain exceptions. One of those exceptions required Columbia Gas to adjust its rates if the federal corporate income tax rate changes after February 1, 2019. The settlement included a chart that calculated the revised rates for tax rates between 30% and 40%, but did not address the calculation for corporate tax rates lower than 30%. This settlement, unlike the Great Lakes settlement, imposes an obligation to adjust the tax change on Columbia Gas, but that obligation would not seem to arise until after February 1, 2019 .

Transcontinental Gas Pipe Line Company

Under a settlement agreement dated August 27, 2013, Transco agreed to file a general rate case no later than August 31, 2018. The revised corporate tax rate will be a part of that proceeding, and one could expect that the  shippers will encourage Transco to file that rate case even earlier in the year to pass through any expected tariff rate reductions.
LawIQ is in the process of completing a summary of the key terms for settlements that apply to natural gas pipelines under prior settlements as well as updating our Return on Equity calculations. As always, we welcome input from customers as to those pipelines that we should prioritize in that review.