Special Report: FERC Solicits Comments on New MLP Tax Policy
Today, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) in anticipation of the Commission's revision of its 2005 Policy Statement on Income Tax Allowances. This NOI was in response to the July 1, 2016 decision of the U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc. In this decision, the court agreed with the plaintiffs who had alleged that FERC's discounted cash flow ratemaking model, coupled with FERC's grant of an income tax allowance to the pipeline's owners, allowed for a "double recovery" of taxes for the partners/owners of partnership pipelines. FERC's NOI highlighted the importance of this issuance, noting that the court's holding in United Airlines had a "potentially significant and widespread effect" on "the oil pipelines, natural gas pipelines, and electric utilities" subject to FERC's jurisdiction.
As we reported in our July 15th Special Report on this issue, FERC had vigorously supported its 2005 Policy Statement on Income Tax Allowances, and argued in United Airlines that its ratemaking model and tax allowance policy did not result in a double recovery of taxes by pipeline partnership owners. But the court disagreed. Rather than invalidate the current tax allowance policy, the court remanded the case to FERC to allow it an opportunity to demonstrate that the tax policy does not allow for the double recovery of taxes for partnership pipelines, or to revise the policy in such a manner that does not allow for a double recovery. Today's NOI responds to the court's remand.
Commissioners Envision Significant Revision
In their comments on the NOI today, Commissioners Norman Bay, Cheryl LaFleur, and Colette Honorable acknowledged that the revised policy statement could have far reaching effects on the industry. Commissioner Honorable noted the NOI has "wide ranging implications, in terms of how we address potential issues of double recovery and how we address certain ratemaking functions including the setting of ROEs." In addition, Commissioners Bay and LaFleur expressed an appreciation of the complexity of the issues, and hoped that FERC would receive comments from a broad range of stakeholders. Commissioner LaFleur stated that "it's ... a pretty difficult issue or otherwise we might have figured out a handy solution and voted out for comment, rather than starting with a generic Notice of Inquiry to get ideas."
As Commissioner LaFleur suggested, the NOI does not lay out a framework for a new policy statement. FERC could have responded to the remand with a definitive Notice of Proposed Rulemaking, or an NOI setting out a proposed policy, but has issued an NOI that merely requests comments that "consider the fundamental concerns" of the United Airlines court that suggest that allowing "a partnership entity to have an income tax allowance results in a double recovery of investor-level tax costs." Based on the NOI, it is clear that FERC has abandoned its argument that the current tax policy adequately prevents a double tax recovery, and that FERC now envisions a wholesale change to its Policy Statement on Income Tax Allowances.
FERC seems to be open-minded as to the solutions to this issue; the NOI requests comments regarding "any proposed methods" to resolve the double recovery of investor-level tax costs for partnerships or similar pass-through entities. In addition, FERC appears to want to review precise, fact-based proposals, requesting that commenters should support their proposals with "data, theoretical analyses, empirical studies, or any other evidence demonstrating the level of partner-investor tax costs reflected in the ROE estimated by the DCF methodology."
If there was any doubt that FERC has abandoned its opposition to the court's conclusions, the NOI states that "commenters should ensure that their proposals do not result in a double recovery of investor level income tax costs for partnership entities as required by United Airlines."
Stakeholders May Influence FERC's Decision
At this point, it is difficult to determine exactly how FERC might revise its tax policy; indeed, the NOI suggests that FERC may not have a proposed solution strong enough to serve as a template for discussion. In this regard, industry stakeholders have a unique opportunity to propose a workable solution that prevents the "double recovery" of taxes for the partners/owners of partnership pipelines that the
United Airlines court found objectionable. Initial comments are due to FERC within 45 days of the date the NOI is published in the Federal Register (which should happen shortly), and reply comments are due 20 days later. Comments from industry stakeholders should offer an instructive lens into how FERC plans to approach revising its current tax allowance policy.
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