On July 18, 2018, FERC issued Order No. 849, finalizing its procedures and regulations regarding the effect of reduced corporate income taxes on certain natural gas pipelines and their rates at FERC. Notably, Order No. 849 requires interstate natural gas pipelines to submit “FERC Form No. 501-G”, an abbreviated cost and revenue study designed to illustrate the effect of reduced corporate tax rates, which FERC might then use to determine whether the pipeline’s rates may be unjust and unreasonable under the Natural Gas Act (“NGA”).

In December 2017, President Trump signed the Tax Cuts and Jobs Act (“TCJA”) into law, which reduced the marginal federal corporate income tax rate from 35 to 21 percent. In response, on March 15, 2018, FERC FERC issued a Notice of Proposed Rulemaking (“NOPR”) proposing to require interstate natural gas pipelines to file the new Form No. 501-G. In addition, FERC proposed four options to natural gas pipelines to account for reduced corporate income taxes:

  • simultaneous with the Form 501-G filing, make a limited NGA section 4 filing to reduce rates that reflect the pipeline’s Form No. 501-G;
  • commit to file either an uncontested rate settlement or a general NGA section 4 rate case before December 31, 2018 (if such a commitment is made, the Commission will not initiate an NGA section 5 investigation of its rates prior to that date);
  • file a statement explaining why no adjustment to rates is needed; or
  • take no further action.

Concurrently, on March 15, 2018, FERC also revised its 2005 Policy Statement for Recovery of Income Tax Costs, determining that pass-through tax entities, such as a master limited partnership (“MLP”), could no long recover an income tax allowance in their cost of service rates at FERC (see March 20, 2018 edition of the WER).

In Order No. 849, FERC adopted nearly all of its proposals from the NOPR, but made four adjustments. First, regarding the limited NGA section 4 filing, FERC clarified that Form No. 501-G will automatically enter a federal and state income tax of zero for all tax pass-through entities, consistent with its revised policy statement on allowed income taxes. However, FERC noted that a pipeline claiming a tax allowance may submit an addendum to the FERC Form No. 501-G justifying why an income tax allowance should be included. Second, an MLP pipeline choosing to make a limited section 4 rate filing (under option 1 above) is permitted to reflect only the income tax reductions from the TCJA (i.e. may, but is not required, to eliminate its tax allowance in compliance). Third, for pipelines choosing to make the limited section 4 rate filing, FERC guarantees a three-year moratorium from NGA section 5 rate investigations if the pipeline’s FERC Form 501-G shows the pipeline’s estimated return on equity is 12 percent or less. Fourth, a natural gas company that is organized as a pass-through entity whose entire income or losses are consolidated on the federal income tax return of its corporate parent is subject to the federal corporate income tax and is eligible for a tax allowance.

Order No. 849 will be effective 45 days after date of publication in the Federal Register. Order No. 849 established a staggered filing schedule and therefore, pipelines will have between 28 and 84 days to make their FERC Form No. 501-G filing, depending on which one of three groups that pipeline has been placed into under Order No. 849. A copy of the final rule is available here.