On July 18, the Federal Energy Regulatory Commission (FERC) issued orders (i) adopting procedures to implement the federal corporate income tax rate reduction in natural gas pipeline rates, and (ii) providing guidance regarding the elimination of accumulated deferred income taxes (ADIT) for master-limited partnership (MLP) pipelines. In Order No. 849,1 FERC directs natural gas pipelines to make one-time informational filings to identify potential cost of service over-recovery. The order incentivizes pipelines to file limited rate reductions under section 4 of the Natural Gas Act (NGA). Alternatively, pipelines may (i) submit a general NGA section 4 filing, (ii) explain why a rate reduction is not necessary, or (iii) take no action. In a separate Revised Policy Statement Rehearing Order,2 FERC explained that a pass-through tax entity that does not recover an income tax allowance may eliminate associated ADIT balances from its cost of service.
The instant orders result from (1) the Tax Cuts and Jobs Act (TCJA) reducing the federal corporate income tax rate from 35 percent to 21 percent, effective January 1, 2018, and (2) the United States Court of Appeals for the District of Columbia Circuit’s United Airlines decision.3 Various parties had petitioned FERC to require pipelines to support their rates in light of the TCJA reduction.
The United Airlines decision remanded to FERC the question of whether allowing an MLP pipeline to earn both an income tax allowance and a discounted cash flow return on equity (ROE) resulted in a double recovery of taxes. In Opinion No. 511-C,4 FERC concluded that granting an income tax allowance did result in double recovery. FERC simultaneously issued (1) a Revised Policy Statement5 explaining that MLP pipelines will no longer be permitted to earn an income tax allowance, and (2) a Notice of Inquiry regarding the treatment of ADIT balances.
On March 15, 2018, in response to the TCJA income tax rate reduction and United Airlines, FERC issued a Notice of Proposed Rulemaking (NOPR).6 The NOPR proposed a mandatory FERC Form No. 501-G (Form 501-G) informational filing by jurisdictional pipelines to assess potential cost of service over-recoveries. FERC also proposed four voluntary filing options regarding implementation of TCJA-related pipeline rate reductions. As discussed below, Order No. 849 generally adopts these procedures.
Order No. 849
FERC Form No. 501-G
Order No. 849 directs all natural gas companies with stated, cost-based rates to make a one-time Form 501-G filing. The filing is intended to inform FERC regarding whether it should “initiate an investigation under NGA section 5 as to whether . . . natural gas pipeline[s] may be collecting unjust and unreasonable rates in light of the recent reduction in the corporate income tax rate and . . . [FERC’s] income tax allowance policies.” Exemptions are provided for pipelines engaged in NGA section 4 or section 5 proceedings as of the Form 501-G filing deadline, and pipelines that file uncontested rate settlements between March 26, 2018, and the Form 501-G filing deadline.
Order No. 849 includes Form 501-G technical requirements related to pass-through entities, ADIT, ROE and capital structure. Namely, Form 501-G automatically reduces state and federal income taxes for pass-through tax entities to zero, and eliminates ADIT from their cost of service, consistent with the Revised Policy Statement Rehearing Order (discussed below). Additionally, FERC instructs pipelines to include an indicative ROE of 10.55 percent, and establishes a hypothetical 57/43 percent equity to debt capital structure for certain pipelines, both consistent with the last litigated pipeline rate case. For all of these items, however, FERC will allow the pipeline to file an addendum supporting alternative proposals.
Notably, FERC does not require MLP or other pass-through pipelines to eliminate tax allowances or ADIT balances, only that they reduce the federal income tax rate to 21 percent. FERC justifies this approach as necessary to ensure speedy rate reductions.
Form 501-G filings will be made on a rolling basis beginning 28 days from the effective date of Order No. 849. Each Form 501-G filing will be separately docketed, and interested parties may intervene, protest and comment within 12 days of the filing. FERC may either choose to institute a section 5 investigation or may issue a notice accepting the filing. FERC does not establish a formal deadline for action on Form 501-G filings, “but will act as promptly as possible.”
Voluntary Filing Options
As noted above, Order No. 849 also provides four voluntary filing options in connection with Form 501-G and the TCJA’s corporate income tax reduction. Option one allows a pipeline to make a limited section 4 filing to reduce its rates. To incentivize pipelines to select this option, FERC institutes a three-year section 5 moratorium for pipelines that make a limited section 4 filing and whose total estimated ROE, as indicated on Form 501-G, is 12 percent or lower. The moratorium does not apply to customers that wish to make a section 5 complaint.
Under option two, if a pipeline commits to filing an uncontested settlement or general section 4 rate case before December 31, 2018, FERC will not initiate a section 5 investigation before that time. A pipeline may seek an extension of the deadline if engaged in settlement negotiations.
Options three and four allow pipelines to make a filing explaining why no rate change is warranted (option three), or to take no action beyond filing Form 501-G (option four). FERC warns, however, that it may institute a section 5 investigation based on a pipeline’s Form 501-G filing.
Notably, FERC provides that any rate reduction as a result of the foregoing filing options will not affect negotiated rates absent specific provisions in individual negotiated rates to the contrary.
Revised Policy Statement Rehearing Order
Building on the Revised Policy Statement, which prohibits MLP pipelines from recovering an income tax allowance, and the ADIT treatment questions presented in the Notice of Inquiry, the Revised Policy Statement Rehearing Order explains that where pass-through tax entities (including MLPs) eliminate income tax recovery, they may similarly eliminate ADIT balances, without refund to customers. FERC cautions, however, that this is merely guidance, and that it must “fully support the application of this guidance in individual cases.” FERC reasons that ADIT refunds are not due based on tax normalization and retroactive ratemaking principles, and rejects any equitable interest in such funds on behalf of customers.
Nearly all jurisdictional natural gas pipelines will be making Form 501-G cost of service informational filings within the next four months. Given pipelines’ voluntary choices regarding income tax reductions, filings will vary in the scope and extent of the reduction and the application of ADIT guidance, and may address other cost of service items. Interested parties will have the opportunity to intervene, comment on and protest such proceedings in support of their interests.