On October 11, 2018, twenty-six pipelines submitted Order No. 849 compliance filings in response to a directive from FERC concerning the effect of reduced corporate income taxes on pipelines. Order No. 849 established a staggered filing schedule, so pipelines have between 28 and 84 days to submit “FERC Form No. 501-G,” depending on how FERC assigned the pipelines. The pipelines in the first category were required to file Form No. 501-G along with other information to inform FERC and the public of the impact of the recent reduction in federal income tax rates, as well as the effect of the Commission’s policy on the collection of federal income taxes by tax pass-through entities, on their revenue requirements.
In December 2017, President Trump signed the Tax Cuts and Jobs Act (“TCJA”) into law, which reduced tax rates for certain individuals and corporations. For corporations, the tax rate went from 35 to 21 percent. On March 15, 2018, FERC proposed that all pipelines file the new Form No. 501-G in a Notice of Proposed Rulemaking (“NOPR”). In addition to filing the form, FERC proposed giving four options to natural gas pipelines:
- accompany the informational filing with a limited Natural Gas Act (“NGA”) section 4 filing to reduce rates that reflect the pipeline’s Form No. 501-G results;
- pledge to file either an uncontested rate settlement or a general NGA section 4 rate case before December 31, 2018 in lieu of a limited NGA section 4 filing;
- submit an addendum supporting an assertion that there need be no adjustment to rates; and/or,
- take no further action.
Parallel with the NOPR, FERC revised its 2005 Policy Statement for Recovery of Income Tax Costs, deciding that pass-through entities, such as master-limited partnerships (“MLP”), should not recover a federal income tax allowance (see March 20, 2018 edition of the WER). On July 18, 2018, FERC issued Order No. 849, adopting nearly all the proposals in the NOPR (see July 24, 2018 edition of the WER). In addition to the four options enumerated above, pipelines can obtain a waiver from the Form No. 501-G filing requirement. Several pipelines have submitted waivers, and some have been granted while some remain pending.
Regarding the first option, FERC encouraged pipelines to elect that option, in order to “quickly reduce rates and to pass on the benefits of reduced tax costs to customers without the need for a full examination of costs and revenues.” Four of the pipelines—North Baja Pipeline, LLC, Millennium Gas Pipeline Company, LLC, East Tennessee Natural Gas, LLC, and Vector Pipeline L.P.—that submitted Form 501-Gs on October 11 chose Option 1 and proposed a limited NGA Section 4 rate reduction in a separate filing.
Three pipelines—Kern River Gas Transmission Company, Southern Star Central Gas Pipeline, Inc., and White River Hub, LLC—selected Option Two indicating that they would be filing rate settlements or general NGA Section 4 cases before the end of the year.
The majority of the pipelines that submitted Form No. 501-G on October 11 selected Option Three based on arguments to the effect that (1) they were already under-recovering their actual cost of service; (2) their return on equity (“ROE”) is already appreciably below FERC’s safe harbor ROE threshold; and/or (3) the Form No. 501-G’s outputs are misleading and have little resemblance to that pipeline’s actual rate of return.
Notably, two affiliated pipelines, Kinetica Energy Express and Kinetica Deepwater Express, selected Option 4 – “no action.” They argued that this was appropriate because they have applications to acquire or abandon certain facilities pending in other FERC dockets. Both pipelines stated, “[u]pon Commission action on these filings, [the] submission of Form 501-G will be outdated and superseded” and that “any action as to the rates based on this data would be extremely premature.”