On Jan. 12, the Federal Energy Regulatory Commission (FERC) issued data requests to four interstate pipelines that are proposing incremental recourse rates in pending Natural Gas Act (NGA) Section 7 certificate applications.1 This action was significant because it appears to be FERC’s first step toward responding to tax law changes in the Law to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, also known as the Tax Cuts and Jobs Act of 2017 (2017 Tax Act).
FERC permits pipelines and public utilities to recover their actual or potential tax expenses in their regulated rates. The 2017 Tax Act reduces the corporate tax rate to 21 percent and allows certain investments to receive bonus depreciation treatment. FERC asked each pipeline to 1) explain how the 2017 Tax Act impacts its proposed project cost of service and the resulting initial recourse rate proposal; 2) provide an adjusted cost of service and recalculated initial incremental recourse rates; and 3) provide all supporting work papers and formulas.2
Despite these data requests, it is unclear whether FERC will take industrywide action regarding tax recovery in pipelines’ existing rates. On Jan. 9, in response to the 2017 Tax Act, consumer advocates and attorneys general of 15 states asked FERC to initiate industrywide rate investigations for natural gas and oil pipelines as well as electric public utilities.3 On Jan. 11, the Michigan Public Service Commission requested that FERC take action specific to natural gas pipelines. These entities note that the state commissions already are reviewing the 2017 Tax Act’s impact on state-regulated retail rates.4
Precedent exists for FERC’s taking industrywide action. In 1987, it issued Order No. 475 following the 1986 decrease in the federal income tax rate. Order No. 475 had required electric public utilities to voluntarily file for rate decreases or face involuntary rate investigations.5 Order No. 475 purposefully exempted interstate natural gas pipelines because at that time most pipeline rates included tax trackers or were subject to periodic rate reviews or rate case “comebacks” that allowed FERC to review their rates every three years.6 This regulatory regime has changed, however, and few pipelines have tax trackers or seek regular rate reviews. However, several recent pipeline rate settlements require rate adjustments should FERC take industrywide action related to income tax law changes.7
Despite the precedent for an industrywide review, FERC may prefer a case-by-case approach. One possibility is that FERC will raise tax over-recoveries in individual rate review orders issued under NGA Section 5. With some exception, FERC has initiated NGA Section 5 rate investigations into a handful of pipeline rates every year since 2009 based on preliminary findings that overall costs and revenues are not balanced. NGA Section 5 investigation orders could be issued later this month if FERC follows last year’s pattern.8 However, the January 2018 FERC meeting agenda does not appear to include any NGA Section 5 proceedings. It is likely that FERC will set for hearing (and include the issue of federal income taxes) for those interstate natural gas pipelines that seek rate increases to satisfy rate filing obligations resulting from comebacks in prior rate settlements. These specific cases may also give some indication of how FERC plans to treat the pipeline industry as a whole. FERC also could take action in its pending Notice of Inquiry Regarding the Commission’s Policy for Recovering Income Tax Costs initiated in December 2016 in Docket No. PL17-1-000, which considers whether to update FERC’s Policy Statement on Income Tax Allowances in effect since 2005.
We will continue to monitor this issue with an eye toward how our clients can prepare and take timely actions in light of the commission’s evolving policies.