In light of reduced corporate tax rates as the result of Tax Cuts and Jobs Act of 2017 (Tax Act), a broad coalition of gas industry trade associations and gas producers recently filed a petition with the Federal Energy Regulatory Commission (FERC) urging the agency to lower gas pipeline and storage company rates to reflect tax rate reductions. The January 31, 2018 petition also offers a blueprint for how FERC could quickly accomplish this task.
Petitioners urge FERC to immediately initiate individual show cause proceedings requiring each pipeline and storage company to file its most recent 12 months of actual cost and revenue data and then adjust this data to: (a) reflect 2018 tax rates on the income tax allowance; (b) reduce and refund amounts in accounts for Accumulated Deferred Income Taxes (ADIT); (c) indicate the rate of return/capital structure assumptions used; (d) indicate the cost allocation and rate design methodologies that underlie their existing rates; and (e) include a derivation of the per unit rates, as adjusted. If this data, as adjusted, demonstrate that revenues received will exceed costs once Tax Act changes are factored in, Petitioners ask FERC to immediately order rate reductions.
Petitioners contend that such summary action by FERC would be appropriate because tax law changes are known and measureable and not subject to dispute. Anticipating pipeline and storage company opposition, petitioners also propose that such companies first be given an opportunity to demonstrate that their preexisting rates are still just and reasonable despite the Tax Act changes.
A key difficulty is that under Section 5 of the Natural Gas Act (NGA) [hyperlink- 15 U.S.C. § 717d], FERC cannot require a reduction in rates until after a final FERC order based on the evidence presented. And although FERC has required the filing of cost and revenue studies in a number of pipeline NGA Section 5 investigations which have led to lower rates, the process for evaluation of such evidence has been slow. For example, in one recent NGA Section 5 investigation order, FERC set a timeline for decision on the rates more than a year later. [158 FERC ¶ 61,044 (2017)] Typically, pipeline cost and revenue studies generate a lot of time-consuming discovery requests. There is every reason to think this would be the case here.
A more practical problem with an industry-wide “show cause” process is the amount of agency resources it will consume. Anticipating this concern, Petitioners offer some proposals as to how FERC could attempt to streamline the process. First, they propose that FERC exclude from the show cause process any pipeline or storage company that is already required to file an NGA Section 4 [15 U.S.C. § 717(c)] rate case in 2018. Second, they propose that FERC exempt Natural Gas Policy Act of 1978 Section 311 [15 U.S.C. § 3371] pipelines because these pipelines are otherwise required to file updated rate justifications on an ongoing basis. Third, they propose that any pipeline or storage company that is currently subject to a settlement rate change moratorium be exempted from submitting such a filing through the end of the moratorium term.
Even with these streamlining efforts, however, implementation will put a considerable burden on FERC staff resources. And exempting pipelines already making NGA Section 4 filings this year doesn’t reduce the burden on FERC staff — the general rate case filing will still need to proceed simultaneously.
Petitioners ask FERC to act as soon as reasonably possible, but the agency is unlikely to act without first soliciting public comment. Assuming FERC adopts the Petitioner’s recommended process, it is likely to be another year before any rates are found to be unjust and unreasonable. In the interim, pipeline and storage companies will continue to earn excessive returns by pocketing Tax Act savings.
Petitioners maintain that addressing Tax Act issues via notice and comment rulemaking would take too much time and unreasonably delay rate relief to consumers. But it is not clear why an expedited rulemaking process to allow development of a formula-based adjustment to existing rates, which is the approach adopted by FERC in 1986 when tax rates last declined significantly, would not be an equally or more speedy alternative to what they have proposed.