United States: Court's Concern About Recovery Windfall Triggers FERC Inquiry

Result Could Be Lower Revenues From Assets Owned By Partnerships

Result Could Be Lower Revenues From Assets Owned By Partnerships

On December 15, 2016, the Federal Energy Regulatory Commission ("FERC") issued a Notice of Inquiry ("NOI") seeking public comment on a matter that could result in significant changes to the way cost-based rates are calculated for oil pipelines and other FERC-regulated entities organized as partnerships, as opposed to corporations.1 The NOI follows the July 2016 decision of the U.S. Court of Appeals for the D.C. Circuit in United Airlines, Inc. v. FERC, where the court reviewed FERC's application of established cost-of-service ratemaking policies to an oil pipeline organized as a limited partnership.2 The court remanded the case to FERC because FERC failed to demonstrate that no double recovery of income tax costs occurred where the pipeline's rates reflected both a rate of return on equity ("ROE") calculated using the "discounted cash flow" method and an income tax allowance.3

FERC issued the NOI to seek public comment regarding potential adjustments to FERC's policies on ROE and income tax allowances "to resolve any double recovery of investor-level tax costs for partnerships or similar pass-through entities."4 In FERC's view, the United Airlines holding has a "potentially significant and widespread effect" not only on oil pipelines, but also on FERC-regulated natural gas pipelines and electric utilities organized as or owned by partnerships or other pass-through entities, including master limited partnerships, that incur no income taxes at the entity level.5 Initial comments on the NOI are due February 6, 2017, and reply comments are due February 27, 2017.

In the context of rate-regulated partnership entities, the United Airlines court identified a tension between FERC's policy for setting ROE and its policy for providing an allowance for recovery of income tax costs. It explained that FERC's discounted cash flow methodology for calculating ROE "determines the pre-tax investor return required to attract investment, irrespective of whether the regulated entity is a partnership or a corporate pipeline."6 An equity owner in a partnership pipeline, however, receives a higher after-tax return than an equity owner in a corporate pipeline, because a partnership pipeline incurs no taxes at the entity level, other than those that may be imputed from its partners.7

According to the court, "[t]hese facts support the conclusion that granting a tax allowance to partnership pipelines results in inequitable returns for partners in those pipelines as compared to shareholders in corporate pipelines,"8 i.e., that partnership pipelines receive double recovery of investor-level income taxes. According to the court, given the differing tax treatment that applies, "the necessary conclusion is that partners in a partnership pipeline receive a windfall compared to shareholders in a corporate pipeline ...."9 While the court affirmed that FERC may permit partnership pipelines to recover an income tax allowance, it added that FERC must do so consistent with its obligation to ensure that investors receive returns commensurate with the risk they assume.10 Therefore, the court found FERC's decision to be arbitrary and capricious, and it vacated and remanded to FERC to consider and demonstrate how it might prevent such double recovery.11

In the NOI, FERC requests feedback on ways that it could adjust its income tax allowance and ROE policies to resolve the potential windfall concerns identified by the D.C. Circuit.12 The NOI invites interested parties to propose specific reforms and to explain how such reforms could enable partnership entities to attract needed capital—a key purpose of ROE-setting as articulated by the U.S. Supreme Court in its landmark 1944 Hope decision—while also preventing partnership entities from double-recovering investor-level income tax costs.13 FERC asks that commenters address the practical implications of their proposals and include supporting data, theoretical analyses, empirical studies, and other relevant evidence demonstrating the soundness of any proposed approach.14

The United Airlines decision and FERC's NOI are only the latest rounds in a heavily litigated area of Commission practice, which has produced a long line of decisions from FERC and from the D.C. Circuit over more than a decade.15 Because income tax allowances and ROE are significant components of cost-of-service rates, FERC's action on the NOI will be of great interest to partnerships and other pass-through entities that own natural gas pipelines, oil pipelines, or electric utilities that provide services at cost-based rates.

Patrick T. Metz, an associate in the Washington Office, assisted in the preparation of this Commentary.

[1] Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs, 157 FERC ¶ 61,210 (2016), 81 Fed. Reg. 94,366 (Dec. 23, 2016).

[2] 827 F.3d 122 (D.C. Cir. 2016).

[3] Id. at 136.

[4] NOI at P 19.

[5] Id. at P 2.

[6] 827 F.3d at 136.

[7] Id.

[8] Id.

[9] Id.

[10] Id. at 137 (citing Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 603 (1944)).

[11] Id.

[12] NOI at P 18.

[13] Id. at PP 19-20.

[14] Id.

[15] See, e.g., ExxonMobil Corp. v. FERC, 487 F.3d 945 (D.C. Cir. 2007); BP West Coast Products, LLC v. FERC, 374 F.3d 1263 (D.C. Cir. 2004); Policy Statement on Income Tax Allowances, 111 FERC ¶ 61,139 (2005); SFPP, L.P., 113 FERC ¶ 61,277 (2005); Texaco Refining and Mktg., Inc. v. SFPP, L.P., 117 FERC ¶ 61,285 (2006); SFPP, L.P., 121 FERC ¶ 61,240 (2007); SFPP, L.P., Opinion No. 511, 134 FERC ¶ 61,121 (2011), on reh'g, Opinion No. 511-A, 137 FERC ¶ 61,220 (2011), on reh'g, Opinion No. 511-B, 150 FERC ¶ 61,096 (2015), vacated and remanded sub nom. United Airlines, Inc. v. FERC, 827 F.3d 122 (D. C. Cir. 2016); SFPP, L.P., Opinion No. 522, 140 FERC ¶ 61,220 (2012), on reh'g, Opinion No. 522-A, 150 FERC ¶ 61,097 (2015).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Kevin J. McIntyre
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.