United States: FERC Addresses Effects Of Tax Cuts On Jurisdictional Rates And Disallows Income Tax Component In MLP-Owned Partnership Pipeline Cost-Of-Service Rates

On March 15, 2018, the Federal Energy Regulatory Commission (“FERC”) issued an order on remand disallowing an income tax component in cost-of-service rates charged by an interstate oil pipeline owned by a master limited partnership (“MLP”), and announced that FERC was reassessing its policy regarding income tax allowances in cost-of-service rates for other types of pass-through entities providing transmission or transportation services. FERC also took several actions directed at reflecting in certain jurisdictional cost-of-service rates the effects of the federal income tax rate reductions under the Tax Cuts and Jobs Act of 2017.1 FERC’s actions on these topics are reviewed below.

1. MLP Cost-of-Service Income Tax Disallowance: Order on Remand and Revised Policy Statement

(a) United Airlines, Inc. v. FERC 2

Insofar as is here pertinent, in United Airlines v. FERC, certain shippers on SFPP, LP (“SFPP”), then a wholly owned subsidiary of an MLP, argued that FERC’s policy granting an income tax allowance for the partnership pipeline resulted in unjust and unreasonable cost-based rates.

Partnership pipelines do not incur taxes at the operating entity level, and FERC’s policy at the time granted MLP pipelines an income tax allowance that accounted for taxes paid by partner-investors attributable to the pipeline. The shippers argued that this allowance, coupled with the fact that a discounted cash flow (“DCF”) return on equity (“ROE”) ensures a sufficient pre-tax rate of return to attract investment capital, resulted in the partners’ double recovery of taxes. Finding that FERC “ha[d] not adequately justified its tax allowance policy for partnership pipelines,”3 the court granted the shippers’ petition for review, vacated FERC’s orders with respect to the double-recovery issue, and remanded to FERC to address the double-recovery issue.

(b) Remand Order 4

In the Remand Order, FERC decides to remove the income tax allowance from SFPP’s cost of service. Doing so, FERC determines, eliminates the double-recovery issue and places SFPP on an even playing field with corporate entities while providing it with a sufficient return through the DCF ROE. FERC finds that, because the DCF analysis determines ROE based on the pre-tax return demanded by market investors, there is no justification to impute partners’ income tax costs to the pipeline’s cost of service.

FERC notes that United Airlines was not limited to MLPs, but rather addressed partnerships generally. Thus, although the Remand Order is limited to MLPs, FERC states that “all partnerships seeking an income tax allowance in a cost-of-service rate case will need to address the United Airlines double recovery concerns….”5 FERC also states that the United Airlines opinion did not expressly overturn ExxonMobil Oil Corp. v. FERC,6 and, therefore, there may be instances where a partnership other than an MLP “could justify imputing an income tax allowance to its cost of service.”7

(c) Revised Policy Statement 8

The Revised Policy Statement applies the decision in the Remand Order to oil and natural gas MLP pipelines on a going-forward basis9 and establishes that MLP-owned pipeline partnerships will not be permitted to recover an income tax allowance in cost-of-service rates. This action reverses FERC’s previous policy statement,10 which had allowed all partnership entities to recover an income tax allowance for the partners’ tax costs. Although the Revised Policy Statement purports to apply generally and repeats the statement that all partnerships that want to recover an income tax allowance will be required to address the double-recovery issue, FERC states that it will address the application of United Airlines to non-MLP partnership or other pass-through business forms “as those issues arise in subsequent proceedings” and no specific actions have been directed to electric transmission utilities.11

FERC will implement its revised policy to oil pipelines in the 2020 five-year review of the oil pipeline index level, and directs oil pipelines organized as MLPs to reflect the elimination of the MLP income tax allowance in their Form No. 6, page 700 reporting.12 FERC also instructs oil pipelines in advance to reflect on Form No. 6, page 700 any other policy changes that FERC may make in subsequent orders that affect the income tax policy for other partnership or pass-through business forms.

The Revised Policy Statement will become effective on the date of its publication in the Federal Register.13 Implementation of the Revised Policy Statement as to natural gas pipelines is addressed in the proposed rulemaking discussed below.

2. Natural Gas Pipeline Rulemaking14

The Tax Cuts and Jobs Act, inter alia, lowered the federal corporate income tax rate from a maximum of 35 percent to a flat 21 percent rate, effective January 1, 2018. As a result, utilities have a lower income tax expense and a reduction in accumulated deferred income taxes (“ADIT”). Following the enactment of the Tax Cuts and Jobs Act, FERC received a number of requests to ensure that the effects of the tax cut were reflected in utility rates.

The NOPR proposes actions to reflect the Tax Cuts and Jobs Act and FERC’s new MLP tax policy on jurisdictional pipeline cost-of-service rates. FERC proposes revising its regulations to (1) require interstate natural gas pipelines to file a new one-time report, FERC Form No. 501-G, on the effects of the tax cut and FERC’s MLP tax policy revision; (2) allow interstate natural gas pipelines to voluntarily submit a limited NGA section 4 filing to reflect the tax cut and FERC’s revised MLP tax policy, or choose one of three alternatives to doing so (discussed below); and (3) require Natural Gas Policy Act (“NGPA”) section 311 and Hinshaw pipelines (generally intrastate pipelines that also provide interstate services) to modify their rates for interstate service if they change their rates for intrastate service to reflect the tax changes. FERC proposes to require only interstate natural gas pipelines that have cost-based rates to comply with the proposed rule; pipelines with market-based rates would not be subject to the proposed rule.

FERC proposes establishing a staggered schedule for filing the FERC Form No. 501-G and making a limited NGA section 4 filing or one of its alternatives, which would result in deadlines for the filings in late summer and early fall 2008. FERC also encourages pipelines to meet with their customers as soon as possible to discuss rate adjustments resulting from the Tax Cuts and Jobs Act and the Revised Policy Statement, including settlement possibilities.15

Although the tax rate reductions also result in a reduction in ADIT, FERC does not propose to take any action regarding the effect of the tax rate decrease on ADIT in the NOPR and instead requests comment on the issue in the notice of inquiry, discussed in section (4) below.

Comments on the NOPR are due in Docket No. RM18-11-000 30 days after publication in the Federal Register.16

(a) FERC Form No. 501-G

FERC proposes adding a new section to its regulations17 to require interstate natural gas pipelines that file a 2017 FERC Form No. 2 or No. 2A and have cost-based rates to make an informational filing, under sections 10 and 14 of the Natural Gas Act (“NGA”) in FERC Form No. 501-G. FERC Form No. 501-G includes an abbreviated cost and revenue study estimating the percentage reduction in the pipeline’s cost of service resulting from the Tax Cuts and Jobs Act and the Revised Policy Statement and the pipeline’s current ROEs before and after the reduction in corporate income taxes and the elimination of income tax allowances for MLPs. The NOPR states that FERC Form No. 501-G prospectively assumes a federal and state income tax expense of zero for “pass-through entities,” i.e., not just MLPs.

FERC proposes two exemptions from filing FERC Form No. 501-G, one for interstate pipelines whose rates are being investigated under NGA section 5, and one for interstate natural gas pipelines that file general NGA section 4 rate cases or uncontested rate settlements before the deadline for their FERC Form No. 501-G. FERC proposes staggered deadlines for filing FERC Form No. 501-G.18 Drafts of FERC Form No. 501-G, as well as an implementation guide on filing in the data entries, are attached to the NOPR. FERC also notes that greenfield pipeline projects that have been authorized but are not yet in service and will not file a Form No. 2 or 2A for 2017 thus would not be required to file a FERC Form No. 501-G report. FERC states that it will address the tax cut and revised MLP tax policy on a case-by-case basis for those pipelines.

FERC proposes that existing pipelines in their FERC Form No. 501-G reports and/or limited NGA section 4 rate reduction filings (see below) address approved initial rates for projects that FERC has authorized but that have not yet gone into service.

(b) Voluntary Rate Filings and Alternatives

In addition to the FERC Form No. 501-G filing, FERC proposes adding a new section to its regulations19 to allow interstate natural gas pipelines to voluntarily20 make a limited NGA section 4 filing to reduce reservation charges and any one-part rates that include fixed costs to reflect the tax rate decrease and the elimination of the income tax allowance for MLPs. An interstate natural gas pipeline organized as a non-MLP partnership would be able to either eliminate the income tax allowance included in its current rates or justify why it should continue to receive an income tax allowance; non-MLP partnership pipelines must still reduce maximum tax rates to reflect the decrease in the federal income tax rates applicable to partners under the Tax Cuts and Jobs Act. FERC states that because the effect of the two tax issues is to reduce a pipeline’s maximum recourse rate, the NGA section 4 proceeding generally would not affect negotiated rates, although it may affect discounted rates.21

The NGA section 4 rate proceedings would proceed on a single-issue basis, and FERC would dismiss without prejudice issues raised outside the scope of the two tax issues. The voluntary NGA section 4 procedure would not be available to a pipeline that currently has a rate case pending before FERC in which the change in the federal corporate income tax rate can be reflected. Under the proposed voluntary filing section, filings would be made no later than the filing date of the pipeline’s FERC Form No. 501-G.

In the NOPR, FERC offers interstate natural gas pipelines three alternatives to the voluntary NGA section 4 filing. The first is to commit to file either a prepackaged uncontested settlement, or, if that is not possible, a general NGA section 4 rate case if the pipeline believes that using the limited NGA section 4 option will not result in a just and reasonable rate. FERC states that it will not initiate NGA section 5 investigation of a pipeline’s rate prior to December 31, 2018, if the pipeline commits to doing so by that date.

The second alternative is for the pipeline to file a statement explaining why an adjustment to its rates is not needed. For example, the pipeline may argue that it is currently under-recovering its overall cost of service or that it is under a rate change moratorium pursuant to a settlement.

Under the proposed third alternative, a pipeline may choose to take no action other than filing FERC Form No. 501-G. In that case, FERC proposes to notice the filing for interventions and protests, and consider in that proceeding whether to initiate an investigation under NGA section 5.

(c) NGPA Section 311 and Hinshaw Pipelines

FERC proposes to require NGPA section 311 and Hinshaw pipelines to modify their rates for interstate service if they change their rates for intrastate service to reflect the Tax Cuts and Jobs Act. That is, if an intrastate pipeline’s rates on file with its state regulatory agency are reduced to reflect the decrease in income tax rates under the Tax Cuts and Jobs Act, the pipeline would be required to file a new rate election within 30 days after the reduced intrastate rate becomes effective.

3. Electric Transmission: Orders to Show Cause22

FERC has issued two show cause orders pursuant to section 206 of the Federal Power Act directing specific utilities to either propose revisions to their formula rates under their tariffs to reflect the Tax Cuts and Jobs Act and describe the methodology used for making the revisions, or to show cause why they should not be required to do so. One show cause order is directed to named transmission utilities with stated rates, and the other to transmission utilities with formula rates in which the federal income tax rate is a fixed line item. No order was directed toward utilities with formula rates that have annually adjusted inputs, because the tax cut will be reflected in their transmission revenue requirements.

4. Notice of Inquiry on Tax Cut Effect on ADIT and Bonus Depreciation for Public Utilities and Pipelines23

In the NOI, FERC requests comments on ADIT and bonus depreciation treatment in light of the Tax Cuts and Jobs Act. The NOI also includes a catch-all comment request regarding the reduction in the federal corporate income tax rate.

FERC explains that ADIT balances are accumulated on public utilities’, interstate natural gas pipelines’, and oil pipelines’ books and records and arise from differing methods of computing taxable income for IRS reporting and under the Uniform System of Accounts. With the federal income tax cut, some of the ADIT liability already collected from customers will exceed what is due to the IRS and must be returned to the customers in their rates. Under existing FERC regulations,24 public utilities, interstate natural gas pipelines, and oil pipelines must adjust their ADIT assets and liabilities as a result of the change in tax rates in the period that the change is enacted.25 Among other ADIT-specific comment requests, FERC seeks comments on the effect on ADIT of the elimination of the income tax allowance for MLPs and “to the extent the income tax allowance is eliminated for other non-MLP pass-through entities.”26

FERC also requests comments on the effect of the bonus depreciation change under the Tax Cuts and Jobs Act, and on whether it should act to address bonus depreciation-related issues.

Comments in response to the NOI are due in Docket No. RP18-12-000 within 60 days after the publication of the NOI in the Federal Register. As of the date of this memorandum, the NOI has not yet been published in the Federal Register.


1 Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017) (“Tax Cuts and Jobs Act”).

2 United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016) (“United Airlines”).

3 United Airlines at 127.

4 SFPP, L.P., Opinion No. 511-C, 162 FERC ¶ 61,228 (2018) (“Remand Order”).

5 Remand Order at P 28 n.64. See also id. at P 22 n.42.

6 487 F.3d 945 (D.C. Cir. 2007).

7 Remand Order at P 28 n 64.

8 Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs, 162 FERC ¶ 61,227 at P 3 (2018) (“Revised Policy Statement”) (Docket No. PL17-1-000).

9 Id. at P 46.

10 Policy Statement on Income Tax Allowances, 111 FERC ¶ 61,139 (2005).

11 Revised Policy Statement at P 3.

12 Id. at P 8.

13 As of the date of this memorandum, the Revised Policy Statement has not yet been published in the Federal Register.

14 Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate, 162 FERC ¶ 61,226 (2018) (“NOPR”).

15 NOPR at P 4.

16 As of the date of this memorandum, the NOPR has not yet been published in the Federal Register.

17 18 C.F.R. § 260.402.

18 In the NOPR, pipelines are divided into four groups: Group I pipelines would need to make the filing within 28 days from the effective date of the proposed regulation; Group II pipelines would need to file within 56 days of the effective date; Group III pipelines would need to make the filing within 84 days of the regulation’s effective date; and Group IV pipelines would have 112 days from the effective date to file FERC Form No. 501-G.

19 18 C.F.R. 154.404.

20 FERC cannot order an NGA section 4 rate case filing.

21 NOPR at PP 45-46.

22 Alcoa Power Generating Inc.–Long Sault Division et al, 162 FERC ¶ 61,224 (2018) (requiring filings of transmission utilities with stated rates); AEP Appalachian Transmission Co. et al., 162 FERC ¶ 61,225 (2015) (requiring filings of transmission utilities with fixed line item federal income taxes in formula rates).

23 Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on Commission-Jurisdictional Rates, 162 FERC ¶ 61,223 (2018) (“NOI”).

24 18 C.F.R. §§ 35.24, 154.305 (2017).

25 NOI at P 13.

26 Id. at P 25.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions