FERC Examining Taxes in Pipeline/Utility Rates; McIntyre, Powelson Give Views

It is not clear what form any proceeding will take, but FERC Chairman Kevin McIntyre and Commissioner Robert Powelson expressed a desire to provide pipeline and utility customers with rate relief stemming from lower corporate taxes that took effect January 1.

The lower corporate taxes included in the Tax Cuts and Jobs Act of 2017 could result in sizeable rate reductions for pipeline and utility customers, of about $90/year, Powelson said January 18 at FERC’s open meeting.

A former state regulator from Pennsylvania, Powelson commended the numerous state commissions that are directing utilities in their jurisdictions to include lower corporate taxes in their rate designs. At the federal level, FERC needs to remain diligent in making sure that formula rates for pipelines and utilities reflect current corporate tax rates, he said.

“In my view, consumers should not be penalized by slow regulatory review processes that could put direct savings into their pockets,” Powelson said before the meeting agenda items were discussed.

McIntyre said he agrees with the sentiment expressed by Powelson, and that the Commission is examining the best way to address the issue. There is precedent on the issue, but “it has been quite some time” since the Commission last addressed corporate tax changes and the impact on pipeline and utility rates, McIntyre said during a media briefing after the meeting.

“We’re looking at what FERC did before and the current situation now” to consider what steps would be appropriate for the Commission, he said. Those possible steps have not been identified, and it could be a combination of a generic proceeding or directives in individual rate cases, he said.

In a series of letters sent to various natural gas pipelines, FERC is asking companies with expansion projects to explain how tax law changes will affect the cost of service and initial rates for the projects. The letter orders from FERC staff direct the pipelines to provide an adjusted cost of service and recalculated initial incremental rate for their projects.

The letter orders, some of which were issued January 16, ask the companies to provide supporting workpapers and formulas, seeking the information to be filed within three business days.

Among the changes in the broad tax reform law are new corporate tax rate of 21%, compared with the previous figure of 35%, bonus depreciation treatment for certain investments and benefits for pass-through entities such as master limited partnerships (MLPs) and limited liability companies.

While FERC considers the next move in examining the issue, “what is not negotiable is the legality of whatever steps we take,” as the Commission will figure out what the law requires and/or permits FERC to implement, McIntyre said.

He added that state authorities have not been bashful about reaching out to the Commission and urging FERC to allow corporate tax savings to be reflected in rates for consumers.

A group of 16 state consumer advocates and attorneys general sent a January 9 request to FERC, asking the Commission to open an investigation to adjust the revenue requirements for pipelines and electric utilities in line with the new tax law.  In separate motions made earlier in January, the head of the American Public Gas Association (APGA) urged FERC to ensure that all natural gas pipeline rates be adjusted to reflect the lower corporate tax rates in the law, while Gordon Gooch, an attorney who is active in oil pipeline rate proceedings, said oil pipelines should be required to make the same changes to their rates under the Interstate Commerce Act (ICA).[1]

Gooch filed his motion for partial summary judgment in the ongoing Notice of Inquiry (NOI) regarding pipelines’ recover of income tax costs (PL17-1).

More recently, oil pipeline and gas pipeline shipper groups filed in support of Gooch’s motion and sought generic action from the Commission in the NOI proceeding.

In a pair of January 17 filings, the Liquids Shippers Group (LSG) and the Natural Gas Indicated Shippers said that without immediate action from FERC, oil and gas pipelines will be charging rates that do not reflect their true costs and would be earning excessive returns.

The Indicated Shippers sought one modification for natural gas pipelines with rate case settlements pending before FERC under Sections 4 or 5 of the Natural Gas Act (NGA). Some of the producers in the group are participants in settlement cases that prohibit parties from advocating any change to the rates that were agreed to in the settlement. “Given these provisions, the Natural Gas Indicated Shippers are not advocating for any change to settlement rates, where a settlement rate moratorium prohibits such advocacy,” they said.

FERC has an obligation under the NGA to protect consumers, and allowing gas pipelines owned by pass-through entities to continue to assess rates that include income tax allowances that do not reflect current tax law enables pipelines to exploit consumers by charging for a tax liability that no longer exists, the shippers said.

The same point was made by LSG regarding FERC’s obligation under the ICA for oil pipeline customers. If MLPs do not immediately drop their rates to reflect their lower tax costs, then the savings will accrue to partners and owners in the form of excessive returns, in violation of the ICA, the group said.

The legal requirements for summary judgment are met, because the tax law changes are known and measurable and not subject to dispute, LSG said. “Immediate FERC action is required” to ensure pipelines to not keep windfall profits between now and when any lower tariff rates take effect, the group said.

Don Santa, president and CEO of the Interstate Natural Gas Association of America (INGAA) said the questions surrounding how FERC should proceed on these issues are not as simple as some suggest.

“Tax expenses are but one of the many components considered in developing interstate pipeline rates, and how to handle the changes resulting from recently-enacted tax legislation while ensuring that rates remain just and reasonable, as required by the Natural Gas Act, may differ based on the circumstances of each pipeline,” Santa said.

He noted that some pipelines have rate settlements that include moratoriums where a pipeline and shippers agreed to freeze rates for a specific period, and recourse rates, in which tax expenses are one component, are not applicable to customers that chose negotiated rates.

“Thus, INGAA hopes the Commission moves carefully in considering how to address this very complex issue,” Santa said.

By Tom Tiernan TTiernan@fosterreport.com

[1]   For a past story, see, Pipeline Customers, State Advocates Seek Rate Changes to Reflect New Tax Law, FR No. 3181, pp. 5-6.

 

 

This article appears as published in The Foster Report No. 3182, issued January 19, 2018

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