FERC Chairman Kevin McIntyre acknowledged that state regulators pushed for tax relief when he met with them recently, but he did not provide any timeframe for FERC to act on pipeline and utility rates to reflect the lower corporate tax rate authorized by Congress.
Addressing the media after FERC’s February 15 meeting, McIntyre said FERC may address tax rate issues through individual cases or a generic proceeding, or a combination of those two approaches.
Speculation about what steps will be taken was the subject of plenty of discussion at the National Association of Regulatory Utility Commissioners’ (NARUC) winter policy summit, where state regulators, municipal utilities and others clamored for methods to provide tax savings to pipeline customers and utility ratepayers in an appropriate way.
“To their credit, state officials are not at all bashful in pushing for consumer relief,” McIntyre said, noting that he had his ear bent by state commissioners at the NARUC meeting, and that state attorneys general have also sought rate reductions stemming from the Tax Cuts and Jobs Act of 2017. Speaking about the lower corporate tax rate in the new law, McIntyre said “this should and must result in savings to consumers, and we are looking for the appropriate steps that we can take to make that happen.”
But as he told NARUC members, “our system of ratemaking is complex” in that the pipeline rates in effect are not of a single type that allows a simple adjustment to a tax component. Many pipelines have black box settlements that cannot be modified easily, McIntyre noted.
Similarly, transmission rates paid by electric utilities may seem like an easy calculation since many transmission entities have formula transmission rates. Yet “there too, it is not a simple cookie cutter matter” because some formulas have a stated numeric tax rate and others have a placeholder to be addressed, so FERC staff is continuing to examine the issues, he said.
His response follows pleadings from industry trade groups about the best way to provide tax relief to consumers and comments at NARUC that laid out options for regulators. Those options for pipelines include launching Section 5 rate proceedings under the Natural Gas Act, seeking rate adjustments under NGA Section 4, or some type of hybrid approach, said Gary Kruse, director of pipeline markets at LawIQ.
A hybrid approach might be reasonable in that FERC could issue an order to show cause and require pipelines to provide data on rates to inform any subsequent step, such as a proposed rulemaking or a generic proceeding, Kruse said. Such a move would allow FERC to prioritize NGA Section 5 filings for those pipelines willing to go through that process, he told a staff subcommittee at the NARUC meeting.
Among the issues to consider is that NGA Section 5 rate cases provide prospective relief only, and they do not always lead to a rate reduction simply because one component of a pipeline’s cost is reduced, because that alone does not prove that the overall tariff rate is unjust and unreasonable, Kruse said. NGA Section 5 proceedings look at all rate elements, and that could result in a rate increase for some pipelines, even with the lower corporate tax rate included in the calculations.
FERC also has limited staff resources to address more than 60 rate cases under NGA Section 5, which could lead to delays in litigation, he added. So, for entities seeking NGA Section 5 proceedings to provide rate relief, that approach “could backfire,” he cautioned.
NGA Section 4 rate cases allow results to be applied retroactively, but they are voluntary and must be initiated by the pipelines, Kruse noted.
Another wrinkle is that many pipelines are collecting revenue through negotiated rates with shippers, and those negotiated rate agreements have provisions that no matter what happens to pipeline costs, the shipper will continue to pay the negotiated rate. So, for pipelines with a lot of negotiated rate deals, a tariff rate reduction due to the lower tax rate would have limited real world impact for shippers, Kruse said.
The last time there was a major tax change to be included in utility rates, in 1987, FERC allowed regulated entities to adjust their rates based on a formula. Even though the entities involved were mainly electric utilities under the Federal Power Act (FPA), the provisions of the FPA and NGA in terms of tax adjustments would be similar, Kruse noted. A proposed rulemaking essentially threatened to bring companies in for NGA Section 5 proceedings if they did not adjust their rates in accordance with the tax measure under NGA Section 4 on a voluntary basis. Kruse termed that move “a classic carrot and stick approach.”
The hybrid approach of seeking data first, would provide Commission staff with the information showing pipelines where a tax rate change would result in true benefits to consumers. “This would allow FERC to prioritize any [NGA] Section 5 proceeding and properly allocate its staff resources to achieve the biggest bang for FERC’s buck,” Kruse told the subcommittee.
That approach is somewhat similar to what a collection of trade groups sought in a recent petition (RP18-415) for FERC to initiate show cause proceedings under the NGA. The Natural Gas Supply Association, Process Gas Consumers Group, Independent Petroleum Association of America, American Public Gas Association, American Forest and Paper Association and numerous individual producers said FERC should require all interstate pipelines to prove that their rates are just and reasonable following passage of the tax law.
The Interstate Natural Gas Association of America (INGAA) countered that FERC should move cautiously and “avoid a one-size-fits-all approach” on the subject. A better step may be to allow each pipeline to act on their unique circumstances in individual proceedings, INGAA said.
For electric utilities, the tax law may result in reduced cash flow and be negative for their credit rating, according to Ryan Wobbrock, vice president and senior analyst at Moody’s Investors Service. Many utilities have deferred tax liabilities on their balance sheet to improve cash flow instead of paying taxes in cash on hand. With a lower corporate tax rate, they will be deferring less taxes and have less cash on hand, Wobbrock said at the February 13 general session of the NARUC meeting.
With that dynamic, Moody’s put 24 companies on a negative credit outlook, indicating that their credit rating will be downgraded slightly, which would mean higher borrowing costs. The implications are very company-specific, and Moody’s is not likely to issue a broad statement on the tax law changes for the industry as a whole, Wobbrock said.
“I think companies will seek to address these issues in regulatory proceedings,” he said.
By Tom Tiernan TTiernan@fosterreport.com
This article appears as published in The Foster Report No. 3186, issued February 16, 2018
Copyright © 2018 by Concentric Energy Publications, Inc. All rights reserved.