FERC Decision on MLPs Not Expected to Have Major Impact

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Pipeline companies don’t expect much of an impact from a March 15 U.S. federal government decision related to income taxes. The Federal Energy Regulatory Commission (FERC) responded to a federal court remand by stating it no longer will allow master limited partnership (MLP) interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates.

The U.S. Court of Appeals for the District of Columbia Circuit in United Airlines Inc. v. FERC held that FERC failed to demonstrate there was no double recovery of income tax costs when permitting SFPP LP, an MLP, to recover both an income tax allowance and a return on equity determined by the discounted cash flow methodology.

FERC acted in response both to the court remand and comments filed in response to an inquiry issued after the court ruling. FERC will now revise its 2005 Policy Statement for Recovery of Income Tax Costs so that it no longer will allow MLPs to recover an income tax allowance in the cost of service.

The revised policy statement explains that, while all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the application of the United Airlines court case to non-MLP partnerships will be addressed as those issues arise in subsequent proceedings.

A number of pipeline companies have responded to the FERC decision, stating the decision would not have a significant impact on their business.

Dallas-based Energy Transfer Partners released a statement on March 15 that the FERC policy revisions “are not expected to have a material impact to [the company’s]earnings and cash flow.” The company added that its rates “are set pursuant to negotiated rate arrangements or rate settlements that it believes would not be subject to adjustment or would be limited in terms of adjustment.” In addition, many of its current transportation services are provided at discounted rates

Likewise, Houston-based Kinder Morgan responded with a March 15 statement, saying the FERC decisions are “not expected to be material to [Kinder Morgan’s] distributable cash flow.” However, as the proposed rulemaking is not yet final, the company said it would provide its input during the public comment process.

“The competitive environment in which interstate natural gas transmission companies operate is vastly different from the historic ‘franchised utility service territory’ that is still prevalent for traditional utilities,” said the Kinder Morgan statement. “As a result, many of our rates are set pursuant to negotiated rate arrangements that we believe should not be subject to adjustment due to changes in tax law.”

Calgary-based TransCanada stated that its rates were also negotiated on an individual basis, and that it planned to participate in FERC’s public comment process.

“Approximately 50 percent of our U.S. Natural Gas Pipelines 2018 revenues are derived from negotiated or discounted tariffs and therefore would not be materially impacted by FERC’s actions,” said TransCanada March 19 statement. “This percentage is expected to increase to approximately 65 percent in 2019 as our growth projects are placed into service. As part of the modernization settlement on Columbia Gas Transmission, we recently filed for, and FERC approved, implementation of a rate reduction due to the corporate tax rate changes on that system.”

Once the public comment period is complete, FERC is expected to issue a final order sometime in the summer or early fall 2018.

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