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FERC Takes Dramatic Action to Reduce Pipeline Rates

At its open meeting on March 15, 2018, the Federal Energy Regulatory Commission issued a proposed rule and a revised policy statement that will require substantial rate reductions for natural gas and oil pipelines.

Two major catalysts drove the Commission’s actions: (1) the reduction of the corporate income tax rate to 21% from 35% by the Tax Cuts and Jobs Act of 2017 prompted the Commission to adopt procedures for natural gas pipelines to reduce rates to reflect the tax cut; and (2) a 2016 court decision directed the Commission to reassess whether Master Limited Partnerships (MLPs) and other pass-through entities are double recovering income taxes under the Commission’s current ratemaking methods.

Natural gas pipelines and oil pipelines will be affected differently by the Commission’s initiatives based on differences in the applicable regulatory schemes. The Commission took action to reflect the impact of the tax cut on natural gas pipeline rates in a rulemaking in Docket No. RM18-11-000, while taking industry-wide action to address the MLP tax issue in existing Docket No. PL17-1-000.

The Commission’s major actions were:

  • MLP tax issue: In response to the Court’s remand in United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016), the Commission ruled that MLPs will no longer be allowed to recover an income tax allowance in the cost of service. Regarding other types of partnerships, the Commission explained 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.
  • New Form No. 501-G: As proposed in the rulemaking, natural gas pipelines will be required to file a new, one-time report, Form No. 501-G, which is an abbreviated cost and revenue study to show the impact of the tax cut and the Commission’s revised MLP tax allowance policy on the pipeline’s cost of service.
  • In addition to filing new Form 501-G, under the proposed rule, natural gas pipelines will have four options:
    1. Each pipeline can make a limited Natural Gas Act (NGA) section 4 filing to reduce its rates by the percentage reduction in its cost of service shown in its Form No. 501-G.
    2. Each pipeline may commit to file either a prepackaged uncontested rate settlement or a general NGA section 4 rate case if it believes that using the limited section 4 option will not result in a just and reasonable rate. If the pipeline commits to do this by December 31, 2018, FERC will not initiate a section 5 investigation of the pipeline’s rates prior to that date.
    3. Each pipeline that does not believe it has to change its rates may choose to file a statement explaining why.
    4. Finally, a pipeline may file the new Form 501-G without taking any other action. At that point, FERC would consider whether to initiate a section 5 investigation.
  • Impact of tax cut on oil pipelines: The Commission said it will address tax changes for the oil pipelines it regulates in the 2020 five-year review of the oil pipeline index level. However, the Commission also stated that, beginning with FERC Form 6 filings due April 18, 2018, oil pipelines must report on page 700 an income tax allowance reflecting the reduced income tax rate established by the Tax Cut and Jobs Act, as well as the Commission’s revised MLP tax policy set forth in Docket No. PL1-17-000.