On July 1, the US Court of Appeals for the District of Columbia Circuit issued an opinion invalidating an oil pipeline partnership’s tax allowance that the Federal Energy Regulatory Commission (FERC) had approved as consistent with established FERC policy.
In United Airlines v. FERC, the DC Circuit determined that FERC “failed to demonstrate that there is no double-recovery of taxes for partnership, as opposed to corporate, pipelines.” The court, in turn, ruled that FERC’s policy as applied in the case was arbitrary and capricious in violation of the Administrative Procedure Act. The court vacated that portion of the FERC decision and remanded for further proceedings.
The DC Circuit’s decision and its underlying analysis threaten to upset long-established FERC-permitted rate recovery of tax expense by pass-through entities and may create far-reaching rate implications for affected interstate pipelines and for electric transmission providers that have opted to be treated as partnerships for tax purposes.