The Federal Energy Regulatory Commission recently issued two orders intended to alleviate concerns that jurisdictional natural gas pipelines may be over-recovering cost-of-service rates due to (1) a reduction of the federal corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act and (2) the DC Circuit Court of Appeals’ decision in United Airlines Inc. v. FERC, which found that FERC’s existing income tax allowance policy, when applied to pass-through entities such as master limited partnerships, creates a possibility of double recovery for income tax allowances under cost-of-service rates. The Commission will now require pipelines to submit informational filings identifying whether the benefits of federal tax reform have been passed on to ratepayers, and has also clarified its guidance that pass-through entity pipelines may eliminate the accumulated deferred income tax component from their rates when they exclude income tax allowances from their costs of service.
Specifically, on July 18, the Federal Energy Regulatory Commission (FERC) issued Order No. 849, which requires jurisdictional pipelines to submit a new informational filing, FERC Form No. 501-G, to identify whether the pipelines have appropriately flowed the benefits of the Tax Cuts and Jobs Act (TCJA) to ratepayers. Additionally, FERC contemporaneously issued an order on rehearing in Docket No. PL17-1, which affirmed and clarified its Revised Policy Statement on Treatment of Income Taxes (Revised Policy Statement). The Revised Policy Statement, which supersedes the Commission’s 2005 Income Tax Policy Statement, provided new guidance that FERC will generally not permit pass-through entity pipelines to recover income tax allowances in their cost-of-service rates. In its order on rehearing, FERC found that when a pass-through entity’s tax allowance is eliminated, it is appropriate to also eliminate the accumulated deferred income tax (ADIT) component from the pipeline’s cost of service.
Order No. 849 requires interstate natural gas pipelines to submit a new informational filing, FERC Form No. 501-G, to evaluate the impact of the TCJA on pipeline rates, but also allows pipelines to voluntarily file a limited Natural Gas Act (NGA) Section 4 rate reduction filing to flow benefits from the TCJA to pipeline customers.
The order also provides that Natural Gas Policy Act Section 311 and Hinshaw pipelines are not required to file the FERC Form No. 501-G or make any other immediate filing. FERC will instead continue to rely on its five-year rate review process for these pipelines as the primary mechanism to consider changes to reflect TCJA tax cost reductions.
FERC Form No. 501-G is substantively an abbreviated cost and revenue study that will allow FERC to identify (1) the percentage reduction in a pipeline’s cost of service resulting from the TCJA and the Revised Policy Statement, and (2) whether a pipeline’s return on equity (ROE) is appropriate. The final rule requires all interstate natural gas pipelines that filed a 2017 FERC Form No. 2 or 2-A to complete the form. FERC will use the information to determine if it should initiate an investigation under NGA Section 5 to assess whether benefits from the TCJA are appropriately flowed to ratepayers.
In addition to the FERC Form No. 501-G filing requirement, the final rule allows pipelines to file an addendum to the form, giving interstate natural gas pipelines an opportunity to either voluntarily reduce their rates in light of tax costs or explain why no action is needed. FERC explained that pipelines may choose from the following four options:
FERC explained that such information will provide it with additional clarity as to whether it is necessary under NGA Section 5 to take targeted actions against particular entities to reduce rates.
FERC emphasized that the option to file a limited rate reduction filing is purely voluntary; however, to incent such action, the final rule guarantees that, for a three-year moratorium period, FERC will not initiate a rate investigation of any pipeline that chooses to reduce rates under Option 1, so long as the filing proposes to reduce the pipeline’s ROE to 12% or less.
FERC’s final rule also allows pipelines organized as pass-through entities, including master limited partnership (MLP) pipelines, to submit filings to reduce their rates in response to the TCJA without addressing the income tax allowance issues identified in the Revised Policy Statement. FERC stated that the issue of whether a further rate reduction may be necessary for such pipelines may arise in a subsequent NGA Section 5 proceeding, subject to the three-year moratorium period, if applicable.
FERC Form No. 501-G also reflects the clarifications to the Revised Policy Statement that were adopted in its contemporaneously issued order on rehearing in Docket No. PL17-1. In the order on rehearing, FERC announced guidance establishing that if an MLP or other pass-through pipeline eliminates its income tax allowance from its cost of service, those entities may remove the ADIT component from their cost-of-service rates. And the guidance confirms that, going forward, pass-through pipelines will effectively be allowed to keep already accumulated ADIT balances after they eliminate income tax allowances from their rates.
In a joint concurring opinion, Commissioners Cheryl LaFleur and Richard Glick noted concerns that the rate benefits that customers and shippers would otherwise receive from the Revised Policy Statement may be significantly reduced by FERC’s guidance because previously accrued ADIT balances would remain with the pipelines. However, they acknowledged that FERC’s authority to rule otherwise would contravene the rule against retroactive ratemaking.
Pipelines must submit FERC Form No. 501-G in accordance with staggered dates identified in the form’s Implementation Guide. In the Implementation Guide, pipelines are separated into three groups. The due date for the first group will be 28 days from the effective date of the final rule, and the due date for each subsequent group will be 28 days from the previous group’s due date. However, pipelines may file their FERC Form No. 501-G reports earlier than the Implementation Guide’s dates. Order No. 849 is effective 45 days after it is published in the Federal Register.
Requests for rehearing of Order No. 849 are due by August 17, 2018.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
 See Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate, Order No. 849, 164 FERC ¶ 61,031 (July 18, 2018).
 Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs, 164 FERC ¶ 61,030 (July 18, 2018).