Inquiry Regarding The Commission's Policy For Recovery of Income Tax Costs, 031518 FERC, PL17-1-000

Docket Nº:PL17-1-000
Party Name:Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs
Judge Panel:Before Commissioners: Kevin J. McIntyre, Chairman; Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard Glick. Nathaniel J. Davis, Sr., Deputy Secretary.
Case Date:March 15, 2018
Court:Federal Energy Regulatory Commission
 
FREE EXCERPT

162 FERC ¶ 61, 227

Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs

No. PL17-1-000

United States of America, Federal Energy Regulatory Commission

March 15, 2018

Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs

AGENCY: Federal Energy Regulatory Commission.

ACTION: Revised Policy Statement on Treatment of Income Taxes

SUMMARY: Following the decision of the U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc., et al. v. Federal Energy Regulatory Commission, 827 F.3d 122 (D.C. Cir. 2016), the Commission issued a notice of inquiry (NOI) seeking comment regarding how to address any double recovery resulting from the Commission's current income tax allowance and rate of return policies. The Commission finds that an impermissible double recovery results from granting a Master Limited Partnership (MLP) pipeline both an income tax allowance and a return on equity pursuant to the discounted cash flow methodology. Accordingly, the Commission revises its policy and will no longer permit an MLP to recover an income tax allowance in its cost of service. While all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the Commission will address the application of United Airlines to non-MLP partnership forms as those issues arise in subsequent proceedings.

EFFECTIVE DATE: This Revised Policy Statement will become effective [date of publication in the Federal Register].

FOR FURTHER INFORMATION CONTACT:

Glenna Riley (Legal Information)

Office of the General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-8620

Glenna.Riley@ferc.gov

Andrew Knudsen (Legal Information)

Office of the General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-6527 Andrew.Knudsen@ferc.gov

James Sarikas (Technical Information)

Office of Energy Markets Regulation

Federal Energy Regulatory Commission

888 First Street, NE

Washington, DC 20426

(202) 502-6831 James.Sarikas@ferc.gov

Scott Everngam (Technical Information)

Office of Energy Markets Regulation

Federal Energy Regulatory Commission

888 First Street, NE

Washington, DC 20426

(202) 502-6614 Scott.Everngam@ferc.gov

SUPPLEMENTARY INFORMATION:

Before Commissioners: Kevin J. McIntyre, Chairman; Cheryl A. LaFleur, Neil Chatterjee, Robert F. Powelson, and Richard Glick.

REVISED POLICY STATEMENT ON TREATMENT OF INCOME TAXES

(Issued March 15, 2018) 1. On December 15, 2016, the Commission issued a Notice of Inquiry (NOI)1 following the decision of the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) in United Airlines.2 In that decision, the D.C. Circuit held that the Commission failed to demonstrate that there was no double recovery of income tax costs when permitting SFPP, L.P. (SFPP), a master limited partnership (MLP), 3 to recover both an income tax allowance and a return on equity (ROE) determined pursuant to the discounted cash flow (DCF) methodology. The NOI sought comments regarding the double-recovery concern.

2. As explained below, the Commission revises the 2005 Income Tax Policy Statement4and will no longer permit MLPs to recover an income tax allowance in their cost of service. To the extent the comments in this proceeding raise arguments that an MLP pipeline should continue to receive an income tax allowance, those comments fail (a) to undermine the conclusion that a double recovery results from granting an MLP both an income tax allowance and a DCF ROE or (b) to justify preserving an income tax allowance notwithstanding such a double recovery. Consistent with this policy, the Commission is concurrently issuing a Remand Order5 denying SFPP an income tax allowance in response to United Airlines.

3. In addition, this record does not provide a basis for addressing the United Airlines double-recovery issue for the innumerable partnership and other pass-through business forms that are not MLPs like SFPP. While all partnerships seeking to recover an income tax allowance will need to address the double-recovery concern, the Commission will address the application of United Airlines to non-MLP partnership or other pass-through business forms as those issues arise in subsequent proceedings.

I. Background

4. Prior to United Airlines, the Commission's 2005 Income Tax Policy Statement allowed all partnership entities (including MLPs, such as SFPP) to recover an income tax allowance for the partners' tax costs much like a corporation receives an income tax allowance for its corporate income tax costs.6 The Commission explained that while a partnership itself does not pay taxes, the partners pay income taxes based upon the partnership income and these partner-level taxes could be imputed to the pipeline.75. Alongside this income tax policy, the Commission has used the DCF methodology to determine the rate of return regulated entities need to attract capital.8 Under the DCF methodology, the required rate of return is estimated to equal a corporate investor's current dividend yield (dividends divided by share price) plus the projected future growth rate of dividends, such that k = D/P + g.9 Similarly, for an MLP, the Commission uses the same formula, substituting unitholder distributions for dividends, unit price for share price, and using a lower long-term growth rate.10

6. In addressing SFPP's West Line rate case filed in 2008, the Commission applied its 2005 policy that allows a partnership to recover an income tax allowance.11 In United Airlines, the D.C. Circuit remanded the Commission's application of this policy, holding that the Commission failed to adequately explain why a double recovery did not result from allowing SFPP to recover both an income tax allowance and a ROE determined by the Commission's DCF methodology.12 Accordingly, the D.C. Circuit remanded the decisions to the Commission to consider "mechanisms for which the Commission can demonstrate that there is no double recovery."13

7. In response, the Commission issued the December 2016 NOI, soliciting comments on how to resolve any double recovery resulting from the 2005 Income Tax Policy Statement and rate of return policies. The Commission received 24 comments and 19 reply comments from customer, pipeline, and electric utility interests.

II. Discussion

8. This Revised Policy Statement explains the Commission's conclusion following United Airlines that an impermissible double recovery results from granting an MLP pipeline both an income tax allowance and a DCF ROE. Accordingly, the Commission will no longer permit MLPs to recover an income tax allowance in their cost of service. Therefore, the Commission instructs oil pipelines organized as MLPs to reflect the Commission's elimination of the MLP income tax allowance in their Form No. 6, page 700 reporting. Based upon this page 700 data, the Commission will incorporate the effects of this Revised Policy on industry-wide oil pipeline costs in the 2020 five-year review of the oil pipeline index level. The Commission is also concurrently issuing a Notice of Proposed Rulemaking that addresses the effects of this Revised Policy on the rates of interstate natural gas pipelines organized as MLPs.14 For those partnerships that are not MLPs, the Commission will address such matters in subsequent proceedings.

A. An Impermissible Double Recovery Results from Granting an MLP Pipeline Both an Income Tax Allowance and a DCF ROE.

9. While some of the comments in this proceeding argue that no double recovery results from granting an income tax allowance to an MLP, none of these arguments are persuasive. As the Commission explains in the Remand Order, a double recovery results from granting an MLP an income tax allowance and a DCF ROE: • MLPs and similar pass-through entities do not incur income taxes at the entity level.15 Instead, the partners are individually responsible for paying taxes on their allocated share of the partnership's taxable income.[16]

• The DCF methodology estimates the returns a regulated entity must provide to investors in order to attract capital.17

• To attract capital, entities in the market must provide investors a pre-tax return, i.e., a return that covers investor-level taxes and leaves sufficient remaining income to earn investors' required after-tax return.18 In other words, because investors must pay taxes from any earnings received from the partnership, the DCF return must be sufficient both to cover the investor's tax costs and to provide the investor a...

To continue reading

FREE SIGN UP