Academic journal article Energy Law Journal

Report of the Oil Pipeline Committee

Academic journal article Energy Law Journal

Report of the Oil Pipeline Committee

Article excerpt

This report summarizes decisions and policy developments that have occurred at the Federal Energy Regualatory Commission (FERC or Commission) and the U.S. Courts of Appeals in the area of oil pipeline regulation. The time frame covered by this report is January 1, 2004 to May 31, 2007.

I. OIL PIPELINE RATEMAKING AND TARIFF ISSUES

A. Treatment of Income Tax Allowance

Since the FERC issued its Policy Statement on Income Tax Allowances in June 2005,' it has issued several decisions addressing die issue of federal income tax allowance for pass-through entities in the gas, electric, and oil arenas. Moreover, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the FERC's authority to grant income tax allowances to pass through entities.2 The following provides a summary of these decisions and the FERC's application of the Policy Statement in individual cases.

1. Policy Statement

In BP West Coast Products, LLC v FERC,3 the D.C. Circuit vacated and remanded the FERC's orders in SFPP, L.P.,4 that SFPP should calculate its income tax allowance in accordance with Lakehead Pipe Line Co., L.P.,5 finding that the FERC had failed to support its policy permitting a partial income tax allowance. In response to BP West Coast, the FERC issued a Notice of Inquiry on December 2, 2004, inviting comments as to whether an income tax allowance is appropriate for public utilities structured as partnerships or other types of passthrough entities that pay no income taxes.6

Although BP West Coast involved an oil pipeline, the FERC's Notice of Inquiry sought comments from all sectors of the industries it regulates. The FERC received one round of comments, with parties' positions largely fitting into four broad categories. Parties advocated that the FERC: (1) provide an income tax allowance only to public utilities that are corporations subject to paying income taxes; (2) provide an income tax allowance to both corporations and partnerships; (3) provide an allowance for partnerships owned by corporations (Lakehead); or (4) eliminate the income tax allowance all-together for pass-through entities that pay no income taxes.7

The FERC issued die Policy Statement on May 4, 2005, permitting a utility organized as partnership or a limited liability corporation to include an income tax allowance in its cost-of-service, provided that the entity seeking such income tax allowance establishes that its partners or members have an actual or potential income tax obligation on the entity's public utility income. The FERC stated that the application of the Policy Statement and associated analysis of income tax liability would be addressed in individual rate proceedings. The FERC also expressly abandoned its Lakehead policy.8

The D.C. Circuit upheld the FERC's application of the Policy Statement, and denied shipper petitioners' petitions for review of the FERC's grant of an income tax allowance to SFPP, L.P.9 As more fully described below, on remand of BP West Coast, the FERC had permitted SFPP an income tax allowance, finding that a pass-through entity, such as SFPP, does not pay any income taxes at the entity level, but SFPP's owners pay income taxes on the income from the utility assets.10 In ExxonMobil, the D.C. Circuit stated that in the Policy Statement the FERC had cured the "principal defect" of the FERC's Lakehead income tax allowance policy because the FERC had removed the differentiation between individual and corporate partners and extended the allowance to all partners that incur an actual or potential liability for income taxes.11 According substantial deference to the FERC's expertise with respect to ratemaking and policy, die D.C. Circuit held that die FERC's decisions were not arbitrary or capricious.12

The D.C. Circuit relied on the FERC's determination that income taxes paid on the partners' distributive share of the pipeline's income were properly "attributable" to the regulated entity because the taxes must be paid whether or not partners receive cash distributions. …

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