Academic journal article Energy Law Journal

Report of the Oil and Liquids Committee

Academic journal article Energy Law Journal

Report of the Oil and Liquids Committee

Article excerpt

I. Significant FERC Administrative Orders

A.Notice of Proposed Rulemaking

1. Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate

On March 15, 2018, the Federal Energy Regulatory Commission (FERC or Commission) issued a Notice of Proposed Rulemaking (NOPR), seeking comments regarding a process that would determine which interstate natural gas pipelines are "collecting unjust and unreasonable rates" as a result of the corporate income tax reductions authorized by the Tax Cuts and Jobs Act (TCJA).1 The FERC concurrently released a supporting Revised Policy Statement on Treatment of Income Taxes (Revised Policy Statement) and an Order on Remand, both in response to United Airlines, Inc. v. FERC, and in all of which addressed the double-recovery concern if a pipeline is claiming an income tax allowance.2

Among other things, the TCJA reduced the federal corporate income tax rate from 35% to 21% when it took effect in January, resulting in a reduction in accumulated deferred income taxes (ADIT) on the books of pipelines.3 To remain in compliance with normalization, pipelines must flow the excess ADIT, which is no longer payable to the IRS, back to ratepayers using the average rate assumption method.4

Together, the TCJA and policy directive emerging from the United Airlines decision prompted the Commission to propose a process requiring interstate natural gas pipelines under the Natural Gas Act (NGA) to submit an informational filing with the Commission.5 The Commission intends for this filing, Form No. 501-G, "to collect financial information to evaluate the impact of the [TCJA] and the Revised Policy Statement on interstate natural gas pipelines' revenue requirement."6

In addition to requiring Form No. 501-G, the Commission proposed four options for each interstate natural gas pipeline to address the changes to the pipeline's recovery of tax costs:

(1) file a limited NGA section 4 filing to reduce the pipeline's rates to reflect the decrease in the federal corporate income tax rate pursuant to the TCJA and the elimination of the income tax allowance for [partnerships] consistent with the Revised Policy Statement, (2) make a commitment to file a general NGA section 4 rate case in the near future, (3) file a statement explaining why an adjustment to its rates is not needed, or (4) take no action other than filing [Form No. 501 -G] .7

If a pipeline opts for option (3) or (4), the Commission will consider, based on the information provided in Form No. 501-G, "comments by interested parties, whether to issue an order to show cause under NGA section 5 requiring the pipeline either to reduce its rates to reflect the income tax reduction or explain why it should not be required to do so."8 The Commission proposed to assign to each pipeline's Form No. 501-G filing an RP docket number and to notice the filing, which would allow for interventions, comments, and protests.9

Most of the data needed to complete Form No. 501-G can be taken from a pipeline's 2017 FERC Form Nos. 2 or 2-1A.10 The FERC proposed to require each pipeline's Form No. 501-G be completed using an indicative return on equity of 10.55%.n Form No. 501-G also outlined additional assumptions for each filing party to use, such as capital structure.12

Depending on where a new project is in development, the FERC intends to address initial rates in a variety of ways to ensure rates are appropriate.13 Furthermore, the FERC proposed that intrastate pipelines with interstate service pursuant to section 311 of the Natural Gas Policy Act of 1978 (NGPA) and Hinshaw pipelines would not be required to file a Form No. 501-G.14 Instead, the FERC intends to evaluate whether these pipelines were charging fair and equitable rates during its 5-year rate review/election, or through a new rate election triggered by a change in state-derived rates.15 However, for those NGPA section 311 and Hinshaw pipelines with Commission-established interstate rates, the FERC proposed to require all to file a new rate election for interstate service if and when they reduce their intrastate service rates to reflect the lowered corporate income tax. …

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