Report of the Oil and Liquids Committee

Energy Law Journal, July 1, 2019 | Go to article overview

Report of the Oil and Liquids Committee


This report summarizes oil and liquids developments of particular interest to energy law practitioners that occurred from July 1, 2018 to June 30, 2019.·

I. Significant FERC Rulemakings and Administrative Orders; Related Court Opinions

A.Tax Issues

On December 15, 2016, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) following the decision of the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) in United Airlines, Inc. v. FERC (United Airlines).1 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 it permitted SFPP, L.P. (SFPP), a master limited partnership (MLP), to recover both an income tax allowance and a return on equity (ROE), determined pursuant to the discounted cash flow (DCF) methodology.2 As background, under the Commission's 2005 Income Tax Policy statement, MLPs, which are passed through tax entities paying no taxes themselves, were able to receive an income tax allowance and a ROE in their cost-ofservice rates calculated pursuant to the DCF methodology.

In response to the D.C. Circuit Remand and the NOI, the Commission revised the 2005 income Tax Policy statement (Revised Policy statement (RPs)) and will no longer permit MLPs to recover an income tax allowance in their cost of service.3 Citing the United Airlines decision, the Commission found the DCF methodology "determines the pre-tax investor return required to attract investment." Given that the return is a pre-tax return, permitting MLP's to recover both an income tax allowance for the partner's tax costs and a discounted cash flow return on equity leads to a double recovery of income tax costs.4 The Commission clarified that the RPs would not apply to non-MLP partnerships and stated that potential double recovery for such entities would be addressed in subsequent proceedings.5 In addition, the RPS instructs oil pipelines organized as MLPs to reflect the Commission's elimination of the income tax allowance in their Form No. 6 page 700 reporting.

in contrast to natural gas pipelines, the overwhelming majority of oil pipelines set their tariff rates using indexing, not cost-of-service ratemaking.6 Under indexing, oil pipelines may adjust their rates annually so long as those rates remain at or below the applicable ceiling levels published by FERC.7 The ceiling levels change every July 1 based on an index that tracks industry-wide cost changes.8 Currently, the index is based upon the Producer's Price Index for Finished Goods, plus 1.23.9 The index will be reassessed in 2020 based upon industry-wide oil pipeline cost changes between 2014 and 2019.10 The industry-wide data, filed in the latter years of the 2014-2019 period, should reflect the Commission's post-United Airlines policy changes as well as the Tax Cuts and Jobs Act of 2017 (TCJA).11 Beginning with the 2018 Form No. 6, oil pipelines were required to report in page 700 data an income tax allowance consistent with United Airlines and the Commission's subsequent holdings denying an MLP an income tax allowance.12 Based upon this data, the Commission will incorporate the effects of the post-United Airlines ' policy changes (as well as the TCJA) on industry-wide oil pipeline costs in the 2020 five-year review of the oil pipeline index level.13 The Commission stated that this will ensure that the industry-wide reduced costs are incorporated on an industry-wide basis as part of the index review. To the extent the Commission issues subsequent orders affecting the income tax policy for other partnership or pass-through business forms, oil pipelines will similarly reflect those policy changes on Form No. 6, page 700.

In addition, the Commission emphasized that the post-United Airlines' policy changes (as well as TCJA) will be reflected in initial oil and gas pipeline costof-service rates and cost-of-service rate changes on a going-forward basis under the Commission's existing ratemaking policies, including cost-of-service rate proceedings resulting from shipper-initiated complaints. …

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