Electricity Markets

FERC takes action tied to tax law impact on gas pipeline rates

The Federal Energy Regulatory Commission on July 18 took final action to facilitate the pass through of the tax reductions provided by the Tax Cuts and Jobs Act signed into law by President Trump on Dec. 22, 2017 and ensure natural gas pipeline rates remain just and reasonable.

FERC’s final rule adopts, with some changes, a proposal from March, in which the Commission proposed to require interstate gas pipelines to file a one-time report, called FERC Form No. 501-G, designed to provide a rough estimate of a pipeline’s return on equity before and after the new tax law and changes to the Commission’s income tax allowance policies.  That information, FERC said, would allow it to determine which pipelines had rates that were too high as a result of the tax changes.

Along with filing the one-time report, the final rule provides interstate natural gas pipelines with several options to address changes to the pipeline’s revenue requirements as a result of the tax reductions.

For example, one option allows interstate natural gas pipelines to make a limited filing under section 4 of the Natural Gas Act (NGA) to reduce its rates to reflect the reduced tax rates. For any pipeline doing so, FERC would guarantee a three-year moratorium on NGA section 5 rate investigations if the pipeline’s FERC Form 501-G shows the pipeline’s estimated ROE as 12 percent or less.

The other three options are: (1) commit to file either a prepackaged uncontested rate settlement or a general NGA section 4 rate case. If the pipeline commits to do this by December 31, 2018, FERC will not initiate a section 5 investigation of its rates before that date; (2) Explain why no rate change is needed; or (3) Take no further action.

Based on what option a pipeline selects, and the contents of the pipeline’s FERC 501-G, FERC would consider whether to initiate an investigation of any pipeline’s rates if it appears those rates may be unjust and unreasonable.

The Commission said that while the final rule maintains the requirement to file the FERC 501-G, it also makes adjustments to the proposed form, including automatically eliminating the accumulated deferred income tax (ADIT) from a pipeline’s cost of service when the form enters a federal and state income tax of zero for pipelines that are non-tax paying entities.

FERC said that this adjustment is consistent with an order on rehearing of the Commission’s revised policy statement in Docket PL17-1-001 that was issued concurrently with the final rule.  In that policy statement, FERC announced that, in response to a federal court decision, it generally would no longer permit gas pipelines organized as master limited partnerships (MLPs) to recover an income tax allowance in their cost-based rates.

The final rule also adopts, with clarifying modifications, the procedures proposed for Natural Gas Policy Act section 311 and Hinshaw pipelines to reflect in their jurisdictional rates any rate reductions from the new tax law and changes to the Commission’s income tax allowance policies.

The final rule takes effect 45 days after publication in the Federal Register.

Glick, LaFleur offer joint concurrence

In response to the companion orders, FERC Commissioners Richard Glick and Cheryl LaFleur issued a joint concurrence on July 18.

The commissioners said they believe that the final rule “sharply highlights the need for a legislative fix” to the Commission’s lack of refund authority in section 5 of the NGA.

Glick and LaFleur said that under current law, the Commission’s ability to protect natural gas customers against unjust and unreasonable rates is compromised by its inability to set a refund effective date, as it is statutorily authorized to do for electric utility rate investigations under the Federal Power Act.

“We believe that current law provides a perverse incentive for protracted litigation and creates an asymmetry of leverage between pipelines seeking a rate increase under Section 4 of the NGA and complainants or the Commission under Section 5,” they wrote.

With respect to the final rule, “we believe that our lack of refund authority affected the balance the Commission was able to strike in today’s order.”

Glick and LaFleur said that it is “a clear tenet of cost-of-service ratemaking that tax savings should flow through to ratepayers, and the Commission is rightly pursuing that goal in the final rule.”

But the commissioners said that because FERC’s Section 5 “stick” under the NGA “cannot effectively deliver timely relief to customers, the final rule proffers a series of ‘carrots’ in the hope that pipelines will exercise their Section 4 filing rights to quickly flow those tax benefits back to their customers. While we think the balance struck in the final rule is reasonable in light of our limited refund authority, we believe that the Commission would be better equipped to protect customers if the law were amended.”

The commissioners also weighed in on FERC’s ADIT guidance. Among other things, they believe that the arguments for applying previously-accrued ADIT balances to reduce future rate base where a tax allowance is eliminated are compelling.

At the same time, they said that based on the arguments presented in the docket regarding the Commission’s authority to mandate those reductions on a generic basis, “it appears that such a directive would run afoul of the rule against retroactive ratemaking.”

Glick and LaFleur pointed out that the order “is simply guidance, and to the extent that customers or shippers in individual proceedings argue that such a reduction is legal in specific cases, we will consider those arguments on the appropriate record.”