Background

A growing number of publicly traded partnerships own interstate energy pipelines, which are regulated by the Federal Energy Regulatory Commission (FERC). Both the construction of new pipeline systems and the rates charged to carry oil, gas, and petroleum products on the pipelines are subject to FERC approval.

The growing number of MLPs among the companies owning energy pipelines has raised some issues, particularly with regard to the formula used to determine appropriate rates. To determine whether proposed rates are appropriate and fair, FERC uses “cost of service” ratemaking, under which pipeline rates are supposed to cover the pipeline operator’s costs, including taxes, and provide a reasonable return on equity (ROE) to investors.

In determining the appropriate ROE, FERC uses a “discounted cash flow” (DCF) approach, under which the expected ROE for a pipeline company is equal to the dividend yield plus the expected rate of growth in earnings per share. The expected rate of growth is based on both analysts’ short-term expectations for growth in the company’s stock and economists’ long-term expectations for growth in the economy as a whole.

Several issues have arisen with regard to ownership of pipelines by MLPs. These include whether MLPs should be able to include an income tax allowance (ITA) in determining their cost of service, whether MLPs should be included in the proxy groups used to set rates for pipeline companies which do not have their own publicly traded equity, and the expected rate of growth that should be used for MLPs in the DCF calculation.

MLPA spent significant time advocating for MLPs on these issues in the early 2000s.  For over a decade they appeared to be settled, with FERC following a policy adopted in 2005 and upheld by a federal appeals court in the 2007 Exxon Mobil case, of permitting an ITA for all entities owning public utility assets providing they can show that an entity or individual has an actual or potential income tax liability to be paid on that income from those assets.

2016-2018 Developments

On July 1, 2016 the same panel that had decided Exxon Mobil, while not overturning that decision, ruled in United Airlines v. FERC that FERC had not adequately demonstrated that its income tax allowance policy did not provide a double-recovery of taxes to partnership investors and remanded the case to FERC.  On December 15, 2016, FERC issued a Notice of Inquiry seeking comments on how to address any double recovery resulting from its current ITA and rate of return policies.  MLPA submitted comments in response to the Notice on March 8, 2017 and reply comments on April 7, 2017.

On March 15, 2018, FERC issued announced that it will no longer allow MLP interstate natural gas and oil pipelines to recover an income tax allowance in cost of service rates, and that the 2005 Policy Statement for Recovery of Income Tax Costs would be revised accordingly.  On April 13, 2018, MLPA filed a request for clarification of the Revised Policy Statement arguing that FERC’s exclusion of all MLPs from the ITA based on the history of a single MLP, despite the wide variety in MLP structures, was arbitrary and capricious and did not constitute reasoned decision making.  Similar requests were filed by a number of MLPs and other interested parties.

On July 18, 2018 FERC issued an order which dismissed the requests for clarification and rehearing, clarified the treatment of previously accumulated Accumulated Deferred Income Taxes (ADIT), and appeared to open the ITA door a crack for some MLPs.  In response, MLPA and other stakeholders have filed new requests for clarification or rehearing.

2016-2018 Resources

Earlier Resources