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Legal Update

FERC Issues Order No. 849 to Force Review of Pipeline Cost-Based Rates Following Tax Cuts and to Implement Its Policy on Income Tax Treatment

30 July 2018
Mayer Brown Legal Update

On July 18, 2018, the US Federal Energy Regulatory Commission (FERC) adopted Order No. 849 (Order) to force a review of cost-based rates and to implement its Policy on the Treatment of Income Taxes (Revised Policy). The Order includes procedures for determining which jurisdictional natural gas pipelines may be collecting unjust and unreasonable cost-based rates1 in light of the income tax reductions provided by the Tax Cuts and Jobs Act (TCJA)2 and the Revised Policy and precedent concerning tax allowances to address the potential double recovery issue identified by United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016).3

The Order requires, pursuant to sections 10 and 14(a) of the Natural Gas Act (NGA), that all interstate natural gas pipelines, with cost-based stated rates, that filed a 2017 FERC Form No. 2 or 2-A must file the FERC Form No. 501-G4 informational filing for the purpose of evaluating the impact of the TCJA and the United Airlines decision on interstate natural gas pipelines' revenue requirements.

Notably, Form No. 501-G is modified so that if a pipeline states that it is not a tax paying entity, the form will not only automatically enter a federal and state income tax of zero but also eliminate accumulated deferred income taxes (ADIT) from the pipeline's cost of service in accordance with the Revised Policy5. Also, if a master limited partnership (MLP) pipeline elects the limited section 4 filing, it need only reflect the tax reductions under the TCJA. For such an MLP pipeline, further changes required under the Revised Policy are not required under the Order.

Under the Order, FERC provides four options each affected interstate natural gas pipeline may choose from to address the changes to the pipeline's revenue requirement as a result of the income tax reductions under the TCJA: (1) a limited NGA section 46 rate reduction filing, (2) a commitment to file a general section 4 rate case in the near future, (3) an explanation of why no rate change is needed, and (4) no action (other than filing a One-time Report). If the pipeline does not choose either of the first two options, FERC will consider, based on the information in the One-time Report and 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.

Significantly, the Order includes a guarantee by FERC that it will not initiate an NGA section 5 rate investigation for a three-year moratorium period for an interstate pipeline that makes a limited NGA section 4 rate reduction filing that reduces its return on equity (ROE) to 12 percent or less.

1 FERC notes that negotiated rates generally are not directly affected by Order No. 849; provided, that a shipper receiving a discounted rate may experience a reduction as a result of the outcome of a rate proceeding if the cost-based rate is reduced below the discounted rate.

2 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, Pub. L. No. 115-97, 131 Stat. 2054 (2017) (TCJA).

3 For more information, see our earlier In Brief: On United Airlines Remand, FERC Disallows Income Tax Allowance for a Pipeline MLP and Issues a Revised Policy Statement on Treatment of Income Taxes, March 22, 2018.

4 Also referred to in the Order as a "One-time Report."

5 FERC explains the rationale for such elimination (without refund liability) at pp.84ff. of the Order.

6 15 U.S.C. 717c (2012).

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