On July 1, 2016, the United States Court of Appeals for the District of Columbia Circuit issued its decision and order in United Airlines Inc. et. al. v. Federal Energy Regulatory Commission and the United States of America, finding that FERC’s 2005 Policy Statement on Income Tax Allowances had not been adequately supported and was arbitrary or capricious and remanded the case for further proceedings consistent with the order. The order unsettles a decade-old FERC policy and reestablishes (since at least FERC’s Lakehead decision in 1995) uncertainty and confusion regarding how to determine the appropriate income tax allowance in cost-of-service rates for certain public utilities, such as master or limited partnerships or, more recently, real estate investment trusts, or REITs, that are not directly subject to relevant taxes. Disregarded entities are commonly used to own gas pipelines and facilities, processing and treatment and storage assets. Also, REITs have been used to own electric transmission and distribution and certain types of gas infrastructure, and this practice is likely to expand.
This case and the proceedings to follow will be closely watched by affected public utilities and their shippers or other consumers.