The Federal Energy Regulatory Commission (FERC) recently revised its Income Tax Allowance (ITA) policy for Master Limited Partnership (MLP) pipelines following both the 2016 decision of the U.S. Court of Appeals for the District of Columbia Circuit in United Airlines, Inc., et al. v. Federal Energy Regulatory Commission, 827 F.3d 122 (D.C. Cir. 2016) and the FERC’s own 2017 Notice of Inquiry (“NOI”) “seeking comment regarding how to address any double recovery resulting from the Commission’s current income tax allowance and rate of return policies” (FERC Docket No. PL17-1-000, Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs).
Consistent with the economic and financial analysis provided by Brattle economists Matthew O’Loughlin, Daniel Arthur, and Michael Tolleth (“Brattle Report”) in the NOI on behalf of the United Airlines Petitioners and Aligned Shippers, FERC eliminated the income tax allowance (“ITA”) for MLP pipelines noting that “an impermissible double recovery results from granting an MLP pipeline both an income tax allowance and a DCF ROE.” (162 FERC ¶ 61,227 (2018), “Revised Policy Statement”)
In reaching its conclusions, FERC relied on several important points that were consistent with the findings of the Brattle Report, namely:
- The FERC’s discounted cash flow rate of return on equity (“DCF ROE”) methodology calculates a before-investor-taxes required rate of return, regardless of whether the pipeline is a partnership or corporation;
- Changes to an MLP pipeline’s unit price does not eliminate the double recovery in the cost of service caused by an MLP ITA;
- Providing an MLP ITA does not cause MLP investors’ pre-investor-tax required rate of return to equal their after-investor-tax required rate of return;
- The DCF ROE compensates for investor taxes notwithstanding the fact that the income tax allowance (which compensates for different, namely corporate, taxes) is a separate regulatory line item; and
- Comparison of total cash flows and tax liabilities over the life cycle of an investment in an MLP corporate pipeline does not demonstrate “parity” in investor returns for the two ownership structures.
Concurrent with its issuance of the Revised Policy Statement, FERC issued further orders in the 2008 and 2009 cost of service ratemaking proceedings (Docket Nos. IS08-390-002 and IS09-437-008) regarding petroleum products pipeline SFPP, L.P. (Opinion No. 511-C, 162 FERC ¶ 61,228 (2018); Opinion No. 522-B, 162 FERC ¶ 61,229 (2018)) that led to the D.C. Circuit’s remand order. Brattle Principals Matthew O’Loughlin and Daniel Arthur provided extensive written and oral testimony on the MLP ITA issue and other topics on behalf of shippers in the underlying 2008 and 2009 SFPP proceedings.
Brattle was retained by Richard E. Powers, Jr. and Steven A. Adducci of Venable LLP and Thomas J. Eastment and Gregory S. Wagner of Baker Botts L.L.P. on behalf of the United Airlines Petitioners and Aligned Shippers to provide economic and financial analysis in the FERC’s NOI proceeding. Brattle was retained by Richard E. Powers, Jr. and Steven A. Adducci of Venable LLP and Marcus W. Sisk, Jr. and Fredrick G. Jauss IV of Dorsey & Whitney LLP to provide economic and financial analysis in SFPP’s 2008 West Line and 2009 East Line rate proceedings.