By William M. Keyser, Sandra E. Safro, Michael L. O’Neill, and Benjamin L. Tejblum
On December 15, 2016, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) seeking comment on how to address any double recovery resulting from income tax allowance policy set forth in its Income Tax Allowance Policy Statement and current policies regarding the derivation of return on equity (ROE). FERC’s existing Income Tax Allowance Policy Statement has been in place since 2005 and permits an income tax allowance for partnerships, or similar pass-through entities, to the extent that partners or members have actual or potential income tax obligations on the partnership entity’s income.
The NOI stems from the July 1, 2016 decision of the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit) in United Airlines Inc. v. Federal Energy Regulatory Commission, 827 F.3d 122 (D.C. Cir. 2016) (UAL v. FERC). In that decision, the DC Circuit held that FERC had not adequately demonstrated that the application of its Income Tax Allowance Policy Statement in combination with its use of a discounted cash flow (DCF) methodology to determine ROE does not result in double recovery of taxes for a pipeline organized as a partnership. The DC Circuit remanded the issue to FERC to develop a mechanism “for which the Commission can demonstrate that there is no double recovery” of partnership income tax costs. Among the potential options that the DC Circuit outlined was eliminating all income tax allowances and setting rates based on pre-tax returns. The NOI explicitly notes “the potentially significant and widespread effect of [the decision in UAL v. FERC] upon the oil pipelines, natural gas pipelines, and electric utilities subject to the Commission’s regulation.” NOI at P 2.