FERC Examines New Policy for Income Tax Costs

December 15, 2016

By Emily Pitlick Mallen

On December 15, 2016, the Federal Energy Regulatory Commission (FERC) initiated a Notice of Inquiry Regarding the Commission’s Policy for Recovering Income Tax Costs (Inquiry). The Inquiry seeks comments regarding how FERC should address any double recovery of income tax costs that may result from FERC’s application of its Policy Statement on Income Tax Allowances (Policy Statement), in effect since 2005. FERC seeks comment regarding how it can allow regulated entities to earn an adequate return on equity that does not result in a double recovery of investor-level taxes for partnerships and other pass-through entities. Comments will be due within 45 days of the date the Inquiry is published in the Federal Register. Reply Comments will be due 20 days after that.

The Inquiry is a direct response to United Airlines, Inc. v. FERC (United Airlines), a decision issued by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) on July 1, 2016 that considered whether the Policy Statement, as applied to a pipeline organized as a partnership, permitted the pipeline’s partners to double-recover the partnership’s income tax costs. The D.C. Circuit accepted the premise that the discounted cash flow (DCF) methodology that FERC uses to determine a regulated pipeline’s return on equity already ensures a sufficient after-tax return to attract investment to the pipeline. It directed FERC to explain how a partnership receiving a tax allowance and a return on equity derived from the DCF methodology did not double recover its taxes. A discussion of United Airlines can be found here. The Inquiry is available here.