FERC Weighs Tax Policy Changes in Wake of Ruling in United Airlines, Inc. v. FERC

On December 15, 2016, the Federal Energy Regulatory Commission (FERC) issued a Notice of Inquiry (NOI) in Docket No. PL17-1, seeking comments on how to address any double recovery that may result from its tax allowance and rate of return policies in light of the ruling in United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016). See Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs, 157 FERC ¶ 61,210 (2016) (citing Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on Equity, 123 FERC ¶ 61,048 (2008); and Inquiry Regarding Income Tax Allowances, 111 FERC ¶ 61,139 (2005)).

In United Airlines, SFPP, L.P.’s (SFPP) Shippers argued that FERC engaged in “arbitrary-or-capricious” decision-making by granting an income tax allowance to SFPP, a master limited partnership (MLP). MLPs are exempt from corporate income tax under the U.S. Tax Code. See 26 U.S.C. § 7704.  The Shippers argued FERC granted SFPP double recovery of the partners’ income taxes by granting an income tax allowance when the return calculated by the discounted cash flow (DCF) analysis already incorporates the investor partner taxes. 

FERC argued that there was no such double recovery because the DCF analysis imputes the tax burdens of the individual partners to the partnership and that the income tax allowance equalized the after-tax "entity-level" rates of return for partnership and corporate pipelines.  

The D.C. Circuit rejected FERC’s argument and found that the policy allowing income tax allowances for partnership pipelines may allow partnerships to unfairly profit from their tax structure, because a partnership does not incur the same income tax burden as a corporation. The D.C. Circuit remanded the proceeding to FERC to consider “mechanisms for which the Commission can demonstrate that there is no double recovery.” 827 F.3d at 137.

FERC issued the NOI in December 2016, seeking comments on whether, and if so how, to address the income tax allowance policy or ROE policy to resolve any double recovery by MLPs and other pass-through entities. Comments were submitted in March and April, 2017.

 Several commenters, including the Association of Oil Pipe Lines (AOPL), the Interstate Natural Gas Association of America (INGAA), and SFPP, raised the preliminary issue of whether United Airlines requires FERC to amend its tax and ROE policies. These commenters argued that because the D.C. Circuit did not reject these policies, but rather found that FERC did not provide sufficient justification for its claim that the income tax policy did not result in double recovery for partnerships, FERC could, and should, reaffirm its policy and offer a new, reasoned explanation for its ruling. In contrast, customer groups such as the Liquids Shippers Group and the shippers group led by United Airlines, argued that the United Airlines ruling mandated that FERC change the income tax allowance policy. These commenters argued that if FERC maintained the policy, it would effectively overrule the D.C. Circuit’s decision. 

The shipper groups, among others, argued in favor of the D.C. Circuit’s definition of the regulated entity as solely the MLP pipeline, stating that, because MLPs are exempt from corporate income taxes, they should not be permitted to recover those taxes through their rates. They proposed that FERC remove the income tax allowance for MLPs from its tax policy. The pipeline commenters argued that FERC should not revise its income tax allowance policy because MLP pipelines actually do pay income taxes. They argued that the D.C. Circuit narrowly defined the entity subject to FERC’s tax policy as just the pipeline; and that the regulated entity is the MLP pipeline and the individual investors who do incur the tax liability. INGAA argued that the current policy recognized this cost to investors as a cost of service, and that without the ability to recover the tax, MLPs may not be able to obtain the financing necessary to promote their infrastructure projects. 

 Two analysts, filing comments on their own behalf, took a slightly different approach than the shipper groups. Thomas Horst, who provided the income tax allowance analysis in the underlying SFPP FERC proceeding, and Erin Noakes, a consumer advocate, suggested that proxy groups for the DCF analysis should only include entities with the same corporate structures, i.e. a proxy group of only partnerships or a proxy group of only corporations. Horst recommended that, for partnerships, the DCF analysis should exclude the income tax allowance. If an MLP pipeline is included in the proxy group for a corporate pipeline, then FERC should decrease the MLP ROE by at least 1.4% to compensate for the difference between MLPs and corporations.

In addition to suggesting that FERC issue a revised tax policy, the Natural Gas Supply Association also suggested that FERC initiate investigations under Section 5 of the Natural Gas Act to review pipeline rates and to remove the income tax allowance for MLP pipelines that already include the allowance in their rates. They suggested FERC stagger the investigations, and begin with the pipelines having “the most egregious over-earnings.”

Meanwhile, FERC remains stymied by its lack of quorum to take action on this NOI and cannot issue a formal rulemaking until it regains quorum. Notably, on April 26, the White House unveiled its 2017 budget proposal to, among other things, cut the tax rate for MLPs to 15%. If adopted, this could impact the outcome of this rulemaking. Because the budget proposal is in its nascent stage, with the final impacts on the energy sector uncertain at this time, it is difficult to predict the outcome of FERC’s deliberations on this rulemaking. We will continue to monitor FERC and Congress to see what happens next. 

If you have questions or would like more information on the issues discussed in this article, please feel free to contact us.

Jennings, Strouss & Salmon Expands Commercial Litigation Practice with the Addition of Jordan T. Leavitt

PHOENIX, Ariz.  – Jennings, Strouss & Salmon, P.L.C. continues to implement its growth strategy to be better positioned for the future by adding JordanT. Leavitt as an associate to its commercial litigation department.

“Jennings Strouss is growing and it is an exciting time for the firm,” states John C. Norling, Managing Attorney of Jennings, Strouss & Salmon. “We are being strategic in our hiring to enhance existing services and expand areas most in demand by our clients. Jordan is a talented young lawyer who comes to us with experience in multiple areas of litigation. His skills are a great asset to the firm and its clients.”

Leavitt’s experience includes commercial, employment, and probate litigation. Prior to joining the firm, he practiced at a law firm in Twin Falls, Idaho. Leavitt also worked as a judicial clerk to the Hon. Nancy Porter in Elko, Nevada and the Hon. Molly J. Huskey at the Idaho Court of Appeals. While earning a J.D. at the Arizona State University Sandra Day O’Connor College of Law, Leavitt served on the executive Board of Jurimetrics: The Journal of Law, Science, and Technology. He earned a B.S. in psychology at Brigham Young University.

“Jennings, Strouss & Salmon has a sterling reputation,” states Leavitt. “I am honored to be practicing with the firm’s exceptional litigation team, and look forward to serving its clients.”

Celebrating 75 years of advising businesses and individuals on a wide-range of legal matters, Jennings, Strouss & Salmon is excited to be growing its transactional and litigation departments to enrich the services offered to clients across multiple practice areas. Over recent months, the firm has welcomed nine new attorneys with experience in multiple areas, including tax, commercial litigation, labor and employment, medical malpractice, legal ethics, bankruptcy, real estate, and energy. Jennings, Strouss & Salmon continues to build its presence throughout North America through its Arizona and Washington, D.C. offices.

Law Day 2017 Celebrates the 14th Amendment

By Norma Izzo, Member, Jennings, Strouss & Salmon, P.L.C.

Today we celebrate Law Day. The American Bar Association first proposed the idea for a nationally recognized Law Day 60 years ago. On May 1, 1958, President Eisenhower established Law Day to celebrate the role of law in the United States. It is an opportunity to reflect on the ways in which the creation of law has developed our country and the freedoms we enjoy. This year’s topic is the 14th Amendment. The 14th Amendment is simply written, but in its plain language, there is a significant amount of constitutional heft, and it has become the workhorse of Constitutional law since its passage in 1868. 

On its face, the 14th Amendment confers citizenship to those born or naturalized in the United States, and reinforces the requirement of “due process” of law and promises “equal protection.” However, one of the most fascinating and wide-ranging impacts of the law is based on a single word:  “State.”  The 14th Amendment commands that “nor shall any State deprive any person of life, liberty, or property” without due process. The 14th Amendment also requires that no State “deny any person within its jurisdiction the equal protection of laws.” By operation of the 14th amendment, the rights set forth in the Bill of Rights (the 1st through 10th Amendments to the U.S. Constitution) have, over time, become applicable to actions by the States.

Although then-President Andrew Johnson called the 14th Amendment “purely ministerial,” it became a vehicle of incredible, wide-ranging change. Women’s right to vote was found to be rooted in the 14th Amendment. The right to be free from unlawful searches and seizures by local and State police was recognized through the application of the 14th Amendment. A defendant’s right to a public defender in State and local prosecutions was granted by the application of the 6th Amendment upon the State, again, by operation of the 14th Amendment. The right to privacy, the right to marry someone of the race or sex that you choose, the right to a school hearing before getting expelled, among others, all are based in the application of the 14th Amendment. Brown v. Board of Education, which compelled the desegregation of schools and determined that “separate but equal” was by no means equal, was grounded in the 14th Amendment. The 14th Amendment, although not as commonly discussed in non-legal circles as other amendments, significantly impacts each of us every day.

Norma Izzo is Chair of Jennings, Strouss & Salmon’s Family Law and Domestic Relations practice. She serves as the current President of the Maricopa County Bar Association.