The Interstate Natural Gas Association of America (INGAA) submits reply comments on the Federal Energy Regulatory Commission’s (Commission) Notice of Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs (NOI), issued on December 15, 2016, pursuant to the schedule established by the Commission. INGAA submitted initial comments in this proceeding presenting empirical evidence demonstrating that the Commission should retain its existing income tax allowance for pipelines that are organized as publicly-traded master limited partnerships (MLP). This issue is of primary importance to INGAA, a trade association representing approximately two-thirds of the nation’s natural gas transmission pipeline systems. Ten of INGAA’s 26 members are organized as MLPs.
EXECUTIVE SUMMARY
The Commission issued the NOI in response to the D.C. Circuit’s opinion in United Airlines, Inc. v. FERC, which held that, “if FERC elects to impute partner taxes to the partnership pipeline entity, it must still ensure parity between equity owners in partnership and corporate pipelines.” The court in United Airlines was concerned that the Commission, in addressing an income tax allowance for an oil pipeline organized as an MLP, had “not provided sufficient justification for its conclusion that there is no double recovery of taxes for partnership pipelines receiving a tax allowance in addition to the discounted cash flow [(DCF)] return on equity [(ROE)].”
INGAA’s initial comments presented testimony of Mr. Barry Sullivan and Dr. Merle Erickson demonstrating that the Commission’s current income tax allowance provides the parity between corporate and MLP pipeline investors required by the court in United Airlines. INGAA presented empirical evidence demonstrating that there is no double recovery of income taxes resulting from an MLP receiving both a tax allowance and a DCF-derived ROE. INGAA further demonstrated that an MLP pipeline must be allowed an income tax allowance in order to have the opportunity to recover its full cost of service, consistent with the policy set forth in the Supreme Court’s decision in FPC v. Hope Natural Gas Co. INGAA explained that removal of the income tax allowance would shake the market’s confidence in MLPs and place them at a disadvantage as compared to corporate-owned pipelines. INGAA also showed that eliminating the tax allowance would contravene Congress’s intent in authorizing pass-through taxation for partnership pipelines and would remove the economic incentives Congress developed to encourage investment in energy infrastructure.
INGAA’s reply comments respond to the initial comments of parties that seek to eliminate or modify the Commission’s existing income tax allowance policy. The Commission should reject such commenters’ assertions that United Airlines held that the income tax allowance for MLP pipelines in addition to the DCF ROE results in a double recovery of income taxes. The court did not make that finding, but instead found only that the Commission did not provide “sufficient justification for its conclusion that there is no double recovery of taxes.” The Commission also should reject commenters’ contentions that the Commission’s only option on remand is to find a replacement for the Commission’s current tax allowance policy. The plain language of United Airlines and long-standing judicial precedent make it clear that the Commission can provide additional justification for its current tax allowance policy on remand.
Commenters’ assertions that the Commission’s current tax allowance policy does not ensure commensurate returns for investors in MLP pipelines and investors in corporate-owned pipelines are also contrary to the facts presented by Dr. Erickson and Mr. Sullivan. The Commission has broad discretion to approve rates that are within a “zone of reasonableness.” INGAA has provided substantial empirical evidence demonstrating that, with the tax allowance, the long-term returns of MLP pipelines and corporate pipelines have been commensurate and that no double recovery of income tax results from this policy. INGAA’s empirical evidence provides sufficient justification for the Commission to continue its current tax allowance policy.
No commenter has provided any credible evidence demonstrating that the Commission’s current tax allowance either results in a double recovery or that the returns for MLP and corporate pipeline investors have not been commensurate under current policy. Process Gas Consumers Group (PGC) and American Forest & Paper Association (AFPA), filing jointly, attempt to demonstrate using a “theoretical” model that “the Commission’s DCF model calculates a return that fully incorporates personal income taxes and need not be ‘adjusted’ to accommodate such taxes.” PGC and AFPA’s theoretical model is based on flawed assumptions, contradicted by the empirical evidence offered by INGAA and others, and provides no basis for the Commission to change its existing policy. The comments of Natural Gas Indicated Shippers and Dr. Thomas Horst, which attempt to demonstrate that the Commission’s tax allowance policy leads to non-commensurate returns for investors in MLP pipelines and corporate pipelines, are similarly flawed and should be rejected. The Commission should disregard the comments of other parties that simply assert that the Commission’s tax allowance policy results in a double recovery of income taxes but provide no supporting evidence whatsoever.
The Commission should conclude, based on the substantial evidence offered by INGAA and others, that the current income tax allowance ensures commensurate returns for investors in both MLP and corporate pipelines and does not result in a double recovery of income taxes by MLP pipelines. The Commission should retain its existing tax allowance policy, disregard the baseless proposals to modify the Commission’s DCF formula, and reject the unsupported requests that the Commission implement proceedings under NGA Section 5 to adjust the rates of MLP natural gas pipelines.
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