Pipelines and partnerships

April 10, 2018 | By Keith Martin in Washington, DC

Pipeline companies that operate as master limited partnerships will no longer be able to pass through an income tax charge to customers as part of cost-of-service rates, the Federal Energy Regulatory Commission said on March 15.

FERC also began moving the same day to direct some pipelines and electric transmission companies to reduce rates after Congress reduced the corporate tax rate from 35% to 21%. 

The commission said it is inappropriate for pipelines owned by master limited partnerships to pass through an income tax charge because such partnerships are not subject to income taxes.

Various airlines and oil refineries had sued to stop the practice. A US appeals court ordered FERC to take another look at it in July 2016. (For earlier coverage, see “Court Orders FERC to Revisit Pipeline Charges” in the August 2016 NewsWire and “Taxes in Transmission and Pipeline Tariffs” in the February 2017 NewsWire.)

A master limited partnership is a partnership whose units are publicly traded.

FERC said it will address whether other partnerships that do not trade as MLPs will be allowed to pass through income taxes as those issues arise in subsequent proceedings.

The Alerian MLP index, which tracks the prices at which MLP units are trading, has fallen by 7.2% since the FERC action. 

The potential effects vary from one pipeline to the next, since not all pipeline rates are cost-of-service rates. Some are negotiated or market-based rates that would not be affected.

The FERC pipeline decision is in Opinion No. 511-C. 

The decision could accelerate a trend of MLPs converting to corporations, selling existing pipelines affected by the change to corporations or taking MLPs private. (For a discussion about one corporate conversion, see “Master Limited Partnerships” in the August 2014 NewsWire.)

Meanwhile, attorneys general from 16 states had asked FERC in January to require interstate pipelines and transmission companies to share tax savings from the corporate rate reduction with their customers by reducing rates.

On March 15, FERC asked 48 electric transmission companies to propose revisions to their rates to reflect the corporate tax reduction or show cause why they should not be required to do so. The utilities have 60 days. The 48 utilities involved have rates that assume a 35% corporate tax rate.

Most other utilities have formula rates that adjust as the corporate tax rate changes.

FERC also asked interstate gas pipelines to make a one-time filing to help it assess the effect of the corporate tax reduction on pipeline rates. The pipeline filings are expected in the late summer or early fall.