PL17-1-001, Order on Rehearing, Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs

164 FERC ¶ 61,030
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: Kevin J. McIntyre, Chairman;
Cheryl A. LaFleur, Neil Chatterjee,
Robert F. Powelson, and Richard Glick.
Inquiry Regarding the Commission's Policy for
Recovery of Income Tax Costs

Docket No. PL17-1-001

ORDER ON REHEARING
(Issued July 18, 2018)
In this order the Commission dismisses the requests for rehearing and clarification
of its Revised Policy Statement on Treatment of Income Taxes (Revised Policy
Statement) 1 addressing the decision of the United States Court of Appeals for the District
of Columbia Circuit (D.C. Circuit) in United Airlines, 2 and provides guidance regarding
the treatment of Accumulated Deferred Income Taxes (ADIT) where the income tax
allowance is eliminated from cost-of-service rates under the Commission’s post-United
Airlines policy.
I.

Background

In United Airlines, the D.C. Circuit held that the Commission failed to
demonstrate there was no double recovery of income tax costs when the Commission
permitted SFPP, L.P. (SFPP), then a master-limited partnership (MLP) pipeline, 3 to
recover both an income tax allowance and a return on equity (ROE) determined by the
discounted cash flow (DCF) methodology. In response, the Commission issued a notice
of inquiry and received comments regarding how to address any double recovery

1

Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs,
Revised Policy Statement, 162 FERC ¶ 61,227 (2018).
2
3

United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016).

At the time of SFPP’s 2008 West Line rate case, SFPP was a wholly owned
subsidiary of an MLP. SFPP, L.P., Opinion No. 511-C, 162 FERC ¶ 61,228, at P 9
(2018).

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resulting from the Commission’s current income tax allowance and rate of return
policies. 4
On March 15, 2018, the Commission issued the Revised Policy Statement. The
Revised Policy Statement superseded the Commission’s 2005 Income Tax Policy
Statement 5 and provided new guidance that the Commission will generally not permit
MLP pipelines like SFPP to recover an income tax allowance in their cost of service.
The Commission explained that an impermissible double recovery of investors’ tax costs
results from granting an MLP pipeline both an income tax allowance and a DCF ROE.
The Revised Policy Statement did not provide guidance regarding implications of the
United Airlines decision for other partnership and pass-through business forms that are
not MLPs like SFPP. Instead, the Commission stated that it would address such issues in
subsequent proceedings. The Commission received a number of requests for rehearing or
clarification of the Revised Policy Statement. 6
Also on March 15, 2018, the Commission issued a Notice of Inquiry in Docket
No. RM18-12 on the effects of the Tax Cuts and Jobs Act of 2017 7 on Commissionjurisdictional rates. 8 Among other items, the Commission sought comment on the

4

Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs,
FERC Stats. & Regs ¶ 35,581 (2016).
5

Inquiry Regarding Tax Allowances, 111 FERC ¶ 61,139 (2005).

6

Requests for rehearing or clarification of the Revised Policy Statement were filed
by Interstate Natural Gas Association of America (INGAA); Association of Oil Pipe
Lines (AOPL); Master Limited Partnership Association; Dominion Energy, Inc.; Kinder
Morgan, Inc. Gas Pipelines; the Tallgrass Pipelines; SFPP; Enable Mississippi River
Transmission, LLC and Enable Gas Transmission, LLC (Enable); TransCanada
Corporation (TransCanada); EQT Midstream Partners, LP (EQT Midstream); Enbridge
Energy Partners, L.P. and Spectra Energy Partners, LP (Enbridge and Spectra); and
Plains Pipeline, L.P (Plains). In addition, Congress members Pete Olson and Gene Green
submitted comments. OFI SteelPath, Inc. also submitted comments, and a motion in
response was filed by R. Gordon Gooch.
7

An Act to provide for reconciliation pursuant to titles II and V of the concurrent
resolution on the budget for fiscal year 2018, Pub. L. No. 115-97, 131 Stat. 2054 (2017)
(Tax Cuts and Jobs Act).
8

Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on CommissionJurisdictional Rates, 83 Fed. Reg. 12,371 (2018), FERC Stats. & Regs. ¶ 35,582 (2018)

Docket No. PL17-1-001

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treatment of ADIT for MLP pipelines (and potentially other pass-through entities) to the
extent that the income tax allowance is eliminated from cost-of-service rates following
the Commission’s post-United Airlines policy. Among other things, the Commission
asked whether previously accumulated sums in ADIT should be eliminated altogether
from cost of service or whether those previously accumulated sums should be placed in a
regulatory liability account and returned to ratepayers. 9 The Commission received
numerous comments that discuss this issue. 10
II.

Discussion

As discussed below, the Commission dismisses the requests for rehearing of the
Revised Policy Statement. In addition, the Commission provides guidance that if an
MLP or other pass-through pipeline eliminates its income tax allowance from its cost of
service pursuant to the post-United Airlines policy, the Commission anticipates that
ADIT will similarly be removed from the cost of service.
The Revised Policy Statement and the guidance provided in this order do not
establish a binding rule, but are instead expressions of general policy intent designed to
provide guidance by notifying entities of the course of action the Commission intends to
follow in future adjudications. 11 The Commission will have to fully support and justify

(ADIT NOI). The Commission incorporates by reference the record in Docket
No. RM18-12.
9

Id. P 25.

10

See comments on the ADIT NOI submitted in Docket No. RM18-12 by the
United Airlines Petitioners and Aligned Shippers (United Airlines Petitioners); Natural
Gas Indicated Shippers; Canadian Association of Petroleum Producers (CAPP); Process
Gas Consumers Group and American Forest and Paper Association; American Public
Power Association and American Municipal Power, Inc. (APPA and AMP); Central
Electric Power Cooperative, Inc., et al.; Mike Hunter, Oklahoma Attorney General;
American Public Gas Association (APGA); Delaware Municipal Electric Corporation,
Inc.; Enable; TransCanada; Enbridge and Spectra; AOPL; INGAA; Tallgrass Pipelines;
Plains; Boardwalk Pipeline Partners, LP; Kinder Morgan Entities; EQT Midstream;
National Grid; Dominion Energy, Inc. Gas Pipelines; and SFPP, Calnev Pipe Line, LLC
and Kinder Morgan Cochin, LLC.
11

Pacific Gas & Electric Co. v. FPC, 506 F.2d 33, 38 (D.C. Cir. 1974).

Docket No. PL17-1-001

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the application of this guidance in individual cases. 12 The Commission emphasizes that
when applied in specific cases, opportunity will be afforded to affected parties to
challenge or support the revised policies through factual or legal presentation and to
present any issues and arguments regarding the application of these policies to the entities
at issue as may be appropriate in the circumstances presented.
A.

Requests for Rehearing of the Revised Policy Statement

The Commission’s normal practice is to dismiss requests for rehearing of policy
statements and reserve any further discussions of the issues contained therein for specific
proceedings in which the policy is applied. Natural Gas Act (NGA) section 19(a)
provides for parties to request rehearing only when they are “aggrieved by an order
issued by the Commission.” 13 As discussed above, the Revised Policy Statement is not a
binding rule that is “finally determinative of the issues or rights to which it is addressed,”
but rather, only “announces the agency’s tentative intentions for the future.” 14 Therefore,
no entities are aggrieved by the Revised Policy Statement, which does not, in and of
itself, finally determine the rights and duties of any entities. The Commission
accordingly dismisses the requests for rehearing.
While the Commission declines to reconsider the policy announced in the Revised
Policy Statement, it will consider the issues and arguments raised in the rehearing
requests in the context of specific cases in which they apply. An entity such as an MLP
pipeline will not be precluded in a future proceeding from arguing and providing
evidentiary support that it is entitled to an income tax allowance and demonstrating that
its recovery of an income tax allowance does not result in a double-recovery of investors’
income tax costs.
B.

Treatment of ADIT under the Revised Policy

If an MLP pipeline’s income tax allowance is eliminated from cost-of-service
rates under the Commission’s revised policy, additional sums will not be recorded in
accounts for current income taxes and ADIT going forward. However, the Commission
recognizes there is uncertainty regarding the treatment of previously accumulated sums in
ADIT prior to an MLP pipeline’s elimination of its income tax allowance. Recognizing
12

Id. at 39 (“A policy statement announces the agency’s tentative intentions for
the future. When the agency applies the policy in a particular situation, it must be
prepared to support the policy just as if the policy statement had never been issued.”).
13

15 U.S.C. § 717r (2012).

14

Pacific Gas & Electric, 506 F.2d at 38.

Docket No. PL17-1-001

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the need for Commission guidance on this issue, the Commission included this issue in
the ADIT NOI in Docket No. RM18-12. Specifically, the Commission sought comment
regarding whether, to the extent the income tax allowance is eliminated from an MLP or
pass-through entity’s cost of service following the revised policy, previously accumulated
sums in ADIT should be eliminated altogether from cost of service or whether those
previously accumulated sums should be placed in a regulatory liability account and
returned to ratepayers. 15 The Commission received numerous comments on both sides.
In general, comments representing customer interests argued that previously accumulated
ADIT should be returned to ratepayers, 16 while comments representing pipeline interests
argued that ADIT should be eliminated from cost of service. 17
As discussed below, the Commission provides guidance that an MLP pipeline (or
other pass-through entity) no longer recovering an income tax allowance pursuant to the
Commission’s post-United Airlines policy may also eliminate previously-accumulated
sums in ADIT from cost of service instead of flowing these previously-accumulated
ADIT balances to ratepayers. This guidance is consistent with: (1) Commission and
Internal Revenue Service (IRS) regulations; (2) Commission precedent that shippers do
not have an ownership interest in previously accumulated sums in ADIT; and (3) D.C.
Circuit precedent suggesting that returning the ADIT amounts would violate the
prohibition against retroactive ratemaking. 18
1.

ADIT

In general, ADIT balances arise from timing differences between the method of
computing book accounting income used in developing the total cost of service for
Commission ratemaking purposes on the one hand, and the method of computing the
actual taxes payable to the IRS and state governments for the same time period. For
example, for book accounting and the ratemaking process a pipeline’s test period cost of
15

ADIT NOI, FERC Stats. & Regs. ¶ 35,582 at P 25.

16

See, e.g., comments on the ADIT NOI submitted by the United Airlines
Petitioners; Natural Gas Indicated Shippers; CAPP; Process Gas Consumers Group and
American Forest and Paper Association; APPA and AMP; Central Electric Power
Cooperative, Inc., et al.; Mike Hunter, Oklahoma Attorney General; APGA; and
Delaware Municipal Electric Corporation, Inc.
17

See, e.g., comments on the ADIT NOI submitted by Enable; TransCanada;
Enbridge and Spectra; AOPL; and Plains.
18

1990).

Public Utilities Comm’n of State of Cal. v. FERC, 894 F.2d 1372 (D.C. Cir.

Docket No. PL17-1-001

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service assumes a tax deduction based upon straight-line depreciation of its pipeline
assets, yet the IRS allows the pipeline an earlier deduction based upon Modified
Accelerated Cost Recovery System (MACRS) depreciation rates as long as the benefits
of the increased deduction are not flowed through to ratepayers. 19 The annual differences
between a cost-of-service tax allowance and the income taxes payable are recorded as
current deferrals of income taxes. 20 The current deferrals of income taxes are added to
the beginning of the period’s ADIT to calculate the end of the year’s ADIT balance.
Under the normalization of tax costs used in the ratemaking process, the income taxes
that are ultimately owed to the IRS for which payment is deferred in the early years due
to accelerated depreciation are matched 21 to the payment under the Commission’s
ratemaking policies’ straight-line depreciated costs. 22 Generally, in the early years of an
asset’s life, ADIT balances increase because a pipeline’s cost of service reflects a higher
tax allowance than the pipeline’s IRS obligations. In a pipeline’s later years, the situation

19

In addition, if the Commission did not normalize tax costs to correspond to
straight-line depreciation, then IRS regulations would prohibit the pipeline from using
accelerated depreciation for determining its tax liability. 26 U.S.C. §§ 167, 168(i)(9)(A).
20

See General Instruction 18, Comprehensive Interperiod Income Tax Allocation,
and Special Instructions Accounts 410.1, 410.2, 411.1, and 411.2 of the Uniform System
of Accounts Prescribed for Natural Gas Companies Subject to the Provisions of the
Natural Gas Act. 18 C.F.R. pt. 201 (2017).
21

“The primary rationale for tax normalization is matching: the recognition in
rates of the tax effects of expenses and revenues with the expenses and revenues
themselves.” Regulations Implementing Tax Normalization for Certain Items Reflecting
Timing Differences in the Recognition of Expenses or Revenues for Ratemaking and
Income Tax Purposes, Order No. 144, FERC Stats. & Regs. ¶ 30,254, at 31,522 (1981),
reh’g denied, Order No. 144-A, FERC Stats. & Regs. ¶ 30,340 (1982), aff’d, Public
Systems v. FERC, 709 F.2d 73 (D.C. Cir. 1983).
22

The normalization method differs from the “flow-through” method where the
tax allowance for regulatory ratemaking purposes reflects the actual amount of taxes paid
in each year. Under the flow-through method the then-current ratepayers realize the tax
benefits of the entire tax deduction in the year the deduction is taken, whereas the tax
expenses will be charged to future ratepayers in the later years when the deferred tax
payments are made. Normalization avoids the problem whereby the timing difference
subsidizes current ratepayers at the expense of future ratepayers and avoids the need for
the entity to increase rates in an asset’s later years to cover payment of deferred taxes.
Public Systems, 709 F.2d at 75-76, 80.

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reverses. Thus, normalization requires shippers receiving service in the early years of an
asset’s life to pay their properly allocated share of the pipeline’s tax expenses.
As part of the normalization methodology as it applies to calculating a cost of
service, the pipeline must include ADIT balances in its rate base. This ensures that
regulated entities do not earn a return on cost-free capital based upon timing differences:
(a) when pipelines recover the normalized tax costs in rates using straight-line
depreciation; and (b) when taxes are actually paid to the IRS using accelerated
depreciation. 23 These timing differences create “cost-free” capital because the pipeline
may use these funds without paying either a return to equity investors or interest on
debt. 24 In a cost-of-service proceeding, the Commission requires the pipeline to deduct
the sums in the ADIT liability accounts from rate base so the pipeline does not
improperly earn a return on amounts funded by cost-free capital. 25 Including ADIT in
rate base generally lowers rates because the pipeline does not earn a return on the
deferred taxes. 26
2.

Commission Guidance

The Commission provides guidance that when an MLP pipeline’s income tax
allowance is eliminated from cost of service, previously accumulated ADIT balances may
also be eliminated. 27 As a result, such pipeline would not be required to return such
23

Once accelerated depreciation has caused the asset to fully depreciate for federal
and state income tax purposes, the pipeline begins to pay the deferred taxes and ADIT
decreases. Ultimately, at the end of the property’s service life, the ADIT liability will be
reduced to zero.
24

Arco Pipe Line Co., Opinion No. 351, 52 FERC ¶ 61,055, at 61,238 (1990).

25

The deduction of ADIT from rate base reflects the lower cost of service that a
utility achieves by its use of the cash flow from deferred taxes in place of debt and equity
capital. Order No. 144-A, FERC Stats. & Regs. ¶ 30,340 at 30,128.
26
27

Public Systems, 709 F.2d at 83.

Pursuant to this policy, a natural gas pipeline would eliminate any balances
recorded in Accumulated Deferred Income Taxes (Account 190), Accumulated Deferred
Income Taxes – Accelerated Amortization Property (Account 281), Accumulated
Deferred Income Taxes–Other Property (Account 282), and Accumulated Deferred
Income Taxes–Other (Account 283). Similarly, to the extent any excess ADIT has been
transferred to Other Regulatory Liabilities (Account 254) or any deficient ADIT has been
transferred to Other Regulatory Assets (Account 182.3), the pipeline would remove the
balances related to ADIT.

Docket No. PL17-1-001

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ADIT to shippers, nor would such ADIT be subtracted from rate base. This guidance is
consistent with: (1) normalization principles as provided by Commission and IRS
regulations; (2) D.C. Circuit and Commission precedent that shippers do not have an
ownership interest in previously accumulated sums in ADIT; and (3) D.C. Circuit
precedent that returning ADIT paid by shippers in previously effective rates after those
rates have been modified to no longer reflect a tax allowance may violate the prohibition
against retroactive ratemaking and the requirement that action under NGA section 5 be
prospective only. 28 While some commenters argue that these ADIT sums should be
returned to ratepayers, these arguments are unpersuasive as discussed below. However,
to the extent the Commission addresses these issues in future proceedings, the
Commission will consider any arguments regarding not only the application of this policy
to the facts of the case, but also any arguments regarding the underlying validity of the
policy itself.
a.

Normalization Principles in Commission and IRS
Regulations

If the Commission does not permit an entity to recover an income tax allowance in
its rates, there appears to be no rationale for requiring such entity to record current or
deferred income taxes on its books. As discussed above, ADIT is a regulatory construct
to ensure that regulated entities do not earn a return on cost-free capital based upon
timing differences between federal and state tax liability and Commission ratemaking. 29
The purpose of normalization is matching the pipeline’s cost-of-service expenses in rates
with the tax effects of those same cost-of-service expenses. 30 If there is no income tax
allowance in Commission rates, there is no basis for the “matching” function of
normalization, including ADIT. 31 Commission and IRS regulations regarding

28

Public Utilities, 894 F.2d 1372. Although certain statutes and regulations
discussed herein are not specifically applicable to oil pipelines, the Commission finds no
basis for treating oil pipelines differently from natural gas pipelines for purposes of this
ADIT guidance. See infra P 14 n.32.
29

Arco, 52 FERC at 61,238.

30

“The primary rationale for tax normalization is matching: the recognition in
rates of the tax effects of expenses and revenues with the expenses and revenues
themselves.” Order No. 144, FERC Stats. & Regs. ¶ 30,254 at 31,522.
31

See Public Utilities, 894 F.2d at 1382 (noting that “[t]ax normalization sought to
‘match’ the timing of a customer’s contribution toward a cost with enjoyment of any
offsetting tax benefit,” but finding the passage of the NGPA which resulted in El Paso no

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normalization for natural gas pipelines only apply to entities with an income tax
allowance component in their regulated cost-of-service rates. 32 Moreover, the
Commission requires entities to make adjustments for excess or deficient ADIT only
where “the item is included in the jurisdictional cost-of-service.” 33 For example, a
change in the federal tax rates giving rise to excess deferred taxes would trigger the
Commission and IRS normalization requirements. 34

longer using cost-of-service rates “mooted the whole question to which normalization
was the answer”).
32

See 18 C.F.R. § 154.305(a) (“An interstate pipeline must compute the income
tax component of its cost-of-service by using tax normalization for all transactions.”);
18 C.F.R. § 154.305(b)(1) (“Tax normalization means computing the income tax
component as if transactions recognized in each period for ratemaking purposes are also
recognized in the same amount and in the same period for income tax purposes.”);
18 C.F.R. 154.305(b)(4) (“Income tax component means that part of the cost-of-service
that covers income tax expenses allowable by the Commission.”); see also 26 U.S.C.
§ 168(i)(9)(A) (“the taxpayer must, in computing its tax expense for purposes of
establishing its cost of service for rate-making purposes …use a method of depreciation
with respect to such property that is the same as, and a depreciation period for such
property that is no shorter than, the method and period used to compute its depreciation
expense for such purposes….”) (emphasis added). Although these rules are not
specifically applicable to oil pipelines subject to Commission regulation, the same
principles apply. See Williams Pipe Line Co., Opinion No. 154-B, 31 FERC ¶ 61,377,
at 61,837-38 (1985). The Commission sees no reason that oil pipelines should be treated
differently from natural gas pipelines for purposes of the ADIT guidance discussed in this
Order. See also CAPP Comments at 4 (“The conceptual foundation of the ADIT account
presumes that the entity whose rates are in issue will be subject to income tax expense in
the future, and that at least a portion of those expenses have been deferred, but not
extinguished.”).
33

Algonquin Gas Transmission Co., 76 FERC ¶ 61,075, at 61,449 (1996); see also
18 C.F.R. § 154.305(c)(2) (“rate base reductions or additions” for ADIT “must be limited
to deferred taxes related to rate base, construction, or other costs and revenues affecting
jurisdictional cost-of-service”) (emphasis added).
34

The Commission’s requirements relating to excess or deficient ADIT balances
apply where the discrepancy is “a result of changes in tax rates” or where “the rate
applicant has not provided deferred taxes in the same amount that would have accrued
had tax normalization always been applied.” 18 C.F.R. § 154.305(d)(1).

Docket No. PL17-1-001
b.

- 10 Ratepayers Have No Ownership Interest in ADIT

The Commission and D.C. Circuit have rejected arguments based on the
misconception that ADIT is a cash reserve over which ratepayers have an ownership
claim or equitable interest. 35 Consistent with these holdings, the Commission has also
explained that ADIT is not a true-up or tracker of money owed to shippers. 36
Rather, as noted above, ADIT records the amount of income taxes that the pipeline
has collected due to normalization and which it will eventually owe the federal
government (not ratepayers) but which have been deferred pending the reversal of the
timing difference such as accelerated depreciation. The balances recorded in ADIT
accounts reflect deferred taxes that are ultimately owed to the IRS. Once the tax
obligations are settled, the associated ADIT amounts are eliminated. For example, when
the pipeline must pay these deferred taxes to the federal government as a result of a sale
of the asset, the ADIT associated with the asset is eliminated (not returned to shippers). 37
c.

Retroactive Ratemaking

In addition, requiring an MLP pipeline that eliminates its income tax allowance
from cost of service under the revised policy to refund ADIT to customers appears to
violate the rule against retroactive ratemaking. 38 The rule against retroactive ratemaking
bars “the Commission’s retroactive substitution of an unreasonably high or low rate with
35

Public Systems, 709 F.2d at 85 (rejecting the notion “that ratepayers have an
ownership claim” to the ADIT balance); Public Utilities, 894 F.2d at 1381 (“The
Commission and this Court have both rejected” “the notion that under normalization
accounting customers enjoy an equitable interest in a utility’s deferred tax account.”);
Order No. 144, FERC Stats. & Regs. ¶ 30,254 at 31,539 (addressing the “erroneous
premise that a loan is being made by ratepayers to utilities” through the normalization
process and stating that ratepayers do not “have an ownership claim or equitable
entitlement to the ‘loaned monies’”); id. at 31,539 n.75 (“This is not to say that customers
do not pay rates that recover deferred taxes. They do. But paying deferred taxes in rates
does not convey an ownership or creditor’s right.”).
36

Lakehead Pipe Line Co. L.P., 75 FERC ¶ 61,181, at 61,594 (1996). Moreover,
there would be practical problems with maintaining such a tracker as many oil pipeline
rates have never been subject to a cost-of-service rate proceeding. For these pipelines, no
cost-of-service income tax allowance has been established.
37

Enbridge Pipelines (KPC), 100 FERC ¶ 61,260, at PP 158-162 (2002).

38

Public Utilities, 894 F.2d 1372.

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a just and reasonable rate.” 39 Under the NGA, the Commission only has the authority to
address over-recovery by prospectively changing a pipeline’s rate under NGA section 5,
and may not retroactively refund over-collected amounts. 40 Requiring an MLP pipeline
whose tax allowance is eliminated to flow-back to ratepayers ADIT that was lawfully
collected under previously filed and approved rates would raise retroactive ratemaking
concerns. The Commission would be retroactively applying its post-United Airlines
policy that permitting MLP pipelines to recover an income tax allowance results in a
double recovery by requiring such pipelines to refund either the income tax allowance
expenses or deferred tax reserves recovered under past rates. Any attempt to refund such
amounts to customers would rest on an impermissible post hoc finding that the past rates
were not just and reasonable. 41
This analysis is supported by the D.C. Circuit’s decision in Public Utilities, which
held that requiring a pipeline to credit ratepayers for earnings on an excess ADIT balance
or refund the balance to ratepayers where the pipeline switched from cost-of-service rates
to ceiling prices violated the rule against retroactive ratemaking. As the court found in
Public Utilities, ADIT “is composed entirely of rate revenue that [the pipeline] has
already collected. Refund of such property, or its earnings, would effectively force [the
pipeline] to return a portion of rates approved by FERC, and collected by [the
pipeline].” 42 The D.C. Circuit explained that to the extent any basis for requiring the
credit to ratepayers rested on the view that the pipeline’s prior cost-of-service rates were
“in retrospect too high” 43 or “unjust and unreasonable” 44 then the credit for earnings on
previously accumulated ADIT sums violated the rule against retroactive ratemaking.

39

City of Piqua v. FERC, 610 F.2d 950, 954 (D.C. Cir. 1979).

40

Under the Interstate Commerce Act, retroactive reparations are similarly not
available for a Commission-initiated investigation, and reparations that can be awarded
following a successful complaint against an oil pipeline are generally limited to two years
prior to the filing date of the complaint. 49 U.S.C. app. § 16(3); Oxy USA, Inc. v. FERC,
64 F.3d 679, 698-700 (D.C. Cir. 2006).
41

See Public Utilities, 894 F.2d at 1382-84.

42

Id. at 1383.

43

Id. at 1380.

44

Id. at 1382.

Docket No. PL17-1-001
d.

- 12 Arguments that ADIT Should Be Returned to Ratepayers
Are Unavailing

The alternative approach raised in the ADIT NOI and supported by some customer
interests is to require that previously accumulated sums be placed in a regulatory liability
account and returned to ratepayers. These commenters assert that the entire ADIT
balance that was included in historical costs of service and collected in order to cover
future tax liabilities is excess and should be flowed-back to ratepayers, just as the
Commission does where a portion of the ADIT balance is overfunded due to a decrease
in tax rates. 45 They argue that eliminating the ADIT balance is inappropriate because the
balance represents sums contributed by ratepayers. 46 They argue that the ADIT balance
resulting from the income tax allowance that was permitted under the Commission’s
2005 Income Tax Policy Statement will be completely overfunded for MLP pipelines that
are no longer eligible for an income tax allowance. 47 These arguments rest upon false
premises.
The Commission is unpersuaded by arguments that the elimination of the income
tax allowance should be treated like a reduction in income tax rates and flowed through
in rates using the Average Rate Assumption Method (ARAM), the Reverse South
Georgia Method (RSGM) 48 or a different method. 49 This is a false analogy. There is a
critical distinction between adjustments to amortize excess or deficient ADIT to be
included in future rates to account for changes in income tax rates, as opposed to a
complete elimination of the income tax allowance. When income tax rates are merely
reduced and an income tax allowance remains in future cost of service, it is appropriate to
credit any excess in ADIT in the future cost of service. 50 In contrast, when the income
45

See, e.g., United Airlines Petitioners Comments 19-28; CAPP Comments at 5-9.

46

See, e.g., Comments of Process Gas Consumers Group and American Forest and
Paper Association at 7; CAPP Comments at 5-6; Comments of Mike Hunter, Oklahoma
Attorney General at 7-8; APGA Comments at 6-7.
47

United Airlines Petitioners Comments at 15, 26-28.

48

See ADIT NOI, FERC Stats. & Regs. ¶ 35,582 at P 17.

49

See, e.g., United Airlines Petitioners Comments at 25, 28-31 (requesting an
expedited amortization period); CAPP Comments at 5, 10-12 (requesting a five-year
amortization period).
50

As discussed above, the obligation to amortize excess ADIT is only triggered
when the pipeline has a tax obligation and there is an excess in ADIT caused by “changes
in tax rates” or where “the rate applicant has not provided deferred taxes in the same

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tax allowance is eliminated due to the post-United Airlines policy, there are no income
tax costs recognized in rates at all, meaning that both the income tax allowance and ADIT
must be completely removed and there is no excess or deficient ADIT balance to
amortize in the cost of service. In this scenario, returning ADIT to future shippers would
be little more than returning rates collected for providing prior period service which is
retroactive ratemaking.
Some commenters representing customer interests cite statements emphasizing
that while pipelines collect from ratepayers more taxes than the pipeline pays under
normalization in early years (i.e. adding to ADIT balances), shippers are made whole
because pipelines in later years collect less in taxes from ratepayers than they are paying
(i.e. reducing ADIT balances). 51 They essentially argue that the pipelines previously
over-collected for future tax expenses that will be owed to the federal government, and
that not returning such amounts gives the pipelines a “windfall.” 52 Such commenters are
essentially arguing for retroactive ratemaking and for returning rate collections associated
with prior period service. 53
Moreover, rates designed pursuant to the normalization principles described above
do not “over-collect” the pipeline’s tax expenses in the early years. Rather, such rates
require shippers receiving service in the early years to pay their properly allocated share

amount that would have accrued had tax normalization always been applied.” 18 C.F.R.
§ 154.305(d); see also Algonquin, 76 FERC at 61,449; United Airlines Petitioners
Comments at 29 (“In the case of an overfunded ADIT balance caused by a tax rate
change, the pipeline still anticipates incurring future tax liability that will be recovered
through an income tax allowance, and still includes an [income tax allowance] in its cost
of service that can be adjusted to correct its ADIT collections.”), but see id. at 25 (“The
current situation is novel in that MLP pipelines have no future tax liability that will be
recovered through an [income tax allowance].”).
51

See, e.g., United Airlines Petitioners Comments at 14 (noting the Commission
stated that “[a]ny excess or deficiency in the deferred tax reserve does not … result in a
windfall to either shareholders or ratepayers since the balances will systematically be
subject to a reconciliation in future rates”) (quoting Order No. 144, FERC Stats. & Regs.
¶ 30,254 at 31,554).
52
53

Id. at 22-23, 28, 30.

See Public Utilities, 894 F.2d at 1382 (rejecting the argument that if excess
ADIT was not returned to ratepayers, the pipeline would receive a “windfall” because the
tax expenses collected in past years would never be returned to ratepayers).

Docket No. PL17-1-001

- 14 -

of the pipeline’s tax expenses for the period of their service. 54 For example, if a shipper
only takes service in the early years and then leaves the system, it has paid its appropriate
share of the pipeline’s tax expenses; the shipper has not paid an excessive amount that it
could only recoup by remaining on the system into the later years. It follows that, if the
Commission determines part way through the overall normalization period that the
pipeline is not entitled to any tax allowance, the Commission cannot require the pipeline
to return to shippers ADIT amounts collected in prior rates without engaging in
retroactive ratemaking. That is because those ADIT amounts represent tax expenses that
the Commission previously found were properly allocated to the approved rates in effect
prior to the Commission’s finding that the pipeline is not entitled to a tax allowance. 55
The Commission orders:
The requests for rehearing or clarification of the Revised Policy Statement are
dismissed, as discussed in the body of this order.
By the Commission. Commissioners LaFleur and Glick are concurring with a joint
separate statement attached.
(SEAL)

Kimberly D. Bose,
Secretary.

54

The Commission's primary justification for its decision to adopt tax
normalization was “the matching principle: as a matter of fairness, customers who pay an
expense should get the tax benefit that accompanies the expense.... To do otherwise
would subsidize present customers at the expense of future ones.” Public Systems, 709
F.2d at 80.
55

See United Airlines Petitioners Comments at 13 (“the ADIT amount reflects
how much a pipeline was deemed to have recovered in past rates that is associated with
future costs, not what has been collected dollar-for-dollar in rates”).

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Inquiry Regarding the Commission's Policy for
Recovery of Income Tax Costs

Docket No.

PL17-1-001

(Issued July 18, 2018)
LaFLEUR, Commissioner, and GLICK, Commissioner, concurring:
In companion orders issued today, the Commission (1) affirms the Revised Policy
Statement on Treatment of Income Taxes (Revised Policy Statement) issued in response
to the decision of the United States Court of Appeals for the District of Columbia Circuit
(D.C. Circuit) in United Airlines; 1 (2) provides guidance regarding the treatment of
Accumulated Deferred Income Taxes (ADIT) where the income tax allowance is
eliminated from cost-of-service rates under the Commission’s post-United Airlines
policy; and (3) issues a Final Rule that establishes procedures for the Commission to
determine which jurisdictional natural gas pipelines may be collecting unjust and
unreasonable rates in light of the income tax reductions provided by the Tax Cuts and
Jobs Act and the Commission’s revised policy and precedent concerning tax allowances
to address the double recovery issue identified by United Airlines. These are significant
orders, and we write separately to provide some additional thoughts regarding these
decisions.
First, with respect to the ADIT guidance issued today, we confess to some
frustration that the rate benefits that customers and shippers would otherwise receive
from the Revised Policy Statement may be significantly reduced by the treatment of
ADIT announced in today’s orders. As a matter of equity, we believe that the arguments
for applying previously-accrued ADIT balances to reduce future rate base where a tax
allowance is eliminated are compelling. However, based on the arguments presented in
this docket regarding the Commission’s authority to mandate those reductions on a
generic basis, it appears that such a directive would run afoul of the rule against
retroactive ratemaking, as interpreted by the D.C. Circuit in Public Utilities Commission
of State of California v. FERC. 2 Nonetheless, we note that today’s order is simply
guidance, and to the extent that customers or shippers in individual proceedings argue
that such a reduction is legal in specific cases, we will consider those arguments on the
appropriate record.
1

United Airlines, Inc. v. FERC, 827 F.3d 122 (D.C. Cir. 2016).

2

894 F.2d 1372 (D.C. Cir. 1990).

Docket No. PL17-1-001

-2-

Second, we believe that today’s Final Rule sharply highlights the need for a
legislative fix to the lack of refund authority in Section 5 of the Natural Gas Act (NGA). 3
Under current law, the Commission’s ability to protect natural gas customers against
unjust and unreasonable rates is compromised by its inability to set a refund date. We
believe that current law provides a perverse incentive for protracted litigation and creates
an asymmetry of leverage between pipelines seeking a rate increase under Section 4 of
the NGA and complainants or the Commission under Section 5.
With respect to the Final Rule, we believe that our lack of refund authority
affected the balance the Commission was able to strike in today’s order. It is a clear tenet
of cost-of-service ratemaking that tax savings should flow through to ratepayers, and the
Commission is rightly pursuing that goal in the Final Rule. However, because our
Section 5 “stick” under the NGA cannot effectively deliver timely relief to customers, the
Final Rule proffers a series of “carrots” in the hope that pipelines will exercise their
Section 4 filing rights to quickly flow those tax benefits back to their customers. While
we think the balance struck in the Final Rule is reasonable in light of our limited refund
authority, we believe that the Commission would be better equipped to protect customers
if the law were amended.
Accordingly, we respectfully concur.

________________________
Cheryl A. LaFleur
Commissioner

3

________________________
Richard Glick
Commissioner

Commissioner LaFleur has been on record in support of Section 5 reform for
several years. Northern Natural Gas Co., 133 FERC ¶ 61,111 (2010) (LaFleur, Comm’r,
dissenting).