FERC Rates to Reflect All Potential Income Taxes

Rates set by the Federal Energy Regulatory Commission will reflect income tax liability, regardless of a utility?s ownership structure, under a policy adopted May 4 in response to a court ruling on rates set for use of a 14-mile-long Los Angeles?area oil pipeline. On the basis of the new policy, FERC denied two requests to rehear arguments on a tariff for Trans-Elect NTD Path 15. In denying rehearing, the commission permitted Trans-Elect to retain its income tax allowance if it can demonstrate it meets the standard set by the policy statement. Trans-Elect operates the third high-voltage line connecting Northern and Southern California that went into operation in December 2004. FERC also allowed a transmission operating company to sell its stock to the public as long as ownership of the stock by users of the company?s services was limited to less than 5 percent of the outstanding shares. During the May 4 meeting, FERC approved revised standards governing business practices and electronic communications for interstate natural gas pipelines, adopting by reference the standards for gas quality reporting and creditworthiness developed by the Whole Gas Quadrant of the North American Energy Standards Board. The commission found that its regulations should reflect the standards set by this consensus energy-standards development group since industry already has to conduct business under these rules, and it adopted a notice of proposed rulemaking to implement similar standards for electric utilities. Stemming from a BP West Coast Products challenge of a tariff granted SFPP?the owner of a pipeline running from Carson to Norwalk?FERC issued a new tax policy. Under it, income tax allowance in cost-of-service rates would be extended to all entities or individuals owning public utility assets, provided they have an actual or potential income tax liability on that public utility income. Thus, the commission explained, a taxpaying corporation or other pass-through entity would be permitted an income tax allowance on the income imputed to the corporation, or to the partners or the members of pass-through entities, provided that the corporation, partners, or members have an actual or potential income tax liability on that income. Basically, under the new rules, regulated utilities and some other entities may add a tax allowance as part of their rates. The order is intended to improve the ability to attract capital by removing risk. ?It removes a cloud of uncertainty,? said the Interstate Natural Gas Association of America. The policy is an outgrowth of a case remanded by the U.S. Court of Appeals for the District of Columbia Circuit. The court held that the commission had not justified limiting the income tax allowance of a limited partnership to the proportion held by corporate partners. This policy had excluded tax allowances for the portion held by individuals since the partnership shielded that part of the partnership?s revenues from income tax until it was distributed to the individual, the commission explained. The court rejected this argument, noting that if any income tax allowance is provided, the total revenue stream is increased, benefiting the individual investors as well as the corporate owners because the additional income is shared on a pro rata basis. In FERC?s policy statement, the commission concluded that the court?s opinion has broader implications for other proceedings and other regulated entities. It also rejected the idea of setting rate of return on a pretax basis to avoid the issue.

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FERC Rates to Reflect All Potential Income Taxes

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