FERC Faces Complications in Adjusting Gas Pipeline Rates to Reflect Lower Federal Corporate Tax Rates

One of the major recent changes made to the federal tax code as the result of the Tax Cuts and Jobs Act was the reduction in corporate income tax from 35 percent to 21 percent. As soon as the corporate tax cuts took effect at the beginning of 2018, the Federal Energy Regulatory Commission (FERC) started to received requests that it use its authority under Section 5 of the Natural Gas Act (NGA) to lower pipeline rates to reflect the reduced corporate tax rates. Absent such action, it is alleged, recourse rates will be inflated and therefore no longer “just and reasonable” as the NGA requires.

In one request to FERC, the American Public Gas Association (APGA) estimates that firm recourse rates should be reduced by 5-9 percent to pass through these tax savings. A related issue is how to handle taxes collected from shippers which have not been paid but recorded in the pipeline’s accumulated deferred income tax (ADIT) account. Such ADIT accounts are likely overfunded because they were collected when the corporate tax rate was 35 percent and, if so, such monies should be refunded to shippers or used to reduce rates going forward. APGA also asks that FERC take immediate industry-wide action, but it is not clear whether FERC can take this approach. Many rates in effect today were established under settlements that prohibited the rates from changing for a period of time. Does the FERC want to walk away from its longtime support of the sanctity of settlements and order changes in such rates before the rate change moratorium periods end? On a more nuts-and-bolts level, how will FERC investigate and modify rates to reflect lower tax expenses if existing recourse rates are based on a “black-box” settlement that does not specify, for example, the debt-to-equity ratio or the debt and equity cost rates used?

In 1987, FERC adopted in Order No. 475 a voluntary, abbreviated rate filing procedure to allow electric utilities to file for rate decreases to reflect the decrease in the federal tax rate as a result of the Tax Reform Act of 1986. The procedure adopted was a formula reduction in rates based on data supplied by the utility in its most recent rate case. FERC did not use this approach to downwardly adjust gas pipeline rates. At the time, most gas pipelines had tax trackers in their tariffs that caused recourse rates to adjust automatically when tax liabilities changed. That is no longer the case. As a result, if FERC does favor an industry-wide approach to address this issue, an order modeled on Order No. 475 may be in the offing.