New Tax Law Exerts Downward Pressure on Incremental Project Recourse Rates

Pipeline expansion capacity is priced at the incremental cost of service of the new facilities to be constructed. This causes the incremental recourse rate to generally be higher than the otherwise applicable system recourse rate. That is no longer necessarily the case. In an order issued to Transcontinental Gas Pipe Line Company January 18, 2018, FERC recomputed a project’s proposed incremental recourse rate using the new 21 percent corporate tax rate. This lowered the incremental cost of service so that the incremental rate was lower than the otherwise applicable system recourse rate. 

As a consequence, FERC ordered the pipeline to charge the system recourse rate for the incremental project’s capacity. The sole shipper on this project had elected negotiated rates so this reduced recourse rate had no impact on its capacity costs. However, FERC’s action suggests that customers who have inked similar negotiated rate contracts for incremental expansions that are pending at the FERC might want to reevaluate that capacity’s value and consider reopening commercial negotiations with their pipeline counterparties.