FERC modifies MLP tax policies

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Publication August 9, 2018

Gas pipelines got a break from the Federal Energy Regulatory Commission.

Many gas pipelines are owned by master limited partnerships or MLPs. These are a form of partnership with ownership units that can be purchased on a stock exchange or secondary market. Like all partnerships, they do not pay income taxes. Rather, each owner or partner pays taxes directly on his or her share of partnership income.

The Federal Energy Regulatory Commission decided on March 15 that pipeline companies that operate as MLPs should no longer be able to pass through an income tax charge to customers as part of cost-of-service rates. The commission said it is inappropriate for such pipeline companies to charge customers for taxes they do not pay.

Various airlines and oil refineries had sued to stop the tax charges. A US appeals court ordered FERC to take another look at the practice in July 2016. (For earlier coverage, see “Court Orders FERC to Revisit Pipeline Charges” in the August 2016 NewsWire, “Taxes in Transmission and Pipeline Tariffs” in the February 2017 NewsWire and “Pipelines and Partnerships” in the April 2018 NewsWire.)

When it ordered a halt to the practice in March, FERC asked for comments on whether it should require MLPs to make refunds to customers for taxes they already collected.

FERC said in a new order on July 18 that no refunds will be required, and it will not require the pipelines to reduce their rate bases by the tax overcharges, since doing so would violate a prohibition against retroactive ratemaking.

It reaffirmed its decision in March not to allow income tax charges to be passed through to customers, but called it a general policy that the commission will have to “fully support and justify” in individual cases. It said, “An entity such as an MLP pipeline will not be precluded in a future proceeding from arguing” that it is entitled to an income tax allowance if it can show that such an allowance will not lead to a “double recovery of investors’ income tax costs.”

The latest order can be found at 164 FERC ¶ 61,030.


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