UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION

Transcription

1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Inquiry Regarding the Commission s ) Policy for Recovery of Income Tax Costs ) Docket No. PL17-1- REQUEST FOR CLARIFICATION, RECONSIDERATION, AND REHEARING OF ENBRIDGE ENERGY PARTNERS, L.P. AND SPECTRA ENERGY PARTNERS, LP Pursuant to Rules 212 and 713 of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission ( Commission or FERC ), 1 and Section 19(a) of the Natural Gas Act ( NGA ), 2 Enbridge Energy Partners, L.P. and its subsidiaries and affiliates (collectively, EEP ) and Spectra Energy Partners, LP and its subsidiaries and affiliates (collectively, SEP ) 3 hereby submit this Request for Clarification, Reconsideration, and Rehearing of the Commission s Revised Policy Statement on Treatment of Income Taxes issued March 15, 2018, in the captioned proceeding ( Revised Policy Statement ). 4 The Revised Policy Statement reverses a longstanding Commission policy on which a significant portion of the Commission-regulated pipeline industry has relied, stating that the Commission will no longer permit [master limited partnerships ( MLPs )] to recover an income tax allowance in its cost of service, 5 but fails to provide 1 18 C.F.R and (2017) U.S.C. 717r(a) (2012). 3 The relevant affiliates of EEP include Bakken Pipeline Company LP; Enbridge Energy, Limited Partnership; and North Dakota Pipeline Company LLC. The relevant affiliates of SEP include Algonquin Gas Transmission, LLC; Big Sandy Pipeline, LLC; East Tennessee Natural Gas, LLC; Market Hub Partners Holding, LLC; Ozark Gas Transmission, L.L.C.; Saltville Gas Storage Company L.L.C., and Texas Eastern Transmission, LP. SEP also has ownership interests in Gulfstream Natural Gas System, L.L.C.; Maritimes & Northeast Pipeline, L.L.C.; Sabal Trail Transmission, LLC; and Southeast Supply Header, LLC. 4 Inquiry Regarding the Commission s Policy for Recovery of Income Tax Costs, 162 FERC 61,227 (2018) ( Revised Policy Statement ). 5 Revised Policy Statement at P 2.

2 any evidentiary support or reasoned explanation for the reversal of the prior Commission policy. EEP and SEP have actively participated in the development of and support the request for clarification, reconsideration, and rehearing filed on behalf of the Interstate Natural Gas Association of America ( INGAA ) in this proceeding. 6 As discussed fully in the INGAA Request, the Commission has an ample record upon which to find that no double recovery exists when an MLP pipeline is permitted to recover a return on equity ( ROE ) calculated using the discounted cash flow ( DCF ) methodology and an income tax allowance. This record is in stark contrast to the lack of record evidence or explanation supporting the Commission s assertion that income taxes are recovered in an MLP pipeline s DCF-based ROE. For the reasons set forth herein, and set forth by INGAA, EEP and SEP request that the Commission reconsider or grant rehearing of its ruling in the Revised Policy Statement and, on reconsideration or rehearing, find that no such double recovery exists and reaffirm the income tax allowance policy established in on which Commission-regulated pipelines have relied. If the Commission declines to make a determination that no such double recovery exists in all instances, the Commission, at a minimum, should grant the clarifications requested herein, including clarifying that there is no double recovery of income tax costs when an income tax allowance is permitted for taxes on income allocated to corporate unitholders of an MLP. To the extent the Commission does not grant the clarifications and 6 Request for Clarification, Reconsideration, and Rehearing of INGAA, Docket No. PL (submitted April 16, 2018) ( INGAA Request ). 7 See Policy Statement on Income Tax Allowances, 111 FERC 61,139 (2005) ( 2005 Income Tax Policy Statement ). 2

3 reconsideration requested herein, EEP and SEP request rehearing of the Revised Policy Statement with respect to each of these points for the reasons detailed below. Given the potential significance of a reversal of the income tax allowance policy on the energy industry, EEP and SEP request the Commission promptly grant this request for clarification, reconsideration, and rehearing of the Revised Policy Statement. In support hereof, EEP and SEP show as follows: I. SPECIFICATIONS OF ERROR 1. The Commission erred by failing to engage in reasoned decision-making by reversing its income tax allowance policy for MLP pipelines. 2. The Commission acted arbitrarily and capriciously by establishing a rule without following the notice-and-comment requirements set forth in the Administrative Procedure Act. 3. The Commission acted arbitrarily and capriciously by failing to provide a reasoned explanation for reversing its prior policy and precedent. 4. The Revised Policy Statement arbitrarily treats two similarly situated pipelines differently, and therefore lacks reasoned decision-making. II. STATEMENT OF ISSUES 1. Whether the Commission acted arbitrarily and capriciously by failing to engage in reasoned decision-making in reversing its income tax allowance policy for MLPs. See, e.g., Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117, 2126 (2016) ( Encino ) (holding that an agency changing its policy must show that there are good reasons for the new policy); Nat l Ass n of Home Builders v. Defs. of Wildlife, 551 U.S. 644, (2007) (holding that the Court would vacate an agency s decision as arbitrary and capricious if the agency s decision offered an explanation for its decision that runs counter to the evidence before the agency ) (internal citation omitted); Motor Vehicle Mfs. Of U.S., Inc. v. State Farm Mut. Automobile Ins. Co., 463 U.S. 29, 43 (1983) (holding that under the arbitrary and capricious standard the agency must examine relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made ) (quoting Burlington Truck Lines v. U.S., 371 U.S. 156, 168 (1962); SEC v. Chenery Corp., 318 U.S. 80, (1943) (setting aside agency regulations that were not supported by the reasons that the agency advanced); Animal Legal Def. Fund v. Perdue, 872 F.3d 602, 3

4 619 (D.C. Cir. 2017) (holding that an agency s action may be consistent with its authorizing statute and yet arbitrary and capricious depending on the agency s ability to demonstrate that it engaged in reasoned decisionmaking ). 2. Whether the Commission acted arbitrarily and capriciously by establishing a binding rule without following the notice-and-comment requirements of the Administrative Procedure Act. 5 U.S.C. 553(b)-(c) (2012); see also, e.g., Nat l Min. Ass n v. McCarthy, 758 F.3d 243, 251 (D.C. Cir. 2014) ( An agency action that purports to impose legally binding obligations or prohibitions on regulated parties... is a legislative rule. ); Sprint Corp. v. FCC, 315 F.3d 369, 377 (D.C. Cir. 2003) (holding that the Commission s failure to issue a notice of proposed rulemaking and follow proper noticeand-comment procedures was enough to vacate a binding rule); General Elec. Co. v. EPA, 290 F.3d 377, (D.C. Cir. 2002) (holding that a binding legislative rule promulgated by the agency without a notice-andcomment period should be vacated). 3. Whether the Commission acted arbitrarily and capriciously by failing to provide a reasoned explanation for reversing its prior income tax allowance policy. See, e.g., Encino at 2120 ( in explaining its changed position, an agency must be cognizant that longstanding policies may have engendered serious reliance interests that must be taken into account. ) (citing FCC v. Fox Televisions Stations, Inc., 566 U.S. 502, (2009) ( Fox ) (agency may not depart from a prior policy sub silentio and must show that there are good reasons for the new policy ) (internal citation omitted)); see also Alcoa Inc. v. FERC, 564 F.3d 1342, 1347 (D.C. Cir. 2009) ( [w]hen an agency shifts course... it must provide a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored ) (quoting Entergy Servs., Inc. v. FERC, 319 F.3d 536, 541 (D.C. Cir. 2003)); Wis. Valley Improvement v. FERC, 236 F.3d 738, 748 (D.C. Cir. 2001) ( an agency acts arbitrarily and capriciously when it abruptly departs from a position it previously held without satisfactorily explaining its reason for doing so ); ANR Pipeline Co. v. FERC, 71 F.3d 897, 901 (D.C. Cir. 1995) ( where an agency departs from established precedent without a reasoned explanation, its decision will be vacated as arbitrary and capricious ) (internal citation omitted). 4. Whether the Commission s denial of an income tax allowance to all MLP pipelines unduly discriminates against MLP pipelines that are subsidiaries of C-corporations vis-à-vis C-corporation pipelines. Encino at 2126 ( an unexplained inconsistency in agency policy is a reason for holding an interpretation to be an arbitrary and capricious change from agency practice. ); Nat l Cable & Telecomms. Ass n v. Brand X Internet Servs., 545 U.S. 967, 981 (2005) ( unexplained inconsistency in agency practice is a reason for holding a policy reversal arbitrary and capricious under the Administrative Procedure Act, unless the agency adequately explains the 4

5 reasons for a reversal of policy ); see also CBS Corp. v. FCC, 663 F.3d 122, 165 n.8 (3d Cir. 2011) ( patently inconsistent applications of agency standards to similar situations are by definition arbitrary ) (quoting S. Shore Hosp., Inc. v. Thompson, 308 F.3d 91, 103 (1st Cir. 2002)); Zhao v. DOJ, 265 F.3d 83, 95 (2d Cir. 2001) ( application of agency standards in a plainly inconsistent manner across similar situations evinces such a lack of rationality as to be arbitrary and capricious. ) (citing Vargas v. INS, 938 F.2d 358, 362 (2d Cir. 1991)). III. REQUEST FOR CLARIFICATION, RECONSIDERATION, AND REHEARING On March 8, 2017, EEP and SEP filed with the Commission comments in response to the Commission s Inquiry Regarding the Commission s Policy for Recovery of Income Tax Costs ( NOI ). 8 EEP and SEP also participated in the development of comments filed by the Association of Oil Pipe Lines ( AOPL ) and INGAA in response to the NOI. 9 These comments, in conjunction with comments filed by other pipelines and industry groups, provided ample record upon which the Commission could satisfy the requirement of the court in United Airlines and provide sufficient justification for [the Commission s] conclusion that there is no double recovery of taxes for partnership pipelines receiving a tax allowance in addition to the discounted cash flow return on equity. 10 On March 15, 2018, the Commission issued the Revised Policy Statement, heavily relying on a misinterpretation of what United Airlines directed the Commission to do on remand. Contrary to what the Revised Policy Statement set forth, the court in United Airlines did not find that a double recovery occurs and did not require that the Commission reverse its income tax cost recovery policy to deny MLPs an income tax allowance. Rather, FERC 61,210 (2016). 9 Comments of AOPL, Docket No. PL (submitted Mar. 8, 2017); Comments of INGAA, Docket No. PL (submitted Mar. 8, 2017); Reply Comments of AOPL, Docket No. PL , (submitted Apr. 7, 2017); Reply Comments of INGAA, Docket No. PL , (submitted Apr. 7, 2017). 10 See United Airlines, Inc. v. FERC, 827 F.3d 122, (D.C. Cir. 2016) ( United Airlines ). 5

6 the court in United Airlines was clear 11 that shippers in that case did not request the court overturn, and that the court in any event could not overturn, its prior decision in ExxonMobil Oil Corp. v. FERC, 12 which upheld the Commission s policy set forth in the 2005 Income Tax Policy Statement that an income tax allowance should be permitted on all partnership interests, or similar legal interests, if the owner of that interest has an actual or potential income tax liability on the public utility income earned through the interest. 13 ExxonMobil further upheld 14 the Commission s decision to allow pass-through entities an income tax allowance on the grounds that public utility income of pass-through entities is attributed directly to the owners of such entities and the owners have an actual or potential income tax liability on that income, 15 and the court in ExxonMobil found the Commission reasonably relied on evidence that a full income tax allowance is necessary to ensure that corporations and partnerships of like risk will earn comparable after-tax returns. 16 None of these findings in ExxonMobil were overturned by United Airlines. The court merely asked the Commission to explain why double recovery does not occur when an MLP includes an income tax allowance in its cost of service rates. The Revised Policy Statement fails to adequately support or explain the Commission s reversal of the prior income tax allowance policy set forth in the 2005 Income Tax Policy Statement, particularly in light of the significant reliance of the natural gas and liquids pipeline industries on the prior policy. As further set forth below, EEP and SEP seek clarification, reconsideration, and rehearing of a number of issues raised by the Commission s reversal 11 United Airlines, 827 F.3d at F.3d 945 (D.C. Cir. 2007) ( ExxonMobil ). 13 Id. at 950 (quoting 2005 Income Tax Policy Statement at P 1). 14 Id. at Income Tax Policy Statement at P ExxonMobil, 487 F.3d at

7 of policy but not adequately addressed in the Revised Policy Statement. In addition to the arguments set forth herein, both INGAA and AOPL have put forth evidence, including testimony, an affidavit, and a declaration in response to the NOI, and, with respect to INGAA, in comments in response to the Revised Policy Statement, that explains why the Commission should find that no double recovery of income taxes occurs when an MLP receives both a DCF ROE and an income tax allowance. EEP and SEP hereby adopt and incorporate herein by reference the arguments and witness testimony, affidavit, and declaration developed with INGAA and AOPL, as well as the arguments set forth in the INGAA Request and the AOPL Request. A. The Revised Policy Statement misinterprets United Airlines as holding that a double recovery does in fact exist and, as a result, fails to undertake and provide the reasoned analysis required for the Commission to reverse its prior income tax policy. The Revised Policy Statement begins by accurately describing United Airlines as holding that the Commission failed to demonstrate that there was no double recovery of income tax costs when permitting an MLP to recover both an income tax allowance and a return on equity determined pursuant to the DCF methodology. 17 The Commission misinterprets this holding and the court s directive, however, and sets as the fundamental premise of the Revised Policy Statement that the United Airlines court itself ruled that allowing an MLP to recover both a DCF-based ROE and an income tax allowance results in a double recovery of income tax costs. 18 The court, however, did not make this finding, 17 Revised Policy Statement at P See, e.g., Revised Policy Statement at P 9 (citing United Airlines for the proposition that permitting an MLP to recover both an income tax allowance and DCF ROE leads to a double recovery of the MLP s income tax costs ); id. at P 11 (referring to the double-recovery finding in United Airlines ) (emphasis added); id. at P 16 (referring to the D.C. Circuit s finding that the DCF ROE itself enables the recovery of an MLP s first tier tax costs, rendering an income tax allowance unnecessary ) (emphasis added); id. at P 23 ( Erickson s life-cycle model does not undermine the fundamental premise of United Airlines that an income tax allowance for MLP pipelines leads to a double recovery ) (emphasis added). 7

8 but simply directed the Commission to explain why no double recovery exists. Specifically, the court in United Airlines found that the Commission had not provided sufficient justification for its conclusion that there is no double recovery of taxes for partnership pipelines receiving a tax allowance in addition to the discounted cash flow return on equity. 19 When a court remands a case to an agency, the agency retains the ability to give full effect to its duties in harmony with the views of the court, and is bound to deal with the problem afresh, performing the function delegated to it. 20 The D.C. Circuit s remand in United Airlines was no different. The court remanded to the Commission to allow the Commission to perform its own, renewed review of the doublerecovery issue and consider mechanisms for which the Commission can demonstrate that there is no double recovery. 21 Despite this directive, the Revised Policy Statement indicates that the Commission misunderstood its charge and its authority on remand. The entire premise of the Revised Policy Statement is that the court in United Airlines ruled that allowing an MLP to recover both a DCF-based ROE and an income tax allowance results in a double recovery of income tax costs. The Commission should grant reconsideration of the Revised Policy Statement and find that no double recovery of income tax costs occurs when MLPs are allowed both a DCF-based ROE and an income tax allowance. If the Commission fails to grant this reconsideration, the Commission has assumed without explanation the very thing it was charged to determine, and therefore failed to follow the directive of the D.C. Circuit on remand. 19 United Airlines, 827 F.3d at SEC v. Chenery Corp., 332 U.S. 194, (1947). 21 Id. at

9 Adopting as fact that a double recovery exists incorrectly substitutes the presumed judgment of the court for the required reasoned decision-making of the Commission itself. The Commission is the governmental authority with the expertise in establishing ratemaking methodology it is not the role of the courts to make administrative and policy decisions. 22 Courts have repeatedly recognized this expertise and provide deference to the Commission s ratemaking decisions, 23 as the D.C. Circuit did in United Airlines when remanding the case to the Commission. Nor does the Commission s willing acceptance of what it understands to be the court s finding in United Airlines give the imprimatur of an agency s informed, reasoned decision-making to the purported finding that a double recovery exists. The mere substitution of the Commission s own discretion with that of the court is neither reasoned nor agency decision-making, but an abdication of regulatory responsibility by the agency. The Commission s failure to explain why no double recovery exists and its adoption of a presumed finding by the court is a failure of reasoned decisionmaking as it reflects no decision-making at all FPC v. Hope Natural Gas Co., 320 U.S. 591, 617 (1944) ( Hope ) ( Congress has entrusted the administration of the Act to the Commission and not to the courts. ). 23 See, e.g., Nat l Ass n of Home Builders, 551 U.S. at (noting that a court dictating agency action on remand, jumped ahead to resolve the merits of the dispute, and erroneously deprived the agency of its usual administrative avenue for explaining and reconciling the arguably contradictory rationales that sometimes appear in the course of lengthy and complex administrative decisions. ); SEC v. Chenery Corp., 332 U.S. 194, (1947) (holding that when a court sets aside an agency order as unsupported by the reasons provided by the agency, the agency is bound to deal with the problem afresh on remand); SEC v. Chenery Corp., 318 U.S. 80, (1943); see also Elec. Consumers Res. Council v. FERC, 407 F.3d 1232, 1236 (D.C. Cir. 2005) (explaining the highly deferential standard applicable to whether rate design is just and reasonable and that the court defers to FERC resolution of factual disputes between expert witnesses). 24 See, e.g., Fox at (agency may not depart from a prior policy sub silentio and must show that there are good reasons for the new policy ); see also Alcoa Inc., 564 F.3d at 1347 (quoting Entergy Servs., Inc., 319 F.3d at 541); Wis. Valley Improvement, 236 F.3d at 748 ( an agency acts arbitrarily and capriciously when it abruptly departs from a position it previously held without satisfactorily explaining its reason for doing so ); ANR Pipeline Co., 71 F.3d at 901 (an agency must provide[] a reasoned explanation for departing from precedent or treating similar situations differently ) (internal citation omitted). 9

10 The Commission s failure to adequately explain its revised income tax policy is made more striking in light of the significant reliance of the natural gas and liquids pipeline industries on the prior policy. As discussed above, the Commission simply accepts as fact and without explanation that a double recovery exists. Working from that premise, the Commission dismisses evidence and arguments to the contrary without adequately analyzing or justifying the reversal in Commission policy, and without accounting for over a decade of reliance by the pipeline industry on the 2005 Income Tax Policy Statement. The Commission disregards the fact that its longstanding policy has engendered serious reliance interests that must be taken into account. 25 Given these reliance interests and the evidence and arguments presented by EEP and SEP, AOPL, INGAA, and others in response to the NOI and the Revised Policy Statement, the Commission should reverse its rulings and grant reconsideration of the Revised Policy Statement and should rely on the ample record evidence to find that no double recovery exists when an MLP pipeline is permitted to recover an ROE calculated using the DCF methodology and an income tax allowance. If the Commission does not grant reconsideration, it should grant rehearing on this point. B. The Commission should clarify that it did not intend to prohibit MLP pipelines from demonstrating why an income tax allowance that it seeks does not result in a double recovery of income taxes. Some of the Commission s language in the Revised Policy Statement could be interpreted as attempting to establish a rule immediately applicable to all MLP pipelines Encino, 136 S. Ct. at 2120 (citing Fox at 515). 26 For example, the Commission states that it will address the application of United Airlines to non-mlp partnership or other pass-through business forms as those issues arise in subsequent proceedings, Revised Policy Statement at P 3, which could be interpreted as pre-determining that all MLPs will be denied an income tax allowance without first undergoing an individual proceeding in which the MLP can put forth its 10

11 This is contrary to the precedential nature of policy statements issued by the Commission, which are not binding on regulated entities until applied in an individual proceeding. 27 Accordingly, the Commission should clarify that MLP pipelines are able to demonstrate in future proceedings that allowing the MLP an income tax allowance does not result in a double recovery of income taxes. If the Commission does not grant this clarification, EEP and SEP request reconsideration or rehearing of this point. The Administrative Procedure Act sets forth specific requirements for agency issuance of a new rule, including detailed notice requirements and opportunity to comment on the proposed rule. 28 The Administrative Procedure Act distinguishes between new rules and regulations and policy statements, and expressly excepts general statements of policy from the notice-and-comment requirement. 29 The reason for the exception, and the critical distinction between a rule and a policy statement, is the different practical effect that these two types of pronouncements have in subsequent administrative proceedings. 30 As explained by the D.C. Circuit, [a] properly adopted substantive rule establishes a standard of conduct which has the force of law. In subsequent administrative proceedings involving a substantive rule, the issues are whether the adjudicated facts conform to the rule and own position on the recovery of income tax costs. In addition, the Form 501-G filing proposed by the Commission in the Notice of Proposed Rulemaking issued contemporaneously with the Revised Policy Statement includes a question Is the Pipeline a separate income taxpaying entity? which, if answered in the negative, results in the Pipeline being unable to add an income tax allowance on the Form 501-G. 27 See, e.g., Nat l Min. Ass n, 758 F.3d at 251 ( An agency action that purports to impose legally binding obligations or prohibitions on regulated parties... is a legislative rule. ); Gen. Elec. Co., 290 F.3d at 381 (finding that a Guidance Document that the agency characterizes as a statement of policy to be a legislative rule because it has the force of law and imposes binding obligations on the parties) U.S.C. 553(b)-(c) U.S.C. 553(b)(3)(A). 30 Pac. Gas & Elec. Co. v. FPC, 506 F.2d 33, 38 (D.C. Cir. 1974). 11

12 whether the rule should be waived or applied in that particular instance. 31 By contrast, a policy statement does not establish a binding norm. It is not finally determinative of the issues or rights to which it is addressed. 32 Instead, a policy statement only announces what the agency seeks to establish as policy. 33 When applying a policy statement in each particular situation, the Commission is not determining whether the specific facts in the situation conform to the policy set forth in the policy statement. The Commission instead must be prepared to support the policy just as if the policy statement had never been issued. 34 If the Commission intends for the Revised Policy Statement to act as a rule immediately applicable to all MLP pipelines, then such rule is in error as it would directly contravene the express language in the Administrative Procedure Act. If, however, the Revised Policy Statement is a true policy statement, then the Commission should clarify that MLP pipelines have the right to provide evidence in any subsequently filed rate cases explaining why some or all of the income tax liability it generates is not recovered solely through the pre-investor tax DCF return. Specifically, the Commission should clarify that if an MLP pipeline provides such evidence as part of its case in a rate case proceeding, the Commission will not simply decline to consider this evidence in an evidentiary hearing in that rate case proceeding. A proposal by an MLP pipeline in a rate case proceeding to recover an income tax allowance, and evidence in support of that proposal, should be treated the same way as the Commission treats other components of a pipeline s cost of 31 Id; see also Clarian Health W., LLC v. Hargan, 878 F.3d 346, 357 (D.C. Cir. 2017) (stating that the most important factor in determining whether an action constitutes a legislative rule or a general statement of policy is whether the action has binding effect). 32 Id. 33 Id. 34 Id. 12

13 service: the Commission should accept the income tax allowance component and, if appropriate, suspend the filing subject to refund and the outcome of a hearing at which the issue of whether to allow an income tax allowance can be determined. The Commission should not simply reject an MLP s proposed income tax allowance in a suspension order as being impermissible based on the Revised Policy Statement. If the Commission fails to provide such a clarification, then the Revised Policy Statement is tantamount to a binding rule in violation of the Administrative Procedure Act s notice-and-comment rulemaking requirements and is in error. 35 Thus, to the extent the Commission fails to so clarify the Revised Policy Statement, EEP and SEP seek reconsideration or rehearing of the Revised Policy Statement. C. The Commission should clarify that the pre-investor tax DCF return does not recover the income taxes allocated to corporate unitholders of an MLP; failure to so clarify would arbitrarily and capriciously discriminate between similarly situated C-corporation and MLP pipelines. The failure of the Revised Policy Statement to adequately explain and support a finding of double recovery is further demonstrated when analyzing the implications of the Revised Policy Statement on MLP subsidiaries of C-corporations. If the Commission declines to reverse the double-recovery finding as requested herein, the Commission should go beyond reserving the double-recovery issue for the innumerable partnership and other pass-through business forms that are not MLPs like SFPP. 36 The Commission should clarify that with respect to MLPs with corporate unitholders, the DCF return does 35 See Nat l Min. Ass n, 758 F.3d at 253; Sprint Corp., 315 F.3d at 377 (holding that the Commission s failure to issue a notice of proposed rulemaking and follow proper notice-and-comment procedures was enough to vacate a binding rule); Gen. Elec. Co., 290 F.3d at (holding that a binding legislative rule promulgated by the agency without a notice-and-comment period should be vacated). 36 Revised Policy Statement at P 3. 13

14 not recover income taxes allocated to the corporate unitholder, and therefore there is no double recovery of income taxes when the MLP is permitted to recover an ROE calculated using the DCF methodology and an income tax allowance for the income taxes allocated to the corporate unitholder. Failure to grant the requested clarification results in an arbitrary and capricious decision because it would unduly discriminate between a C-corporation that spins off a portion of its pipeline subsidiaries through an MLP and a C-corporation that continues to own its pipeline subsidiaries without bringing in public investors through an MLP. 37 As further discussed below, immediately prior to a spin-off transaction where regulated assets are dropped down from a C-corporation into an MLP, the C-corporation would be eligible for both a DCF ROE and an income tax allowance. However, if the requested clarification is not granted, after the completion of a dropdown transaction the change in corporate form of a regulated pipeline from a C-corporation to an MLP could eliminate the ability to receive an income tax allowance despite absolutely no change in actual tax liability. The Commission provides no basis for this discriminatory treatment. 38 Assuming for the sake of argument that some investors in an MLP consider the tax effect of the distributions that the MLP will pay when the investor purchases its units on 37 Encino, 136 S. Ct. at 2126 ( an unexplained inconsistency in agency policy is a reason for holding an interpretation to be an arbitrary and capricious change from agency practice. ); Nat l Cable & Telecomms. Ass n., 545 U.S. at 981 ( unexplained inconsistency in agency practice is a reason for holding a policy reversal arbitrary and capricious under the Administrative Procedure Act, unless the agency adequately explains the reasons for a reversal of policy ); see also CBS Corp., 663 F.3d at 165 n.8 ( patently inconsistent applications of agency standards to similar situations are by definition arbitrary ) (internal quotation omitted); Zhao, 265 F.3d at 95 ( application of agency standards in a plainly inconsistent manner across similar situations evinces such a lack of rationality as to be arbitrary and capricious. ) (internal quotation omitted). 38 Encino, 136 S. Ct. at 2126 (noting that an unexplained inconsistency in agency policy can be an arbitrary and capricious change in agency practice). 14

15 the open market, the Commission has failed to explain how this assumption applies to the corporate unitholder of an MLP who did not purchase the units on the open market. The acquisition of the units, along with the interests and motives of a corporate sponsor unitholder in its subsidiary MLP, are fundamentally different from the purchase of units and the interests and motives of an individual investor seeking a return from an MLP unit. The corporation is driven by a need to create an investment vehicle and a more efficient way of raising capital for new pipeline development, without creating an additional level of taxation. The corporation s decision to spin off a portion of its assets to the public through an MLP structure is not premised on a calculation of any pre-tax return from the units it will hold in the MLP. Moreover, the corporation s expected tax liability does not change: the corporate sponsor will continue to be responsible for the taxes associated with the income allocated to it by the MLP at the same corporate income tax rate as it paid prior to spinning off an interest in its pipeline assets. Prior to the spin-off transaction, the corporation would have been entitled to both an income tax allowance for 100 percent of those taxes and a pre-investor tax DCF return. However, after the spin-off of an interest in the pipeline assets is completed, even though the MLP will generate nearly the same, or possibly even greater, 39 income tax liability for the corporate sponsor, the Revised Policy Statement appears to state that the pre-investor tax DCF return alone would recover the income tax liability. 39 The allocation of taxable income to MLP unitholders may differ among MLPs such that corporate unitholders may, for example, be allocated a higher percentage of the partnership s taxable income than would otherwise be allocated given their ownership interest in the MLP. This is one example of the numerous variations across MLPs that the Commission failed to consider when it used one MLP to generate a rule potentially binding multiple, dissimilar MLPs. 15

16 The Revised Policy Statement does not address the disconnect between the assumed pre-tax return demanded by individual, public unitholders purchasing units on the open market and the unchanged (or increased) allocation of income taxes to the corporate sponsor unitholder itself, which does not participate in the open market and therefore presumably does not make the same demand for a pre-tax return as the Commission asserts is made by individual unitholders. Because the interests and motives of a corporate sponsor unitholder in its subsidiary MLP are fundamentally different from the interests and motives of investors, the Commission should clarify that the pre-investor tax DCF ROE does not recover the income taxes that are allocated to the corporate sponsor unitholders of an MLP. If the Commission fails to grant this clarification, EEP and SEP request reconsideration or rehearing on this point. There is no explanation provided in the Revised Policy Statement justifying how, nor does the record support any explanation as to how, the same pre-investor tax DCF ROE assumptions apply to both individual investors and corporate sponsor unitholders. An income tax allowance policy that fails to reconcile the fundamental differences between individual and corporate sponsor unitholders would not be a product of reasoned decision-making and accordingly, is arbitrary and capricious. The pre- and post-spin-off comparison of an MLP and a C-corporation above also demonstrates how the Revised Policy Statement is inconsistent with the goal of the ratemaking process set forth in the Natural Gas Act as interpreted by the Supreme Court. As discussed in FPC v. Hope Natural Gas Co., a regulated pipeline must be allowed the opportunity to recover its full cost of service. 40 Denying an income tax allowance to an MLP whose corporate sponsor unitholder incurs the exact same income tax liability after a 40 Hope, 320 U.S. at

17 spin-off transaction as it would have incurred immediately prior to such spin-off transaction elevates corporate form over actual cost incurrence and results in the inability to recover actual tax liability paid on income from Commission-regulated assets. This is particularly true in light of the fact that the DCF ROE calculation does not account for any pre-tax return considerations of the corporate sponsor unitholder. The pre- and post-spin-off comparison of an MLP and C-corporation also illustrates that, unless the Commission grants the clarification requested, the Revised Policy Statement results in disparate treatment of MLPs and C-corporations based purely on corporate form. This result would be in direct contradiction to the Commission s obligation, as described in United Airlines, that it must still ensure parity between equity owners in partnership and corporate pipelines. 41 The Commission and the D.C. Circuit have both recognized that income taxes are a cost of operating a pipeline and both corporations and partnerships are entitled to recover this cost. 42 As discussed above, a corporate unitholder of an MLP does not consider income taxes as part of its return on the units it holds, and does not recover its income taxes in the DCF-based ROE. If a corporate unitholder also is not allowed an income tax allowance then, despite the fact that income taxes are a cost of operating a pipeline that should be recovered, there is no mechanism through which the corporate unitholder can recover this cost. This returns the Commission to the same situation it previously found untenable, which finding the D.C. Circuit supported in ExxonMobil, that allowing corporate pipelines to recover an actually incurred 41 United Airlines, 827 F.3d at See ExxonMobil, 487 F.3d at 945. The D.C. Circuit in United Airlines explicitly did not overturn ExxonMobil, and stated that in ExxonMobil the court held that, to the extent FERC has a reasonable basis for granting a tax allowance to partnership pipelines, it may do so. United Airlines, 827 F.3d at 135,

18 income tax cost while not allowing partnerships to recover an actually incurred income tax cost would be inequitable and would not maintain parity with pipelines that operate as corporations. 43 The effects of this disparity are significant and must be re-considered. Continuing with the example above, if the Commission does not grant the clarification requested, then the day after a C-corporation spins off a portion of its pipeline subsidiaries through an MLP, its cost of service would be reduced by the prior amount of its income tax allowance, even though from an actual cost incurrence standpoint there is no difference between the MLP and C-corporation pipeline. Purely as a result of a change in corporate structure, the just and reasonable rate on the MLP pipeline would be lower than the just and reasonable rate on the exact same C-corporation pipeline the day before the spin-off. As absurd a result as this appears, the effect of this potential shift in cost recovery already has been felt in the market disruption affecting MLPs, 44 and will continue to adversely affect MLPs in a disparate manner. The Commission should, at a minimum, grant the requested clarification in order to restore parity between MLPs and C-corporations to assure confidence in the financial integrity of MLPs so as to maintain its credit and attract capital. 45 Ensuring that MLPs continue to have access to capital will continue to further Congress goal of encouraging continued development of critical energy infrastructure through the use of the MLP structure ExxonMobil, 487 F.3d at See AOPL Request at 9; INGAA Request at See Hope, 320 U.S. at See INGAA Request, Section IV.D; AOPL Request, Section III.A. 18

19 IV. CONCLUSION EEP and SEP respectfully request that the Commission reverse its findings in the Revised Policy Statement on reconsideration or on rehearing and provide the requested clarifications, or if clarification is not provided then grant reconsideration or rehearing, in the manner and for the reasons set forth herein. WHEREFORE, EEP and SEP respectfully move for clarification, reconsideration, and rehearing of the Revised Policy Statement. Respectfully submitted, /s/ Steven E. Hellman Steven E. Hellman Associate General Counsel 5400 Westheimer Court Houston, TX (713) /s/ Jennifer R. Rinker Jennifer R. Rinker Senior Legal Counsel & FERC Chief Compliance Officer 5400 Westheimer Court Houston, TX (713) Counsel for Spectra Energy Partners, LP and Enbridge Energy Partners, L.P. Dated: April 16,

20 CERTIFICATE OF SERVICE I hereby certify that I have this 16th day of April, 2018, served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding. /s/ Damien R. Lyster Damien R. Lyster

21 Document Content(s) Request for Clarification Reconsideration and Rehearing.PDF