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. PL REQUEST FOR CLARIFICATION OR IN THE ALTERNATIVE REHEARING OF KINDER MORGAN, INC. GAS PIPELINES Pursuant to section 19(a) of the Natural Gas Act ( NGA ) 1 and Rule 713 of the Federal Energy Regulatory Commission s ( FERC or the Commission ) Rules of Practice and Procedure, 2 Kinder Morgan, Inc. Gas Pipelines ( KMI Gas Pipelines ) 3 submits this request for clarification or, in the alternative, rehearing of FERC s March 15, 2018 Revised Policy Statement on Treatment of Income Taxes ( Revised Policy Statement ). 4 As demonstrated below, the Commission should clarify that the Revised Policy Statement does not apply a new income tax allowance policy to non-master Limited Partnership ( MLP ) pass-through entity pipelines. In the alternative, if the Revised Policy Statement was intended to apply a new income tax allowance policy to non-mlp pass-through entity pipelines, the Commission must grant this request for rehearing and reverse that decision U.S.C. 717r(a) (2012) C.F.R (2017). 3 For purposes of this pleading, the Kinder Morgan Gas Pipelines are: Natural Gas Pipeline Company of America LLC; Tennessee Gas Pipeline Company, L.L.C.; Southern Natural Gas Company, L.L.C.; Colorado Interstate Gas Company, L.L.C.; Wyoming Interstate Company, L.L.C.; El Paso Natural Gas Company, L.L.C.; Mojave Pipeline Company, L.L.C.; Bear Creek Storage Company, L.L.C.; Cheyenne Plains Gas Pipeline Company, LLC; Elba Express Company, L.L.C.; Kinder Morgan Louisiana Pipeline LLC; Southern LNG Company, L.L.C.; TransColorado Gas Transmission Company LLC. 4 Inquiry Regarding the Commission s Policy for Recovery of Income Tax Costs, 162 FERC 61,227 (2018) (Hereinafter Revised Policy Statement ). 5 KMI Gas Pipelines also supports an income tax allowance for pipelines organized as MLPs. Such a policy reflects Congress intent of encouraging investment through the use of the MLP structure. KMI Gas

2 The Commission s longstanding income tax allowance in effect prior to the Revised Policy Statement presumed that all entities were permitted an income tax allowance in their cost-of-service rates for all ownership interests with an actual or potential tax obligation. In this proceeding, the Commission should not lose sight of the sound cost-of-service ratemaking principles underlying the fundamental concept of an income tax allowance. The income tax allowance has always been recognized as a cost recoverable in a pipelines cost-of-service rates. The Commission should recognize the long history of pipelines organized as partnerships entitled to income tax allowances where the partners are tax-paying entities. Partnerships and other pass-through structures have been an efficient structure for allocating risk and deploying capital to support infrastructure development. These structures have been used to develop major off-shore pipelines like Stingray and Sea Robin and other major interstate pipelines like Rockies Express Pipeline, Midcontinent Express Pipeline, Fayetteville Express Pipeline, and many others. Income tax allowances for pipelines organized as partnerships or other pass-through structures with earnings subject to an income tax obligation of the parent C- corporation are not merely just and reasonable but also essential for the continued existence of pipelines with such structures. For pipelines with these structures and where a corporate income tax will be paid, the income tax allowance ensures that the actual return to shareholder is 100 cents on the dollar of return on equity. BACKGROUND For many years, Commission policy has entitled pipelines organized as non-mlp partnerships and other pass-through entities to an income tax allowance in their cost of Pipelines also supports the requests for rehearing submitted by the Interstate National Gas Association of America ( INGAA ) and SFPP, L.P. on this issue. 2

3 service rates. Prior to Lakehead, 6 the Commission s policy was that partnerships were entitled to an income tax allowance with respect to income attributable to its corporate partners. 7 When the Commission articulated its policy in Lakehead, the Commission continued its longstanding policy to permit recovery of an income tax allowance for the portion of income taxes attributable to its corporate partners, but clarified that an allowance was not permitted with respect to interests held by individual unitholders. 8 Lakehead was reviewed by the D.C. Circuit in BP West Coast and remanded to the Commission for it to adequately justify the policy s differential treatment of individual versus corporate partners. 9 However, notably, BP West Coast did not categorically prohibit the Commission from granting income tax allowances to pipelines that operated as limited partnerships. 10 Rather, the D.C. Circuit remanded because the Commission had offered no reasoning to support its distinction between corporate partners and individual partners. 11 Indeed, the court left open to the Commission the option of 6 Lakehead Pipe Line Co., 71 FERC 61,338 (1995). 7 Id. (citing Pelican Interstate Gas Sys., 29 FERC 61,062, at p. 61,135 (1984) and Riverside Pipeline Co., L.P., 48 FERC 61,309, at p. 62,017 (1989)). ( The Commission first concludes that Lakehead is entitled to an income tax allowance with respect to income attributable to its corporate partners. This accords with current Commission policy. When partnership interests are held by corporations, the partnership is entitled to a tax allowance in its cost-of-service for those corporate interests because the tax cost will be passed on to the corporate owners who must pay corporate income taxes on their allocated share of income directly on their tax returns. The partnership is in essence a division of each of its corporate partners because the partnership functions as a conduit for income tax purposes. ) 8 ExxonMobil Oil Corp. v. FERC, 487 F.3d 945, 948 (D.C. Cir. 2007) (citing Lakehead Pipe Line Co., 71 FERC 61,338, at p. 62,314 (1995)) ( ExxonMobil ); see also Revised Policy Statement at P 16 ( No double recovery results when corporate pipeline s costs of service includes an income tax allowance because [the] corporate income tax is paid directly by the corporation. ). 9 See BP West Coast Products, LLC v. FERC, 374 F.3d 1263, 1290 (D.C. Cir. 2004). 10 ExxonMobil, 487 F.3d at Id. at

4 developing a superior rationale to support a continued federal income tax allowance solely for corporate partners. 12 In response to the BP West Coast remand, rather than justify Lakehead, the Commission adopted a new policy in 2005 the Policy Statement on Income Tax Allowances 13 which permitted an income tax allowance for all ownership interests with an actual or potential tax liability. 14 The Commission found it would be inequitable to grant a full income tax allowance to corporations while denying the same to pipelines owned by limited partnerships. 15 The D.C. Circuit upheld this new policy in ExxonMobil, concluding that it was not arbitrary or capricious for the Commission to allow regulated pipelines operating as limited partnerships to recover an income tax allowance to the extent its partners incur actual or potential income tax liability on their respective shares of the partnership income. 16 This proceeding stems from United Airlines, a 2016 opinion concerning the Commission s grant of an income tax allowance to one MLP pipeline in particular, SFPP, L.P. ( SFPP ), in which the D.C. Circuit remanded the MLP tax allowance issue to the Commission, finding that FERC has not provided sufficient justification for its conclusion that there is no double recovery of taxes for partnership pipelines receiving a tax allowance. 17 Notably, the D.C. Circuit clarified that to the extent FERC has a 12 SFPP, L.P., 111 FERC 61,334, at P 21 (2005). 13 Policy Statement on Income Tax Allowances, 111 FERC 61,139, at P 33, reh g denied, 112 FERC 61,203 (2005) ( 2005 Tax Policy Statement ). 14 See 2005 Tax Policy Statement. 15 Id. at pp. 61, ExxonMobil, 487 F.3d at United Airlines, Inc. v. FERC, 827 F.3d 122, (D.C. Cir. 2016) ( United Airlines ), on remand, SFPP, L.P., Opinion No. 511-C, 162 FERC 61,228 (2018). 4

5 reasoned basis for granting a tax allowance to partnership pipelines, it may do so. 18 In response to the remand, the Commission initiated this proceeding with a notice of inquiry. 19 After receiving comments, the Commission reversed its position one that had withstood judicial review and issued its Revised Policy Statement which the Commission has implemented in subsequent proceedings by presuming that even non- MLP pass-through entity pipelines must address the double recovery concern from United Airlines. The Commission has made this apparent policy change even though it recognizes that the record before it in this proceeding does not support applying the holding from United Airlines to non-mlp pass-through entities. Thus, by its own admission, the Commission s apparent policy change is not supported by substantial evidence in the record and would therefore be arbitrary and capricious. Accordingly, the Commission must clarify that the Revised Policy Statement does not apply a new income tax allowance policy to non-mlp pass-through entities or require those pipelines to satisfy any presumption beyond the requirements of the 2005 Policy Statement on Income Tax Allowances in order include an income tax allowance in rates. SPECIFICATIONS OF ERRORS In compliance with Rule 713(c)(1), KMI Gas Pipelines specify the following errors in the Revised Policy Statement: 1. The Commission failed to engage in reasoned decision-making in reversing its income tax allowance policy for non-mlp pass-through entity pipelines. 2. The Commission failed its responsibility under the NGA and Hope to ensure that investors in non-mlp pass-through entity pipelines earn similar returns as investors in C-corporation pipelines of commensurate risk. 18 United Airlines, 827 F.3d at 135 (citing ExxonMobil, 487 F.3d at 955). 19 Inquiry Regarding the Commission s Policy for Recovery of Income Tax Costs, 81 Fed. Reg. 94,366 (Dec. 23, 2016), FERC Stats. & Regs. 35,581 (2016) ( NOI ). 5

6 STATEMENT OF ISSUES In compliance with Rule 713(c)(2), KMI Gas Pipelines submit the following 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 non- MLP pass-through entity pipelines. See Allentown Mack Sales & Service, Inc. v. NLRB, 522 U.S. 359, 374 (1998). 2. Whether the Commission acted arbitrarily and capriciously in reversing its income tax allowance policy for non-mlp pass-through entity pipelines by failing its responsibility under the NGA and Hope to ensure that investors in the companies it regulates earn similar returns in companies of commensurate risk. See FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944) ( Hope ). REQUEST FOR CLARIFICATION OR, IN THE ALTERNATIVE, REHEARING For the reasons explained below, the Commission should clarify that it has not adopted a new income tax allowance policy for non-mlp pass-through entities in the Revised Policy Statement. In the alternative, if the Commission has adopted a new policy towards non-mlp pass-through entities, it must grant rehearing and reverse its decision. I. The Commission should clarify that it has not changed its income tax allowance policy for non-mlp pass-through entity pipelines. The KMI Gas Pipelines acknowledge that the Revised Policy Statement states that it does not address other, non-mlp partnership or other pass-through business forms, 20 but since its issuance, the Commission s actions towards non-mlp pass-through entity pipelines suggests that the Commission s income tax allowance policy for non-mlp pass-through entities has in fact changed. The Commission s 2005 Policy Statement on Income Tax Allowances presumed that non-mlp pass-through entities were permitted an 20 Id. at P 45. 6

7 income tax allowance in their cost-of-service rates for all ownership interests with an actual or potential tax obligation. 21 The Revised Policy Statement appears to reverse this presumption by declaring that all non-mlp pass-through entities will need to address the concerns raised by the court in United Airlines[.] 22 Further, Commission actions since the issuance of the Revised Policy Statement suggest that the Commission presumes that such entities are double-recovering if they receive any income tax allowance in their cost-of-service rates. Additionally, the Revised Policy Statement appears to have shifted the non-mlp pass-through entities burden of proof, from showing that its partners incur actual or potential income tax liability to proving a negative that recovering an income tax allowance will not be a doublerecovery. The Commission has done this even though the United Airlines court did not call into question the appropriateness of an income tax allowance for pipeline entities that are held by corporations that have an income tax obligation on the pipeline s earnings. To clear up this confusion and confirm that the Commission has not reversed its policy presumption, the Commission should explicitly clarify that it has not changed the income tax allowance policy for non-mlp pass-through entities. a. Pursuant to the Revised Policy Statement, the Commission appears to have applied to non-mlp pass-through entities a new policy which presumes double recovery. Since the issuance of the Revised Policy Statement, the Commission appears to presume that all partnerships and other pass-through entities should not receive a tax allowance. For example, shortly after the issuance of the Revised Policy Statement, FERC s Office of Energy Market Regulation ( OEMR ) submitted data requests in CP 21 See 2005 Tax Policy Statement. 22 Revised Policy Statement at PP 3, 45. 7

8 dockets concerning certificate applications of pipelines, which asked non-mlp passthrough entity pipelines to address their proposed income tax allowances in the context of the Revised Policy Statement and asked whether, in the wake of the Revised Policy Statement, if these non-mlp pass-through entities were still proposing an income tax allowance at all. Most significantly, Commission Staff asked non-mlp pass-through entity pipelines why their proposal to include an income tax allowance will not result in a double recovery of income taxes. These questions imply a wholly new Commission policy towards non-mlp pass-through entities a presumption that they are not entitled to an income tax allowance and that including one in rates is double-recovering. The Commission s new presumption that non-mlp pass-through entities are not entitled to an income tax allowance is also hard-wired into the proposed FERC Form No. 501-G. As explained in the Notice of Proposed Rulemaking issued on March 15, 2018, 23 [p]rospectively for pass-through entities, FERC Form No. 501-G assumes a federal and state income tax expense of zero. 24 For non-mlp pass-through entities which disagree notwithstanding United Airlines, they must submit a statement with supporting documentation to justify why it should continue to receive an income tax allowance in its existing rates. 25 The Commission cannot use a policy statement purportedly limited to MLPs as a basis for requiring other pipelines that are not MLPs like SFPP 26 to bear the burden of proving that their existing rates remain just and reasonable. In fact, under the NGA, a pipeline has no obligation to prove that its existing rates are just and reasonable. 23 Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate, 162 FERC 61,226 (2018) ( NOPR ). 24 Id. at P Id. 26 Revised Policy Statement at P 3. See also at P 45 ( [t]his Revised Policy Statement does not address other, non-mlp partnership or other pass-through business forms. ) 8

9 If the Commission believes a rate has become unjust and unreasonable, the Commission can initiate a proceeding pursuant to Section 5 of the NGA and hold a hearing in which the Commission would bear the burden of proving the rate unjust and unreasonable due to a double recovery. But the Commission has made no such determination, held no such hearings, and has not borne the burden. Instead it has impermissibly saddled non-mlp pass-through entities with a new burden. Furthermore, in a proceeding pursuant to Section 4 of the NGA, a pipeline has a right to propose rates and has the burden to demonstrate that those rates are just and reasonable. 27 Each pipelines individual circumstance determine factually whether they are entitled to an income tax allowance. Previous to the Revised Policy Statement, to justify a proposed income tax allowance, a pass-through entity pipeline merely had to show that its partners incur actual or potential income tax liability on their respective shares of the partnership income. 28 Now, it appears that the Commission is requiring a much higher showing that the pass-through entity pipeline has the burden to show its proposed income tax allowance will not be a double-recovery. Thus, these pipelines must now prove a negative, a material expansion of the evidentiary burden under Section 4. Pipelines should not have to defend a pre-ordained assumption that they are not entitled to an income tax allowance as the Commission s actions following the Revised Policy Statement suggest. As is evident from just these examples, the Commission appears to be applying a new income tax allowance policy to non-mlp pass-through entities, without any notice, U.S.C. 717c(e). Tenn. Gas Pipeline Co., 76 FERC 61,022, at p. 61,098 (1996), aff d on reh g, 80 FERC 61,070 (1997), pet. denied sub nom., Complex" Consol. Edison Co. of NY, Inc., v. FERC, 165 F.3d 992, 1010 (D.C. Cir. 1999). 28 ExxonMobil, 487 F.3d at

10 comment or analysis. The Commission now appears to presume that they are not entitled to an income tax allowance and including one in rates is double-recovering, a new approach which amounts to an impermissible burden shift by the Commission, violating the fundamental constructs of burden of proof enshrined in the NGA. Therefore, the Commission should explicitly clarify that it has not changed the income tax allowance policy for non-mlp pass-through entities. II. In the alternative, if the Commission adopted a new policy towards non-mlp pass-through entities, it must grant rehearing and reverse its decision. a. The new policy towards non-mlp pass-through entities lacks support of substantial evidence in the record and thus is arbitrary and capricious. If the Commission has adopted a new policy towards non-mlp pass-through entities, it must grant rehearing and reverse its decision. The Revised Policy Statement does not include any of the reasoned decision-making required to justify the Commission s policy change related to non-mlp pass through entities. 29 The Commission explicitly stated that the Revised Policy Statement failed to provide a reasoned-basis for changing the income tax allowance policy for non-mlp pass-through entities, declaring this record does not provide a basis for addressing the United Airlines double-recovery issue for the innumerable partnership and other pass-through business forms that are not MLPs like SFPP. 30 Yet that is the policy that the Commission is now implementing through Commission Staff data requests and the proposed FERC Form No. 501-G. The Commission s adoption of this new policy towards non-mlp pass through entities without the support of substantial evidence in the record is a failure to apply 29 See, e.g., Allentown Mack Sales & Serv., 522 U.S. at Revised Policy Statement at P 3. See also at P 45 ( [t]his Revised Policy Statement does not address other, non-mlp partnership or other pass-through business forms. ) 10

11 reasoned decision-making and thus is arbitrary and capricious. 31 Accordingly, the Commission must grant rehearing. b. The new policy towards non-mlp pass-through entities violates Hope for failing to ensure that investors in non-mlp pass-through entities earn similar returns as investors in C-corporations. In denying an income tax allowance to a non-mlp pass-through entity owned fully or partially by a C-corporation, the Commission fails to meet its obligation to ensure commensurate... returns on investments for equity owner[s] as required under Hope. 32 Under the Commission s application of the Revised Policy Statement, as evidenced by the Commission s data requests in certificate application proceedings and in Form No. 501-G, a pipeline organized as a C-corporation would be permitted to recover a tax allowance, but the non-mlp pass-through entity subsidiary of the same C- corporation would not, despite the parent C-corporations owing similar tax liabilities in both cases. This disparate treatment would occur even though a C-corporation owning a non-mlp pass-through entity pipeline has the same ultimate tax liability as if the pipeline itself is a C-corporation, because the income from the non-mlp pass-through entity subsidiary pipeline is included in the calculation of the parent C-corporation s federal tax liability. The Commission has long recognized, and the courts have affirmed, calculation of pipeline income tax allowance on a stand-alone basis without reducing it to reflect 31 ANR Pipeline Co. v. FERC, 71 F.3d 897, 901 (D.C. Cir. 1995) ( [W]here an agency departs from established precedent without a reasoned explanation, its decision will be vacated as arbitrary and capricious. ) See also Greater Boston Television Corp. v. F.C.C., 444 F.2d 841, 852 (D.C. Cir. 1970)( An agency changing its course must supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored, and if an agency glosses over or swerves from prior precedents without discussion it may cross the line from the tolerably terse to the intolerably mute. ) 32 United Airlines, 827 F.3d at 137 (citing Hope, 320 U.S. at 603). 11

12 tax savings resulting from use of a consolidated corporate return. 33 There is no legitimate justification for this disparate treatment of two similarly situated owners. KMI, a C-corporation, is an example of an entity which would be harmed by the Commission s discriminatory treatment, as it owns non-mlp pass-through entities and pays taxes on the revenues from those pipelines that flow up to it. Since KMI pays taxes on the revenue flowing to it from its non-mlp pass-through entities, there is no justification for denying KMI an income tax allowance for its revenue stemming from these ownership interests. 34 Accordingly, the Commission must grant rehearing. CONCLUSION WHEREFORE, for the reasons stated herein, the Commission should grant the request for rehearing. Respectfully submitted, /s/ J. Curtis Moffatt J. Curtis Moffatt Vice President and General Counsel Kinder Morgan, Inc Louisiana St., Suite 1001 Houston, TX Office: Curt_Moffatt@kindermorgan.com Paul Korman Philip W. Mone Van Ness Feldman, LLP 1050 Thomas Jefferson St NW 33 See, e.g., City of Charlottesville, 774 F.2d 1205 at 1216 (1985) ( The point is that it is an expense of the consolidated company caused by the jurisdictional activities and thus properly assessed against the ratepayers. ) 34 Entitling non-mlp pass-through entity pipelines an income tax allowance to the extent their units are held by C-corporations would reflect the Commission s previous policy under Lakehead. As noted above, Lakehead was addressed in BP West Coast where the D.C. Circuit left open to the Commission the option of developing a superior rationale to support a continued federal income tax allowance solely for corporate partners. SFPP, L.P., 111 FERC 61,332 at P

13 Seventh Floor Washington, DC (202) Dated: April 16, 2018 Attorneys for the Kinder Morgan, Inc. Gas Pipelines. 13

14 CERTIFICATE OF SERVICE I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Federal Energy Regulatory Commission in this proceeding. Dated at Washington, DC this 16 th day of April /s/ Marco Bracamonte Marco Bracamonte, Paralegal Van Ness Feldman, LLP 1050 Thomas Jefferson Street, NW Washington, DC 20007

15 Document Content(s) Kinder Morgan Req for Reh'g PL17-1 (041618).PDF