​Income Taxes in Rates of Partnerships

In March 2018, FERC issued a Revised Policy Statement and Opinion No. 511-C, the remand order pursuant to United Airlines (a DC Court of Appeals decision addressing income taxes for master limited partnerships (MLP)).  These FERC decisions explained that United Airlines’ income tax double-recovery concern precludes an MLP pipeline from claiming an income tax allowance in its cost of service based upon two findings:

1. MLP pipelines do not incur income taxes at the entity level.  Instead, the MLP unitholders are individually responsible for paying taxes on their allocated share of the MLP partnership’s taxable income; and
2. The ROE determined using the DCF methodology incorporates the MLP unitholder’s investor-level taxes. This is because the DCF methodology estimates the returns a regulated entity must provide to investors in order to attract capital.  To attract capital, entities must provide investors a pre-investor tax return, i.e., a return that covers investor-level taxes and leaves sufficient remaining income to earn investors’ required after-tax return.  Accordingly, the returns produced by the DCF methodology are pre-investor tax returns, meaning that they incorporate the MLP unitholders’ income taxes.

​On February 21, 2019, FERC issued an Order (Docket No. RP18-922) preliminarily finding that Trailblazer Pipeline’s rates should not include an income tax allowance on that part of investor supplied capital that is from certain Private Owners as the Private Owners incur only one level of taxation, specifically a personal income tax, and the DCF ROE incorporates investor-level taxes.  Thus, because the Private Owners incur only one level of taxes on Trailblazer’s income and the DCF ROE already includes a level of taxation, providing the Private Owners an income tax allowance in the Trailblazer cost of service would compensate the Private Owners twice for their single level of taxation.  FERC also preliminarily found that it is proper to include an income tax allowance in Trailblazer’s rates for the part of investor supplied capital coming from its parent corporation, which does pay corporate taxes.  In summary, FERC found that: 

1. For owners taxed as individuals, United Airlines’ double-recovery concern generally precludes an income tax allowance because: (i) DCF returns already include investor-level taxes; and (ii) these individuals incur only one level of taxation.
2. For owners that are taxed as corporations, United Airlines’ double-recovery concern generally does not preclude an income tax allowance because: (i) the DCF returns only include investor-level taxes; and (ii) the corporate owner incurs a corporate income tax liability prior to the investor-level tax on the corporation’s dividends reflected in the DCF return.

 
FERC emphasized that these findings, which address complex factual and policy matters, are preliminary and may change based upon subsequent evidence and argument from the ongoing administrative law judge hearing where these issues are to be fully litigated.