North American Oil & Gas Pipelines

MAY 2018

North American Oil & Gas Pipelines covers the news shaping the business of oil and gas pipeline construction and maintenance in North America, including pipeline installation methods, integrity management innovations and managerial strategies.

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Page 16 of 43

generic statement of policy; it does not de- termine particular issues or rights for any specific pipeline, but merely announces FERC's intentions for the future. Accord- ingly, MLP pipelines have been told that their rates will go down, but they cannot seek rehearing from FERC or judicial re- view by the courts, at least not yet. In con- trast, FERC actually reduced SFPP's costs; it is aggrieved and, therefore, could seek rehearing and appeal. Nevertheless, one pipeline sought clari- fication of the policy statement. Domin- ion Energy claimed that the policy change is unreasonable, especially when applied to an MLP pipeline that is a subsidiary of a corporation. Dominion Energy ar- gued that, under the law, income from an MLP subsidiary pipeline is included in the parent corporation's federal tax liability. In other words, the parent corporation would lose money because it must pay taxes on the MLP pipeline's income, but it cannot recover the tax costs. The argu- ment makes sense. Whether FERC agrees is another issue. Two, FERC concurrently issued in Docket No. RM18-11-000 a Notice of Pro- posed Rulemaking (NOPR) that addresses the effects of this Revised Policy on the rates of interstate natural gas pipelines organized as MLPs. Based on the Policy Statement and the recent Tax Cuts and Jobs Act that reduced taxes, the NOPR proposes that pipelines: 1.) file a limited NGA section 4 rate case to address tax issues; 2.) commit to filing a general sec- tion 4 rate case in the near future; 3.) file a statement explaining why no rate adjust- ment is needed; or 4.) file a one-time re- port on the rate effect of the tax reduction. Interested parties may file comments on the NOPR by April 25. Three, FERC also issued in Docket No. RM18-12-000 a Notice of In- quiry (NOI) — a preliminary rulemaking notice, which precedes a NOPR — seek- ing comments on the effect of the Tax Cuts and Jobs Act on FERC-jurisdictional rates, particularly, whether, and if so how, FERC should address changes re- lating to accumulated deferred income taxes (ADIT) and bonus depreciation. Interested parties may file comments on the NOI by May 21. Four, FERC also instituted a couple of NGA Section 5 investigations, involving Midwestern Gas Transmission Co. (Docket No. RP18-441-000) and Do- minion Energy Overthrust Pipeline LLC (Docket No. RP18-442-000). Based on a review of cost and revenue information reported by the pipelines, FERC contends that they may be over-recovering their cost-of-service and, in particular, may be earning an impermissibly large return on equity, which will become even more pro- nounced given the recent reductions in corporate income tax rates. As a result, FERC directed each pipe- line to file a cost and revenue study based on information for the latest 12-month period available and established an evi- dentiary hearing to address the issues. Many believe that these two pipelines are just part of the first wave; don't be sur- prised, if FERC issues more NGA section 5 investigations. In sum, the MLP issue poses more problems for pipelines than the corpo- rate tax reduction. The logic underlying FERC's policy statement might be diffi- cult to assail. But a corporate tax reduc- tion does not necessarily translate into a dollar-for-dollar rate reduction. Rates, as you know, are made like "sausage" and often developed in a "black box." Nevertheless, there will be changes. Some have predicted a wave of MLP pipelines transforming themselves into corporations. Whether it's the antici- pated loss of a tax allowance or a possible rate reduction from decreased tax rates, pipelines are likely assessing their op- tions and consulting with their shippers. Speaking of shippers, many natural gas shippers take service under "negotiated" not "cost-of-service" rates. Look for pipe- lines to provide shippers with incentives to take negotiated rate service. Bottom line, FERC's recent actions could result in lower pipeline rates. Washington Watch is a bimonthly report on the oil and gas pipeline regulatory landscape. Steve Weiler is partner at Dorsey & Whitney LLC in Washington, D.C. Contact him at MAY 2 018 | North American Oil & Gas Pipelines 17

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