Pipes Cite FERC's Treatment of Partnership Tax Liability as 'Significant'

The year 2005 saw a smooth change of the guard at FERC as Chairman Joseph Kelliher took over the reins from Pat Wood in mid-year, and was marked by significant policy changes and clarifications on the natural gas side, along with agency approval of several key liquefied natural gas (LNG), pipeline and storage projects.

"A very significant decision that dealt with a complex issue and had a lot of impact on pipelines as an investment" involved whether partnerships should be able to recover actual or potential income tax liability in their cost-of-service rates, said Donald Santa, president of the Interstate Natural Gas Association of America (INGAA), which represents interstate natural gas pipelines, and a former FERC Commissioner.

Last May, the Federal Energy Regulatory Commission adopted a policy statement allowing regulated energy companies, such as interstate gas pipelines and public utilities, that are partnerships to include actual or potential income taxes in their cost-of-service rates. The Commission took this action after the U.S. Court of Appeals for the District of Columbia Circuit in July 2004 vacated and remanded an agency ruling that provided for an income tax allowance in the rates of SFPP LP, an oil pipeline limited partnership (see Daily GPI, May 5).

At issue in the case was whether partnerships, such as SFFP, should be allowed tax recovery even though they (the entity) typically do not have any tax liability. The court returned the case, BP West Coast Producers LLC vs. FERC, to the Commission to articulate its reason for allowing the pipeline partnership to collect income taxes in its rates. FERC substantiated its reasoning for its decision, saying that income taxes are a cost of a partnership's operations that are paid by the individual partners. It further concluded that the ruling extended beyond SFFP to other capital structures involving partnerships and other forms of ownership in the regulated oil, natural gas and electricity industries.

"Even though it was an oil pipeline case, it had ramifications for all partnerships" that own pipelines and other energy infrastructure, INGAA's Santa told NGI. "Had the Commission disallowed [the tax recovery], it would have cut the legs out from under partnerships owning pipelines," he noted.

Santa also gave high marks to the Commission for its quick "responsiveness" to the gas pipelines and public power companies that were affected by Hurricanes Katrina and Rita. FERC granted immediate waivers of its standards of conduct to allow for speedy restoration, gave pipelines authority to waive penalties of affected shippers, and waived individual tariffs of several pipelines (Enbridge-owned Stingray Pipeline Co., for instance) to allow for the delivery of gas production that had been shut in off the coast of Louisiana, and to allow pipes to bypass affected gas processing facilities in the state.

In a single order in November, the Commission also took steps to spur and expedite repairs and the construction of new interstate gas pipeline facilities in an effort to bolster deliveries of gas supplies from the hurricane-battered Gulf Coast region. Specifically, it waived regulations on a temporary basis to raise the cost limitations for projects that natural gas pipelines can construct without prior specific authorizations from FERC under Part 157 blanket certificates, and it expanded the definition of eligible pipeline projects to include mainline facilities (see Daily GPI, Nov. 18). The waivers apply to projects that are constructed and placed into service by Oct. 31, 2006. Shortly thereafter, INGAA petitioned FERC to make these changes to blanket certificates permanent, but the agency has yet to respond (see Daily GPI, Nov. 23) .

FERC further said it was willing to consider requests for the cost recovery of hurricane-related damages, provided the filings were jurisdictional to the federal agency.

Before breaking for the holidays, FERC proposed long-sought reforms of the agency's pricing policies to promote the construction of more natural gas storage sites in the United States -- an action that Kelliher said would help improve the operation of the gas markets and reduce price volatility. "It remains to be seen how significant that order will be," Santa said.

"One thing appears to be encouraging -- they [FERC] claim they will open up the market power test to include substitutes," he noted. Under the proposed rule, the agency said it would consider potential substitutes to storage in a relevant product market when deciding whether market power exists. The potential substitutes could include available pipeline capacity, supplies from local gas production, LNG and released transportation capacity, which are available to the same customers that would be served by new storage operations (see Daily GPI, Dec. 16).

In 2005, there was a "continuation of a positive direction by the Commission" in approving a number of "well presented" certificate applications for gas pipeline, LNG and storage projects, according to Santa. FERC's Office of Energy Projects "is really doing a fine job" of moving project applications to expand the gas infrastructure in the U.S., he said.

Some believe the most important policy event this past year was the clarification by Congress in its Energy Policy Act of 2005 that federal regulators, not the states, have exclusive jurisdiction over the siting of new LNG facilities onshore. But Santa isn't one of them. "It was important that Congress came down pretty emphatically on the side of federal jurisdiction," but he believes the particular facts of the case that led to the lawmakers' action were "limited in scope" and may have only measured ramifications for the rest of the LNG industry.

A pitched battle between California regulators and FERC over who had siting authority over Sound Energy Solutions' proposed terminal in Long Beach Harbor caused lawmakers to intervene to settle the issue. The two sides quietly ended their nearly 20-month jurisdictional dispute in October, shortly after the energy bill was enacted into law (see Daily GPI, Oct. 6).

FERC failed to take generic action on gas quality and LNG interchangeability in 2005, but "it doesn't surprise me that the Commission held off on that issue," Santa said. He noted that the "lack of any consensus by industry makes it a difficult issue to tackle," and it poses a challenge with respect to determining what the chemical composition of gas should be.

Santa also believes that the transition in the chairmanship this year, the additional FERC workload created by the Energy Policy Act and the aftermath of the Gulf Coast hurricanes were in part responsible for the agency's inaction on generic gas quality and interchangeability standards in 2005. FERC during the past four months has been "consumed" with implementing provisions in the new energy law.

Santa pointed out that a number of individual gas quality cases currently are being litigated at the Commission. "It may be that the individual cases define the resolution [of the issue] rather than any generic" action.

As for the change in FERC leadership in 2005, Santa said Kelliher "was able to hit the ground running" because he "already knew the lay of the land" at the Commission. "This made for a seamless transition.

Copyright 2005 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.


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