The abrupt nature of the Federal Energy Regulatory Commission’s (FERC) recent MLP tax policy statement may have jolted markets and stunned industry observers, but the announcement was just the latest episode in a long legal struggle that is unlikely to be over.
On March 15, FERC announced that it would no longer allow pipelines owned by MLPs to recover an income tax allowance in cost-of-service rates. Citing a decision by the U.S. Court of Appeals for the DC Circuit in July 2016, FERC Chairman Kevin McIntyre said that the court had been clear that the Commission’s income tax allowance policy, when coupled with its discounted cash flow methodology to set return on equity, constituted a “double recovery” of income tax costs for MLPs. Therefore, the income tax allowance that MLPs have enjoyed had to go.
Did it? FERC’s interpretation of the court’s directive was not accepted by all.