162 FERC ¶ 61,227

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Docket No. PL17-1-000

Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs

(Issued March 15, 2018)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Revised Policy Statement on Treatment of Income Taxes

SUMMARY: Following the decision of the U.S. Court of Appeals for the District of 

Columbia Circuit in United Airlines, Inc., et al. v. Federal Energy Regulatory Commission, 

827 F.3d 122 (D.C. Cir. 2016), the Commission issued a notice of inquiry (NOI) seeking

comment regarding how to address any double recovery resulting from the Commission’s 

current income tax allowance and rate of return policies. The Commission finds that an 

impermissible double recovery results from granting a Master Limited Partnership (MLP) 

pipeline both an income tax allowance and a return on equity pursuant to the discounted 

cash flow methodology. Accordingly, the Commission revises its policy and will no longer 

permit an MLP to recover an income tax allowance in its cost of service. While all 

partnerships seeking to recover an income tax allowance will need to address the doublerecovery concern, the Commission will address the application of United Airlines to nonMLP partnership forms as those issues arise in subsequent proceedings. 

EFFECTIVE DATE: This Revised Policy Statement will become effective [date of 

publication in the Federal Register].

FOR FURTHER INFORMATION CONTACT:
Docket No. PL17

-1-000- 2 -

Glenna Riley (Legal Information)

Office of the General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-8620

Glenna.Riley@ferc.gov

Andrew Knudsen (Legal Information)

Office of the General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-6527

Andrew.Knudsen@ferc.gov

James Sarikas (Technical Information)

Office of Energy Markets Regulation

Federal Energy Regulatory Commission 

888 First Street, NE 

Washington, DC 20426 

(202) 502-6831

James.Sarikas@ferc.gov

Scott Everngam (Technical Information)

Office of Energy Markets Regulation

Federal Energy Regulatory Commission 

888 First Street, NE 

Washington, DC 20426 

(202) 502-6614

Scott.Everngam@ferc.gov

SUPPLEMENTARY INFORMATION: 
162 FERC ¶ 61,227

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Kevin J. McIntyre, Chairman;

 Cheryl A. LaFleur, Neil Chatterjee,

Robert F. Powelson, and Richard Glick.

Inquiry Regarding the Commission’s Policy for 

Recovery of Income Tax Costs

Docket No. PL17-1-000

REVISED POLICY STATEMENT ON TREATMENT OF INCOME TAXES 

(Issued March 15, 2018)

1. On December 15, 2016, the Commission issued a Notice of Inquiry (NOI)1 following 

the decision of the United States Court of Appeals for the District of Columbia Circuit (D.C. 

Circuit) in United Airlines.

2 In that decision, the D.C. Circuit held that the Commission 

failed to demonstrate that there was no double recovery of income tax costs when permitting 

SFPP, L.P. (SFPP), a master limited partnership (MLP),3 to recover both an income tax 

allowance and a return on equity (ROE) determined pursuant to the discounted cash flow 

(DCF) methodology. The NOI sought comments regarding the double-recovery concern. 

 1 Inquiry Regarding the Commission’s Policy for Recovery of Income Tax Costs,

157 FERC ¶ 61,210 (2016) (NOI).

2 United Airlines, Inc., v. FERC, 827 F.3d 122, 134, 136 (D.C. Cir. 2016) (United 

Airlines).

3 An MLP is a publicly traded partnership under the Internal Revenue Code that 

receives at least 90 percent of its income from certain qualifying sources, including gas and 

oil transportation. See 26 U.S.C. 7704; NOI, 157 FERC ¶ 61,210 at PP 4-7. At the time 

of SFPP’s rate filing, Kinder Morgan Energy Partners (KMEP), an MLP, indirectly owned 

a 99 percent general partner interest in SFPP. SFPP, L.P., Opinion No. 511, 134 FERC 

¶ 61,121, at P 74 (2011). 
Docket No. PL17-1-000 - 2 -

2. As explained below, the Commission revises the 2005 Income Tax Policy Statement4

and will no longer permit MLPs to recover an income tax allowance in their cost of service. 

To the extent the comments in this proceeding raise arguments that an MLP pipeline 

should continue to receive an income tax allowance, those comments fail (a) to undermine 

the conclusion that a double recovery results from granting an MLP both an income 

tax allowance and a DCF ROE or (b) to justify preserving an income tax allowance 

notwithstanding such a double recovery. Consistent with this policy, the Commission is 

concurrently issuing a Remand Order5 denying SFPP an income tax allowance in response 

to United Airlines.

3. In addition, 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. While all partnerships seeking to recover an income tax 

allowance will need to address the double-recovery concern, the Commission will address 

the application of United Airlines to non-MLP partnership or other pass-through business

forms as those issues arise in subsequent proceedings.

I. Background 

4. Prior to United Airlines, the Commission’s 2005 Income Tax Policy Statement 

allowed all partnership entities (including MLPs, such as SFPP) to recover an income tax 

 4 Policy Statement on Income Tax Allowances, 111 FERC ¶ 61,139 (2005) (2005 

Income Tax Policy Statement). 

5 SFPP, L.P., Opinion No. 511-C, 162 FERC ¶ 61,228 (2018) (Remand Order).
Docket No. PL17-1-000 - 3 -

allowance for the partners’ tax costs much like a corporation receives an income tax 

allowance for its corporate income tax costs.6

 The Commission explained that while a 

partnership itself does not pay taxes, the partners pay income taxes based upon the 

partnership income and these partner-level taxes could be imputed to the pipeline.7

5. Alongside this income tax policy, the Commission has used the DCF methodology 

to determine the rate of return regulated entities need to attract capital.8

 Under the DCF 

methodology, the required rate of return is estimated to equal a corporate investor’s current 

dividend yield (dividends divided by share price) plus the projected future growth rate of 

dividends, such that k = D/P + g.9

 Similarly, for an MLP, the Commission uses the same 

 6 2005 Income Tax Policy Statement, 111 FERC ¶ 61,139. The Commission’s policy

permits an income tax allowance, provided that the owners can show an actual or potential 

income tax liability to be paid on income from the regulated assets. 

7 Id. 

8 United Airlines, 827 F.3d at 136; Coakley v. Bangor Hydro-Electric Co., Opinion 

No. 531, 147 FERC ¶ 61,234, at P 14 (2014). The Supreme Court has stated that “the 

return to the equity owner should be commensurate with the return on investments in other 

enterprises having corresponding risks. That return, moreover, should be sufficient to 

assure confidence in the financial integrity of the enterprise, so as to maintain its credit and 

to attract capital.” FPC v. Hope Natural Gas Co., 320 U.S. 591 (1944); Bluefield Water 

Works & Improvement Co. v. Public Service Comm'n, 262 U.S. 679 (1923).

9 Where P is the price of the stock at the relevant time, D is the current dividend, 

k is the investors’ required rate of return, and g is the expected growth rate in dividends. 

When a regulated entity is a wholly owned subsidiary and not publicly-traded, the 

Commission applies the DCF formula to other publicly-traded entities in a proxy group, 

and, based typically upon the median of the range of returns in the proxy group, the 

Commission determines the regulated entity’s allowed ROE. 
Docket No. PL17-1-000 - 4 -

formula, substituting unitholder distributions for dividends, unit price for share price, and 

using a lower long-term growth rate.10

6. In addressing SFPP’s West Line rate case filed in 2008, the Commission applied its

2005 policy that allows a partnership to recover an income tax allowance.11 In United 

Airlines, the D.C. Circuit remanded the Commission’s application of this policy, holding 

that the Commission failed to adequately explain why a double recovery did not result from 

allowing SFPP to recover both an income tax allowance and a ROE determined by the 

Commission’s DCF methodology.12 Accordingly, the D.C. Circuit remanded the decisions 

to the Commission to consider “mechanisms for which the Commission can demonstrate 

that there is no double recovery.”13 

7. In response, the Commission issued the December 2016 NOI, soliciting comments on 

how to resolve any double recovery resulting from the 2005 Income Tax Policy Statement 

 10 Composition of Proxy Groups for Determining Gas and Oil Pipeline Return on 

Equity, 123 FERC ¶ 61,048, at P 6 (2008) (Proxy Group Policy Statement).

11 Opinion No. 511, 134 FERC ¶ 61,121, order on reh’g, Opinion No. 511-A, 

137 FERC ¶ 61,220 (2011), order on reh’g, Opinion No. 511-B, 150 FERC ¶ 61,096 

(2015).

12 United Airlines marks the third time the D.C. Circuit has reviewed the 

Commission’s income tax allowance policy with respect to partnership entities. 

See BP West Coast Products, LLC v. FERC, 374 F.3d 1263 (D.C. Cir. 2004); 

ExxonMobil Oil Corp. v. FERC, 487 F.3d 945 (D.C. Cir. 2007).

13 United Airlines, 827 F.3d at 137. The D.C. Circuit did not restrict the 

Commission’s policy options, but, among other possibilities, it noted that the 

Commission could consider removing any duplicative tax recovery for partnerships 

directly from the DCF ROE, or eliminating all income tax allowances and setting rates 

based on pre-tax returns. Id.
Docket No. PL17-1-000 - 5 -

and rate of return policies. The Commission received 24 comments and 19 reply comments 

from customer, pipeline, and electric utility interests. 

II. Discussion

8. This Revised Policy Statement explains the Commission’s conclusion following 

United Airlines that an impermissible double recovery results from granting an MLP 

pipeline both an income tax allowance and a DCF ROE. Accordingly, the Commission 

will no longer permit MLPs to recover an income tax allowance in their cost of service. 

Therefore, the Commission instructs oil pipelines organized as MLPs to reflect the 

Commission’s elimination of the MLP income tax allowance in their Form No. 6, page 700 

reporting. Based upon this page 700 data, the Commission will incorporate the effects of 

this Revised Policy on industry-wide oil pipeline costs in the 2020 five-year review of the 

oil pipeline index level. The Commission is also concurrently issuing a Notice of Proposed 

Rulemaking that addresses the effects of this Revised Policy on the rates of interstate natural 

gas pipelines organized as MLPs.

14 For those partnerships that are not MLPs, the 

Commission will address such matters in subsequent proceedings. 

A. An Impermissible Double Recovery Results from Granting an MLP 

Pipeline Both an Income Tax Allowance and a DCF ROE.

9. While some of the comments in this proceeding argue that no double recovery results 

from granting an income tax allowance to an MLP, none of these arguments are persuasive. 

 14Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal 

Income Tax Rate, 162 FERC ¶ 61,226 (2018).
Docket No. PL17-1-000 - 6 -

As the Commission explains in the Remand Order, a double recovery results from granting 

an MLP an income tax allowance and a DCF ROE:

• MLPs and similar pass-through entities do not incur income taxes at the entity 

level.15 Instead, the partners are individually responsible for paying taxes on their 

allocated share of the partnership’s taxable income.16

• The DCF methodology estimates the returns a regulated entity must provide to 

investors in order to attract capital.17

• To attract capital, entities in the market must provide investors a pre-tax return, i.e., a 

return that covers investor-level taxes and leaves sufficient remaining income to earn 

investors’ required after-tax return.18 In other words, because investors must pay 

taxes from any earnings received from the partnership, the DCF return must be 

sufficient both to cover the investor’s tax costs and to provide the investor a 

sufficient after-tax ROE. 

• The DCF methodology “determines the pre-tax investor return required to attract 

investment.”19 

 15 United Airlines, 827 F.3d at 136. 

16 2005 Income Tax Policy Statement, 111 FERC ¶ 61,139 at P 33; see also

ExxonMobil, 487 F.3d at 954 (noting that “investors in a limited partnership are required to 

pay tax on their distributive shares of the partnership income, even if they do not receive a 

cash distribution”). In contrast, corporations pay entity-level income taxes, and corporate 

dividends are second tier income to a common stock investor, not analogous to partnership 

distributions.

17 See Coakley v. Bangor Hydro-Electric Co., Opinion No. 531, 147 FERC ¶ 61,234 

at P 14.

18 Kern River Transmission Co., Opinion No. 486-B, 126 FERC ¶ 61,034, at P 114 

(2009) (“investors invest on the basis of after-tax returns and price an instrument 

accordingly”). 

19 United Airlines, 827 F.3d at 136 (emphasis added).
Docket No. PL17-1-000 - 7 -

Given that the DCF return is a “pre-tax return,” permitting an MLP to recover both an 

income tax allowance and a DCF ROE leads to a double recovery of the MLP’s income tax 

costs.20 

10. This Revised Policy Statement addresses comments responding to the NOI asserting 

that (a) granting an MLP an income tax allowance does not cause a double recovery or 

(b) notwithstanding the existence of a double recovery, MLPs should continue to receive 

an income tax allowance. As discussed below, these arguments are unavailing.

1. A double recovery results from granting an MLP both an income 

tax allowance and a DCF ROE

11. The Commission rejects arguments from pipelines and pipeline groups that no double 

recovery results from granting an MLP both an income tax allowance and a DCF ROE. 

These include claims that (a) changes to the stock price eliminate the double recovery, 

(b) MLP partners’ taxes are “first tier” taxes that should be recoverable in an income tax 

allowance, (c) the return produced by the DCF analysis is never grossed-up (or adjusted) to 

include MLP partners’ tax costs, (d) the presence of an income tax allowance causes MLP 

investors to demand a lower return in the market place, (e) a life-cycle hypothetical shows

that corporate and MLP tax costs and after-tax returns are similar when an income tax 

allowance is present, (f) the calculation of the growth rate in the DCF Formula for MLPs 

addresses the double-recovery issue, and (g) various empirical studies refute the doublerecovery finding in United Airlines. As discussed below none of these arguments resolves 

 20 Id. at 137. 
Docket No. PL17-1-000 - 8 -

the double-recovery concern, and accordingly, the Commission will no longer permit MLPs 

to recover an income tax allowance in cost-of-service rates.

a. Changes to a Pipeline’s Unit Price Do Not Resolve the 

Double-Recovery Issue

12. Some commenters argue that there is no double recovery caused by an income tax 

allowance for MLPs because the income tax allowance merely increases the price of the 

MLP units.21 These commenters assert that as a result of the increased unit price, investors 

will receive the same rate of return whether or not the pipeline receives an income tax 

allowance, and, thus, there is no double recovery. 

13. The Commission rejects such arguments as inapposite. As explained in the Remand 

Order, the double-recovery issue is separate from the post-rate case effects upon an MLP 

pipeline’s unit price. An MLP pipeline’s DCF ROE is typically based upon a proxy group 

of other MLPs,22 all of which must provide investors with sufficient pre-investor tax returns 

to attract capital. Permitting an MLP pipeline to recover both the DCF pre-investor tax 

return and an income tax allowance for the investor-level tax costs leads to a double

 21 E.g., Association of Oil Pipe Lines (AOPL) Initial Comments at 24-27, Graham 

Declaration at 12-13; SFPP Initial Comments at 21-26, Vander Weide Declaration at 

PP 8, 19. These commenters argue that if an MLP is able to charge a higher tariff rate, 

the increased cash flow will lead to increased distributions to investors and MLP prices 

will rise to reflect the additional cash flow. Hence, the market will immediately react to 

eliminate any differences such that the after-tax returns of partnership and corporate 

investors are equalized. 

22 The proxy group may include corporations as well. In that case, the ROE will 

reflect the dividend tax paid by corporate investors.
Docket No. PL17-1-000 - 9 -

recovery. Whether or not the double recovery leads to an increased unit price, the 

impermissible double recovery in the MLP’s cost of service remains.23 

14. Moreover, while permitting such a double recovery may increase the unit price, these 

changes in the unit price do not resolve the double-recovery problem or change the DCF 

return from a pre-investor tax return to an after-investor tax return. Rather, if an MLP 

pipeline obtains a new revenue source that increases distributions to investors (such as an 

income tax allowance), the unit price will rise until, once again, the investor receives the 

cash flow necessary to cover the investor’s income tax liabilities and to earn an after-tax 

return that is comparable to other investments of similar risk.24 Likewise, if the MLP’s cash 

 23 While an inflated cost of service will likely increase distributions to investors and 

cause a pipeline’s unit price to rise, such benefits to a pipeline’s unitholders do not render 

the double recovery permissible. Under this theory, the Commission could increase a 

pipeline’s cost of service by allowing the pipeline to incorporate duplicative costs, yet these 

commenters appear to claim that because its unit price would subsequently rise, the 

inclusion of duplicative costs in the pipeline’s cost of service is not unjust or unreasonable. 

This argument is without merit. 

24 United Airlines, 827 F.3d at 136. In finding that “the [DCF ROE] determines 

the pre-tax investor return required to attract investment, irrespective of whether the 

regulated entity is a partnership or a corporate pipeline,” the Court relied on Opinion 

No. 511, 134 FERC ¶ 61,121 at PP 243, 244, which included the following example:

The investor desires a 6 percent after-tax return and has a 

25 percent marginal tax rate. Thus, the security must have an 

ROE of 8 percent to achieve an after-tax yield of 6 percent. 

Assume that the distribution or dividend is $8. The investor will 

price the security at $100. Conversely, if the security price is 

$100 and the yield is $8, the Commission determines that the 

required return is 8 percent. If the dollar distribution increases to 

$10, the investor will price the security at $125 because $10 is 8 

percent of $125. The Commission would note that the security 

price is $125 and that the yield is $10, or a return of 8 percent. If 

the distribution is $6, the security price will drop to $75, a return 

of 8 percent. The Commission would observe a $75 dollar 
Docket No. PL17-1-000 - 10 -

flows are reduced (such as via the removal of the income tax allowance) and consequently 

distributions decline, the MLP unit price will drop until the returns once again both cover an 

investor’s tax costs and provide the sufficient after-tax returns. Whether or not a pipeline 

receives an income tax allowance, the MLP’s DCF return will always be a pre-investor tax 

return.25 

b. The Argument that MLPs Are Entitled to Recover “First 

Tier” Taxes Is Irrelevant

15. Some commenters contend that removing the income tax allowance is contrary to 

Commission and court findings that MLP pipelines may recover so-called “first tier” taxes 

for income generated by the regulated pipeline.26 The pipelines claim that because a 

partnership does not itself pay taxes, the taxes paid by the partners are the “first tier” tax, 

much like the corporate income tax is the “first tier” tax for the corporation. The pipelines 

contrast these “first tier” taxes with so-called “second tier” taxes (such as the dividend tax 

paid by corporate stockholders) which are not typically recovered by the income tax 

allowance. 

 

security price, a $6 yield, and a return of 8 percent. In all cases 

the ROE is 8 percent and the after-tax return is 6 percent based on 

the market-established return.

25 This is true both for the entity whose rates are at issue in a cost-of-service rate case 

(such as SFPP in the Remand Order) and for the entities in the proxy group. 

26 Interstate Natural Gas Association of America (INGAA) Initial Comments, 

Sullivan Affidavit at 12-14, 24-25, 27.
Docket No. PL17-1-000 - 11 -

16. The Commission is not persuaded by such arguments, which were already presented 

to the D.C. Circuit.27 The pipelines’ arguments do not address the D.C. Circuit’s finding 

that the DCF ROE itself enables the recovery of an MLP’s “first tier” tax costs, rendering an 

income tax allowance unnecessary. Whether or not a tax can be labeled a “first tier” tax is 

irrelevant to the double-recovery issue. No double recovery results when a corporate

pipeline’s cost of service includes an income tax allowance because this so-called “first tier” 

corporate income tax is paid directly by the corporation, rather than by unitholders from the 

dividends used in the DCF methodology.28 In contrast, the MLP itself pays no taxes.29

Because the “first tier” MLP income taxes are paid directly by the unitholders,30 the D.C. 

Circuit explained that the pre-investor tax DCF return must be sufficient to recover an MLP 

investor’s tax costs in order to attract capital. While the D.C. Circuit reaffirmed that an 

MLP pipeline may recover such “first tier” investor income tax costs, the D.C. Circuit also 

 27 Federal Energy Regulatory Commission and United States of America, Brief for 

Respondents, Case No. 11-1479, at 26 (D.C. Cir., filed Feb. 5, 2016).

28 Corporations first pay the corporate income tax from their earnings prior to any 

dividends to investors. Then, subsequently, investors pay taxes on dividends. While the 

pre-investor tax DCF return would reflect the dividend tax paid by investors, it does not 

reflect the corporate income tax. 

29 United Airlines, 827 F.3d at 136 (explaining “unlike a corporate pipeline, a 

partnership pipeline incurs no taxes, except those imputed from its partners, at the entity 

level”).

30 In the past, the Commission has stated that its income tax allowance policy 

“imputes” those investor-level taxes to the partnership entity. In using such phrasing, the 

Commission never denied that investors nonetheless pay the investor-level taxes.
Docket No. PL17-1-000 - 12 -

held that an MLP pipeline may not double recover those costs via both an income tax 

allowance and the DCF return.31 

c. The Argument that the Tax Allowance Reduces Investors’ 

Required Return Lacks Merit

17. SFPP argues that investors recognize that the income tax costs are recovered by the 

pipeline through the income tax allowance and therefore, elect not to demand a DCF return 

on their investment that would cover those income tax costs.32 Because under this theory 

the DCF return would not include investor tax costs, SFPP argues that there is no double 

recovery. In essence, SFPP contends that the pre-tax return produced by a DCF analysis of 

an MLP with a tax allowance is the equivalent of an after-tax return, since investors do not 

demand a pre-tax return. Similarly, SFPP argues that if MLPs lose the income tax 

allowance, then the MLP investors will demand a higher pre-tax return than under present 

policy.

18. The Commission rejects SFPP’s assertions. These arguments distort how the income 

tax allowance affects investor tax liability. MLP investors owe a tax on any increased 

income, whether or not that income results from an income tax allowance or another 

 31 In United Airlines, the D.C. Circuit acknowledged that in ExxonMobil it held that 

the Commission provided a reasoned basis for allowing an MLP pipeline to recover the 

“first tier” income tax costs paid by the MLP partners. However, the D.C. Circuit explained

that in ExxonMobil, it had “reserved the issue of whether the combination of the [DCF 

ROE] and the tax allowance results in a double recovery of taxes for partnership pipelines.”

United Airlines, 827 F.3d at 134; see also ExxonMobil, 487 F.3d 945.

32 SFPP Initial Comments at 17, Vander Weide Declaration at PP 12, 14, 18. SFPP 

claims that investors will not “gross-up” the required after-tax return to include tax costs. 

SFPP Initial Comments at 16; Vander Weide Declaration at PP 6, 18.
Docket No. PL17-1-000 - 13 -

source.

33 Accordingly, while as discussed above an MLP income tax allowance may 

increase the unit price, investors will continue to demand a pre-tax return even when a 

portion of a pipeline’s rate is attributable to an “income tax allowance.” 34 Notwithstanding 

the presence of an income tax allowance, the pre-investor tax ROE produced by the DCF 

analysis does not equal the investor’s after-tax return. Likewise, if an MLP pipeline’s loss 

of its income tax allowance reduces rates and investor income, the unit price will decline 

until the investor once again earns an adequate pre-tax return. 

19. SFPP’s comments rely almost exclusively upon the incorrect assumption that for an 

MLP with an income tax allowance, an MLP investor’s pre-tax return equals its after-tax 

return.35 However, while SFPP relies heavily upon this assumption in this proceeding, 

SFPP elsewhere takes the opposite position – presenting hypotheticals showing that an 

 33 The Internal Revenue Code does not exempt from taxation income that results 

from the increases to rates resulting from the cost-of-service income tax allowance.

34 Suppose an income tax allowance increases a pipeline’s rates, raising investor 

income from $10 to $12. Two things have occurred; first the investor’s pre-tax income 

increased from $10 to $12 and second the investor now owes taxes on $12 of income just as 

she owed taxes on the initial $10. The unit price will increase until the investor receives the 

same pre-tax return at $12 of income that it received at $10 of income. In other words, 

Commission policy does not shift the actual liability to pay income taxes from the MLP 

partners to the MLP itself. 

35 E.g,. SFPP Initial Comments, Vander Weide Affidavit at 8 (Table 1, Lines 11-15, 

showing the before-tax DCF ROE equaling the investor’s after-tax return), 12 (Table 2, 

Lines 11-15, showing the before-tax DCF ROE and investor’s pre-tax return equaling the 

investor’s after-tax return), 16 (Table 3, lines 11-15 showing for a pipeline with an income 

tax allowance, the before-tax DCF ROE and investor’s pre-tax return equaling the investor’s 

after-tax return). 
Docket No. PL17-1-000 - 14 -

investor will demand a pre-tax return whether or not the pipeline receives an income tax 

allowance.36 

d. The Cost-Of-Service Gross-Up Theory Was Rejected by the 

D.C. Circuit

20. Some pipeline commenters also attempt to reframe the cost-of-service “gross-up” 

theory rejected by the D.C. Circuit. This argument, which the Commission also made on 

appeal in the United Airlines proceeding, asserts that the DCF return does not include 

investor tax costs because the Commission never adjusts, or “grosses-up,” the return 

produced by the DCF analysis to recover such tax costs.37 In response to the NOI, pipeline 

commenters assert that the DCF ROE cannot include an MLP investor’s income tax costs 

because the income tax costs are not a separate line item in the DCF methodology.38 

 36 In its West Line rate case, SFPP filed post-remand comments and supplemental 

comments following United Airlines. In those comments, SFPP presented a hypothetical 

showing that an MLP recovering both an income tax allowance (Table 1, Column C) and a 

DCF ROE earns the same 6.5 percent investor after-tax return as an MLP without an income 

tax allowance (Table 1, Column D). SFPP, L.P., Supplemental Reply Comments, Docket 

No. IS08-390, at 10 (November 30, 2016). While the table does not show the investors’ 

pre-tax returns, since both pipelines were subject to a 35 percent investor level tax, both 

must have recovered a 10 percent pre-tax investor return. Thus, in SFPP’s own example, 

the cost-of-service double-recovery of income tax costs of the pipeline in Column C inflated 

the unit price until it earned the same pre-tax return as the pipeline without an income tax 

allowance in Column D.

37 Federal Energy Regulatory Commission and United States of America, Brief for 

Respondents, Case No. 11-1479, at 28-29 (D.C. Cir., filed Feb. 5, 2016) (citations omitted) 

(“In contrast to the way in which income taxes are grossed up outside the context of 

Commission regulation, the Commission does not gross up [i.e., increase] a jurisdictional 

entity’s operating revenues or return to cover the income taxes that must be paid to obtain its 

after-tax return.”). 

38 INGAA Initial Comments at 24, Sullivan Affidavit at 6, 17-18, 22, 25-27, 30.
Docket No. PL17-1-000 - 15 -

21. The Commission rejects this position. The Commission’s DCF methodology need 

not include a mathematical step to add income taxes. For the reasons described above, “the 

[DCF ROE] determines the pre-tax investor return”39 that already reflects cash flow for both 

the (a) investor’s tax costs and (b) the investor’s post-tax return. 

e. The Life-Cycle Hypothetical Does Not Refute the D.C. 

Circuit’s Holding

22. INGAA witness Merle Erickson presents a life-cycle model that compares the total 

tax expenses of a hypothetical MLP to a hypothetical corporation. Under the assumptions 

of the model, Erickson finds that MLPs’ and corporations’ aggregate tax burdens are 

comparable and that both earn similar returns if MLPs are permitted an income tax 

allowance.40 Pipeline commenters claim that the model globally demonstrates that the 

Commission’s current income tax policy provides parity in the returns to partnerships and 

corporations.41 

23. We do not find this argument to be persuasive. Erickson’s life-cycle model does not 

undermine the fundamental premise of United Airlines that an income tax allowance for

MLP pipelines leads to a double recovery. Whether or not the overall MLP and corporate 

tax burdens are equivalent or different, if the investor tax costs are incorporated into the 

DCF returns, then the income tax allowance for MLP pipelines leads to a double recovery.42

 39 United Airlines, 827 F.3d at 136 (citing Opinion No. 511, 134 FERC ¶ 61,121 at 

PP 243-44).

40 INGAA Initial Comments, Erickson Affidavit at 12.

41 INGAA Initial Comments at 4, 25. 

42 Erickson himself concedes that MLP unitholders must pay the entirety of the tax 
Docket No. PL17-1-000 - 16 -

24. In addition, Erickson’s model does not necessarily establish that overall MLP tax 

levels are actually comparable to corporate tax levels or that an income tax allowance 

equalizes returns. Like similar hypothetical models, the results of Erickson’s proposal rely 

upon subjective assumptions.43 For example, as Thomas Horst explains, Erickson’s 

hypothetical would show that MLPs (with an income tax allowance) receive higher returns 

if Erickson had accounted for (a) the time value of money44 and (b) certain tax issues related

 

burden whereas corporate unitholders must only pay the dividend tax (not the corporate 

income tax). INGAA Initial Comments, Erickson Affidavit at 13. Accordingly, it follows

that whereas the DCF return for an MLP pipeline must include the entire income tax costs, 

a corporate pipeline’s DCF return would not include the corporate income tax. 

43 When attacking models proposed by shippers, AOPL witness John Graham states 

that for such hypotheticals, “There are too many variables to draw broad-based 

conclusions.” AOPL Initial Comments, Graham Affidavit at 8. This comment applies with 

equal force to Erickson’s model. Erickson’s assumptions include (1) a five-year investment 

horizon; (2) that the MLP distributes all available cash and the corporation has a 65 percent 

dividend pay-out ratio; (3) certain tax rates for corporate income, corporate dividends and 

capital gains, and ordinary MLP income; and (4) that the corporate investors are able to sell 

their stock for the value of their original investment plus accumulated retained earnings, 

while the MLP investors sell their units for the value of their original investment. The lifecycle model also assumes constant earnings before interest, taxes, depreciation and 

amortization and application of a fifteen-year Modified Accelerated Cost Recovery System. 

The life-cycle analysis does not take into account the time value of money in reporting the 

total after-tax cash flow to the MLP and corporate investors. 

44 Thomas Horst Reply Comments at 2. An investor in a corporation usually must 

pay his dividend taxes immediately. In contrast, an MLP investor can use depreciation and 

other deductions to offset taxable income. As a result, an MLP investor may have no net 

taxable income in a given year. NOI, 157 FERC ¶ 61,210 at P 6. Even though the investor 

may ultimately be required to pay such taxes when the units are sold, the MLP investor 

benefits from the time value of money during the deferral period. 
Docket No. PL17-1-000 - 17 -

to the sale of MLP units.45 The Brattle report presented by shipper commenters similarly 

demonstrates how reasonable changes to Erickson’s assumptions change the model’s 

output.46 Thus, Erickson’s hypothetical does not undermine the fundamental conclusion of 

United Airlines that allowing MLP pipelines to include both an income tax allowance and a 

full DCF ROE in their cost of service leads to a double recovery. 

f. The Treatment of the Growth Rate in the DCF Does Not 

Resolve the Double Recovery Concern

25. Pipelines emphasize that in the DCF formula, the Commission projects that the longterm growth of MLP pipelines will be only half that of corporations.47 Therefore, they 

argue “to the extent the Commission concludes that there is a potential for double recovery 

of income tax costs through the MLP ROE, the Commission has already addressed that 

concern.”48

 45 Id. Dr. Horst argues that when an MLP unit is sold, its basis increases – much like 

in the sale of any property or asset. This only further increases the depreciation deferrals 

that are available to the subsequent investor. 

46 United Airlines Petitioners Reply Comments, Brattle Report at PP 73-74. 

47 AOPL Initial Comments at 46. As noted above, the DCF relies upon the general 

formula k=D/P+g. The growth rate in this formula incorporates two components: a short 

term growth rate (calculated using security analysts’ five-year forecasts for each company in 

the proxy group as published by IBES) and a long-term growth rate (based upon forecasts 

for gross domestic product (GDP) growth). The short-term forecast receives a two-thirds 

weighting and the long-term forecast receives a one-third weighting in calculating the 

growth rate in the DCF model. Proxy Group Policy Statement, 123 FERC ¶ 61,048 at P 6.

 48 AOPL Initial Comments at 46. 
Docket No. PL17-1-000 - 18 -

26. The Commission concludes that the treatment in the DCF analysis of the long-term

MLP growth projection does not resolve the double-recovery concern in United Airlines. 

When conducting a DCF analysis to determine investors’ required rate of return, the 

Commission halves the long-term growth rate for MLPs in the proxy group because MLPs 

are likely to have a lower long-term growth rate than corporations.49 The treatment of 

investor-level taxes presents an entirely separate issue. As discussed above, regardless of 

the projected growth rate used in the DCF analysis to determine the investors’ required rate 

of return, that required return must provide investors cash flows to both (a) recover investor 

level tax costs and (b) provide the investor with a sufficient after tax return. 

g. Pipelines’ Empirical Studies Do Not Resolve the D.C. 

Circuit’s Double-Recovery Concern

27. Pipeline commenters advance two empirical criticisms of the holdings in United 

Airlines. First, they criticize studies presented by shippers in the underlying SFPP 

proceeding showing that MLP pipeline DCF returns exceed corporate pipeline DCF returns, 

while shipper commenters argue that a modified version of these studies supports the 

opposite result. Second, the pipelines argue the relationship between MLP and corporate 

pipeline DCF returns does not show a systemic disparity consistent with the different tax 

 49 The Commission explained corporations “(1) have greater opportunities for 

diversification because their investment opportunities are not limited to those that meet the 

tax qualifying standards for an MLP and (2) are able to assume greater risk at the margin 

because of less pressure to maintain a high payout ratio.” Proxy Group Policy Statement, 

123 FERC ¶ 61,048 at P 93. Accordingly, the Commission concluded that the “long term 

growth rate for MLPs will be less than that of schedule C corporations....” Id. P 94. See 

also El Paso Natural Gas Co., Opinion No. 528-A, 154 FERC ¶ 61,120, at PP 271-275, 

278-283 (2016). 
Docket No. PL17-1-000 - 19 -

levels, and, thus, they argue that this refutes the holding that there is no double recovery. As 

discussed below, these arguments lack merit. 

i. The Reasoning in United Airlines Holds, Whether or 

Not MLP DCF Returns Exceed Corporate DCF 

Returns 

28. In order to counter the D.C. Circuit’s double-recovery finding, pipeline commenters 

attack studies presented by shippers in the underlying SFPP 2008 West Line rate case

addressed on appeal in United Airlines.

50 These studies purported to show that MLP 

pipeline DCF returns exceeded corporate pipeline DCF returns, which the shippers argued 

showed that the DCF returns reflected tax differences. Now, pipeline commenters argue 

that due to alleged flaws in these studies, the court in United Airlines erred by finding that 

the MLP pipeline DCF returns include investor-level tax costs. They assert that if their 

preferred sample of six pipelines (two corporations and four MLPs) is considered, corporate

DCF returns may actually exceed MLP DCF returns.51 

29. The criticisms of the underlying studies in SFPP’s 2008 West Line Rate case are 

irrelevant. In United Airlines, the D.C. Circuit did not rely upon these studies to find that 

the DCF returns include MLP investors’ income tax costs, and the shipper-petitioners did 

not cite these studies in their appeal.52 Any such reliance would have been unnecessary. As 

described above, the inclusion of MLP investor-level taxes in the DCF return necessarily 

 50 INGAA Initial Comments, Sullivan Affidavit at 41-48.

51 Id. at 47-48. 

52 Before the Administrative Law Judge and the Commission, shippers argued that 

this disparity demonstrated the inclusion in the DCF ROE of the MLP investors’ income tax 

costs, which they argued generally exceeded the dividend taxes paid by corporate investors.
Docket No. PL17-1-000 - 20 -

follows from the basic application of DCF theory and the understanding that investors 

consider the tax consequences of their investments. 

30. Furthermore, the studies are also inapposite. The holding in United Airlines would 

not change if the pipeline commenters were to conclusively establish that when controlling 

for all factors but investor-level taxes, corporate pipeline DCF returns exceeded MLP 

pipeline DCF returns. This would merely demonstrate that the MLP investors’ tax burden 

was less than the corporate investors’ dividend tax burden.53 In order to attract capital, the 

investor-required MLP pipeline DCF return would still include the investor-level tax costs, 

and thus, a double recovery results from the additional recovery of an income tax allowance 

for MLPs.54 

 53 While historically a corporate investor’s dividend tax rate has typically been less 

than the weighted average income tax rate for MLP investors (AOPL Initial Comments, 

Graham Affidavit at 5-6), MLPs have various tax deferrals and other characteristics that 

may further narrow or eliminate this difference. Nonetheless, any such conclusion based

upon the pipeline commenters’ data is dubious, as it is based upon a small sample size of 

only two corporations and four MLPs. INGAA Initial Comments, Sullivan Affidavit at 47-

48. 

54 Likewise, the December 22, 2017 Tax Cuts and Jobs Act does not alter the 

Commission’s analysis. Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054 (2017). 

While the tax rates for both corporations and individuals have been reduced, the DCF ROE 

will continue to provide a pre-investor tax return. As discussed above, investors will 

continue to demand a return that both covers the investor level tax costs and leaves the 

investor a sufficient after tax return compared to other investments of comparable risk. 
Docket No. PL17-1-000 - 21 -

ii. The Pipeline Commenters’ Empirical Evidence Fails 

to Disprove the Double Recovery 

31. Pipelines make two broad arguments. First, pipeline commenters argue that if the 

DCF methodology includes investor-tax costs as determined by the D.C. Circuit in United 

Airlines, there should be a systematic relationship between MLP pipeline and corporate

pipeline DCF returns reflecting these differences in investor-level taxes. Second, they argue 

that if pipelines are double-recovering their costs, then MLP pipelines should report higher 

DCF returns, distribution yields, and growth rates than corporate pipelines. 

32. In their first argument, pipelines argue that if the DCF returns include investor tax 

costs, then there should be a consistent differential between MLP pipeline and corporate 

pipeline DCF returns. For example, if MLP investor-level taxes exceed corporate investorlevel taxes, then pipeline commenters state that MLP pipeline DCF returns should always 

exceed corporate pipeline DCF returns, or vice versa. To refute the holding in United 

Airlines, pipeline commenters present empirical analyses purporting to show that the DCF 

returns for MLP pipelines do not show a consistent differential.55 These studies consist of 

(1) a line graph showing DCF returns for 23 pipelines between August 2007 to January 

2017 in which MLP pipelines’ DCF returns do not always exceed corporate pipelines’

 55 See INGAA Initial Comments at 31-35, Sullivan Affidavit at 42-69; AOPL Initial 

Comments at 3, 24, 28-30; Master Limited Partnership Association (MLPA) Initial 

Comments at 9.
Docket No. PL17-1-000 - 22 -

returns,56 and (2) DCF returns over the January 2008 to January 2017 period comparing 

four pairs of MLP and corporate affiliates57 in which the relationship between the corporate 

affiliate and the MLP affiliate returns fluctuated significantly. 

33. These studies suffer from fundamental methodological flaws that undermine the 

pipelines’ conclusions. It is true that the United Airlines double-recovery theory would 

predict that, assuming all other factors are exactly equal, investor-level tax differences 

would create a differential between MLP and corporate pipeline DCF returns.58 However, 

differences in risk and other factors can subsume any effects of taxation, and because the 

studies inadequately control for varying risk levels, the studies do not isolate the effect of 

the MLP and corporate investor-level income taxes on the DCF returns. The first study, 

which compared 23 MLP and corporate pipelines, completely ignores the entities’ differing 

risk levels59 and merely shows a line graph of DCF returns for each pipeline without

presenting any related numerical analysis.60 While the pipeline commenters’ second study 

 56 INGAA Initial Comments, Sullivan Affidavit at 48-49. INGAA witness Sullivan 

performed similar analysis for different components of the DCF, including both the 

dividend yield and the growth rate. Id. at 65-69.

57 Id. at 50-51.

58 In essence, investors would demand higher returns from the business form with the 

higher investor-level taxes.

59 INGAA witness Sullivan’s arguments involving distribution yields and growth 

rates are similarly flawed. 

60 For example, on page 49 of his affidavit, INGAA consultant Sullivan submitted a 

line-chart which purports to show that corporate and MLP DCF returns are not discernibly 

different. However, (a) the y-axis is drawn so as to compress most of the returns to a 

narrow band, and (b) meaningful statistical differences could be completely obscured by this 
Docket No. PL17-1-000 - 23 -

attempts to address varying risk levels by comparing four affiliated corporations and MLPs 

in their first study,61 the affiliated MLPs were only a fraction of the affiliated corporations’ 

larger business interests, which, as the pipeline commenters concede, contributed to 

significant fluctuations in the relationship between the two entities’ relative DCF returns.62

Moreover, this analysis based upon a mere four examples does not establish how investor 

level taxes (as opposed to other factors) affect either corporate or MLP investor returns. 

34. Pipelines advance a second argument – that if MLPs are double recovering their 

costs, they should report higher returns than corporations. For example, INGAA witness 

Sullivan also argues that “[i]f MLPs double recovered income taxes through both an income 

tax allowance and a DCF return, I would expect the DCF ROEs and its components, the 

distribution yields and the IBES growth rates of MLPs to be systematically higher than 

corporations throughout the period 2008 to the present.”63 Citing the same studies above, 

 

poor graphical presentation. Similar criticisms apply to Sullivan’s comparison of MLP 

distributions to corporate dividends on page 65 of his affidavit and growth rates on page 68 

of his affidavit. It is possible that a more precise numerical example could actually present

facts undermining the pipelines’ favored result.

61 Id. at 52-62. Sullivan also adds a comparison between a completely unrelated 

MLP (Boardwalk Pipeline Partners) and a corporation (Kinder Morgan). Because these are 

completely different businesses, such a comparison is irrelevant for the purpose of 

identifying the effect of different tax levels on the DCF. 

62 For each of the four pairs, the DCF return for the corporation at times exceeded the 

return for the MLP whereas on other occasions the return for the MLP exceeded the 

corporation. Id. Sullivan describes situations in which growth estimates or factors 

involving unrelated assets would affect the DCF return of the corporation but not the MLP. 

63 Id. at 58. 
Docket No. PL17-1-000 - 24 -

Sullivan argues that because the data does not show systematically higher returns, yields or 

growth rates for MLPs, there must be no double recovery.

35. The Commission finds this argument unpersuasive because it relies upon the same 

flawed studies discussed above. As noted above, the line graphs provide a flawed analysis 

that may obscure actual differences between MLPs and corporations and, more 

fundamentally, that fails to address the multiple other risk and market factors that could 

affect any particular MLP and corporate pipeline’s DCF returns, distribution yields, and 

growth levels. Moreover, as discussed previously, to the extent an MLP pipeline doublerecovers its costs, the unit price will rise – obscuring the effects of the double recovery in 

the distribution yields, projected growth rates, and DCF returns.64 These studies do not 

undermine the double-recovery findings of United Airlines or the Remand Order.

2. Other Arguments for Preserving an Income Tax Allowance Lack 

Merit

36. Pipeline commenters also argue that even if a double recovery exists, the income tax 

allowance should nonetheless be preserved. These arguments rely upon (1) Congressional 

intent, (2) preserving parity between corporate and MLP pipelines, and (3) the effect of 

removing the income tax allowance upon the ability of pipelines to attract capital. As 

discussed below, these arguments were either explicitly rejected by the D.C. Circuit in 

United Airlines or are otherwise without merit. 

 64 As explained in section II.A.1.a, whether or not a pipeline receives an income tax 

allowance, the DCF return will always be a pre-investor tax return. However, to the extent a 

pipeline is permitted to start double-recovering its costs, the unit price will rise until the 

DCF once again provides investors with a pre-tax return.
Docket No. PL17-1-000 - 25 -

a. Congressional Intent Does Not Authorize a Double Recovery

37. Pipeline commenters argue that providing MLP pipelines an income tax allowance 

implements Congress’ intent to facilitate infrastructure investment.65 In 1987 Congress 

eliminated pass-through status for most publicly-traded partnerships, but explicitly granted 

an exception for certain energy-related MLPs in section 7704 of the Internal Revenue 

Code.66 Pipeline commenters present two specific arguments to support their Congressional 

intent claims, both of which are unavailing. First, they argue that because the Commission’s 

policy in 1987 allowed pass-through entities to recover the same income tax allowance as 

corporations, Congress understood and intended to continue that rate treatment in section 

7704.67 Second, they present a letter that Senator Max Baucus submitted to the Commission 

in 1996,68 expressing concern with the Commission’s decision to allow MLP pipelines only 

a partial income tax allowance in Lakehead.69

 65 See INGAA Initial Comments at 12-13; MLPA Initial Comments at 3-4; AOPL 

Initial Comments at 7, 41-42; SFPP Initial Comments at 30; TransCanada Corporation 

Initial Comments at 2; Enbridge Initial Comments at 4; Meliora Capital, LLC Initial 

Comments.

66 26 U.S.C. 7704. 

67 INGAA Initial Comments at 13-15.

68 INGAA Initial Comments at 14; MLPA Initial Comments at 3-4. 

69 Lakehead Pipe Line Co., L.P., 75 FERC ¶ 61,181 (1996). Senator Baucus 

participated in the writing of the 1987 legislation. The letter states that “placing this 

obstacle in the path of pipeline companies wishing to operate as [publicly-traded 

partnerships] directly contravenes the policy we adopted in that legislation of making the 

[publicly-traded partnership] structure freely available to the pipeline industry” and “[i]t 

was certainly not our intention for pipelines operating as [publicly-traded partnerships] 

to be singled out for negative treatment relative to other pipelines solely because of their
Docket No. PL17-1-000 - 26 -

38. As discussed in the Remand Order, the D.C. Circuit has twice rejected the argument 

that Congress’ intent in section 7704 provides an independent basis for upholding a full 

income tax allowance for partnership pipelines.70 Consistent with these holdings, the court 

in United Airlines unequivocally instructed the Commission to consider “mechanisms for 

which the Commission can demonstrate that there is no double recovery.”71 Accordingly, 

the pipeline commenters’ attempt to justify affording MLP pipelines an income tax 

allowance on the basis that the Commission is implementing Congress’ intent in section 

7704 is contrary to United Airlines. 

39. In addition, the pipeline commenters fail to demonstrate that Congress intended the 

Commission’s income tax allowance policy to provide a necessary component of the 

advantages conferred in section 7704. They provide no support for their argument that 

because the Commission afforded partnerships a tax allowance in 1987, Congress intended 

to continue that rate treatment in the 1987 legislation.72

 

partnership status.” Letter from U.S. Senator Max Baucus, FERC Docket No. IS92-27-000 

(Jan. 9, 1996).

70 BP West Coast, 374 F.3d at 1293 (“[t]he mandate of Congress in the tax 

amendment was exhausted when the pipeline limited partnership was exempted from 

corporate taxation. It did not empower FERC to do anything....”); United Airlines, 

827 F.3d at 136 (rejecting the Commission’s argument that “any disparate treatment

between partners in partnership pipelines and shareholders in corporate pipelines is the 

result of the Internal Revenue Code, not FERC’s tax allowance policy”).

71 United Airlines, 827 F.3d at 136.

72 As the Commission explains in the Remand Order, Congress did not provide 

explicit instructions to federal agencies regarding how to address section 7704’s tax 

treatment in setting regulated entity rates as, for instance, it did in the Revenue Act of 1964. 
Docket No. PL17-1-000 - 27 -

40. Nor do the pipeline commenters present any legislative history to support their 

claim. Regarding the letter from Senator Baucus, evidence of legislative intent that occurs 

subsequent to, and in this case years after, the 1987 enactment of section 7704 is entitled to 

little, if any weight.

73 The MLPA also points to other legislation by Congress in recent 

years to demonstrate ongoing support for the use of MLPs to raise capital in the energy 

 

See Alabama-Tennessee Natural Gas Co. v. FPC, 359 F.2d 318, 333 (5th Cir. 1966) (“In 

the Revenue Acts of 1962 and 1964 Congress demonstrated that when it desires a tax statute 

to restrict the ratemaking authority of federal regulatory agencies it does so in precise 

language.”). Courts are hesitant to find that Congress implicitly intended to restrict an 

agency’s discretion in carrying out its statutory obligations. See Alabama-Tennessee 

Natural Gas Co. v. FPC, 359 F.2d at 335 (“It is unlikely to suppose that Congress amended 

the Natural Gas Act by a reference in the Internal Revenue Code; it is unreasonable to read 

Section 167 [of the Code] as a mandate reducing the Commission’s responsibility to fix fair 

rates according to its usual ratemaking policies in favor of the consumer”); see also Cheney 

R. Co. v. ICC, 902 F.2d 66, 69 (D.C. Cir. 1990) (“in an administrative setting, ... Congress 

is presumed to have left to reasonable agency discretion questions that it has not directly 

resolved”).

73 See Thomas v. Network Solutions, Inc., 176 F. 3d 500, 507 n.10 (D.C. Cir. 1999) 

(referring to letters from members of Congress written after the legislation in question was 

passed and noting that “[s]uch isolated post-enactment statements, to the extent that they are 

legislative history, carry little weight”); U.S. v. United Mine Workers of America, 330 U.S. 

258, 282 (1947) (remarks of senators in 1943 were not an authoritative source of evidence 

of Congress’ legislative intent in enacting a 1932 statute); D.C. v. Heller, 554 U.S. 570, 605 

(2008) (“post-enactment legislative history ... a deprecatory contradiction in terms, refers to 

statements of those who drafted or voted for the law that are made after its enactment and 

hence could have no effect on the congressional vote”); Barber v. Thomas, 560 U.S. 474, 

486 (2010) (“whatever interpretive force one attaches to legislative history, the Court 

normally gives little weight to statements, such as those of the individual legislators, made 

after the bill in question has become a law”); Friends of Earth, Inc. v. E.P.A., 446 F.3d 140, 

147 (D.C. Cir. 2006) (“‘[P]ost-enactment legislative history,’ after all, ‘is not only 

oxymoronic but inherently entitled to little weight’”) (quoting Cobell v. Norton, 428 F.3d 

1070, 1075 (D.C. Cir. 2005)).
Docket No. PL17-1-000 - 28 -

sector. These statutes do not include any specific provisions related to MLP pipeline rate 

treatment.74

41. In conclusion, removing the income tax allowance will not eviscerate the preferential 

tax treatment that Congress gave entities engaged in natural resource activities75 by 

permitting them to operate as publicly-traded partnerships with pass-through taxation, 

including the ability to reach a broader base of investors and defer certain tax obligations.76

Even in the absence of an income tax allowance, the energy sector will benefit from the 

MLP business form by enabling MLP-owned pipelines to provide lower tariff rates to 

shippers, including those engaged in production, marketing and refining.

b. Preserving the Income Tax Allowance for MLP Pipelines 

Does Not Create Parity

42. Pipeline commenters claim that removing the income tax allowance would put MLP 

pipelines at a competitive disadvantage relative to corporate pipelines.

77 

 74 See MLPA Initial Comments at 4 (citing the American Jobs Creation Act, 

Emergency Economic Stabilization Act of 2008, and the Tax Reform Act of 2014). 

75 An MLP must receive at least 90 percent of its income from certain qualifying 

sources including “the exploration, development, mining or production, processing, refining, 

transportation (including pipelines transporting gas, oil, or products thereof), or the 

marketing of any mineral or natural resource (including fertilizer, geothermal energy, and 

timber), industrial source carbon dioxide, or the transportation or storage of [certain fuels].” 

26 U.S.C. 7704.

76 Pipeline commenters explain that the MLP structure permits risk sharing by 

combining pass-through taxation and publicly-traded units which allows MLPs to reach a 

broader base of investors and facilitates raising capital for infrastructure projects. AOPL 

Initial Comments at 6, 39, 13; MLPA Initial Comments at 2-3.

77 AOPL Initial Comments at 43; INGAA Initial Comments at 7, 15; MLPA Initial 

Comments at 15.
Docket No. PL17-1-000 - 29 -

43. The court in United Airlines reached the opposite conclusion. The court determined

that granting MLP pipelines an income tax allowance results in inequitable returns for 

partners as compared to corporate shareholders because this policy allows partnership

pipelines, unlike corporate pipelines, to recover their income tax costs twice.78 Therefore, 

removal of the income tax allowance for MLP pipelines restores parity between MLPs and 

corporations by ensuring that a pipeline recovers its income tax costs only once regardless 

of business form.79 

c. Preserving the Income Tax Allowance Is Not Necessary for 

Pipelines To Attract Capital

44. Pipelines claim that removal of the income tax allowance for MLPs will deny 

pipelines adequate recovery under Hope and deter investment.80 This is not the case. 

Notwithstanding the absence of an income tax allowance, MLP pipelines will continue to 

recover their costs and a reasonable return for investors. United Airlines and the Remand 

Order merely deny MLP pipelines the double recovery of their income tax costs.

 78 United Airlines, 827 F.3d at 136.

79 While comments have presented hypotheticals in an attempt to show that MLPs 

require such a double recovery, they suffer from the same defects as the pipelines’ other 

arguments. For instance, while SFPP attempts to include a hypothetical showing that an 

income tax allowance is necessary to equalize returns, this hypothetical depends upon the 

faulty investor gross-up theory discussed above. See SFPP Initial Comments, Vander 

Weide Affidavit at 12 (Table 2, Lines 11-15, showing the before-tax DCF ROE and 

investor’s pre-tax return equaling the investor’s after-tax return).

80 INGAA Initial Comments at 27-28; AOPL Initial Comments at 7, 35-37.
Docket No. PL17-1-000 - 30 -

B. Conclusion 

45. As discussed above, the Commission finds that granting an MLP an income tax 

allowance results in an impermissible double recovery. This Revised Policy Statement does 

not address other, non-MLP partnership or other pass-through business forms.81 While any 

such entity claiming an income tax allowance will need to address the concerns raised by 

the court in United Airlines, the Commission will address income tax allowance issues 

involving non-MLP partnership forms in subsequent proceedings. 

46. This Revised Policy Statement will affect both oil and natural gas MLP pipelines on 

a going-forward basis. Some late-filed comments proposed that the Commission take 

immediate action to require natural gas and oil pipelines to reduce rates to reflect the Tax 

Cuts and Jobs Act. As noted above, the Commission is concurrently issuing a Notice of 

Proposed Rulemaking that addresses the effects upon interstate natural gas pipeline rates of 

the post-United Airlines’ policy changes and the Tax Cuts and Jobs Act of 2017.82 While 

the Commission is not taking similar industry-wide action regarding oil pipeline rates, these 

issues will be addressed in due course. When oil pipelines file Form No. 6, page 700 on 

 81 See, e.g., Initial Comments of the United Airlines Petitioners and Allied Shippers 

at 14 (“A generic proceeding is not well-suited to addressing the wide array of possible 

organizational forms and their respective tax implications. The better approach would be to 

examine the appropriate tax allowance treatment on a case-by-case basis in adjudicatory 

proceedings in which various business structures and their consequences can be examined in 

detail on an individual, case-specific basis.”); Liquids Shipper Group Initial Comments at 7

(“To the extent there may be individual and complex pipeline ownership structures that 

include both partnerships and corporations, the application of the FERC’s policy can be 

determined on a case-by-case basis, addressing those unique circumstances.”).

82 See Docket No. RM18-11-000.
Docket No. PL17-1-000 - 31 -

April 18, 2018, they must report an income tax allowance consistent with United Airlines 

and the Commission’s subsequent holdings denying an MLP an income tax allowance.83 

Based upon page 700 data, the Commission will incorporate the effects of the post-United 

Airlines’ policy changes (as well as the Tax Cuts and Jobs Act of 2017)84 on industry-wide 

oil pipeline costs in the 2020 five-year review of the oil pipeline index level.85 In this way 

the Commission will ensure that the industry-wide reduced costs are incorporated on an 

industry-wide basis as part of the index review. To the extent the Commission issues 

subsequent orders affecting the income tax policy for other partnership or pass-through 

business forms, oil pipelines should similarly reflect those policy changes on Form No. 6, 

page 700. 

 83 Due to these findings that including an income tax allowance in the cost of service 

leads to a double-recovery, there is no basis for an MLP pipeline to claim an income tax 

allowance in the summary Form No. 6, page 700 cost of service for the 2016 or 2017 data 

listed in the April 18, 2018 filing.

84 The Tax Cuts and Jobs Act changed oil pipeline tax costs effective January 1, 

2018, and the resulting reduction to tax costs should be reflected in the tax allowance 

(page 700, lines 8 and 8a) in the 2018 data reported in Form No. 6, page 700, to be filed 

on April 18, 2019. 

85 The overwhelming majority of oil pipelines set their rates using indexing, not 

cost-of-service ratemaking using an oil pipeline’s particular costs. Under indexing, oil 

pipelines may adjust their rates annually, so long as those rates remain at or below the 

applicable ceiling levels. The ceiling levels change every July 1 based on an index that 

tracks industry-wide cost changes. 18 CFR § 342.3. Currently, the index level is based 

upon the Producer’s Price Index for Finished Goods plus 1.23. The index will be reassessed in 2020 based upon industry-wide oil pipeline cost changes between 2014 and 

2019. E.g. Five-Year Review of the Oil Pipeline Index, 153 FERC ¶ 61,312 (2015) aff’d,

Assoc. of Oil Pipe Lines v. FERC, 876 F.3d 336 (D.C. Cir. 2017). The industry-wide data 

filed in the latter years of the 2014-2019 period should reflect the Commission’s postUnited Airlines policy changes as well as the Tax Cuts and Jobs Act.
Docket No. PL17-1-000 - 32 -

47. In addition, the Commission emphasizes that the post-United Airlines’ policy 

changes (as well as the Tax Cuts and Jobs Act of 2017) will be reflected in initial oil and 

gas pipeline cost-of-service rates and cost-of-service rate changes on a going-forward basis

under the Commission’s existing ratemaking policies,

86 including cost-of-service rate 

proceedings resulting from shipper-initiated complaints.

III. Document Availability

48. In addition to publishing the full text of this document in the Federal Register, the 

Commission provides all interested persons an opportunity to view and/or print the contents 

of this document via the Internet through FERC’s Home Page (http://www.ferc.gov) and 

in FERC’s Public Reference Room during normal business hours (8:30 a.m. to 5:00 p.m. 

Eastern time) at 888 First Street, NE, Room 2A, Washington, DC 20426.

49. From FERC’s Home Page on the Internet, this information is available on eLibrary. 

The full text of this document is available on eLibrary in PDF and Microsoft Word format 

for viewing, printing, and/or downloading. To access this document in eLibrary, type the 

docket number excluding the last three digits of this document in the docket number field.

50. User assistance is available for eLibrary and the FERC’s website during normal 

business hours from FERC Online Support at 202-502-6652 (toll free at 1-866-208-3676) or 

email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-8371, 

TTY (202) 502-8659. E-mail the Public Reference Room at 

public.referenceroom@ferc.gov.

 86 See, e.g., 18 C.F.R. §§ 154.312(m), 154.313(e)(13), 384.123; 342.2, 342.4(a); 

18 C.F.R. pt. 346. 
Docket No. PL17-1-000 - 33 -

IV. Effective Date

51. This Revised Policy Statement will become effective [date of publication in the 

Federal Register].

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.