Document ID: FERC-2016-1723-0001
Agency: ferc
Document Type: Notice
Title: Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs
Posted Date: 2016-12-23T05:00Z

[Federal Register Volume 81, Number 247 (Friday, December 23, 2016)]
[Notices]
[Pages 94366-94370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30970]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. PL17-1-000]

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

AGENCY:  Federal Energy Regulatory Commission, Department of Energy.

ACTION:  Notice of Inquiry.

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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 seeks comment regarding how to address any double 
recovery resulting from the Commission's current income tax allowance 
and rate of return policies.

DATES:  Initial Comments are due February 6, 2017, and Reply Comments 
are due February 27, 2017.

ADDRESSES:  Comments, identified by docket number, may be filed in the 
following ways:
     Electronic Filing through http://www.ferc.gov. Documents 
created electronically using word processing software should be filed 
in native applications or print-to-PDF format and not in a scanned 
format.
     Mail/Hand Delivery: Those unable to file electronically 
may mail or hand-deliver comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE., 
Washington, DC 20426.
     Instructions: For detailed instructions on submitting 
comments, see the Comment Procedures Section of this document.

FOR FURTHER INFORMATION CONTACT: 
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: 
    1. The Commission seeks comments regarding how to address any 
double recovery resulting from the Commission's current income tax 
allowance and rate of return policies. This Notice of Inquiry (NOI) 
follows the U.S. Court of Appeals for the District of Columbia Circuit 
(D.C. Circuit) holding in United Airlines, Inc., et al. v. Federal 
Energy Regulatory Commission that the Commission failed to demonstrate 
that there is no double recovery of taxes for a partnership pipeline as 
a result of the income tax allowance and return on equity (ROE) 
determined pursuant to the discounted cash flow (DCF) methodology.\1\ 
Accordingly, the Court remanded the decisions to the Commission to 
develop a mechanism ``for which the Commission can demonstrate that 
there is no double recovery'' of partnership income tax costs.\2\
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    \1\ United Airlines Inc., et al. v. FERC, 827 F.3d 122, 134, 136 
(D.C. Cir. 2016) (United Airlines).
    \2\ Id. at 137.
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    2. The Commission recognizes the potentially significant and 
widespread effect of this holding upon the oil pipelines, natural gas 
pipelines, and electric utilities subject to the Commission's 
regulation. The importance of the income tax policy for partnership 
entities extends well-beyond the particular interests of the parties to 
the United Airlines proceeding. The Commission also recognizes that 
additional industry comment may provide further insight into the 
relationship between a partnership's income tax allowance and the 
Commission's DCF methodology. Accordingly, this NOI seeks further 
information as the Commission re-evaluates its policies following the 
United Airlines decision. Initial Comments are due February 6, 2017, 
and Reply Comments are due February 27, 2017.

I. Background

    3. This proceeding involves the relationship between the 
Commission's income tax allowance and ROE policies. Both have evolved 
in the past two decades to address the emergence of partnership 
entities in FERC-regulated industries, particularly Master Limited 
Partnerships (MLPs) that own oil and natural gas pipeline assets.\3\
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    \3\ See Composition of Proxy Groups for Determining Gas and Oil 
Pipeline Return on Equity, 123 FERC ] 61,048 (2008) (Proxy Group 
Policy Statement); Inquiry Regarding on Income Tax Allowances, 111 
FERC ] 61,139 (2005) (Income Tax Policy Statement).
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A. The MLP Business Model

    4. An MLP is a publicly traded partnership.\4\ In order to be 
treated as an MLP for Federal income tax purposes, an MLP must receive 
at least 90 percent of its income from certain qualifying sources, 
including natural gas and oil pipelines.\5\
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    \4\ The Internal Revenue Service defines a ``publicly traded 
partnership'' as any partnership if its interests are traded on an 
established securities market or are readily tradable on a secondary 
market or the substantial equivalent thereof. 26 U.S.C. 7704; 26 CFR 
1.7704-1.
    \5\ 26 U.S.C. 7704. Qualifying sources include natural resource 
activities such as exploration, development, mining or production, 
processing, refining, transportation, storage and marketing of any 
mineral or natural resource, including gas and oil. Id.
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    5. MLPs consist of a general partner, that manages the partnership, 
and limited partners, that provide capital and receive cash 
distributions. MLP limited partner units are traded on public 
exchanges, just like corporate stock shares.\6\ Based upon the MLP's 
partnership agreement, MLPs generally (a) distribute most ``available 
cash flow'' to the general and limited partners in the form of 
quarterly distributions, and, in a separate calculation, (b) allocate 
to the general and limited partners net partnership income for income 
tax purposes.\7\
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    \6\ Proxy Group Policy Statement, 123 FERC ]61,048 at P 10.
    \7\ Id. at P 11; Master Limited Partnership Association (MLPA), 
MLP-101, Basic Tax Principles, https://www.mlpassociation.org/mlp-101/basic-tax-principles/ (last visited Nov. 29, 2016) (MLPA Basic 
Tax Principles). Most MLP agreements define ``available cash flow'' 
as (1) net income (gross revenues minus operating expenses) plus (2) 
depreciation and amortization, minus (3) capital investments the 
partnership must make to maintain its current asset base and cash 
flow stream. Depreciation and amortization may be considered a part 
of ``available cash flow,'' because depreciation is an accounting 
charge against current income, rather than an actual cash expense. 
Thus, depreciation does not reduce the MLP's current cash on hand. 
Proxy Group Policy Statement, 123 FERC ]61,048 at P 11.

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[[Page 94367]]

    6. Quarterly cash distributions received by a partner are not 
equivalent to the partner's share of the MLP's taxable income. MLPs are 
pass-through entities and each partner is personally responsible for 
paying income taxes on the partnership's net taxable income.\8\ For tax 
purposes, the partnership agreement allocates to each partner a share 
of the partnership's taxable income.\9\ Deductions, including 
depreciation, losses, and credits, may substantially offset the taxable 
income. As a result, a partner may have no net taxable income in a 
given year.\10\
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    \8\ Income Tax Policy Statement, 111 FERC ]61,139 at P 33; MLPA 
Basic Tax Principles; see also ExxonMobil Oil Corp. v. FERC, 487 
F.3d 945, 954 (D.C. Cir. 2007) (ExxonMobil) (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. SFPP, L.P., Opinion No. 511, 134 FERC ]61,121, at PP 
223, 253 (2011) (Opinion No. 511).
    \9\ The partner reports this taxable income and its components 
(e.g., gain, deductions, losses, credits) to the Internal Revenue 
Service on the K-1. See Dep't of Treasury, Internal Revenue Service, 
Partner's Instructions for Schedule K-1 (Form 1065) (2015), https://www.irs.gov/instructions/i1065sk1/index.html (IRS Instructions for 
K-1).
    \10\ Proxy Group Policy Statement, 123 FERC ]61,048 at P 14.
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    7. In contrast, the partner may receive a quarterly distribution 
whether or not it is allocated a positive net income tax liability for 
that period. The quarterly distributions are considered to be a return 
of capital, which reduces the partner's basis in the MLP units and is 
only taxed at the time of distribution if the partner's adjusted basis 
falls to zero.\11\ The investor's original basis (the price paid for 
the units) is adjusted downwards by cash distributions and allocations 
of deductions, and is adjusted upwards by allocations of income. When 
the units are sold, the taxable gain is the sales price minus the 
adjusted basis.\12\ The portion of the gain attributable to basis 
reductions for prior depreciation deductions is ``recaptured'' and 
taxed as ordinary income rather than capital gain.\13\
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    \11\ Id. P 15; MLPA Basic Tax Principles. Provided that the 
partner's adjusted basis is above zero, tax on distributions is 
deferred until the investor sells the units. If the basis falls to 
zero, future cash distributions are taxed as capital gain in the 
year received. MLPA Basic Tax Principles.
    \12\ MLPA Basic Tax Principles; IRS Instructions for K-1.
    \13\ MLPA Basic Tax Principles.
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B. Return on Equity Policies

    8. In Hope,\14\ the Supreme Court 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.'' 
\15\ Since the 1980s, the Commission has used the DCF model to develop 
a range of returns earned on investments in companies with 
corresponding risks for purposes of determining the ROE for regulated 
entities.
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    \14\ Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591 
(1944) (Hope).
    \15\ Id. at 603; see also Bluefield Waterworks & Improvement Co. 
v. Pub. Serv. Comm'n, 262 U.S. 679, 692-693 (1923); Duquesne Light 
Co. v. Barasch, 488 U.S. 299, 314 (1989).
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    9. Under the Commission's cost-of-service ratemaking methodology, 
the DCF model is used to determine a reasonable ROE that a regulated 
entity may recover in rates in addition to its costs. The purpose of 
the DCF methodology is to estimate the return required by investors in 
order to invest in the pipeline or utility whose rates are at 
issue.\16\ To do this, the DCF model considers the range of returns 
that the market provides investors in a proxy group of publicly-traded 
entities with similar risk profiles.\17\
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    \16\ Martha Coakley, Mass. Attorney Gen. v. Bangor Hydro-Elec. 
Co., Opinion No. 531, 147 FERC ]61,234, at P 14 (2014) (Opinion No. 
531).
    \17\ See Canadian Ass'n of Petroleum Producers v. FERC, 254 F.3d 
289, 293-294 (D.C. Cir. 2001).
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    10. The DCF model was originally developed as a method for 
investors to estimate the value of securities, including common stocks. 
It is based on the premise that ``a stock's price is equal to the 
present value of the infinite stream of expected dividends discounted 
at a market rate commensurate with the stock's risk.'' \18\ With 
simplifying assumptions, the DCF model results in the investor using 
the following formula to determine share price:
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    \18\ Id.; see also Proxy Group Policy Statement, 123 FERC 
]61,048 at P 58.

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P = D/(k-g)

where P is the price of the stock at the relevant time, D is the 
current dividend, k is the discount rate (or investors' required rate 
of return), and g is the expected growth rate in dividends. For 
ratemaking purposes, the Commission rearranges the DCF formula to solve 
for ``k'', the discount rate, which represents the rate of return that 
investors require to invest in the firm.\19\ Under the resulting DCF 
formula, the required rate of return is estimated to equal current 
dividend yield (dividends divided by share price) plus the projected 
future growth rate of dividends:
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    \19\ Opinion No. 531, 147 FERC ]61,234 at P 15. In contrast, 
``r'' represents the regulated entity's rate of return. Although the 
Commission has at times used the terms ``r'' and ``k'' 
interchangeably, the Commission intends to apply these terms more 
precisely and requests that the participants in this proceeding do 
so also unless quoting a prior Commission order.

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k = D/P + g

    11. The Commission compares the returns of proxy group entities on 
an after-entity-level-tax basis, rather than before-tax basis, because 
most comparable securities trade on the basis of an entity's after-tax 
return on its public utility income.\20\ Based typically upon the 
median of the range of returns in the proxy group, the Commission 
determines the regulated entity's allowed ROE,\21\ although the ROE may 
sometimes be adjusted upwards or downwards within the zone of 
reasonableness.\22\
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    \20\ Brief of Respondent Federal Energy Regulatory Commission, 
at 8, Case No. 11-1479 (D.C. Cir., filed Feb. 5, 2016).
    \21\ See Southern California Edison Co. v. FERC, 717 F.3d 177, 
182-183 (D.C. Cir. 2013).
    \22\ See, e.g., Opinion No. 531, 147 FERC ]61,234 at PP 150-151. 
The zone of reasonableness is defined by the low and high estimates 
of the market cost of equity for the members of the proxy group. Id. 
P 23.
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    12. The Commission's proxy group criteria is based on the principle 
that entities included in the proxy group must be of comparable risk to 
the firm whose ROE is being determined in a particular rate 
proceeding.\23\ As entities narrowly focused on providing oil and 
natural gas pipeline transportation have increasingly adopted the MLP 
business form, the Commission has included MLPs in the proxy group for 
natural gas and oil pipelines because those MLPs are likely more 
representative of predominantly pipeline firms than the diversified 
corporations otherwise available for inclusion in a proxy group.\24\ 
The Commission uses the same DCF analysis for MLPs as for corporations, 
except that the Commission uses a lower long-term growth projection for 
MLPs than for corporations.\25\ The Commission concluded that an MLP's 
quarterly distributions could be used to measure cash flows from the 
investment without any adjustment to remove return of

[[Page 94368]]

capital.\26\ The Commission explained that ``since the DCF model uses 
the total unadjusted cash flows to determine the stock's value, it is 
theoretically inconsistent [with the DCF model] to use lower adjusted 
cash flows when using the DCF model to determine the return required by 
investors purchasing the stock.'' \27\
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    \23\ Petal Gas Storage, L.L.C. v. FERC, 496 F.3d 695, 699 (D.C. 
Cir. 2007) (Petal); Proxy Group Policy Statement, 123 FERC ] 61,048 
at PP 24, 29.
    \24\ See Proxy Group Policy Statement, 123 FERC ]61,048 at PP 
47-50.
    \25\ The long-term growth projection for corporations is 
projected growth in Gross Domestic Product (GDP) and for MLPs one 
half that projection. Id. P 106.
    \26\ See Id. PP 57-63.
    \27\ See Id. P 58.
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C. Income Tax Policy

    13. In May 2005, the Commission issued an Income Tax Policy 
Statement \28\ permitting an income tax allowance for all regulated 
entities (including corporations and partnerships), provided that the 
owners can show an actual or potential income tax liability to be paid 
on income from the regulated assets. The Commission continued its 
longstanding policy of permitting corporations to recover an income tax 
allowance because corporations themselves incur a corporate income tax 
liability. The Commission reasoned that while a partnership or other 
pass-through entity does not pay taxes, the partners incur an income 
tax liability on the partnership income. Accordingly, those income tax 
costs are appropriately included in rates.\29\ The D.C. Circuit upheld 
this policy, in ExxonMobil,\30\ explaining that the income tax 
liability of partners is attributable to the regulated entity and may 
be recovered in pipeline rates, provided that the partners have an 
actual or potential income tax liability.\31\
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    \28\ See Income Tax Policy Statement, 111 FERC ]61,139. The 
Policy Statement was issued in response to BP West Coast Products, 
LLC v. FERC, 374 F.3d 1263 (DC Cir. 2004) (BP West Coast). That 
decision held that the Commission failed to justify its then 
existing policy of affording partnership entities an income tax 
allowance for income attributable to interests held by corporations, 
but not for income attributable to interests held by individuals.
    \29\ Id. P 34.
    \30\ ExxonMobil, 487 F.3d 945.
    \31\ Id. at 953-955.
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    14. In July 2016, in United Airlines,\32\ the D.C. Circuit, 
reviewing a series of orders involving SFPP, L.P.,\33\ held that the 
Commission failed to demonstrate that there is no double recovery of 
taxes for a partnership pipeline as a result of awarding that pipeline 
both an income tax allowance and a pre-investor-tax ROE pursuant to the 
DCF methodology.\34\ The Court upheld ExxonMobil's finding that a 
pipeline may recover partnership income tax costs so long as the 
partners have an actual or potential income tax liability,\35\ but 
concluded that allowing partnerships to double recover those tax costs 
would be inconsistent with the Supreme Court's mandate in Hope.\36\
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    \32\ United Airlines, 827 F.3d 122.
    \33\ 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).
    \34\ United Airlines, 827 F.3d at 134, 136.
    \35\ Id. at 135 (citing ExxonMobil, 487 F.3d at 954-955); id. at 
137.
    \36\ Id. at 137 (citing Hope, 320 U.S. at 603).
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    15. The Court remanded the decisions to the Commission to develop a 
mechanism ``for which the Commission can demonstrate that there is no 
double recovery'' of partnership income tax costs.\37\ The Court noted 
that the Commission may consider the options of 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.\38\
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    \37\ Id.
    \38\ Id. As noted by the Court, the Commission previously 
considered the option of setting rates based on pre-investor level 
and pre-entity level tax returns in its 2005 policy statement and 
concluded this approach would be impracticable. See Income Tax 
Policy Statement, 111 FERC ]61,139 at P 40.
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    16. The Court also directed the Commission to ensure parity between 
equity owners in partnership and corporate pipelines.\39\ The Court did 
not find persuasive 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.'' \40\
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    \39\ United Airlines, 827 F.3d at 137.
    \40\ Id. at 136; see also BP West Coast, 374 F.3d at 1293 (``The 
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, let alone to create an 
allowance for fictitious taxes.'').
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II. Commission Questions

    17. The Commission seeks comment regarding methods to allow 
regulated entities to earn an adequate return consistent with Hope \41\ 
that do not result in a double recovery of investor-level taxes for 
partnerships or similar pass-through entities.
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    \41\ 320 U.S. at 603.
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    18. Comments should consider the fundamental concerns presented by 
United Airlines and shipper litigants that permitting a partnership 
entity to have an income tax allowance results in a double recovery of 
investor-level tax costs because:

     The DCF methodology estimates the rate of return that 
an investor requires in order to invest in the regulated entity.\42\
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    \42\ United Airlines, 827 F.3d at 136; Opinion No. 531, 147 FERC 
] 61,234 at P 14.
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     As a general matter, potential investors evaluate 
whether to invest in an entity based on the returns they expect to 
receive after paying any applicable taxes on the investment 
income,\43\ and thus, to attract capital, entities in the market 
must provide investors a return that covers investor-level taxes and 
leaves sufficient remaining income to earn their required after-tax 
return.\44\
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    \43\ Kern River Gas Transmission Co., Opinion 486-B, 126 FERC ] 
61,034, at P 114 (2009) (``investors invest on the basis of after-
tax returns and price an instrument accordingly'').
    \44\ 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 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.
    Although the concept may be more complex for an MLP, this 
proposition is also evidenced in the fact that the yields on bonds 
that pay taxable interest income are higher than the yields on bonds 
of state and local governments that pay tax-exempt income. Joint 
Initial Brief of Shipper Petitioners, at 20, Case No. 11-1479 (D.C. 
Cir., filed Feb. 5, 2016).
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     Because the return estimated by the DCF methodology 
includes the cash flow necessary to cover investors' income tax 
liabilities and earn a sufficient after-tax return, the Commission's 
policy of allowing partnership entities to recover a separate income 
tax allowance may result in a double recovery.\45\
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    \45\ United Airlines, 827 F.3d at 137 (remanding for the 
Commission to consider ``mechanisms for which the Commission can 
demonstrate that there is no double recovery'').
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     While allowing a partnership entity to recover the 
partner-investors' tax costs is reasonable,\46\ allowing a 
partnership to double recover those tax costs is not.\47\
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    \46\ Id. at 135, 137 (noting that the Commission had a reasoned 
basis for granting an income tax allowance to partnership 
pipelines); ExxonMobil, 487 F.3d at 951-953 (concluding that the 
Commission provided a reasonable justification for its policy of 
allowing partnership pipelines an income tax allowance to the extent 
that the partners incur actual or potential tax liability); see also 
City of Charlottesville v. FERC, 774 F.2d 1205, 1207 (D.C. Cir. 
1985) (``cost-of-service ratemaking principles'' require ``rates 
yielding sufficient revenue to cover all proper costs, including 
federal income taxes, plus a specified return on invested 
capital''); BP West Coast, 374 F.3d 1263 at 1286 (``There is no 
question that as a general proposition a pipeline that pays income 
taxes is entitled to recover the costs of the taxes paid from its 
ratepayers''); Pub. Serv. Comm'n of N.M. v. FERC, 653 F.2d 681, 683 
(D.C. Cir. 1981).
    \47\ United Airlines, 827 F.3d at 136 (finding that ``[b]ecause 
the Supreme Court has instructed that `the return to the equity 
owner should be commensurate with returns on investments in other 
enterprises having corresponding risks,' FERC has not shown that the 
resulting rates under FERC's current policy are `just and 
reasonable.' '') (quoting Hope, 320 U.S. at 603).

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[[Page 94369]]

     Changes in the share price do not resolve the double 
recovery issue. MLP investors will demand the same percentage return 
on the share price whether or not a pipeline receives an income tax 
allowance. If an MLP obtains a new revenue source that increases its 
distributions to investors (such as an income tax allowance that 
increases its rates), the share price will rise until, once again, 
the investor receives the cash flow necessary to cover investors' 
income tax liabilities and earn a sufficient after-tax return.\48\
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    \48\ Opinion No. 511, 134 FERC ] 61,121 at PP 243-44; Joint 
Initial Brief of Shipper Petitioners, at 34-35, 39-40, Case No. 11-
1479 (D.C. Cir., Feb. 5, 2016); id. at Attachment 3 (SFP-98 and SFP-
99); Proxy Group Policy Statement, 123 FERC ] 61,048 at P 58 
(``under the DCF model, all cash flows, whatever their source, 
contribute to the value of stock''); see also United Airlines, 827 
F.3d at 136-137. Although the Court did not directly address this 
particular aspect of the Shippers' argument, the Shippers have 
repeatedly raised it in their claims that this income results in a 
double recovery. See Opinion No. 511, 134 FERC ] 61,121 at PP 238-
239. Further, citing to the same passage in Opinion No. 511 as the 
Shippers, the Court did acknowledge 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.'' United Airlines, 827 F.3d at 136 (citing 
Opinion No. 511, 134 FERC ] 61,121 at PP 243-244).
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     As opposed to an MLP pipeline, the double recovery 
issue does not arise for a corporation's income tax allowance. The 
corporation pays its corporate income taxes itself. Accordingly, 
although a return to investors must cover investor-level taxes and 
sufficient remaining income to earn their required after-tax return, 
the corporate income tax is not an investor level tax.\49\ Thus, the 
corporate income tax cost recovered in the income tax allowance is 
not reflected in the return estimated by the DCF methodology.\50\
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    \49\ Income Tax Policy Statement, 111 FERC ] 61,139 at P 38.
    \50\ United Airlines, 827 F.3d at 136 (finding that ``unlike a 
corporate pipeline, a partnership pipeline incurs no taxes, except 
those imputed from its partners, at the entity level'' and that the 
facts ``support the conclusion that granting a tax allowance to 
partnership pipelines results in inequitable returns for partners in 
those pipelines as compared to shareholders in corporate 
pipelines.'').

    19. In light of the above, the Commission invites comments 
regarding any proposed methods to adjust the income tax allowance 
policy or current ROE policies to resolve any double recovery of 
investor-level tax costs for partnerships or similar pass-through 
entities. Comments should provide a detailed explanation of any 
proposal, including evidentiary support and how any adjustment to the 
Commission's tax allowance and/or ROE policies should be specifically 
implemented. Comments should explain how the proposed approach would 
(a) resolve any double recovery of investor-level income tax costs for 
partnership entities, and (b) allow regulated entities to earn a 
sufficient return consistent with the capital attraction standard in 
Hope.\51\ Comments should support any proposed methods with data, 
theoretical analyses, empirical studies, or any other evidence relevant 
to demonstrating the level of partner-investor tax costs reflected in 
the ROE estimated by the DCF methodology. Comments should address how 
these proposals apply to publically traded pass-through entities, such 
as MLPs and real estate investment trusts (REITS), as well other pass 
through entities, including closely held partnerships and joint 
ventures.
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    \51\ 320 U.S. at 603.
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    20. Comments should also address the practical application of their 
proposals. For example, to the extent a commenter advocates eliminating 
the income tax allowance for partnerships and relying on the ROE 
awarded the pipeline for the recovery of investor-level tax costs, its 
comments should address whether any changes to the Commission's ROE 
policies are necessary to ensure that the ROE reflects appropriate tax 
costs for the particular entity whose rates are at issue.\52\ 
Alternatively, commenters could propose reducing the DCF return to 
remove all investor-level tax costs and rely on an income tax allowance 
to recover the investor-level tax costs. Commenters advocating this 
latter approach should explain how an adjustment to the DCF return 
could be made to remove investor-level tax costs for each entity in the 
DCF proxy group.\53\ In addition, those commenters should describe how 
to determine the level of the income tax allowance for partnership 
entities.\54\ As stated above, commenters should ensure that their 
proposals do not result in a double recovery of investor level income 
tax costs for partnership entities as required by United Airlines.
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    \52\ For example, investors in an MLP incur different investor-
level taxes than investors in a corporation. Commenters could 
propose adjustments to equalize the after-investor-level tax returns 
for each entity in the proxy group or explain why such adjustments 
are not necessary. Alternatively, commenters could propose a means 
for including only entities in the proxy group that incur similar 
investor-level tax costs. To the extent any commenter advocates the 
latter approach, that commenter should address how the composition 
of the proxy group and the availability of companies for the proxy 
group in a given rate case could be affected if the composition of 
the proxy group is changed to account for the different investor-
level taxes of different business forms. See Petal, 496 F.3d 695 at 
698-700; Proxy Group Policy Statement, 123 FERC ] 61,048 at P 9 
(explaining that an insufficient number of pipelines using the 
corporate business form are available for the formation of a natural 
gas pipeline proxy group).
    \53\ See n.52.
    \54\ Currently, the Commission uses the weighted marginal tax 
rate of the MLP's partners. Income Tax Policy Statement, 111 FERC ] 
61,139 at P 32; SFPP, L.P., 121 FERC ] 61,240, at P 35 (2007).
---------------------------------------------------------------------------

III. Procedure for Comments

    21. The Commission invites interested persons to submit written 
comments on the issue identified in this Notice of Inquiry as discussed 
above. Comments are due February 6, 2017 and reply comments are due 
February 27, 2017. Comments must refer to Docket No. PL17-1-000, and 
must include the commenter's name, the organization it represents, if 
applicable, and its address. To facilitate the Commission's review of 
the comments, commenters are requested to provide an executive summary 
of their position. Additional issues the commenters wish to raise 
should be identified separately. The commenters should double space 
their comments.
    22. The Commission encourages comments to be filed electronically 
via the eFiling link on the Commission's Web site at http://www.ferc.gov. The Commission accepts most standard word processing 
formats. Documents created electronically using word processing 
software should be filed in native applications or print-to-PDF format 
and not in a scanned format. Commenters filing electronically do not 
need to make a paper filing.
    23. Commenters that are not able to file comments electronically 
must send an original of their comments to: Federal Energy Regulatory 
Commission, Secretary of the Commission, 888 First Street NE., 
Washington, DC 20426.
    24. All comments will be placed in the Commission's public files 
and may be viewed, printed, or downloaded remotely as described in the 
Document Availability section below. Commenters on this proposal are 
not required to serve copies of their comments on other commenters.

IV. Document Availability

    25. The Commission provides all interested persons an opportunity 
to view and/or print the contents of this document via the Internet 
through the Commission's Home Page (http://www.ferc.gov) and in the 
Commission'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.
    26. From the Commission's Home Page on the Internet, this 
information is available in the Commission's document management 
system, eLibrary. The full text of this document is available on 
eLibrary in PDF and Microsoft Word

[[Page 94370]]

format for viewing, printing, and/or downloading. To access this 
document in eLibrary, type the docket number (excluding the last three 
digits) in the docket number field.
    27. User assistance is available for eLibrary and the Commission's 
Web site during normal business hours. For assistance, please contact 
the Commission's Online Support at 1-866-208-3676 (toll free) or 202-
502-6652 (email at FERCOnlineSupport@ferc.gov) or the Public Reference 
Room at 202-502-8371, TTY 202-502-8659 (email at 
public.referenceroom@ferc.gov).

    By direction of the Commission.

    Issued: December 15, 2016.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2016-30970 Filed 12-22-16; 8:45 am]
BILLING CODE 6717-01-P