THE SOURCE - Summer 2018 - 21

APGA was hopeful that pipelines
would render voluntary filings to reduce
the rates of recourse rate shippers. The
vast majority of APGA members receive
service under recourse rates-fully
regulated cost-of-service based maximum
rates under tariff. That did not happen,
although Columbia Gas Transmission
will lower rates now as required by
existing settlement obligations. Instead,
the pipelines argued that to change
rates FERC must hold full, trial-type rate
hearings. They understand well that FERC
lacks the resources to hold so many rate
cases simultaneously.
On March 15, 2018, FERC announced
that it was proposing a new regulation to
compel all 133 interstate pipelines to file
a one-time report in a new Form 501-G
to collect financial detail on the impact
of the Tax Act. Pipelines would file in four
groups: staggered 30-day cycles once the
rule is final, presumably this summer. In
addition, pipelines have four options to
voluntarily address the changes or explain
why no action is needed: (1) file to reduce
the pipeline's rates only for tax impacts,
(2) make a commitment to file a general
rate case in the near future, (3) file a
statement explaining why an adjustment
to its rates is not needed, or (4) take no
action other than filing the One-time
Report. Reluctant pipelines could face a
section 5 action requiring the pipeline
either to reduce its rates to reflect the
income tax reduction or explain why it
should not be required to do so.
FERC simultaneously reversed its policy
allowing so-called pass-through entities
organized as partnerships to claim a tax
allowance in the first place. But as shippers
have argued for years, partnerships do not
pay taxes but pass them through to their
partners. FERC is ending the allowance
of so-called phantom taxes, so it is telling
interstate natural gas pipelines to account
of that change if it affects them in the
Form 501-G.
FERC Is Constrained by an
Antiquated Statute
Unlike most state utility statutes, as
well as the Federal Power Act, the Natural
Gas Act (NGA) only permits FERC to
change pipeline rates to reflect the Tax
Act prospectively from a final decision.
For decades, APGA has asked Congress to

amend section 5 of the NGA to allow FERC
to establish a refund date when it initiates
an investigation of pipeline rates-just
as it can under the Federal Power Act.
This episode should revive the efforts
of APGA and others to demonstrate the
shortcomings of the current law.
How Far Will FERC Go to Change Rates
Agreed to Voluntarily
It has become routine for rate increase
applications to be resolved by a voluntary
unanimous settlement and for shippers
to take a negotiated rate that is immune
from changes in regulated rates. Most
parties value the certainty in such
arrangements for business purposes.
Kinder Morgan says that around
two-thirds of its pipeline and storage
revenues are derived from negotiated
rate or discounted rate agreements that it
believes should be immune from Tax Act
consequences. (This also indicates that
correcting the rates of recourse shippers
paying max rates will affect the smaller
portion of pipeline revenues.)
The law protects these arrangements
from governmental interference. The
Mobile-Sierra doctrine shields such
private contracts and settlements
by creating a presumption that rates
freely negotiated satisfy the "just and
reasonable" requirement imposed by
law. Once declared to be a "practically
insurmountable" standard, the
presumption may be overcome but only
if FERC concludes that the agreement
"seriously harms the public interest." The
premise is the "commonsense notion"
that these parties are sophisticated
businesses that may be expected to
negotiate a just and reasonable rate. But
when those sophisticated parties fail to
foresee a dramatic tax law change, not
applying that change thwarts the public
interest judgment of Congress inherent in
the change.5
Accordingly, in its rule proposal,
FERC stated: "unless a negotiated rate
agreement expressly provides otherwise,
the rates in such agreements will be
unaffected by any reduction in the
pipeline's maximum rate reductions
resulting from the policies adopted in the
rulemaking proceeding."
Few if any negotiated rate agreements
include tax adjusters. Consider the case of

project shippers that executed precedent
agreements in 2017 pledging themselves
to 15-year negotiated rate transportation
agreements that assume the higher
tax rate. Or the shippers on Florida Gas
Transmission who agreed in 2016 to lock
in rates until 2021 to settle a rate increase
application. In theory, the parties could
have contemplated a corporate tax
change. In reality, that was not part of
the discussion. FERC should undertake
a review. Certainty, if unjust, is unjust
certainty.
FERC should consider acting pursuant
to NGA Section 5 to require pipelines to
include tax-surcharge mechanisms in
their tariffs that automatically require
reductions or increases to account for tax
changes. FERC has permitted surcharges
to apply to discounted rate agreements
for hurricane costs.6 This could result in
a rate reduction - by way of a negative
surcharge - for negotiated rate shippers
whose contracts permit the imposition
of surcharges.
In summary, Congress created a full
plate of difficult issues for FERC in the Tax
Act. Tax cut advocates want ratepayers to
see these lower costs immediately, while
pipelines have indicated that they will
appeal any FERC action they deem beyond
the authority granted in the NGA. Utilities
and pipelines justify higher profits from
the tax savings as a sound way to secure
infrastructure expansions. But that is not
how cost-of-service ratemaking works. The
structure of the NGA means that with each
passing day interstate pipeline shippers
see no benefit from the Tax Act. FERC must
remedy that quickly.
Footnotes
1 For example, Baltimore Gas &
Electric announced a $4.27 monthly
rate reduction for a combined gas-electric residential
customer from an $82 million tax savings.
2 https://www.nytimes.com/2018/01/09/business/
economy/tax-cut-power.html
3 E.g., Transcontinental Gas Pipe Line Company, LLC, 162
FERC ¶ 61,050 (Jan. 18, 2018).
4 See, e.g., Responses to FERC - OEP Fourth Data Request,
Docket No. CP17-8 (filed Jan 8, 2018) (new tax rate
reduced rates on FGT East-West Project by 10.25%).
5 On the other hand, by its nature a big change in taxes
creates unfairness. Consider whether a pipeline that
received a certificate for a new project with new
incremental rates a few weeks before the historic
tax act should be treated differently than one whose
certificate was issued in January 2018.
6 Sea Robin Pipeline Co., LLC, 143 FERC ¶ 61,129 (2013).

THE SOURCE | SUMMER 2018, VOL. 10, ISSUE 4 21


https://www.nytimes.com/2018/01/09/business/economy/tax-cut-power.html

Table of Contents for the Digital Edition of THE SOURCE - Summer 2018

APGA Events
First Person
2018 Starts off with Gas Records
Energy Regulatory Update
The Result of Not Addressing Increasing Cybersecurity Risk
Conversation with an APGA Member
APGA Leads Charge to Lower Pipeline Rates to Match Lower Tax Rates
Legislative Outlook
Enhancing Resilience of Critical Infrastructure with Combined Heat and Power
The Pipeline
The Importance of Getting Involved with State and Local Building Code Developments
At Last
Advertisers’ Index/Advertiser.com
THE SOURCE - Summer 2018 - Intro
THE SOURCE - Summer 2018 - bellyband1
THE SOURCE - Summer 2018 - bellyband2
THE SOURCE - Summer 2018 - cover1
THE SOURCE - Summer 2018 - cover2
THE SOURCE - Summer 2018 - 3
THE SOURCE - Summer 2018 - 4
THE SOURCE - Summer 2018 - 5
THE SOURCE - Summer 2018 - 6
THE SOURCE - Summer 2018 - APGA Events
THE SOURCE - Summer 2018 - First Person
THE SOURCE - Summer 2018 - 9
THE SOURCE - Summer 2018 - 2018 Starts off with Gas Records
THE SOURCE - Summer 2018 - 11
THE SOURCE - Summer 2018 - Energy Regulatory Update
THE SOURCE - Summer 2018 - 13
THE SOURCE - Summer 2018 - The Result of Not Addressing Increasing Cybersecurity Risk
THE SOURCE - Summer 2018 - 15
THE SOURCE - Summer 2018 - 16
THE SOURCE - Summer 2018 - 17
THE SOURCE - Summer 2018 - Conversation with an APGA Member
THE SOURCE - Summer 2018 - 19
THE SOURCE - Summer 2018 - APGA Leads Charge to Lower Pipeline Rates to Match Lower Tax Rates
THE SOURCE - Summer 2018 - 21
THE SOURCE - Summer 2018 - Legislative Outlook
THE SOURCE - Summer 2018 - Enhancing Resilience of Critical Infrastructure with Combined Heat and Power
THE SOURCE - Summer 2018 - 24
THE SOURCE - Summer 2018 - 25
THE SOURCE - Summer 2018 - The Pipeline
THE SOURCE - Summer 2018 - The Importance of Getting Involved with State and Local Building Code Developments
THE SOURCE - Summer 2018 - 28
THE SOURCE - Summer 2018 - At Last
THE SOURCE - Summer 2018 - Advertisers’ Index/Advertiser.com
THE SOURCE - Summer 2018 - cover3
THE SOURCE - Summer 2018 - cover4
THE SOURCE - Summer 2018 - divider1
THE SOURCE - Summer 2018 - divider2
THE SOURCE - Summer 2018 - 35
THE SOURCE - Summer 2018 - 36
THE SOURCE - Summer 2018 - 40
THE SOURCE - Summer 2018 - 41
THE SOURCE - Summer 2018 - 42
THE SOURCE - Summer 2018 - 43
THE SOURCE - Summer 2018 - 44
THE SOURCE - Summer 2018 - 45
THE SOURCE - Summer 2018 - 46
THE SOURCE - Summer 2018 - 47
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