July 2018, Vol. 245, No. 7

Government

Pipeline MLPs Fighting FERC Tax Moves

Pipeline master limited partnerships (MLPs) want the Federal Energy Regulatory Commission (FERC) to reverse a March 2018 revised policy statement (RPS) that has dramatically hurt their financial conditions. The elimination of an MLP tax allowance would be exacerbated by a second March FERC proposal, which would significantly and negatively affect the rates they charge shippers. It allows pipelines to voluntarily file rate reductions to reflect the decrease in their federal corporate income tax, thanks to the Tax Cuts and Jobs Act (TCJA) signed by President Trump last December, or explain why no action is needed or take no action other than filing the informational filing. 

It is the RPS which is creating havoc with the financial health of MLPs. Dominion Energy, Inc. has lost nearly $7 billion of market capitalization between March 15 and early May 2018 while Dominion Energy Midstream Partners, LP, owner of several interstate natural gas pipelines, lost approximately $730 million of market capitalization, or nearly 43 percent, during the same period, according to the company.

In its first quarter 2018 financial statement, Enbridge, Inc., a Canadian company which owns U.S. pipelines such as Spectra Energy, said, “Many MLPs, including Spectra Energy Partners LP (SEP) and Enbridge Energy Partners, L.P. (EEP) both of which Enbridge sponsors and retains an equity interest in, have responded to the FERC announcement regarding tax allowance, both directly and through industry associations, objecting to the change in FERC policy and requesting a re-hearing.”

Shippers, the Natural Gas Supply Association and others are pushing the FERC to act, because they believe the TCJA and the RPS have made the currently effective income tax allowance set forth in a pipeline’s cost of service overstated.  The pipelines argue that, even if current rates are higher than they would be, the shippers agreed to those rates and the resulting contracts should be sacrosanct unless a shipper can cite a “public interest” argument for revising rates mid-contract. 

“Absent extraordinary circumstances – which do not exist here – shippers cannot now seek to revise their contractually-binding arrangements, relied upon by natural gas pipelines to support important infrastructure development, simply because a foreseeable change in the corporate income tax rate has now come to fruition,” wrote Matthew Eggerding, senior counsel, Midstream EQT Midstream Partners, LP, in comments submitted to the FERC in May. “In the event they believe that a pipeline has failed to make a contractually-required adjustment, shippers are free to avail themselves of the Natural Gas Act’s Section 5 complaint procedures.”

Dominion argues that some shippers did negotiate contract provisions to account for a potential tax rate reduction nearly a year ahead of the TCJA as they had similarly done years ago in anticipation of the Tax Reform Act of 1986. “Given this history, shippers’ pleas for contract abrogation ring hollow,” wrote Margaret H. Peters, Managing General Counsel, Dominion Energy Services.

The RPS piece of the proposed rule is clearly the bigger of the two irritants. The Interstate Natural Gas Association of America said removing the MLP income tax allowance issues from the proposed rule will reduce the uncertainty associated with the proposed rule and help allow pipelines and their customers to focus on the potential rate reductions resulting from the reduction of the corporate income tax rate in the TCJA. 

The proposed rule provides interstate natural gas pipeline companies four options to consider and address the reduced costs attributable to the TCJA and the Revised Policy Statement: 1) Submit a limited NGA Section 4 filing to reduce its rates by the percentage reduction in its cost of service resulting from the [TCJA] and the Revised Policy Statement, as calculated in the FERC Form No. 501-G; 2) Commit to file either a prepackaged uncontested settlement or, if that is not possible, a general NGA section 4 rate case by December 31, 2018; 3) File a statement explaining why an adjustment to rates is not needed; or, 4) Take no action.

Substantial Opposition to PJM Push for Higher Pipeline Rates

PJM Interconnection, the largest regional transmission organization (RTO) in the U.S., is taking a beating from interstate pipelines, other RTOs and Independent System Operators (ISOs) – and even its customers – because of PJM’s proposal for the Federal Energy Regulatory Commission (FERC) to require that RTOs and ISOs submit filings for pipeline rate adjustments in the name of assuring electric grid “resilience.” The backlash relates to PJM’s request for near-term help after FERC invited industry input on solutions to the vulnerability of gas-dependent electric generators to extreme weather events.

Electric generators in the Midwest, where the electric power system is administered by PJM, and the Northeast are increasingly dependent on natural gas as coal- and nuclear-fired power stations are retired. Current supplies of natural gas to those areas, served by PJM and ISO-New England, are to some extent inadequate and further complicated by the fact that generators mostly rely on secondary gas supplies in an emergency – that is, buying gas from local distribution companies when a severe cold snap hits. The generators rarely enter into firm contracts with pipelines to guarantee supply.

Comments submitted to the FERC by the California Independent System Operator Corp.; ISO New England, Inc. (ISO-NE); Midcontinent Independent System Operator, Inc.; New York Independent System Operator, Inc.; and Southwest Power Pool, Inc. stated, “…the record in this proceeding does not support any universal resilience standard or tariff changes requirements. The Commission should not impose on other RTOs/ISOs the specific actions and deadlines PJM requests, many of which are based on reforms PJM is pursuing to address issues specific to its region.”

Not only have other RTOs/ISOs ganged up on PJM, but so have PJM’s industrial customers. Under the banner of the PJM Consumer Representatives, they include groups such as the American Forest and Paper Association, American Iron and Steel Institute, Delaware Public Service Commission, Industrial Energy Users-Ohio and many others. They argue that PJM was using the FERC effort to improve power system “resilience” to force the agency to adopt changes to transmission and infrastructure planning, operation rules, and market rules. “Absent a common understanding and uniform definition, ensuring resilience is neither measurable nor auditable,” they argued. “Consequently, calibrating any such investment to ensure that consumers are not saddled with unnecessary costs, under the guise of ‘resilience,’ presents a significant challenge that must be addressed to ensure that rate results comport with the Federal Power Act.”

The Edison Electric Institute, which represents the electric generation industry, gave no support to PJM’s request, either.  Instead, it said steps FERC has already made to enhance the resilience of the bulk-power system should be considered, such as its recent conferences on electric-gas coordination and efforts on price formation and transparency.

New England has been the region that has arguably been most affected by extreme cold weather events as its electric generators had trouble getting U.S. gas last winter and had to rely on foreign LNG, in some instances. In February, Boston received LNG imports from the $27 billion Yamal Peninsula project, a massive new LNG complex in northern Siberia.

An analysis by ISO-NE found that energy shortfalls due to inadequate fuel supply would occur in almost every fuel-mix scenario in winter 2024-25, requiring frequent use of emergency actions to fully meet demand or protect the grid. P&GJ