[Federal Register Volume 84, Number 81 (Friday, April 26, 2019)]
[Rules and Regulations]
[Pages 17739-17750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08241]



[[Page 17739]]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 154, 260, and 284

[Docket Nos. RM18-11-001, RP18-415-001; Order No. 849-A]


Interstate and Intrastate Natural Gas Pipelines; Rate Changes 
Relating to Federal Income Tax Rate; American Forest & Paper 
Association

AGENCY: Federal Energy Regulatory Commission, Department of Energy.

ACTION: Final rule; order denying rehearing.

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SUMMARY: The Federal Energy Commission (Commission) denies rehearing 
and reaffirms its determinations in Order No. 849. Order No. 849 
adopted procedures for determining which jurisdictional natural gas 
pipelines may be collecting unjust and unreasonable rates in light of 
the income tax reductions provided by the Tax Cuts and Jobs Act and the 
Commission's revised policy and precedent concerning tax allowances to 
address the double recovery issue identified by United Airlines, Inc. 
v. FERC. These procedures also allowed interstate natural gas pipelines 
to voluntarily reduce their rates.

DATES: The order denying rehearing was approved by the Commission on 
April 18, 2019.

FOR FURTHER INFORMATION CONTACT:  Adam Eldean (Legal Information), 
Office of the General Counsel, 888 First Street NE, Washington, DC 
20426, (202) 502-8047, [email protected].
    Seong-Kook Berry (Technical Information), Office of Energy Market 
Regulation, 888 First Street NE, Washington, DC 20426, (202) 502-6544, 
[email protected].

SUPPLEMENTARY INFORMATION: 

Table of Contents

 
                                                              Paragraph
                                                                 Nos.
 
I. Introduction............................................            1
    A. Background..........................................            3
    B. Requests for Rehearing..............................            5
II. Discussion.............................................            6
    A. Legal Authority.....................................            6
        1. Final Rule......................................            6
        2. Request for Rehearing...........................            9
        3. Commission Determination........................           11
    B. ROE and Capital Structure Used In FERC Form No. 501-           25
     G.....................................................
        1. Final Rule......................................           25
        2. Request for Rehearing...........................           26
        3. Commission Determination........................           29
    C. Order No. 849 Rate Moratorium.......................           35
        1. Final Rule......................................           35
        2. Request for Rehearing...........................           36
        3. Commission Determination........................           37
    D. Accumulated Deferred Income Taxes...................           39
        1. Final Rule......................................           39
        2. Requests for Rehearing..........................           41
        3. Commission Determination........................           45
    E. Tax Allowance for Pass-Through Entities.............           53
        1. Final Rule......................................           53
        2. Requests for Rehearing..........................           54
        3. Commission Determination........................           56
III. Document Availability.................................           60
 

I. Introduction

    1. On July 18, 2018, the Commission issued a final rule \1\ (Order 
No. 849) adopting procedures for determining which jurisdictional 
natural gas pipelines may be collecting unjust and unreasonable rates 
in light of the income tax reductions provided by the Tax Cuts and Jobs 
Act \2\ and the Commission's Revised Policy Statement \3\ and precedent 
\4\ concerning tax allowances to address the double recovery issue 
identified by United Airlines, Inc. v. FERC.\5\ These procedures also 
allow interstate natural gas pipelines to voluntarily reduce their 
rates.
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    \1\ Interstate and Intrastate Natural Gas Pipelines; Rate 
Changes Relating to Federal Income Tax Rate, Order No. 849, 83 FR 
36672, 164 FERC ] 61,031 (2018).
    \2\ An Act to provide for reconciliation pursuant to titles II 
and V of the concurrent resolution on the budget for fiscal year 
2018, Public Law 115-97, 131 Stat. 2054 (2017) (Tax Cuts and Jobs 
Act).
    \3\ Inquiry Regarding the Commission's Policy for Recovery of 
Income Tax Costs, 162 FERC ] 61,227 (2018) (Revised Policy 
Statement), order on reh'g, 164 FERC ] 61,030 (2018) (Revised Policy 
Statement Rehearing).
    \4\ SFPP, L.P., Opinion No. 511-C, 162 FERC ] 61,228, at P 9 
(2018).
    \5\ 827 F.3d 122 (D.C. Cir. 2016) (United Airlines). For 
purposes of this order, the Revised Policy Statement, United 
Airlines, and Opinion No. 511-C will collectively be referred to as 
``United Airlines Issuances.''
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    2. As discussed below, we deny the requests for rehearing and 
reaffirm the Commission's determinations in Order No. 849.

A. Background

    3. Order No. 849 established a requirement, pursuant to sections 10 
and 14(a) of the Natural Gas Act (NGA),\6\ that all interstate natural 
gas companies with cost-based stated rates that filed a 2017 FERC Form 
No. 2 or 2-A must file the FERC Form No. 501-G informational filing for 
the purpose of evaluating the impact of the Tax Cuts and Jobs Act and 
the United Airlines Issuances on interstate natural gas pipelines' 
revenue requirements. In addition to the FERC Form No. 501-G filing 
requirement, the Commission provided four options for each interstate 
natural gas pipeline to make a filing to address the changes to the 
pipeline's recovery of tax costs or explain why no action is needed: 
(1) A

[[Page 17740]]

limited NGA section 4 \7\ rate reduction filing (Option 1), (2) a 
commitment to file a general section 4 rate case or prepackaged 
settlement in the near future (Option 2), (3) an explanation why no 
rate change is needed (Option 3), and (4) no action (Option 4). These 
procedures were intended to encourage natural gas pipelines to 
voluntarily reduce their rates to the extent the tax changes result in 
their over-recovering their cost of service, while also providing the 
Commission and stakeholders information necessary to take targeted 
actions under NGA section 5 \8\ where necessary to achieve just and 
reasonable rates.
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    \6\ 15 U.S.C. 717i(a), 717m(a) (2012).
    \7\ 15 U.S.C. 717c.
    \8\ 15 U.S.C. 717d.
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    4. In Order No. 849, the Commission identified 129 interstate 
natural gas pipelines with cost-based rates that were required to file 
the FERC Form No. 501-G. As of the date of this order, the Commission 
has received 129 interstate natural gas pipeline filings. One pipeline 
still has an extension of time and eight have been granted a waiver of 
filing the FERC Form No. 501-G. Of the remaining 120 pipelines, nine 
pipelines filed limited NGA section 4 rate reduction filings under 
Option 1,\9\ 22 pipelines filed general NGA section 4 cases or 
prepackaged settlements revising their rates under Option 2, 84 
pipelines filed statements as to why no change in their rates is 
necessary under Option 3, and five pipelines filed the FERC Form No. 
501-G without taking any other action under Option 4. Additionally, the 
Commission has initiated six NGA section 5 rate investigations.
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    \9\ Tuscarora Gas Transmission Company (Tuscarora) and Northern 
Border Pipeline Company (Northern Border) filed under Option 1 and 
Option 2. Here we have chosen to categorize Tuscarora's and Northern 
Border's filings under Option 2.
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B. Requests for Rehearing

    5. The following entities filed timely requests for rehearing of 
Order No. 849: Process Gas Consumers Group and American Forest and 
Paper Association (Process Gas); Enable Mississippi River Transmission, 
LLC and Enable Gas Transmission, LLC (together, Enable); and the Kinder 
Morgan Entities,\10\ Spectra Energy Partners, LP, and Enable 
(collectively, Pipeline Group). We deny rehearing, as discussed below.
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    \10\ For purposes of this pleading, the Kinder Morgan Entities 
are Natural Gas Pipeline Company of America LLC; Tennessee Gas 
Pipeline Company, L.L.C.; Southern Natural Gas Company, L.L.C.; 
Colorado Interstate Gas Company, L.L.C.; Wyoming Interstate Company, 
L.L.C.; El Paso Natural Gas Company, L.L.C.; Mojave Pipeline 
Company, L.L.C.; Bear Creek Storage Company, L.L.C.; Cheyenne Plains 
Gas Pipeline Company, L.L.C.; Elba Express Company, L.L.C.; Kinder 
Morgan Louisiana Pipeline LLC; Southern LNG Company, L.L.C.; 
TransColorado Gas Transmission Company LLC.
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II. Discussion

A. Legal Authority

1. Final Rule
    6. As stated above, the final rule established a requirement, 
pursuant to sections 10 and 14(a) of the NGA, that all interstate 
natural gas companies, with cost-based stated rates, that filed a 2017 
FERC Form No. 2 or 2-A must file the FERC Form No. 501-G informational 
filing for the purpose of evaluating the impact of the Tax Cuts and 
Jobs Act and the United Airlines Issuances on interstate natural gas 
pipelines' revenue requirements.\11\ Using the data in the pipelines' 
2017 FERC Form Nos. 2 and 2-A, these studies estimate (1) the 
percentage reduction in the pipeline's cost of service resulting from 
the Tax Cuts and Jobs Act and the Revised Policy Statement, and (2) the 
pipeline's current Returns on Equity (ROE) before and after the 
reduction in corporate income taxes and the elimination of income tax 
allowances for master limited partnership (MLP) pipelines. Recognizing 
that the 2017 calendar year data reported in the pipeline's FERC Form 
No. 2 or 2-A may not be fully representative of the pipeline's current 
situation when it files the FERC Form No. 501-G, the Commission 
provided pipelines the opportunity to file an Addendum to the FERC Form 
No. 501-G.\12\ The Commission emphasized the informational nature of 
the FERC Form No. 501-G filing and explained that ``the [f]inal [r]ule 
contains no requirement that an interstate pipeline make any form of 
rate filing.'' \13\ Regarding the Addendum to the FERC Form No. 501-G, 
the Commission stated that the filing of such an Addendum is ``purely 
voluntary.'' \14\
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    \11\ Order No. 849, 164 FERC ] 61,031 at P 30.
    \12\ Id. PP 73-74.
    \13\ Id. PP 69, 72.
    \14\ Id. P 73.
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    7. The final rule also permitted pipelines to use the indicated 
cost of service reduction calculated in the FERC Form No. 501-G as the 
basis for the limited NGA section 4 rate reduction filings, which the 
final rule allowed pipelines to make to reduce their maximum rates to 
reflect the reduced corporate income tax rates provided by the Tax Cuts 
and Jobs Act or the elimination of MLP tax allowances by the Revised 
Policy Statement. However, the final rule also clarified that a 
pipeline could base the rate reduction on the reduction calculated in 
its Addendum.\15\
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    \15\ Id. P 204.
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    8. The final rule found that NGA sections 10 and 14(a) provided the 
Commission authority to require pipelines to file the FERC Form No. 
501-G. The Commission stated that it routinely initiates NGA section 5 
investigations ``based upon our review of publicly available 
information on file with the Commission'' \16\ and that the primary 
purpose of the FERC Form No. 501-G is to ``provide information relevant 
to determining whether the Commission should exercise its discretion to 
initiate an investigation under NGA section 5.'' \17\ The Commission 
rejected the argument that the court's decision in Consumers Energy v. 
FERC reversing a Commission order requiring Hinshaw pipelines to file a 
petition for rate change prohibited the Commission from requiring 
pipelines to file the FERC Form No. 501-G. The Commission found that, 
to the contrary, Consumers Energy v. FERC condoned information 
collection as long as the Commission acts `` `with clarity and 
precision' so as to ensure that any directive for the pipeline to make 
`informational filings' is just that, and not an NGA section 4 filing 
to `justify its current rate.' '' \18\ The Commission also found in the 
final rule that providing pipelines with the option to submit an 
Addendum, which may require the pipeline to exercise some degree of 
judgment, does not transform the proceeding into an NGA section 4 rate 
filing or improperly shift to the pipeline the burden of justifying its 
existing rates in violation of NGA section 5.\19\ The Commission 
explained that the D.C. Circuit rejected a similar contention in INGAA 
v. FERC and found that the Commission ``has authority . . . under [NGA 
section] 10 and [NGA section] 14 to require pipelines to submit needed 
information for making its [NGA section] 5 decisions.'' \20\
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    \16\ Id. P 69 (citing Natural Gas Pipeline Co. of America LLC, 
158 FERC ] 61,044, at P 1 (2017); Wyoming Interstate Co., L.L.C., 
158 FERC ] 61,040, at P 1 (2017); Tuscarora Gas Transmission Co., 
154 FERC ] 61,030, at P 1, reh'g denied, 154 FERC ] 61,273 (2016)).
    \17\ Id. PP 69-70.
    \18\ Id. P 70 (citing Consumers Energy Co. v. FERC, 226 F.3d 
777, 777 (6th Cir. 2000) (Consumers Energy v. FERC)).
    \19\ Id. P 74.
    \20\ Id. PP 74-75 (citing Interstate Nat. Gas Ass'n of Am. v. 
FERC, 285 F.3d 18, 38 (D.C. Cir. 2002) (INGAA v. FERC)).
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2. Request for Rehearing
    9. Pipeline Group argues that the Commission exceeded its statutory

[[Page 17741]]

authority under NGA sections 10 and 14 and disregarded the requirements 
of NGA sections 4 and 5 by requiring pipelines to complete and file the 
FERC Form No. 501-G.\21\ Pipeline Group argues that the rate 
assumptions pipelines are required to make in the FERC Form No. 501-G 
are not merely informational and are in fact rate determinations that 
produce a distorted view as to whether the pipelines' rates remain just 
and reasonable and generate an indicated rate reduction, which the 
Commission later referred to as an ``indicated cost of service 
reduction'' in the final rule. Pipeline Group argues that the indicated 
cost of service reduction generated by the FERC Form No. 501-G is an 
implied rate and that only a pipeline is empowered to propose such a 
change in its rates, under its own terms, pursuant to NGA section 
4.\22\ Pipeline Group argues that the Commission may only propose such 
a reduction in a pipeline's cost of service and resulting rates 
pursuant to NGA section 5. Pipeline Group also argues that the 
Commission is shifting the burden of proof by requiring pipelines to 
file a form that compels a statement of an indicated rate reduction 
that ``can be used as evidence to the exact same extent that any other 
Commission form can be used as evidence.'' \23\ Pipeline Group contends 
that the courts have been vigilant in maintaining the boundary between 
NGA sections 4 and 5 \24\ and that, to comply with the NGA, the 
Commission should abandon or substantially amend the FERC Form No. 501-
G requirement. Pipeline Group also points out that the Commission 
already collects information through FERC Form Nos. 2 \25\ and 3-Q,\26\ 
which Pipeline Group argues is evidence that the FERC Form No. 501-G is 
not merely an information collection requirement. Additionally, 
Pipeline Group argues that the option of providing an addendum to the 
FERC Form No. 501-G forces a pipeline to defend an existing just and 
reasonable rate, which is a step reserved to pipelines in an NGA 
section 4 or 5 proceeding.
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    \21\ Pipeline Group Request for Rehearing at 4-10.
    \22\ Id. at 3 (citing Consumers Energy v. FERC, 226 F.3d 777; 
Pub. Serv. Comm'n of New York v. FERC, 866 F.2d 487 (D.C. Cir. 1989) 
(New York PSC)).
    \23\ Id. (citing Order No. 849, 164 FERC ] 61,031 at P 78).
    \24\ Id. at 5-6 (citing United Gas Pipe Line Co. v. Mobile Gas 
Serv. Corp., 350 U.S. 332, 343 (1956) (explaining that the 
Commission's authority under NGA section 5(a) is ``to set aside and 
modify any rate or contract which it determines, after a hearing, to 
be `unjust and unreasonable, unduly discriminatory, or 
preferential''' and that ``[t]his is neither a `rate-making' nor a 
`rate-changing' procedure.''); Western Resources v. FERC, 9 F.3d 
1568, 1578 (D.C. Cir. 1993) (``This court has consistently 
disallowed attempts to blur the line between Sec. Sec.  4 and 5.''); 
Sea Robin Pipeline Co. v. FERC, 795 F.2d 182, 183 (D.C. Cir. 1986) 
(``The Commission is not free to blend, or pick and choose at will 
between, its section 4 and 5 authority.'')).
    \25\ Annual report for Major natural gas companies. 18 CFR 206.1 
(2018).
    \26\ Quarterly financial report of electric utilities, 
licensees, and natural gas companies. 18 CFR 206.300.
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    10. Pipeline Group argues that the Commission's comparison of the 
final rule to Order No. 637's requirements that pipelines provide 
information concerning the operational feasibility of segmentation is 
misplaced.\27\ Pipeline Group contends that the Order No. 637 
informational requirement concerned pipeline operational matters, not 
rate matters. Pipeline Group argues that the INGAA v. FERC \28\ court 
agreed that the Commission has authority under NGA sections 10 and 14 
to require a pipeline to submit needed information for making its NGA 
section 5 decisions but that this agreement was limited to the specific 
issues of Order No. 637. Pipeline Group also argues that the comparison 
of the FERC Form No. 501-G to reporting requirements of Hinshaw 
pipelines is inaccurate.\29\ Pipeline Group contends that, because the 
FERC Form No. 501-G runs data through a formula that produces an 
indicated cost of service reduction among other things, FERC Form No. 
501-G is akin to the Commission's required petition for rate approval 
for Hinshaw pipelines that was invalidated the Sixth Circuit in 
Consumers Energy v. FERC.\30\
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    \27\ Pipeline Group Request for Rehearing at 8-9. See Regulation 
of Short-Term Natural Gas Transportation Services and Regulation of 
Interstate Natural Gas Transportation Services, Order No. 637, FERC 
Stats. & Regs. ] 31,091, at 31,301-4 (cross-referenced at 90 FERC ] 
61,109), order on reh'g, Order No. 637-A, FERC Stats. & Regs. ] 
31,099, at 31,590-96 (cross-referenced at 91 FERC ] 61,169), order 
denying reh'g, Order No. 637-B, 92 FERC ] 61,062 (2000).
    \28\ Pipeline Group Request for Rehearing at 8 (citing INGAA v. 
FERC, 285 F.3d at 38-39).
    \29\ Id. at 9-10.
    \30\ Id. (citing Consumers Energy v. FERC, 226 F.3d at 781 
(rejecting a requirement that a Hinshaw pipeline file periodic rate 
petitions)).
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3. Commission Determination
    11. We disagree with Pipeline Group's characterization of the FERC 
Form No. 501-G. We find that the requirement to file the FERC Form No. 
501-G is a permissible collection of information pursuant to NGA 
sections 10 and 14(a), rather than an impermissible requirement that 
pipelines file a rate pursuant to NGA section 4, as argued by Pipeline 
Group.
    12. As the Commission stated in the final rule, the FERC Form No. 
501-G serves two purposes. The first purpose is to provide information 
relevant to determining whether the Commission should exercise its 
discretion to initiate an investigation under NGA section 5 as to 
whether the subject interstate natural gas pipeline may be collecting 
unjust and unreasonable rates in light of the recent reduction in the 
corporate income tax rate and change in the Commission's income tax 
allowance policies. The second purpose is to support any limited NGA 
section 4 filings pipelines may choose to make to reduce their maximum 
rates to reflect the Tax Cuts and Jobs Act or the United Airlines 
Issuances. The Commission's authority to require information for both 
these purposes is provided in NGA sections 10(a) and 14(a).\31\
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    \31\ 15 U.S.C. 717i(a) (``Every natural-gas company shall file 
with the Commission such annual and other periodic or special 
reports as the Commission may by rules and regulations or order 
prescribe as necessary or appropriate to assist the Commission in 
the proper administration of this act.''); 15 U.S.C. 717m(a) (``The 
Commission may permit any person to file with it a statement in 
writing . . . as it shall determine, as to any or all facts and 
circumstances concerning a matter which may be the subject of 
investigation.''). See also Tuscarora Gas Transmission Co., 154 FERC 
] 61,273, at PP 4-14 (2016) (requiring a pipeline to submit a more 
detailed cost and revenue study).
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    13. With regard to the first purpose, the D.C. Circuit expressly 
held in INGAA v. FERC that ``[t]he Commission has authority under 
[section] 5 of the NGA to order hearings to determine whether a given 
pipeline is in compliance with FERC's rules, . . . and under [NGA 
section] 10 and [section] 14 to require pipelines to submit needed 
information for making its [section] 5 decisions.'' \32\ In INGAA v. 
FERC, the court affirmed the Commission's exercise of this authority to 
direct each pipeline to file pro forma tariff sheets showing how it 
intended to comply with a regulation requiring pipelines to permit 
segmentation \33\ or to explain why its system's configuration 
justified not acting under NGA section 5 to require full segmentation 
rights. In affirming this requirement, the court stated, ``As to the 
Commission's determination to extract information from pipelines 
relevant to the practical issues, we see no violation of the NGA.'' 
\34\
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    \32\ INGAA v. FERC, 285 F.3d at 38-39 (emphasis supplied).
    \33\ 18 CFR 284.7(d) (2018).
    \34\ INGAA v. FERC, 285 F.3d at 38.
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    14. The FERC Form No. 501-G requires pipelines to calculate their 
``Total Estimated ROE (excluding fuel)'' before and after the reduction 
in corporate income taxes and the elimination of income tax allowances 
for MLP pipelines.\35\ The final rule

[[Page 17742]]

found that information concerning the pipeline's ROE was relevant to 
the issue of whether the Commission should exercise its discretion to 
initiate an investigation of the pipeline's rate pursuant to NGA 
section 5, and therefore the court's decision in INGAA v. FERC 
supported the Commission's authority to collect this information.
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    \35\ FERC Form No. 501-G, page 3, line 26.
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    15. Pipeline Group suggests that the court's holding in INGAA v. 
FERC was limited to providing information on operational issues of the 
type at issue in that case, rather than rate issues. We disagree. NGA 
section 10 expressly provides that the Commission may require pipelines 
to report information relevant to rates including ``among other things, 
full information as to assets and liabilities, capitalization, 
investment and reduction thereof, gross receipts, interest due and 
paid, depreciation, amortization, and other reserves, cost of 
facilities, cost of maintenance and operation of facilities for the [. 
. .] transportation [. . .] of natural gas, cost of renewal and 
replacement of such facilities, transportation, delivery, uses, and 
sale of natural gas.'' This is exactly the type of cost and revenue 
information the FERC Form No. 501-G collects in order to calculate the 
pipeline's total estimated ROE for purposes of deciding whether to 
initiate a NGA section 5 investigation.
    16. The FERC Form No. 501-G also calculates an ``Indicated Cost of 
Service Reduction'' \36\ for use in conjunction with the limited NGA 
section 4 rate reduction filings that pipelines can elect to file under 
Option 1 of the final rule. Pipeline Group contends that the 
requirement to calculate an Indicated Cost of Service Reduction 
effectively requires the pipeline to make a NGA section 4 rate filing. 
This contention is wrong. Although Pipeline Group is correct that the 
form includes equations that calculate certain values, including the 
indicated cost of service reduction, the inclusion of these equations 
and calculated values does not transform the informational filing into 
a NGA section 4 rate filing. The FERC Form No. 501-G is limited to 
requesting cost and revenue information as permitted by NGA sections 10 
and 14(a). It does not require pipelines to file any change in their 
existing rate schedules as is contemplated by NGA section 4. It is true 
that the final rule gives pipelines the option to submit a separate 
limited NGA section 4 filing reducing their maximum rates based on the 
indicated cost of service reduction calculated in the FERC Form No. 
501-G. However, that is simply one option among the four options the 
final rule provides pipelines, including the option to take no action 
at all other than filing the FERC Form No. 501-G. There is no 
requirement that pipelines make any such limited NGA section 4 rate 
reduction filing, and if a pipeline does make such a filing it may base 
the rate reduction on data in its Addendum rather than the indicated 
cost of service reduction calculated in the FERC Form No. 501-G.\37\ In 
fact, only 11 of the 129 pipelines subject to the requirement to file a 
FERC Form No. 501-G have thus far chosen the option of filing a limited 
NGA section 4 rate reduction pursuant to Sec.  154.404 adopted pursuant 
to the final rule,\38\ thereby demonstrating the voluntary nature of 
this option. This rulemaking proceeding is thus unlike New York 
PSC,\39\ relied on by Pipeline Group, in which the Commission ordered a 
pipeline to file an actual NGA section 4 rate case every three years, 
with revised rate schedules setting forth proposed rates for each 
customer class.
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    \36\ FERC Form No. 501-G, page 1, line 34.
    \37\ Order No. 849, 164 FERC ] 61,031 at P 204.
    \38\ East Tennessee Natural Gas, LLC in Docket No. RP19-64-000; 
Millennium Pipeline Co., LLC in Docket No. RP19-66-000; North Baja 
Pipeline, LLC in Docket No. RP19-72-000; Vector Pipeline L.P. in 
Docket No. RP19-61-000; Central Kentucky Transmission Co. in Docket 
No. RP19-156-000; Gulf Shore Energy Partners, LP in Docket No. RP19-
252-000; Southeast Supply Header, LLC in Docket No. RP19-267-000; 
Great Lakes Gas Transmission Limited Partnership in Docket No. RP19-
409-000; Nautilus Pipeline Co., L.L.C. in Docket No. RP19-401-000; 
Northern Border Pipeline Company in Docket No. RP19-414-000; 
Tuscarora Gas Transmission Co. in Docket No. RP19-419-000.
    \39\ 866 F.2d at 489.
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    17. Additionally, the Commission's decision to allow pipelines to 
include an addendum to their FERC Form No. 501-G does not transform the 
proceeding into an NGA section 4 proceeding. The Commission understood 
that the standardized FERC Form No. 501-G may not provide a complete 
cost and revenue profile for each pipeline and provided an opportunity 
for pipelines to voluntarily submit additional information to the 
Commission. The Commission did not determine in the final rule that the 
information provided in the FERC Form No. 501-G, with or without an 
addendum, would constitute a rate filing.
    18. In both Consumers Energy v. FERC and INGAA v. FERC, the courts 
considered the Commission's intent when deciding whether an information 
collection requirement constituted an impermissible requirement for a 
pipeline to justify its existing rates under NGA section 4, i.e., was 
the Commission's intent (1) only to collect information for use in 
satisfying its burdens under NGA section 5 or (2) instead to require 
the pipeline to modify its rates under NGA section 4. Thus, in 
Consumers Energy v. FERC, reversing a Commission information collection 
requirement, the court stated, ``If all FERC had really wanted to do 
was require Consumers to make periodic `informational filings,' then it 
is difficult to understand why, for example, FERC's initial order 
provides that . . . Consumers shall file `a petition for rate approval 
to justify its current rate or to establish a new maximum rate.' '' 
\40\ The court also pointed to the fact that the Commission did not use 
the term ``informational filings'' nor any obvious synonym to describe 
the petition in either of its orders.\41\ By contrast, in INGAA v. 
FERC, the court affirmed an information collection requirement, finding 
that ``the orders contain some express language supporting the position 
of the Commission's counsel at oral argument that FERC will indeed 
shoulder the burden under [section] 5 of the NGA to show the requisite 
operational feasibility,'' \42\ and the court cited, among other 
things, the Commission's statement in Order No. 637-B that the 
Commission ``will be acting under section 5 to implement changes.'' 
\43\
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    \40\ Consumers Energy v. FERC, 226 F.3d at 781 (emphasis in 
court decision).
    \41\ See id.
    \42\ INGAA v. FERC, 285 F.3d at 38.
    \43\ Id. (quoting Order No. 637-B, 92 FERC at 61,165).
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    19. Consistent with the Commission orders at issue in INGAA v. 
FERC, and contrary to the orders at issue in Consumers Energy v. FERC, 
the final rule consistently treats the FERC Form No. 501-G as simply an 
informational filing, and the final rule recognizes that the Commission 
must proceed under NGA section 5 in order to require any pipeline to 
reduce its rates to reflect the income tax reduction in the Tax Cuts 
and Jobs Act or the elimination of the MLP tax allowance in the Revised 
Policy Statement. For example, the final rule states, ``The primary 
purpose of the One-time Report . . . is to provide information relevant 
to determining whether the Commission should exercise its discretion to 
initiate an investigation under NGA section 5 as to whether the subject 
interstate natural gas pipeline may be collecting unjust and 
unreasonable rates in light of the recent reduction in the corporate 
income tax rate and change in the Commission's income tax allowance 
policies.'' \44\ The final rule also

[[Page 17743]]

expressly states that ``[i]f we decide based on the information in the 
One-time Report to initiate a section 5 investigation, we will, as in 
the Order No. 637 compliance filings addressed in INGAA, `shoulder the 
burden under [section] 5 of the NGA.' '' \45\ Moreover, unlike the 
Commission orders addressed in Consumers Energy v. FERC, the final rule 
consistently described the FERC Form No. 501-G as an ``informational 
filing.'' \46\
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    \44\ Order No. 849, 164 FERC ] 61,031 at P 69. See also id. P 
104 (``[A]ny rates determined in an NGA section 5 investigation, 
including ROE, will be based on the record developed in any hearing 
established by the Commission, and in such a hearing the Commission 
will have the burden of persuasion under NGA section 5 on all 
issues, including ROE.'').
    \45\ Id. P 76.
    \46\ See, e.g., id. PP 2, 21, 30, 59, 103, and 111.
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    20. Pipeline Group points out that, on remand of the court's 
decision in Consumers Energy v. FERC, the Commission established a 
policy of requiring Hinshaw Pipelines to make periodic informational 
filings in the form specified by Sec.  154.313 of the Commission's 
regulations for minor rate changes, instead of requiring them to file a 
petition for rate change.\47\ Pipeline Group asserts that, although NGA 
sections 10 and 14(a) may permit the Commission to require pipelines to 
file the information contained in Sec.  154.313, the FERC Form No. 501-
G is different from Sec.  154.313. Pipeline Group asserts that the FERC 
Form No. 501-G does not simply require pipelines to file the data 
listed in Sec.  154.313, but instead it runs the data through a formula 
that produces an indicated cost of service reduction, among other 
things. Therefore, Pipeline Group argues, the FERC Form No. 501-G is 
akin to the impermissible requirement to file a petition for rate 
change invalidated by Consumers Energy v. FERC, ``because it produces 
an output, requiring the pipeline to justify whether its rates remain 
just and unreasonable.'' \48\
---------------------------------------------------------------------------

    \47\ See Consumers Energy Co., 94 FERC ] 61,287 (2001).
    \48\ Pipeline Group Request for Rehearing at 10.
---------------------------------------------------------------------------

    21. We disagree. First, Pipeline Group's attempt to distinguish the 
FERC Form No. 501-G from Sec.  154.313 is factually incorrect. For 
example, Sec.  154.313(b) requires the pipeline to file the Statements 
I-1 through I-4 and Statement J required by Sec.  154.312. Statement I-
1 through I-4 require the pipeline to functionalize, classify, and 
allocate its cost of service and provide the formulae used in the 
allocation of the cost of service. Schedule J requires the pipeline to 
compare total revenue by rate schedule to the allocated cost of 
service, and Schedule J-2 requires the pipeline to show the derivation 
of each rate component of each rate schedule. Thus, Sec.  154.313, 
similar to the FERC Form No. 501-G, requires the pipeline to run data 
through formulas that produce ``an output.'' Moreover, in the case of 
Sec.  154.313, the ``output'' is not simply an overall indicated 
reduction in cost of service, but specific rates for each rate 
schedule. Thus, Sec.  154.313 requires the pipeline to provide 
substantially more detailed information concerning its costs, revenues, 
and rates than the five-page FERC Form No. 501-G, which does not 
require any allocation of costs among rate schedules or derivation of 
rates for each service.
    22. In any event, as discussed above, the key question in 
determining whether the FERC Form No. 501-G is a permissible 
information collection requirement is whether the Commission intended 
only to collect information for use in satisfying its burdens under NGA 
section 5 or whether the FERC Form No. 501-G actually requires the 
pipeline to modify its rates. As with our requirement for Hinshaw 
pipelines to file a cost and revenue study consistent with Sec.  
154.313, our intent in requiring the FERC Form No. 501-G is only to 
collect information for use in satisfying our burdens under NGA section 
5. Aside from the express language in Order No. 849 summarized above 
stating this intent, the Commission has in fact used the FERC Form No. 
501-G in precisely the manner it said it would--to determine whether to 
exercise its discretion to initiate an NGA section 5 rate investigation 
of each pipeline.
    23. A common outcome following the filing of the FERC Form No. 501-
G has been a Commission order explaining that the Commission has 
determined not to exercise its discretion to initiate a NGA section 5 
rate investigation and the closure of the docket without further 
Commission action.\49\ In the cases in which the Commission has 
initiated an NGA section 5 investigation and established a hearing, it 
has done so based upon the FERC Form No. 501-G, comments to the form, 
and publicly available information on file with the Commission,\50\ and 
has expressly recognized that the pipeline does not have an NGA section 
4 burden to justify its existing rates.\51\ Moreover, the Commission 
has required the pipeline to submit a cost and revenue study based on 
the latest 12-month period available, and authorized use of an 
abbreviated six-month adjustment period following the 12-month base 
period used in the cost and revenue study.\52\ Thus, any rate change 
that may be required in the NGA section 5 proceeding is likely to be 
based on cost and revenue data from 2018 and early 2019, rather than 
the 2017 Form Nos. 2 and 2-A data reflected in the FERC Form No. 501-G 
or the indicated cost of service reduction calculated based on that 
data.
---------------------------------------------------------------------------

    \49\ See, e.g., ETC Tiger Pipeline, LLC, 166 FERC ] 61,028 
(2019); American Midstream (AlaTenn), LLC, 166 FERC ] 61,118 (2019); 
Cheniere Creole Trail Pipeline, L.P., 166 FERC ] 61,198 (2019); 
Dominion Energy Transmission, Inc., 166 FERC ] 61,178 (2019); Enable 
Gas Transmission, LLC, 166 FERC ] 61,176 (2019); High Point Gas 
Transmission, LLC, 166 FERC ] 61,153 (2019); Kern River Gas 
Transmission Co., 166 FERC ] 61,154 (2019); Southern Star Central 
Gas Pipeline, Inc., 166 FERC ] 61,155 (2019); Trunkline Gas Co., 
LLC, 166 FERC ] 61,215 (2019).
    \50\ See East Tennessee Natural Gas, LLC, 165 FERC ] 61,198 
(2018); Bear Creek, 166 FERC ] 61,034; Northern Natural Gas Co., 166 
FERC ] 61,033 (2019); Panhandle Eastern Pipe Line Co., LP, 166 FERC 
] 61,032 (2019); Southwest Gas Storage Co., 166 FERC ] 61,117; 
Stagecoach Pipeline & Storage Co. LLC, 166 FERC ] 61,199 (2019).
    \51\ East Tennessee, 165 FERC ] 61,198 at P 27; Bear Creek, 166 
FERC ] 61,034 at P 15; Northern Natural Gas Co., 166 FERC ] 61,033 
at P 24; Panhandle Eastern, 166 FERC ] 61,032 at P 16; Southwest Gas 
Storage, 166 FERC ] 61,117 at P 11; Stagecoach, 166 FERC ] 61,199 at 
P 13.
    \52\ East Tennessee, 165 FERC ] 61,198 at PP 27-28; Bear Creek, 
166 FERC ] 61,034 at PP 15-16; Northern Natural Gas Co., 166 FERC ] 
61,033 at PP 24-25; Panhandle Eastern, 166 FERC ] 61,032 at PP 16-
17; Southwest Gas Storage, 166 FERC ] 61,117 at PP 11-12; 
Stagecoach, 166 FERC ] 61,199 at PP 13-14.
---------------------------------------------------------------------------

    24. In summary, contrary to Pipeline Group's arguments, requiring 
the informational FERC Form No. 501-G filing is squarely within the 
Commission's authority and it has not served as a rate filing. Pipeline 
Group suggests that the Commission may only propose a reduction in a 
pipeline's cost of service and resulting rates pursuant to NGA section 
5, and that is in fact what has occurred following the final rule. The 
FERC Form No. 501-G is not an NGA section 4 filing and the pipeline is 
not required to show that its rates are just and reasonable. The 
pipeline need only provide accurate information in its FERC Form No. 
501-G filing, as required by NGA section 10(a).\53\ Pipeline Group is 
also incorrect in its assertion that, because the Commission already 
collects information through FERC Form Nos. 2 and 3-Q, the FERC Form 
No. 501-G is somehow more than an information collection requirement. 
The FERC Form No. 501-G collects information that is not required in 
FERC Form Nos. 2 and 3-Q, specifically the effect of the recent 
reduction in the corporate income tax rate and change in the 
Commission's income tax allowance policies on a pipeline's cost of 
service. Pursuant to NGA sections 10(a) and 14(a), the Commission is 
permitted to

[[Page 17744]]

collect information to assist in the proper administration of the NGA, 
and the Commission is not limited to the information required in FERC 
Form Nos. 2 and 3-Q.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 717i(a) (``Such reports shall be made under oath 
unless the Commission otherwise specifies.'').
---------------------------------------------------------------------------

B. ROE and Capital Structure Used in FERC Form No. 501-G

1. Final Rule
    25. In the final rule, the Commission required that each pipeline's 
FERC Form No. 501-G be completed using an indicative ROE of 10.55 
percent, consistent with the ROE determined in El Paso,\54\ the last 
rate case where that issue was fully litigated.\55\ The final rule also 
revised the originally proposed FERC Form No. 501-G to ask respondents 
a series of factual questions about their actual capital structure in 
order to elicit the information necessary to apply the Commission's 
capital structure policy set forth in Transcontinental Gas Pipe Line 
Corp.\56\ Under that policy, a pipeline may use its own capital 
structure, if its debt is issued in its own name and publicly traded, 
the debt is rated by a rating agency, and the equity portion of the 
capital structure is not excessive.\57\ If the pipeline's own debt does 
not satisfy these standards, it can use its parent's capital structure, 
if the parent satisfies the same standards. Otherwise, the pipeline 
must use a hypothetical capital structure. Based on the FERC Form No. 
501-G's questions as to whether the pipeline or its parent satisfies 
these standards, the form automatically uses either the reported 
capital structure of the pipeline or its parent or a hypothetical 
capital structure.\58\ The final rule also held that, if a hypothetical 
capital structure was used, it would be 57 percent equity and 43 
percent debt, consistent with the average capital structures of the 
proxy companies used to determine the 10.55 percent ROE in El Paso.\59\
---------------------------------------------------------------------------

    \54\ El Paso Natural Gas Co., Opinion No. 528, 145 FERC ] 
61,040, at P 642 (2013), reh'g denied, Opinion No. 528-A, 154 FERC ] 
61,120 (2016) (El Paso).
    \55\ Order No. 849, 164 FERC ] 61,031 at PP 103-106.
    \56\ Transcontinental Gas Pipe Line Corp., Opinion No. 414, 80 
FERC ] 61,157 (1997), reh'g, Opinion No. 414-A, 84 FERC ] 61,084 
(1998) (Transco).
    \57\ The FERC Form No. 501-G treats the equity portion of a 
pipeline's capital structure as excessive if it is above 65 percent.
    \58\ Order No. 849, 164 FERC ] 61,031 at PP 111, 114.
    \59\ Id. P 115.
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2. Request for Rehearing
    26. Pipeline Group argues that the inputs to the FERC Form No. 501-
G, such as the Indicative ROE and the Hypothetical Capital Structure, 
are not supported by the record or justified, and are arbitrary and 
capricious.\60\ Pipeline Group contends that the Commission did not 
sufficiently respond to its comments to the Notice of Proposed 
Rulemaking that the criteria pipelines are directed to utilize in the 
FERC Form No. 501-G (such as the Indicative ROE of 10.55 percent and 
the specified Hypothetical Capital Structure) are misplaced, unlawful, 
and should be deleted from the form and left for each individual 
pipeline to determine. Pipeline Group argues that the Commission made 
no showing that the proxy group in the El Paso proceeding used to 
calculate the 10.55 percent indicative ROE in the FERC Form No. 501-G 
would produce the same ROE six years later. Pipeline Group argues that 
the Commission did not make a showing pursuant to NGA section 5 that 
such an ROE is appropriate for a different pipeline serving different 
markets.
---------------------------------------------------------------------------

    \60\ Pipeline Group Request for Rehearing at 10-12.
---------------------------------------------------------------------------

    27. Pipeline Group also argues that the Commission departed from 
prior practice in its review of pipeline Form Nos. 2 and 2-A reports 
for purposes of deciding whether to initiate NGA section 5 rate 
investigations when it required pipelines to propose a capital 
structure and make a legal determination as to whether that proposed 
structure and debt cost meets the requirements of Opinion No. 414. 
Pipeline Group asserts that the Commission has not previously imposed 
such a requirement on pipelines.\61\
---------------------------------------------------------------------------

    \61\ Id. at 11 (citing Natural Gas Pipeline Co. of America LLC, 
129 FERC ] 61,158 (2009); Northern Natural Gas Co., 129 FERC ] 
61,159 (2009); Great Lakes Gas Transmission Limited Partnership, 129 
FERC ] 61,160 (2009); Kinder Morgan Interstate Gas Transmission LLC, 
133 FERC ] 61,157 (2010); Ozark Gas Transmission, L.L.C., 133 FERC ] 
61,158 (2010); Bear Creek Storage Co., 137 FERC ] 61,134 (2011); 
MIGC LLC, 137 FERC ] 61,135 (2011); ANR Storage Co., 137 FERC ] 
61,136 (2011); Wyoming Interstate Co., 141 FERC ] 61,117 (2012); 
Viking Gas Transmission Co., 141 FERC ] 61,118 (2012); Tuscarora Gas 
Transmission Co., 154 FERC ] 61,030; Empire Pipeline, Inc., 154 FERC 
] 61,029 (2016); Iroquois Gas Transmission System, L.P., 154 FERC ] 
61,028 (2016); Columbia Gulf Transmission, LLC, 154 FERC ] 61,027 
(2016); Wyoming Interstate Co., 158 FERC ] 61,040; Natural Gas 
Pipeline Co. of America LLC, 158 FERC ] 61,044; Dominion Energy 
Overthrust Pipeline, LLC, 162 FERC ] 61,218 (2018); Midwestern Gas 
Transmission Co., 162 FERC ] 61,219 (2018)).
---------------------------------------------------------------------------

    28. Additionally, Pipeline Group argues that pipelines' current 
rates may be established pursuant to settlements of NGA section 4 or 5 
proceedings on a ``black box'' basis without specifying individual 
components used to calculate rates including ROE and capital structure. 
Pipeline Group contends that, by requiring certain ROE and capital 
structure inputs, the Commission is expanding the review of pipeline's 
existing rates from reductions in light of the Tax Cuts and Jobs Act to 
the overall costs and revenues of the pipeline akin to a traditional 
NGA section 5 proceeding.
3. Commission Determination
    29. The Commission addressed many of the same arguments in the 
final rule that Pipeline Group raises on rehearing. As explained in the 
final rule, a cost and revenue study requires an indicative ROE and, 
consistent with Commission practice in other contexts, the final rule 
used the last litigated ROE determined by Commission. For example, the 
Commission has used the last litigated ROE in developing initial rates 
for existing facilities being acquired by a new pipeline.\62\ Here, the 
last litigated ROE was in El Paso wherein the Commission adopted an ROE 
of 10.55 percent.
---------------------------------------------------------------------------

    \62\ See, e.g., Southern Natural Gas Co. L.L.C., 139 FERC ] 
61,237, at P 154 (2012); High Point Gas Transmission, LLC, 139 FERC 
] 61,237 (2012); Northern Natural Gas Co., 119 FERC ] 61,035, at P 
37 (2007).
---------------------------------------------------------------------------

    30. The Commission recognized that the 10.55 percent ROE determined 
in El Paso was based on financial data from 2011. However, no commenter 
provided any updated ROE analysis using current financial data that the 
Commission could use in the FERC Form No. 501-G. The Commission 
considered pipeline commenters' suggestion that they be permitted to 
use their own ROEs or ROEs derived in a rate proceeding or established 
pursuant to approved settlements, but the Commission determined that 
the last rate cases of many pipelines occurred as long ago as, or even 
before, the El Paso rate case. The Commission also determined that many 
settlements are ``black box'' settlements that do not have an ROE and, 
therefore, using the El Paso 10.55 percent ROE as the indicative ROE in 
all pipelines' FERC Form No. 501-G is preferable to pipelines' using a 
variety of ROEs, which in almost all cases were not fully 
litigated.\63\
---------------------------------------------------------------------------

    \63\ Order No. 849, 164 FERC ] 61,031 at PP 103-106.
---------------------------------------------------------------------------

    31. The Commission also rejects Pipeline Group's contention that 
the Commission failed to support the hypothetical capital structure 
mandated by the FERC Form No. 501-G where the capital structure of the 
pipeline or its parent is deemed unacceptable for ratemaking purposes. 
Pipeline Group argues that the Commission has not previously in its NGA 
section 5 rate investigations required a pipeline to propose a capital 
structure and make a

[[Page 17745]]

legal determination as to whether that capital structure satisfies the 
Transco requirements. As the final rule explained, the Commission 
modified the FERC Form No. 501-G so that it would not require a 
pipeline to make a legal determination as to whether its capital 
structure is consistent with Commission policy or propose a capital 
structure. Rather, the FERC Form No. 501-G requires the pipeline to 
answer three questions concerning facts relevant to determining what 
capital structure should be used to determine the pipeline's rates.\64\ 
Then, based on the pipeline's answers to these questions, the FERC Form 
No. 501-G automatically chooses a capital structure consistent with the 
pipeline's answers to the questions. Thus, the pipeline is not asked to 
make any legal determination concerning what capital structure is 
consistent with Commission policy.
---------------------------------------------------------------------------

    \64\ The questions are: ``(1) Is the debt issued in the entity's 
name and traded? (2) Is the debt rated by a rating agency) (3) Is 
the equity ratio less than 65%?''
---------------------------------------------------------------------------

    32. The use of an indicative ROE and stated capital structure in 
FERC Form No. 501-G is necessary to estimate a pipeline's return on 
equity and achieve the Commission's goal of developing a form that 
serves two purposes: (1) To help determine whether to initiate NGA 
section 5 investigations of interstate natural gas pipelines' rates and 
(2) provide support for limited NGA section 4 filings pipelines may 
choose to make to reduce their rates to reflect the Tax Cuts and Jobs 
Act or the United Airlines Issuances. As stated in the final rule, for 
purposes of helping determine whether to initiate NGA section 5 
investigations of interstate natural gas pipelines' rates, the FERC 
Form No. 501-G is only intended to produce a rough estimate of the 
pipeline's ROE before and after the Tax Cuts and Jobs Act or the United 
Airlines Issuances. Pipeline Group contends that the Commission has not 
met its NGA section 5 burden to show that a pipeline's existing ROE is 
unjust and unreasonable or that the El Paso 10.55 percent ROE or 
hypothetical capital structure would be just and reasonable for a 
different pipeline today. However, as explained in the final rule, the 
Commission is not using the FERC Form No. 501-G, including its 
indicative ROE and capital structure, to satisfy its burden under NGA 
section 5 to show that any pipeline's existing rates are unjust and 
unreasonable. Rather, the FERC Form No. 501-G is simply intended to 
provide a rough estimate of the pipeline's current return on equity for 
purposes of deciding whether the Commission should exercise its 
discretion to initiate a rate investigation pursuant to NGA section 5. 
The data in the FERC Form No. 501-G will not be used to actually 
establish rates in any NGA section 5 investigation that the Commission 
may initiate. If the Commission does initiate an investigation pursuant 
to NGA section 5, any rates determined in that proceeding, including 
the capital structure and ROE, will be based on the record developed in 
the hearing, and in such a hearing, the Commission will have the burden 
of persuasion under NGA section 5 on all issues, including ROE. Indeed, 
in our orders establishing NGA rate investigations based on the 
information in a pipeline's FERC Form No. 501-G, the Commission has 
stated that it makes no finding as to what would constitute a just and 
reasonable ROE for the company and, if the FERC Form No. 501-G required 
a hypothetical capital structure, the Commission has also stated that 
it makes no finding as to a just and reasonable capital structure. 
Those are among the issues set for hearing.\65\
---------------------------------------------------------------------------

    \65\ East Tennessee, 165 FERC ] 61,198 at P 24 n 43; Bear Creek, 
166 FERC ] 61,034 at P 14 n 22; Northern Natural Gas Co., 166 FERC ] 
61,033 at P 20 n 41; Panhandle Eastern, 166 FERC ] 61,032 at P 15 n 
16; Southwest Gas Storage, 166 FERC ] 61,117 at P 10 n 14; 
Stagecoach, 166 FERC ] 61,199 at P 12 n 20.
---------------------------------------------------------------------------

    33. Regarding the second purpose of the FERC Form No. 501-G 
(providing support for limited NGA section 4 filings pipelines may 
choose to make to reduce their rates), the Commission explained that a 
pipeline may submit an Addendum with its FERC Form No. 501-G setting 
forth an alternative ROE, along with full support for its proposed ROE, 
and use that ROE in calculating its proposed percentage rate reduction 
in its limited NGA section 4 rate filing. Similarly, pipelines are 
permitted to use a capital structure other than those used in its FERC 
Form No. 501-G in its limited NGA section 4 rate filing by submitting 
an Addendum to their FERC Form No. 501-G if they believe that the form 
inaccurately represents their financial situation. But, as previously 
stated, the limited NGA section 4 filing is voluntary and a pipeline is 
not required to submit additional information regarding its capital 
structure in an Addendum.
    34. Finally, Pipeline Group contends that by requiring an 
indicative ROE and capital structure the Commission is expanding its 
review of pipeline rates from reductions in light of the Tax Cuts and 
Jobs Act to the overall costs and revenue of the pipeline--a review 
traditionally done in an NGA section 5 proceeding. The Commission is 
properly considering all the pipelines' cost and revenues in deciding 
whether to initiate NGA section 5 rate investigations. As explained in 
the final rule,\66\ despite the reduction in the corporate income tax 
and the change in policy concerning MLP tax allowances, a rate 
reduction may not be justified for a significant number of pipelines, 
because the pipeline's existing rates may not fully recover its cost of 
service. The Commission must consider all the pipeline's costs and 
revenues to determine whether this is true. By the same token, the FERC 
Form No. 501-G may suggest that a pipeline is over-recovering its cost 
of service for reasons that go beyond the Tax Cuts and Jobs Act and the 
revised MLP tax allowance policy. It is consistent with our 
responsibilities under the NGA to investigate those possible cost over-
recoveries as well.
---------------------------------------------------------------------------

    \66\ Order No. 849, 164 FERC ] 61,031 at P 222.
---------------------------------------------------------------------------

C. Order No. 849 Rate Moratorium

1. Final Rule
    35. In the final rule, the Commission granted in part commenters' 
request for a moratorium on NGA section 5 investigations in the event a 
pipeline chooses the limited NGA section 4 option. The Commission 
determined that it is ``reasonable to provide pipelines an incentive to 
make [] limited NGA section 4 rate reduction filings'' in the form of a 
three-year moratorium on NGA section 5 investigations, noting that such 
a filing is an ``efficient and expeditious method of passing along to 
ratepayers the benefit of the reduction in the corporate income tax 
rate or the elimination of the MLP income tax allowance, without the 
need for the costly and time-consuming litigation entailed in an NGA 
section 5 rate investigation.'' \67\ Recognizing that a pipeline could 
make a limited NGA section 4 rate reduction filing and yet still have a 
significantly excessive ROE, the Commission outlined the following 
requirements to qualify for the three-year moratorium on NGA section 5 
rate investigations: (1) The Commission accepts the pipeline's limited 
NGA section 4 filing and (2) the pipeline's Total Estimated ROE after 
the filing, as calculated on page 3, line 26, column (E) of its FERC 
Form No. 501-G, is 12 percent or less.\68\
---------------------------------------------------------------------------

    \67\ Id. P 199.
    \68\ Id.
---------------------------------------------------------------------------

2. Request for Rehearing
    36. Pipeline Group argues that the 12 percent ROE test to qualify 
for the rate moratorium for limited NGA section 4

[[Page 17746]]

filings is not supported by the record or justified, and is arbitrary 
and capricious.\69\ Pipeline Group states that it supports a rate 
moratorium for pipelines voluntarily participating in the limited NGA 
section 4 process but that establishing an arbitrary threshold to 
qualify for such moratorium limits any incentive that the Commission 
intended to provide pipelines and expands the terms of a limited NGA 
section 4 proceeding that the Commission intended to be limited. 
Pipeline Group argues the voluntary reduction alone should be 
sufficient to entitle the pipeline to a moratorium. Pipeline Group 
argues that the Commission did not provide the reasoned decision making 
required to justify the Commission's 12 percent threshold policy. 
Pipeline Group contends that the Commission has not attempted to tie 
the 12 percent ROE threshold to evidence in the record or to show that 
the threshold is representative of an appropriate ROE for pipelines 
across the country that operate in different markets and face differing 
risks. Pipeline Group claims that, over the last five years, the 
average ROE estimated by the Commission when instituting NGA section 5 
proceedings was 18.6 percent and the lowest ROE estimated by the 
Commission was 15.7 percent. Pipeline Group argues that the Commission 
``must supply a reasoned analysis indicating that prior policies 
standards are being deliberately changed, not casually ignored'' when 
it departs from an established policy, precedent, or standard.\70\
---------------------------------------------------------------------------

    \69\ Pipeline Group Request for Rehearing at 12-16.
    \70\ Id. at 16 (citing Greater Boston Television Corp. v. FCC, 
444 F.2d 841, at 852 (D.C. Cir. 1970); West Deptford Energy, LLC v. 
FERC, 766 F.3d 10, at 20 (D.C. Cir. 2014); Williams Gas Processing-
Gulf Coast Co., L.P. v. FERC, 475 F.3d 319, at 322 (D.C. Cir. 
2006)).
---------------------------------------------------------------------------

3. Commission Determination
    37. We reject Pipeline Group's argument that the 12 percent ROE 
test to qualify for the three-year rate moratorium for limited NGA 
section 4 filings is not supported by the record or justified, and is 
arbitrary and capricious. The terms the Commission established for 
qualifying for the three-year moratorium on rate investigations are a 
reasonable exercise of the Commission's discretion in deciding whether 
to initiate an NGA section 5 investigation.\71\ Pipeline Group is 
correct that the threshold to qualify for the moratorium limits the 
incentive provided by the moratorium, but only for pipelines that still 
may have a significantly excessive ROE even after choosing the limited 
NGA section 4 filing option. Based on comments and other record 
evidence, the Commission chose a threshold that would create an 
appropriate balance between incentivizing the limited NGA section 4 
filing and preventing a pipeline that may have a significantly 
excessive ROE from shielding its rate from Commission scrutiny.
---------------------------------------------------------------------------

    \71\ See General Motors Corp v. FERC, 613 F.2d at 944 (``[A]n 
administrative agency's decision to conduct or not to conduct an 
investigation is committed to the agency's discretion'') (citations 
omitted).
---------------------------------------------------------------------------

    38. While Pipeline Group points out that the Commission has not 
initiated an NGA section 5 investigation against a pipeline with an 
estimated ROE below 15.7 percent in the last five years, our discretion 
to initiate such investigations is not restricted to pipelines with 
ROEs that exceed any particular level of ROE. In any event, Pipeline 
Group inappropriately conflates the Commission's past decisions 
concerning when to exercise its discretion to initiate an NGA section 5 
investigation with the final rule's moratorium incentive to make the 
limited NGA section 4 filing. In establishing the 12 percent ROE 
threshold for qualifying for the moratorium, the Commission has not 
departed from an established policy as Pipeline Group claims. The final 
rule addressed a new situation not previously faced by the Commission: 
Whether and how to modify the stated rates of natural gas pipelines as 
a result of the substantial reduction in the corporate income tax by 
the Tax Cuts and Jobs Act and the elimination of MLP tax allowances by 
the United Airlines Issuances. Among other things, the Commission 
adopted a new rule permitting pipelines to reduce their rates to 
reflect these actions in limited NGA section 4 rate filings as an 
exception to the Commission's general policy prohibiting such limited 
NGA section rate reductions. In conjunction with this action, the 
Commission chose to agree to a three-year moratorium on rate 
investigations if the pipeline's ROE as calculated in the FERC Form No. 
501-G was reduced to 12 percent or less. The Commission has not 
previously provided any such moratorium on NGA section 5 rate 
investigations. Thus, the Commission was adopting a new policy to 
address a new situation--there was no established policy from which to 
depart. Instead, the moratorium described in the final rule is an 
incentive created by the Commission to encourage pipelines to make a 
limited NGA section 4 filing, and the moratorium incentive is specific 
to that rulemaking.

D. Accumulated Deferred Income Taxes

1. Final Rule
    39. As the Commission explained in the final rule, Accumulated 
Deferred Income Taxes (ADIT) balances are accumulated on the regulated 
books and records of interstate natural gas pipelines based on the 
requirements of the Commission's Uniform System of Accounts.\72\ ADIT 
balances arise from differences between the method of computing taxable 
income for reporting to the Internal Revenue Service (IRS) and the 
method of computing income for regulatory accounting purposes. The 
Commission's regulatory accounting requirements then serve to inform 
the development of a natural gas pipeline's rates, including the 
depreciation and ADIT ratemaking components. The Commission stated that 
ADIT generally affects regulated natural gas pipelines' ratemaking 
either by decreasing rate base, in the case of an ADIT liability, or 
increasing rate base, in the case of an ADIT asset. As a result of the 
reduction in the federal corporate income tax rate, taxes that have 
been previously deferred and reflected in ADIT will be owed to the IRS 
based on the 21 percent tax rate, rather than the 35 percent tax rate 
used to recognize the ADIT initially. The difference between the 
already recognized ADIT based on a 35 percent tax rate and the 
recomputed deferred taxes, which will actually be owed to the IRS, at a 
21 percent tax rate requires an adjustment to ADIT balances for the 
excess or deficiency.\73\
---------------------------------------------------------------------------

    \72\ 18 CFR part 201 (2018).
    \73\ Order No. 849, 164 FERC ] 61,031 at PP 63-65.
---------------------------------------------------------------------------

    40. The Commission explained that the FERC Form No. 501-G would 
require pipelines to use calendar year 2017 ADIT balances as reported 
in their 2017 FERC Form Nos. 2 and 2-A in calculating rate base. The 
Commission stated that FERC Form No. 501-G would also require the 
pipelines to reduce their income tax allowance by an amount reflecting 
the first year's amortization of excess ADIT resulting from the reduced 
income tax rates under the Tax Cuts and Jobs Act. The Commission also 
set forth a policy concerning the treatment of ADIT when the tax 
allowances of pass-through pipelines (including MLP pipelines) are 
eliminated. The Commission modified FERC Form No. 501-G so that, if a 
pass-through entity states that it does not pay taxes, the form would 
not only eliminate its income tax allowance, but would also eliminate 
ADIT.\74\ The Commission noted that the modification only applies to 
the FERC Form No. 501-G (and the

[[Page 17747]]

optional limited NGA section 4 filings pursuant to Sec.  154.404(a)) of 
the Commission's regulations, and that it does not establish a broader 
rule.\75\
---------------------------------------------------------------------------

    \74\ Id. PP 130-132.
    \75\ Id. P 136.
---------------------------------------------------------------------------

2. Requests for Rehearing
    41. Process Gas argues that the Commission erred by allowing the 
elimination of ADIT balances for pass-through pipelines without a 
reduction to the pipeline's rate base contrary to the Commission's 
normalization policy.\76\ Process Gas contends that the Commission's 
normalization policy, as affirmed by the D.C. Circuit,\77\ allows all 
ratepayers who take service from a utility throughout its depreciable 
life to receive the benefit of a tax deduction that the utility enjoys 
in the early years of operation. Process Gas states that, as a result 
of normalization, the pipeline's rates include a higher tax allowance 
in the early years than what the utility actually pays and a lower tax 
allowance in the later years than what it actually pays. Process Gas 
argues that the Commission's elimination of ADIT for pass-through 
pipelines that remove the allowance for income taxes from current rates 
without adjusting rate base violated the principle that normalization 
will not result in any permanent tax savings by the pipeline that are 
not reversed in subsequent periods. Process Gas also argues that, 
contrary to the D.C. Circuit's finding regarding Order No. 144,\78\ the 
benefits of the deferred taxes will accrue to the utility's 
stockholders because they will retain the benefits that ADIT represents 
under normalization and will not be required to pass them on to future 
ratepayers through lower rates.
---------------------------------------------------------------------------

    \76\ Process Gas Request for Rehearing at 4-9.
    \77\ Id. at 4 (citing Public Systems v. FERC, 709 F.2d 73 (D.C. 
Cir. 1983) (Public Systems)).
    \78\ Id. at 7 (citing Tax Normalization for Certain Items 
Reflecting Timing Differences in the Recognition of Expenses or 
Revenues for Ratemaking and Income Tax Purposes, Order No. 144, FERC 
Stats. & Regs. ] 30,254, at PP 86-89 (1981), order on reh'g, Order 
No. 144-A, FERC Stats. & Regs. ] 30,340 (1982); Public Systems, 709 
F.2d at 83 (``Fourth, the Commission found that the rate of return 
earned on common equity is the same under either flow-through or 
normalization. Deferred taxes do not accrue to the benefit of 
utility stockholders.'')).
---------------------------------------------------------------------------

    42. Process Gas also argues that the Commission incorrectly relied 
upon Public Utilities Commission of State of California v. FERC \79\ 
for the proposition that continuing to deduct ADIT from rate base would 
constitute retroactive ratemaking.\80\ Process Gas contends that an 
important aspect of the Court's reasoning that the Commission had no 
legal right to adjust rates to reflect ADIT in CPUC was the removal of 
transportation assets from the pass-through entity's rate base. Process 
Gas argues that CPUC is inapposite because the Commission only asserts 
that the pipeline's double recovery of tax costs associated with those 
assets has been removed, not the actual transportation assets. Process 
Gas also contends that the removal of the tax allowance from an MLP 
pipeline's cost of service is not a change from cost-based rate 
regulation to non-cost based rate regulation, as was the case in CPUC. 
Additionally, Process Gas argues that, unlike CPUC, the pipeline assets 
to which ADIT directly relates have not been removed from the 
pipelines' jurisdictional rates.
---------------------------------------------------------------------------

    \79\ 894 F.2d 1372 (D.C. Cir. 1990) (CPUC).
    \80\ Process Gas Request for Rehearing at 7-9.
---------------------------------------------------------------------------

    43. Process Gas also contends that the Commission's failure to 
apply ADIT as a credit retroactively increases the pipeline's returns 
in violation of the rule against retroactive ratemaking.\81\ Process 
Gas argues that, while the rule against retroactive ratemaking 
prohibits the Commission from adjusting current rates to make up for a 
utility's over-collection or under-collection in prior periods, the 
rule does not apply when the parties are on notice that the rates may 
be changed.\82\ Process Gas argues that, in allowing normalization, the 
Commission placed parties on notice that any tax savings in the early 
years of a pipeline's useful life would be offset by reductions to rate 
base in subsequent years. Process Gas also argues that parties were on 
notice that the account balances for the timing differences are 
expected to offset costs reflected in rate charges to customers in 
future periods and that the balance of the account is not to be 
transferred to earnings. Process Gas notes that ADIT is booked under 
the Commission's accounting regulations in Account Nos. 281 and 282, 
which both indicate that ``[t]he utility is restricted in its use of 
this account to the purposes set forth above. It shall not transfer the 
balance in this account or any portion thereof to retained earnings or 
make any use thereof except as provided in the text of this account 
without the prior approval of the Commission.'' \83\ Process Gas also 
argues that the Commission has previously found that disregarding prior 
treatment of specific expenses over the life of the facilities is 
unjust and unreasonable \84\ and that there are no retroactive 
ratemaking concerns with requiring a pipeline to continue to account 
for prepaid costs on a going forward basis.\85\
---------------------------------------------------------------------------

    \81\ Id. at 10-13.
    \82\ Id. at 10 (citing Towns of Concord v. FERC, 955 F.2d 67, 71 
n.2 (D.C. Cir. 1992); Columbia Gas Transmission Corp. v. FERC, 895 
F.2d 791, 797 (D.C. Cir. 1990)).
    \83\ Id. at 11 (citing USOA Accounts 281.D and 282.D, 18 CFR 
part 101 (2018)).
    \84\ Id. (citing Williams Natural Gas Co., 60 FERC ] 61,140, at 
61,506 (1992) (``[t]o disregard depreciation expenses already paid 
by transportation customers with respect to service on particular 
gathering facilities would mean that those transportation customers 
would have to pay more over the life of the facilities than they 
would have to pay if the reserve for depreciation appropriately 
reflected the depreciation expenses already paid.'')).
    \85\ Id. at 11-12 (citing BP Pipelines Alaska Inc., 119 FERC ] 
63,007, at P 168 (2007), aff'd, Opinion No. 502, 123 FERC ] 61,287, 
at P 163 (2008)).
---------------------------------------------------------------------------

    44. Process Gas also argues that the Commission misconstrued prior 
precedent regarding whether deferred taxes can be analogized to a 
loan.\86\ Process Gas contends that the Commission held in Order No. 
849 that deferred taxes are not loans from customers and, thus, 
customers have no right to future rate reductions relying on its 
determinations in Order No. 144. Process Gas argues that, in fact, the 
Commission held in Order No. 144 that the loan analogy was illustrative 
and rejected the proposition that today's customers pay tomorrow's 
customer's tax costs under normalization. Process Gas argues that the 
Commission made clear that each generation of customers pays its own 
costs, and that the flow-through method gives current customers tax 
benefits that belong to future customers. Therefore, Process Gas 
argues, the Commission's determination in Order No. 849 takes away the 
future tax benefits from future period customers and gives them to the 
pipeline, which is inconsistent with Order No. 144 and its finding that 
deferred taxes represent a benefit owed to future customers.
---------------------------------------------------------------------------

    \86\ Id. at 13-14.
---------------------------------------------------------------------------

3. Commission Determination
    45. We reject Process Gas' argument that Order No. 849 erred by 
requiring that pass-through entities that eliminate the income tax 
allowance also eliminate ADIT on the FERC Form No. 501-G. Rather, the 
treatment of ADIT in Order No. 849 is consistent with both Commission 
policy \87\ and relevant court precedent. While the Commission can make 
changes to rates on a prospective basis, if an income tax allowance is 
removed from cost of service, continuing to deduct ADIT from rate

[[Page 17748]]

base or crediting ratepayers the excess ADIT balance would constitute 
impermissible retroactive ratemaking.\88\ We conclude that this 
precedent compels the approach adopted by the Commission in Order No. 
849.
---------------------------------------------------------------------------

    \87\ See Revised Policy Statement Rehearing, 164 FERC ] 61,030 
(providing non-binding guidance that where an MLP or other pass-
through pipeline eliminates its income tax allowance from its cost 
of service pursuant to the Commission's post-United Airlines policy, 
the Commission anticipates that ADIT will similarly be removed from 
cost of service); SFPP, L.P., Opinion No. 511-D, 166 FERC ] 61,142 
(2019) (holding that an MLP oil pipeline appropriately eliminated 
ADIT where its income tax allowance was eliminated from cost of 
service).
    \88\ CPUC, 894 F.2d 1371; see also SFPP, L.P., Opinion No. 511-
D, 166 FERC ] 61,142 at PP 93-95.
---------------------------------------------------------------------------

    46. Contrary to Process Gas' arguments, the elimination of ADIT 
does not violate the Commission's normalization policy.\89\ As the 
Commission explained in Order No. 849, the Commission's normalization 
policies only apply to entities with an income tax allowance component 
in their regulated cost-of-service rates.\90\ In contrast, where a 
pipeline's income tax allowance is eliminated on the FERC Form No. 501-
G under the Commission's post-United Airlines policy, there is no 
rationale for requiring the pipeline to record current or deferred 
income taxes. The Commission in Order No. 849 explained that the 
purpose of normalization is matching the pipeline's cost-of-service 
expenses in rates with the tax effects of those same cost-of-service 
expenses.\91\ If there is no income tax allowance in Commission rates, 
there is no basis for the matching function of normalization and no 
liability for the deferred taxes reflected in ADIT.
---------------------------------------------------------------------------

    \89\ Process Gas Request for Rehearing at 3-7.
    \90\ Order No. 849, 164 FERC ] 61,031 at P 132. Commission and 
IRS regulations regarding normalization (including ADIT) only apply 
to entities with an income tax allowance component in their 
regulated cost-of-service rates. See 18 CFR 154.305(a) (2018) (``An 
interstate pipeline must compute the income tax component of its 
cost-of-service by using tax normalization for all transactions''); 
18 CFR 154.305(b)(1) (``Tax normalization means computing the income 
tax component as if transactions recognized in each period for 
ratemaking purposes are also recognized in the same amount and in 
the same period for income tax purposes''); 18 CFR 154.305(b)(4) 
(``Income tax component means that part of the cost-of-service that 
covers income tax expenses allowable by the Commission''); 26 U.S.C. 
168(i)(9)(A) (``the taxpayer must, in computing its tax expense for 
purposes of establishing its cost of service for rate-making 
purposes . . . use a method of depreciation with respect to such 
property that is the same as, and a depreciation period for such 
property that is no shorter than, the method and period used to 
compute its depreciation expense for such purposes. . . . '') 
(emphasis added). See also Algonquin Gas Transmission Co., 76 FERC ] 
61,075, at 61,449 (1996); 18 CFR 154.305(c)(2) (``rate base 
reductions or additions'' for ADIT ``must be limited to deferred 
taxes related to rate base, construction, or other costs and 
revenues affecting jurisdictional cost-of-service'') (emphasis 
added); 18 CFR 154.305(d)(1) (requirements relating to excess or 
deficient ADIT balances apply where the discrepancy is ``a result of 
changes in tax rates'' or where ``the rate applicant has not 
provided deferred taxes in the same amount that would have accrued 
had tax normalization always been applied'').
    \91\ Order No. 849, 164 FERC ] 61,031 at P 132 (citing Order No. 
144, FERC Stats. & Regs. ] 30,254 at 31,522 (``The primary rationale 
for normalization is matching: the recognition in rates of the tax 
effects of expenses and revenues with the expenses and revenues 
themselves'')); see also Public Systems, 709 F.2d at 80 (The 
Commission's primary justification for its decision to adopt tax 
normalization was ``the matching principle: as a matter of fairness, 
customers who pay an expense should get the tax benefit that 
accompanies the expense . . . .'').
---------------------------------------------------------------------------

    47. We also reject Process Gas' argument that Order No. 849 
deprives future customers of the benefit of deferred taxes that they 
are owed. Process Gas concedes that under normalization ``each 
generation of customers pays its own [income tax] costs.'' \92\ As 
such, future customers have no equitable right to the sums accumulated 
in ADIT that were paid by prior customers for prior period service.\93\ 
ADIT is not money owed to past or future ratepayers, but rather 
deferred taxes that are ultimately owed to the government.\94\ 
Moreover, because future customers are not paying tax costs in rates 
where a pass-through pipeline's income tax allowance has been 
eliminated, such customers are not owed the associated ``benefits'' 
resulting from deferred taxes under the Commission's normalization 
policy.
---------------------------------------------------------------------------

    \92\ Process Gas Request for Rehearing at 13.
    \93\ Judicial and Commission precedent establish that customers 
have no equitable interest or ownership claim in ADIT. See Public 
Systems, 709 F.2d at 85 (rejecting the notion ``that ratepayers have 
an ownership claim'' to the ADIT balance); CPUC, 894 F.2d at 1381 
(``The Commission and this Court have both rejected'' ``the notion 
that under normalization accounting customers enjoy an equitable 
interest in a utility's deferred tax account''); Order No. 144, FERC 
Stats. & Regs. ] 30,254 at 31,539 (addressing the ``erroneous 
premise that a loan is being made by ratepayers to utilities'' 
through the normalization process and stating that ratepayers do not 
``have an ownership claim or equitable entitlement to the `loaned 
monies'''); id. at 31,539 n.75 (``This is not to say that customers 
do not pay rates that recover deferred taxes. They do. But paying 
deferred taxes in rates does not convey an ownership or creditor's 
right''); Opinion No. 511-D, 166 FERC ] 61,142 at P 92 (``ratepayers 
have no equitable interest or ownership claim in ADIT''); id. P 100 
(``the Commission and D.C. Circuit have consistently held that 
shippers do not have an equitable interest in ADIT'').
    \94\ Opinion No. 511-D, 166 FERC ] 61,142 at P 100. The 
Commission has also explained that ADIT is not a true-up or tracker 
of money owed to shippers. Lakehead Pipe Line Co. L.P., Opinion No. 
397-A, 75 FERC ] 61,181, at 61,594 (1996). In any case, as explained 
elsewhere in this order, FERC Form No. 501-G is merely an 
informational filing. Although FERC Form No. 501-G includes certain 
assumptions based on Commission ratemaking policy in order to 
produce a rough estimate of the pipeline's ROE before and after the 
Tax Cuts and Jobs Act or the United Airlines Issuances for 
informational purposes, the data in the FERC Form No. 501-G will not 
be used to actually establish rates in any NGA section 5 
investigation that the Commission may initiate.
---------------------------------------------------------------------------

    48. Similarly, contrary to Process Gas' arguments, we reaffirm that 
it comports with retroactive ratemaking principles to require pipelines 
that eliminate the income tax allowance on FERC Form No. 501-G to also 
eliminate ADIT on the FERC Form No. 501-G.\95\ As Process Gas 
recognizes, normalization merely requires customers to pay their 
properly allocated share of the pipeline's tax expenses for the period 
of their service.\96\
---------------------------------------------------------------------------

    \95\ Order No. 849, 164 FERC ] 61,031 at PP 133-134; see also 
SFPP, L.P., Opinion No. 511-D, 166 FERC ] 61,142 at PP 93-95.
    \96\ Process Gas Request for Rehearing at 13 (stating that under 
the Commission's income tax allowance policies, ``each generation 
pays its own costs'').
---------------------------------------------------------------------------

    49. As the Commission explained in Order No. 849, requiring 
pipelines to return ADIT amounts collected in prior rates for this 
prior period service would constitute impermissible retroactive 
ratemaking.\97\ Although Process Gas attempts to distinguish the CPUC 
decision discussed in Order No. 849, in both CPUC and the scenario 
addressed by Order No. 849 where a pipeline's income tax is eliminated 
pursuant to the Commission's post-United Airlines policy, the income 
tax allowance is removed from cost of service and, accordingly, the 
basis for tax normalization in a pipeline's cost-of-service rates is no 
longer applicable.\98\ Therefore, notwithstanding the various arguments 
raised by Process Gas, we continue to find that the D.C. Circuit's 
holding in CPUC is controlling here. As the D.C. Circuit stated, ADIT 
``is composed entirely of rate revenue that [the pipeline] has already 
collected. Refund of such property, or its earnings, would effectively 
force [the pipeline] to return a portion of rates approved by FERC, and 
collected by [the pipeline].'' \99\ The D.C. Circuit elaborated that, 
to the extent any basis for requiring the pipeline to credit ratepayers 
for earnings on previously accumulated ADIT sums rested on the view 
that the pipeline's prior cost-of-

[[Page 17749]]

service rates were ``in retrospect too high'' or ``unjust and 
unreasonable,'' then the credit violated the rule against retroactive 
ratemaking.\100\ In sum, we find that Order No. 849 correctly applied 
the D.C. Circuit's reasoning in CPUC in determining that requiring a 
pass-through pipeline whose income tax allowance has been eliminated to 
apply ADIT as a credit to rate base on the Form No. 501-G would be 
inconsistent with the rule against retroactive ratemaking.\101\
---------------------------------------------------------------------------

    \97\ Order No. 849, 164 FERC ] 61,031 at P 133 (citing CPUC, 894 
F.2d 1371).
    \98\ In CPUC the pipeline switched to statutory, proscribed rate 
ceilings from cost-of-service rates. CPUC, 894 F.2d at 1379 (the 
switch ``wiped out the premise of tax normalization'' and hence the 
matching principle ``ceased to operate as an explicit guide''); id. 
at 1382 (``Tax normalization sought to `match' the timing of a 
customer's contribution toward a cost with enjoyment of any 
offsetting tax benefit. . . . Enactment of the NGPA, however, mooted 
the whole question to which normalization was an answer.''). This 
contrasts to situations in which the income tax allowance and the 
required normalization remains in cost of service. Public Systems, 
709 F.2d at 80 (the Commission's primary justification for its 
decision to adopt tax normalization was ``the matching principle: as 
a matter of fairness, customers who pay an expense should get the 
tax benefit that accompanies the expense. . . . To do otherwise 
would subsidize present customers at the expense of future ones.'').
    \99\ CPUC, 894 F.2d at 1383; see also id. at 1382 (``[t]his kind 
of post hoc tinkering would undermine the predictability which the 
[retroactive ratemaking] doctrine seeks to protect.'').
    \100\ Id. at 1380, 1382.
    \101\ See also Opinion No. 511-D, 166 FERC ] 61,142 at PP 93-95, 
101-105.
---------------------------------------------------------------------------

    50. We also reject Process Gas' argument that applying ADIT as a 
credit to rate base on the FERC Form No. 501-G does not constitute 
retroactive ratemaking because pipelines were on notice based on the 
Commission's normalization regulations. As explained above, the 
Commission's normalization policy does not apply in the context of a 
complete elimination of a pipeline's income tax allowance from cost of 
service.\102\
---------------------------------------------------------------------------

    \102\ Id. PP 97, 104-105. We are similarly unpersuaded by 
Process Gas' argument that removing ADIT from the FERC Form No. 501-
G is itself retroactive ratemaking. Process Gas Request for 
Rehearing at 12. As explained above, ADIT consists of the tax costs 
collected by the pipeline from prior shippers' rates and paid for 
the prior shippers' service.
---------------------------------------------------------------------------

    51. We also dismiss Process Gas' argument that this case is 
analogous to BP Pipelines Alaska, where the Commission found that 
requiring a pipeline to account for prepaid costs for Dismantlement 
Removal and Restoration (DR&R) on a going-forward basis did not 
constitute retroactive ratemaking.\103\ In that case, the DR&R 
continued to be recoverable in rates, but had merely been over-
collected. In contrast, the adjustment to the FERC Form No. 501-G to 
remove ADIT reflects a situation where a pass-through entity's income 
tax allowance has been removed from cost of service, and there is thus 
no justification for tax normalization in going-forward rates. In these 
circumstances, the Commission has ``no legal right to reduce [the 
pipeline's going forward] rates . . . below levels found to be just and 
reasonable'' as this would constitute ``in substance a retroactive 
adjustment of prior rates based on normalization.'' \104\
---------------------------------------------------------------------------

    \103\ Process Gas Request for Rehearing at 12 (citing BP 
Pipelines Alaska Inc., 119 FERC ] 63,007 at P 168, aff'd, Opinion 
No. 502, 123 FERC ] 61,287 at P 163).
    \104\ CPUC, 894 F.2d at 1383-1384.
---------------------------------------------------------------------------

    52. Finally, to the extent Process Gas or any other entity objects 
to the treatment of ADIT for purposes of the FERC Form 501-G, as set 
forth in Order No. 849, we reiterate that the treatment of a pass-
through entity's ADIT for purposes of the FERC Form No. 501-G does not 
establish a broader rule, nor does Order No. 849 itself preclude 
shippers and pipelines from advocating for a different treatment of 
ADIT in any future rate litigation.\105\ Rather, as explained elsewhere 
in this order, the FERC Form No. 501-G serves a limited informational 
purpose to assist the Commission in determining whether to exercise its 
discretion to initiate NGA section 5 investigations of interstate 
natural gas pipelines' rates.\106\ In Order No. 849, the Commission 
determined that the informational FERC Form No. 501-G is likely to be 
the most useful if it removes ADIT whenever the income tax allowance is 
eliminated.\107\ However, if Process Gas or another entity seeks to 
take a different position in a litigated rate proceeding, Order No. 849 
does not preclude them from doing so.
---------------------------------------------------------------------------

    \105\ Order No. 849, 164 FERC ] 61,031 at P 135.
    \106\ FERC Form No. 501-G's only other potential use was as part 
of a pipeline's discretionary limited NGA section 4 filings pursuant 
to Sec.  154.404(a). However, Order No. 849 permitted these limited 
NGA section 4 filings to be based upon an Appendix to the FERC Form 
No. 501-G. Thus, had Order No. 849 not permitted the removal of ADIT 
on FERC Form No. 501-G itself, the pipeline could have nonetheless 
removed ADIT in the Appendix to the FERC Form No. 501-G. In such a 
scenario, the removal of ADIT would have been reflected in any 
discretionary limited NGA section 4 rate reduction filed by the 
pipeline.
    \107\ Order No. 849, 164 FERC ] 61,031 at P 135.
---------------------------------------------------------------------------

E. Tax Allowance for Pass-Through Entities

1. Final Rule
    53. For purposes of FERC Form No. 501-G, if a pipeline states that 
it is not a taxpaying entity, the form will automatically enter a 
federal and state income tax of zero.\108\ The Commission stated in the 
final rule that a natural gas company organized as a pass-through 
entity, all of whose income or losses are consolidated on the federal 
income tax return of its corporate parent, is considered to be subject 
to the federal corporate income tax, and is thus eligible for a tax 
allowance for purposes of the final rule.\109\ The Commission reasoned 
that an income tax allowance is appropriate in the cost of service of a 
pass-through subsidiary of a corporation ``when such a subsidiary does 
not itself incur a tax liability but generates one that might appear on 
a consolidated return of the corporate group.'' \110\
---------------------------------------------------------------------------

    \108\ Id. P 3.
    \109\ Id.
    \110\ Id. P 56 (citing BP West Coast Products, LLC v. FERC, 374 
F.3d 1263, at 1289 (D.C. Cir. 2004) (BP West Coast Products, LLC)).
---------------------------------------------------------------------------

2. Requests for Rehearing
    54. Process Gas contends that the Commission erred by assuming that 
all subsidiaries of corporations that appear on the consolidated 
parent's tax return are generating actual income taxes for the 
corporation.\111\ Process Gas also contends that the Commission 
eliminated the burden of proof for a pass-through entity claiming such 
a tax allowance. Process Gas argues that the determination in Order No. 
849 that a natural gas company organized as a pass-through entity whose 
income or losses are consolidated on the federal income tax return of 
its corporate parent is considered to be subject to federal income 
taxes for the purpose of filing the limited NGA section 4 filing is not 
supported by the precedent cited by the Commission.\112\ Process Gas 
argues that the BP West Coast Products, LLC precedent can be 
distinguished because the court appeared to require proof that a 
subsidiary actually generated a tax liability for the parent 
corporation to justify an allowance for income tax for a corporate 
subsidiary. Process Gas contends that the Commission may be awarding an 
income tax allowance based upon phantom taxes.
---------------------------------------------------------------------------

    \111\ Process Gas Request for Rehearing at 14-16.
    \112\ Id. at 14 (citing Order No. 849, 164 FERC ] 61,031 at P 57 
(citing BP West Coast Products, LLC, 374 F.3d at 1289).
---------------------------------------------------------------------------

    55. Enable argues that the Commission erred in determining that a 
pipeline with an MLP in its organizational structure that is owned in 
part indirectly by corporate unitholders should not receive an income 
tax allowance, yet a pass-through entity that is a wholly owned 
subsidiary of a corporation should be eligible for an income tax 
allowance.\113\ Enable contends that the Commission failed to explain 
the purported distinction between the two pass-through structures and 
that the distinction is not supported by precedent. Enable argues that 
the Commission has inverted the logic of BP West Coast Products, LLC, 
and asserts that the case actually criticizes the Commission for 
limiting an income tax allowance to corporate unitholders (not just 
those consolidating on a federal return the entirety of income from an 
affiliate in which the corporation owed an interest). Enable also 
argues that the Commission ignored the fact that United Airlines did 
not validate a distinction between a pass-through entity wholly owned 
by corporate unitholders and an MLP owned in part by corporate 
unitholders for purposes of assessing income tax allowance eligibility.
---------------------------------------------------------------------------

    \113\ Enable Request for Rehearing at 4-8.

---------------------------------------------------------------------------

[[Page 17750]]

3. Commission Determination
    56. We deny both Process Gas' and Enable's rehearing requests. 
Commission policy supports the position adopted by Order No. 849.
    57. Specifically, we reject Process Gas' argument that Order No. 
849 incorrectly permitted the wholly owned subsidiary of a corporation 
to claim an income tax allowance on FERC Form No. 501-G.\114\ Rather, 
the Commission's standalone income tax policies have long permitted a 
wholly owned pipeline subsidiary to recover the income tax costs of its 
corporate parent that arise from jurisdictional service.\115\ Moreover, 
under the stand-alone methodology, it is not relevant that the income 
from the subsidiary allocated to the corporate parent may be offset by 
other deductions or losses of the parent or affiliates.\116\ Rather, as 
the D.C. Circuit has explained, under the stand-alone methodology, 
``pipeline ratepayers may be assessed with a tax expense when the 
consolidated company in fact pays no taxes.'' \117\
---------------------------------------------------------------------------

    \114\ Order No. 849, 164 FERC ] 61,031 at P 57 (citing BP West 
Coast Products, LLC, 374 F.3d at 1289).
    \115\ Under the stand-alone policy, a regulated entity is 
permitted an income tax allowance notwithstanding the fact that it 
is the corporate parent that pays the income tax on behalf of the 
regulated entity. City of Charlottesville v. FERC, 774 F.2d 1205, 
1207-1208 (D.C. Cir. 1985). See also BP West Coast Products, LLC, 
374 F.3d at 1289 (explaining that an income tax allowance is 
appropriate in the cost of service of a pass-through subsidiary of a 
corporation ``when such a subsidiary does not itself incur a tax 
liability but generates one that might appear on a consolidated 
return of the corporate group'').
    \116\ City of Charlottesville, 774 F.2d at 1215.
    \117\ Id. (emphasis original).
---------------------------------------------------------------------------

    58. Enable's arguments are also unpersuasive. The Commission 
addressed similar arguments in its July 30, 2018 Enable MRT decision, 
which addressed Enable's own NGA section 4 rate proceeding where Enable 
argued that an income tax allowance should be permitted for the income 
tax costs of its corporate MLP unitholders.\118\ In the Enable MRT 
decision, the Commission explained that United Airlines' double-
recovery concern precludes an income tax allowance for the income tax 
costs of corporate MLP unitholders as well as other MLP unitholders. 
The Enable MRT decision emphasized the distinction between (a) a 
pipeline organized as a pass-through entity that is owned by an MLP 
that has corporate unitholders; and (b) a pipeline organized as a pass-
through entity that is a wholly owned subsidiary of a corporation. The 
Commission explained that an MLP incurs no tax liability prior to 
making the distribution to its unitholders that is reflected in the DCF 
model's determination of the MLP's ROE.\119\ Thus, the MLP's 
distribution includes funds that the corporate and individual 
unitholders may use to pay taxes on their share of the MLP's 
income.\120\ In contrast, a corporation that wholly owns a pass-through 
pipeline pays the corporate income tax prior to the investor-level 
dividend reflected in the DCF model's calculation of the pipeline's 
ROE.\121\ Although a double-recovery results from granting a pipeline 
an income tax allowance to reflect the tax liability of corporate or 
other MLP unitholders, no double-recovery results from granting an 
income tax allowance to the wholly owned subsidiary of a 
corporation.\122\ Consistent with this logic, Order No. 849 permitted 
an income tax allowance for the wholly owned subsidiary of a 
corporation while denying an income tax allowance for the tax costs of 
an MLP's corporate unitholders.
---------------------------------------------------------------------------

    \118\ Enable Mississippi River Transmission, LLC, 164 FERC ] 
61,075, at PP 29-40 (2018) (Enable MRT). Enable MRT was a wholly 
owned subsidiary of an MLP. Because 86 percent of the MLPs 
unitholders were corporations, Enable MRT claimed that it should 
receive an income tax allowance based upon the corporate income tax 
rate as applied to this 86 percent corporate ownership share.
    \119\ Id. P 35.
    \120\ Id.
    \121\ Id.
    \122\ Id.
---------------------------------------------------------------------------

    59. In any case, in regard to both Enable's and Process Gas' 
concerns, we reiterate that the FERC Form No. 501-G serves a limited 
informational purpose involving the Commission's exercise of its 
discretion to initiate NGA section 5 investigations of interstate 
natural gas pipelines' rates \123\ and the holdings of Order No. 849 do 
not establish a broader rule constraining pipelines or shippers from 
adopting contrary positions in other proceedings.\124\
---------------------------------------------------------------------------

    \123\ As noted elsewhere in this order, the pipeline may also 
use FERC Form No. 501-G and an Appendix to FERC Form No. 501-G in 
any discretionary limited NGA section 4 rate reduction pursuant to 
Order No. 849. See supra note 106. However, regardless of the tax 
treatment of wholly owned corporate subsidiaries on the FERC Form 
No. 501-G, the pipeline in the Appendix could claim that as a 
subsidiary of a corporation it incurs a corporate income tax 
allowance. This Appendix could then serve as the basis for any rate 
adjustment pursuant to the limited NGA section 4 rate filings 
permitted by Order No. 849.
    \124\ See Order No. 849, 164 FERC ] 61,031 at P 135. The 
electronic version of FERC Form No. 501-G filed by a pipeline can 
easily be modified by any shipper to change the taxpaying status of 
the regulated entity and the shipper could attempt to use this as 
the basis of its own NGA section 5 complaint (as opposed to relying 
upon the Commission's discretionary unilateral action).
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III. Document Availability

    60. 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 the Commission's Home Page 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.
    61. From the Commission'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 in the docket number 
field.
    62. User assistance is available for eLibrary and the Commission's 
website during normal business hours from FERC Online Support at (202) 
502-6652 (toll free at 1-866-208-3676) or email at 
[email protected], or the Public Reference Room at (202) 502-
8371, TTY (202) 502-8659. Email the Public Reference Room at 
[email protected].

    By the Commission. Commissioner McNamee is not participating.

    Issued: April 18, 2019.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. 2019-08241 Filed 4-25-19; 8:45 am]
BILLING CODE 6717-01-P