Ferc Rule changes - help?

[Zorrofan]

https://www.ferc.gov/media/news-releases/2018/2018-3/07-18-18.asp#.W1DKPNJKg2y

 

Although the final rule maintains the requirement to file the FERC 501-G, the final rule makes adjustments to the proposed form, including automatically eliminating the accumulated deferred income tax (ADIT) from a pipeline’s cost of service when the form enters a federal and state income tax of zero for pipelines that are non-tax paying entities. This adjustment is consistent with the Order on Rehearing of the Revised Policy Statement in Docket PL17-1-001 issued concurrently with the final rule. The final rule also encourages pipelines to file an addendum to the FERC 501-G to reflect their individual financial situation.

 

Huge pop in some MLP's today. FERC makes changes to form 501-G but does eliminating deferred income tax from cost of service really change things that much? In English please as my head hurts...

 

thanks

Zorro

[shhughes1116]

Yes, things have changed that much, for a few pipelines.   

 

ADIT is essentially the difference between income taxes paid, and income tax allowance included in ratemaking (even in the absence of paying income tax, as may be the case for an MLP.)  Under the proposed rule, when ADIT is a liability - in other words when the cost-of-service ratemaking includes an income tax allowance but the entity doesn't pay that income tax, the amount of that liability would be removed from the rate base, thereby reducing customer rates and therefore reducing revenue/earnings on the asset (smaller rate base with same allowed ROE).   

 

By zeroing out ADIT on the form, when the federal and/or state income tax is zero (i.e. when the entity is an MLP), the rate base remains the same, so the anticipated reduction revenue/earnings for these pipelines is averted, hence the bounce today.  This is pretty significant if a pipeline included a 30% income tax allowance in their cost-of-service ratemaking, but doesn't actually pay income tax.