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Why Tax Law Likely Means Lower Revenue for Pipeline Operators

Why Tax Law Likely Means Lower Revenue for Pipeline Operators; Federal regulators are likely to require many companies to cut the rates they charge customers

Matthews, Christopher M. Wall Street Journal (Online); New York, N.Y. [New York, N.Y]08 Feb 2018: n/a.

The U.S. tax overhaul will likely force many pipeline operators to lower the rates they charge customers, a side effect of the new law with major consequences for some of the industry's biggest companies.

Pipeline companies generally stand to benefit from the tax overhaul, including through reduction in the corporate tax to 21% from 35%. But it means many of them will likely be required by federal regulators, who oversee how much operators charge on interstate systems, to cut their rates and pass the savings on to their customers.

On some pipelines, rates could decrease by as much as 10%, which would cut revenue for the companies by hundreds of millions of dollars, according to a Wall Street Journal analysis.

One major question is whether the Federal Energy Regulatory Commission will exempt from cuts those rates that companies negotiated in advance of pipelines starting up, as the agency has done with prior tax changes. Generally such negotiated rates are not regulated for the life of the contract.

If the exemption is granted with the latest tax change, that would have uneven effects across the industry, with some companies harder hit than others.

For some large pipeline companies, including Williams Cos., TransCanada Corp., and Dominion Energy Inc., the majority of their revenue on natural-gas pipelines would be subject to a rate decrease, according to a Wall Street Journal analysis of data compiled by energy analytics company LawIQ. Dominion, for example, got $1.18 billion in 2016 on rate-regulated lines, nearly 80% of its overall natural-gas pipeline revenue, according to the analysis.

Rates on oil pipelines are subject to different rules but could also decrease because of the tax cut. Pipeline companies that are structured as master limited partnerships also benefit from the tax overhaul, through a provision that effectively reduces the top tax rate for owners of many so-called pass-through entities to 29.6%, from 39.6% previously.

Other companies, including Enbridge Inc., Energy Transfer Equity and Kinder Morgan Inc., have more negotiated rates and thus would be less exposed to rate decreases, according to the analysis, though each could still lose tens of millions of dollars in revenue on gas lines as a result.

The analysis didn't factor new pipelines coming online with negotiated rates, which could reduce a company's exposure. Dominion, for example, has two major projects scheduled to enter service by 2019, which it said would increase its negotiated-rate revenue to around 60%.

"As with everyone else in the natural-gas pipeline industry, we are waiting to see what, if any, action the FERC takes in response to tax reform," Dominion spokeswoman Jen Kostyniuk said.

Other companies declined to comment or didn't respond to requests for comment.

Kinder Morgan Chief Executive Steven Kean said during the company's earnings call last month that FERC would need to consider all facets of a pipeline's operating costs, not just taxes, before making any rate adjustments.

"We do not believe that the FERC can or should isolate the tax-law change for some separate immediate action," Mr. Kean said. The company declined to comment further.

In January, regulators from 16 states wrote FERC, requesting that it cut the rates for pipelines, and compel public-utility companies to pass down the tax savings to electricity customers and other rate payers.

FERC regulates the rates on oil and gas pipelines that are part of interstate transmission systems and allows companies to peg rates, in part, to operational costs. Since 2005, regulators have allowed pipeline companies to include federal taxes in that cost of service calculation.

With the tax break, the cost of service will go down and so, too, should rates, say shippers. But FERC's process for adjusting rates is complex and could take months or longer. So far it has asked 13 pipeline operators to review their rates.

TransCanada told FERC on Monday that it would reduce its rates on the Columbia Gas Transmission pipeline network--which stretches from New York state to the Gulf of Mexico--by 6% as a result of the tax cut.

"The Commission is reviewing requests to reopen rate cases among interstate pipelines to determine potential impacts of the new tax law on existing rates," said FERC spokeswoman Tamara Young-Allen.

The agency previously sought rate cuts from public utilities in 1987 following a cut to the corporate tax from 46% to 34%. That time around, companies that had previously negotiated rates directly with customers weren't subject to decreases until those contracts expired.

Write to Christopher M. Matthews at christopher.matthews@wsj.com