Commissioner James Danly Statement
September 25, 2023
Docket Nos. RP19-78-007, et al.

I dissent in part from today’s order[1] because it does “not chang[e] the outcome of Opinion No. 885.”[2]  It “continue[s] to find that [Accumulated Deferred Income Tax (ADIT)] and [Excess Deferred Income Tax (EDIT or excess ADIT)] warrant different treatment.”[3]  The Commission continues “to find that Panhandle appropriately removed its ADIT balances from its cost of service for the purposes of setting rates in this proceeding.”[4]  “As to EDIT, [the Commission] continue[s] to find that Panhandle should place EDIT in Account No. 254 and amortize such amounts back in rates to shippers.”[5]  Regarding Panhandle’s capital structure, the Commission “continue[s] to find that Panhandle should remove amounts related to ADIT from the equity component of its capital structure and reverse its write-off of EDIT, thereby removing EDIT from the retained earnings used to determine the equity component of Panhandle’s capital structure.”[6]  The Commission continues to reject Panhandle’s arguments that, following its reorganization and “now as [a Master Limited Partnership (MLP)] with no income tax component, there is no mechanism through which EDIT can be returned to ratepayers.”[7]  It further continues to find that the directive to return EDIT to ratepayers does not violate the rule against retroactive ratemaking.[8]

I write separately to highlight my earlier explanation that the Commission failed to engage in reasoned decision making when it determined Panhandle’s EDIT cannot be extinguished or be subject to the same normalization restrictions that apply to ADIT balances in this case.[9]  EDIT is part of the income tax allowance component, and the placement of EDIT in Account 254 does not change that.[10]  As the Commission explained in SFPP, L.P.,

where 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.  In the absence of ADIT, there is no ADIT adjustment to rate base or amortization allowance to be reflected in cost-of-service rates.[11]

In Opinion No. 885, the Commission recognized that “[t]he core function of normalization is ‘matching,’” which is “‘matching the pipeline’s cost-of-service expenses in rates with the tax effects of those same cost-of-service expenses.’”[12]  Once Panhandle became an MLP the “premise of tax normalization” and the basis for crediting excess ADIT, were “wiped out.”[13]

In its rehearing request,[14] Panhandle cited an order issued after Opinion No. 885, i.e.,  System Energy Resources, Inc., where the Commission acknowledged “that it is appropriate for excess ADIT to also be subject to the Commission’s tax normalization policy.”[15]  Therefore, as Panhandle explained in its rehearing request, “[e]xcess ADIT is subject to the same normalization[] restrictions that ADIT balances have and, therefore, the Commission’s holdings on ADIT apply equally to excess ADIT and require excess ADIT to be eliminated to comport with normalization principles.”[16]  I agree.  It is not reasoned decision making to treat ADIT and EDIT differently, and Panhandle should not be required to amortize EDIT back to shippers.  I do not find compelling the Commission’s dismissive response that our “determination that the tax normalization policy as applicable under the specific facts of System Energy is not applicable here, and not incongruent with our findings in Opinion No. 885.”[17]

Though I concur with other aspects of the issuance, I remain concerned with certain of the findings.  For example, the order’s elimination of ADIT from the equity component of the capital structure does not comport with Commission and judicial precedent.  I invited anyone seeking rehearing to address whether ADIT should be eliminated from the equity component of the capital structure, particularly given the likely profound consequence on Panhandle’s capital structure.[18]  Citing Golden Spread Electric Cooperative, Inc.,[19] Panhandle pointed, in part, to a prior Commission’s holding “‘that the source of the retained earnings is not relevant’” and “‘[r]etained earnings represent a return from investment, or net profit after dividends are paid, [and] are a component of a firm’s capitalization.’”[20]  Panhandle further noted that “[t]he Commission cited no precedent or past guidance in support of its finding that Panhandle must reduce the equity component of its capital adjustment by the amount of the retained earnings that are traced to ADIT balances and excess ADIT.”[21]  According to Panhandle, this “is because there is no support for those findings.”[22]

The instant order responds that Panhandle erred in placing EDIT in retained earnings used to determine the equity component of Panhandle’s capital structure and in including ADIT in the equity component of its capital structure.[23]  I am not convinced by the Commission’s arguments that it is merely making a rate determination to remove amounts that should not be recovered and it is not impeding Panhandle’ right to use retained earnings.[24]  Based on my reading of Commission and judicial precedent, the directed changes to ADIT and EDIT constitute unlawful retroactive ratemaking.  Notwithstanding the order’s arguments, or suggestions, to the contrary, no exception applies to the rule against retroactive ratemaking, and the ADIT Policy Statement[25] likewise does not apply.[26]  As I previously explained,[27] in SFPP, L.P. v. FERC, the court states, “FERC could neither refund the ADIT nor continue to remove it from rate base without violating the rule against retroactivity.”[28]  The same holds true for EDIT.  By requiring Panhandle to remove ADIT and EDIT from its capital structure, Panhandle will be denied an opportunity to earn a just and reasonable return on its and its parent’s investments, running afoul of the Supreme Court’s holding in Federal Power Commission v. Hope Natural Gas Co.[29] that a pipeline’s “return . . . should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital.”[30]  Nothing in this issuance convinces me otherwise.

For these reasons, I respectfully concur in part and dissent in part.


[1] See Panhandle E. Pipe Line Co., LP, 184 FERC ¶ 61,181 (2023) (Opinion No. 885-A).

[2] Id. P 4 & n.7 (citation omitted); see also Panhandle E. Pipe Line Co., LP, 181 FERC ¶ 61,211 (2022) (Opinion No. 885).  On February 14, 2023, Panhandle Eastern Pipe Line Company, LP (Panhandle) submitted a filing in compliance with the directives of Opinion No. 885, which was corrected on February 27, 2023 (Compliance Filing), and accepted by the Commission on May 26, 2023.  See Panhandle E. Pipe Line Co., LP, 183 FERC ¶ 61,148 (2023) (Compliance Order).  Pursuant to the Compliance Order, on June 26, 2023, Panhandle filed actual tariff records with an effective date of March 1, 2020.  Today’s issuance also rejects the June 26, 2023 compliance filing in which Panhandle filed actual tariff records with an effective date of March 1, 2020, directs a further compliance filing, and dismisses, in part, Panhandle’s limited request for rehearing of the Compliance Order.  Opinion No. 885-A, 184 FERC ¶ 61,181 at P 4.

[3] Id. P 111.

[4] Id. P 13.

[5] Id.

[6] Id. P 14.

[7] Id. P 116.

[8] See id. P 118.

[9] See Opinion No. 885, 181 FERC ¶ 61,211 (Danly, Comm’r, concurring in part & dissenting in part).

[10] Id. (Danly, Comm’r, concurring in part & dissenting in part at P 4); see 18 C.F.R. § 154.305.  Amounts recorded in Account No. 254 may be removed “[i]f it is later determined that [such amounts] will not be returned to customers through rates.”  18 C.F.R. Pt. 201 (instruction (C) for Account 254).

[11] SFPP, L.P., 166 FERC ¶ 61,142, at P 97 (2019), aff’d, SFPP, L.P. v. FERC, 967 F.3d 788 (D.C. Cir. 2020).

[12] Opinion No. 885, 181 FERC ¶ 61,211 at P 64 & n.114 (citations omitted).

[13] Pub. Utils. Comm’n of Cal. v. FERC , 894 F.2d 1372, 1379 (D.C. Cir. 1990) (Public Utilities).  The majority’s attempt to distinguish Public Utilities is a non-sequitur.  Panhandle, 181 FERC ¶ 61,211 at P 86 (“Public Utilities does not address the distinction between ADIT and [excess ADIT] following a federal income tax rate change.”).  Public Utilities is not limited to the narrow facts in that case—that is, a pipeline’s elective switch to pricing under the Natural Gas Policy Act.  Public Utilities applies to any switch that “wipe[s] out the premise of tax normalization” as Panhandle’s restructuring did here. Public Utilities, 894 F.2d at 1379.

[14] See Panhandle January 17, 2023 Rehearing Request at 69-70 (Panhandle Rehearing Request).

[15] Sys. Energy Res., Inc., 181 FERC ¶ 61,244, at P 180 (2022) (System Energy).

[16] Panhandle Rehearing Request at 70.

[17] Opinion No. 885-A, 184 FERC ¶ 61,181 at P 117.

[18] See Opinion No. 885, 181 FERC ¶ 61,211 (Danly, Comm’r, concurring in part & dissenting in part at PP 5-6).

[19] Golden Spread Elec. Coop., Inc., Opinion No. 501, 123 FERC ¶ 61,047 (2008).

[20] Panhandle Rehearing Request at 14 (citations omitted in original).

[21] Id. at 102.

[22] Id.

[23] See Opinion No. 885-A, 184 FERC ¶ 61,181 at PP 149-152.

[24] See id. P 148.

[25] Acct. & Ratemaking Treatment of Accumulated Deferred Income Taxes & Treatment Following the Sale or Ret. of an Asset, 165 FERC ¶ 61,115 (2018) (ADIT Policy Statement).

[26] See, e.g., Opinion No. 885-A, 184 FERC ¶ 61,181 at PP 118-129.

[27] See Opinion No. 885, 181 FERC ¶ 61,211 (Danly, Comm’r, concurring in part & dissenting in part at P 5).

[28] SFPP, L.P. v. FERC, 967 F.3d at 803 (emphasis added).

[29] 320 U.S. 591 (1944).

[30] Id. at 603 (citation omitted).

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