D.C. Circuit Upholds FERC Income Tax Allowance Policy
By Mark K. Lewis and Damon R. Daniels
On May 29, 2007, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) upheld the Federal Energy Regulatory Commissions (FERC) current income tax allowance policy (May 29 Opinion). A copy of the decision is appended to this alert. The decision, while it is important for any entity with cost-based rates set by FERC, is particularly significant for entities formed as partnerships and their investors. In FERC ratemaking, the income tax allowance permits regulated entities to recover the income tax on income from regulated activities through their rates. As affirmed by the May 29 Opinion, FERC will grant a full income tax allowance to every regulated entity with cost-based rates, including all partnerships, provided the regulated entity can demonstrate that it or its owners face an actual or potential income tax liability on the income from its regulated activities. In so doing, FERCs current policy ensures greater parity between partnerships and other corporate forms in ratemaking, irrespective of any perceived benefits to investors of the partnership form.