As recently reported, on March 15, 2018, the Federal Energy Regulatory Commission (“FERC”) indicated that it would no longer allow oil and gas pipelines structured as Master Limited Partnerships (“MLPs”) to recover an income tax allowance for cost-of-service rates. The cost-of-service model particularly impacts those MLPs which operate interstate pipelines in the sector’s midstream. These MLPs charge customers a regulated price, a portion of which is to cover corporate tax charges. However, MLPs don’t pay corporate taxes in the first instance, because they are pass-through entities which distribute their pre-tax income to unit holders, who then pay taxes on it according to their own individual situation.
FERC has announced — in the wake of recent tax cuts and a D.C. Circuit Court decision in United Airlines vs. FERC – that for more than a decade MLPs have been able “to recover an income tax allowance in their cost of service.” In effect, this has served to boost the amount of pre-tax income to be pass through to investors.
While it is unclear as to when any rule issued by FERC will go into effect, perhaps no sooner than 2020, MLPs were adversely impacted in trading. At one point during trading on March 15, the Alerian MLP ETF (NYSE: AMLP) — which serves to track the MLP sector — was down as much as 10%. This ETF has lost approx. 18% in the past year.