David Cay Johnson: Pipeline monopolies' income tax is paid by the public

[Winehole23]

Most monopoly pipelines are organized as master limited partnerships, or MLPs (http://www.investopedia.com/terms/m/mlp.asp). Congress exempted MLPs from corporate income tax under the 1986 Tax Reform Act.



So collecting the tax that never gets paid, I reported previously, means the pipeline really earns an after-tax rate of return that is 154 percent of what is authorized.



What makes this outrage even worse is that MLP investors do not get the tax money. Management contracts, whose terms are obfuscated in disclosure reports, sweep the fake tax dollars away to the companies that oversee the MLPs and primarily enrich their executives, as Gordon Gooch, FERC’s former general counsel, found by scrutinizing those documents.






The new court ruling shows that the pipelines are ripping people off for not just 54 percent more than their profits, as I have reported, but for double that.



In the latest twist in a case known colloquially as United Airlines v. FERC (https://www.cadc.uscourts.gov/internet/opinions.nsf/0/034AB41AC788112485257FE30050BB3F/$file/11-1479-1622707.pdf), Senior Circuit Judge David B. Sentelle, who has been hearing appeals of FERC pipeline tax cases for a quarter-century, came to this conclusion on July 1 in the U.S. Court of Appeals, District of Columbia Circuit Court.



Judge Sentelle wrote that United Airlines and eight other pipeline customers, known as the Shippers, complain that they are being overcharged because the rates they pay include covering taxes that the pipelines do not owe. You end up paying the bill when they pass these costs on through higher fares or in reduced profits earned by shareholders.



The Shippers “claim that because FERC’s rate-making methodology already ensures a sufficient after-tax rate of return to attract investment capital, and partnership pipelines otherwise do not incur entity-level taxes, FERC’s tax allowance policy permits partners in a partnership pipeline to ‘double recover’ their taxes.”



Judge Sentelle concluded that the plaintiffs were right.



Unfortunately, he did not include the tax algebra in his decision so that we could calculate the amount of the overcharges.



Previously I calculated from disclosure reports that the pipeline industry tax rip-off totals about $3.4 billion annually. A Congressional study prompted by my reporting estimated the cost at $1.9 billion. Judge Sentelle’s decision suggests the rip-off costs Americans somewhere between $3.8 billion to $6.8 billion annually.


http://www.thedailybeast.com/articles/2016/09/01/how-congress-makes-regular-taxpayers-foot-the-bill-for-oil-pipeline-fat-cats.html

[Winehole23]

The problem is in what Judge Sentelle ordered. He could have blocked the fake tax, but did not. Instead he sent the issue back to FERC, giving it an opportunity to gin up another justification for letting pipelines collect twice on a tax they never have to pay.



“We agree that FERC has not adequately justified its tax allowance policy for partnership pipelines and grant the Shippers’ petition,” Sentelle ruled (PDF (https://www.cadc.uscourts.gov/internet/opinions.nsf/0/034AB41AC788112485257FE30050BB3F/$file/11-1479-1622707.pdf)).



Sentelle in an earlier ruling had allowed the pipelines to collect the fake tax. In a ruling before that, in the late 1990s, he held that collecting the tax from shippers was improper because it was a nonexistent expense that he called a “phantom tax.” Judge Sentelle noted that once you start allowing imaginary expenses there is no end to the mischief.



FERC got around this by inventing a new regulatory approach called the “position paper” that allowed pipeline lobbyists to legally meet with commissioners in secret to craft the plan. Only then was it announced as a case, which ended the one-sided meetings. All sides were then given two weeks and allowed one 15-page filing with no rebuttals. The rate case was, to be polite, a sham.

[Winehole23]

No one should have to pay any tax that goes not to government but stays with the business. And whether seen as an obligation of the pipeline’s direct customers, like United Airlines, or the ultimate customer—you—no justification exists for imposing a tax unless Congress requires it and the money goes to Uncle Sam.

That’s why United Airlines and the other shippers sued again to reduce the price they were being charged for transporting airline fuel.



In his latest ruling Sentelle seems to recognize his error, but unfortunately he did not block the fake tax from being collected. Instead he told FERC to undertake yet another rule-making proceeding. Based on past history you will keep being dinged for this fake tax.