By Christopher M. Matthews

Federal regulators eliminated a key tax benefit for some pipeline companies on Thursday, a move that could force some pipelines to lower their rates and make it even more difficult for the struggling sector to raise money for new projects.

The decision by the Federal Energy Regulatory Commission to eliminate certain master limited partnerships' income-tax allowances on cost-of-service rates caused many pipeline companies' stock prices to plummet on Thursday afternoon. Shares of Enbridge Energy Partners LP were down 16%, Spectra Energy Partners LP shares were down 12%, while Williams Cos. and Energy Transfer Equity shares were down more than 9%.

At issue is a 2005 policy at FERC allowing interstate natural gas and oil pipelines configured as pass-through companies to include an allowance for income taxes in the rates they charge customers. The policy has been litigated for years as customers claim it allowed pipeline owners to essentially recover income-tax costs twice.

The U.S. Court of Appeals for the D.C. Circuit said in 2016 that FERC hadn't proven that Kinder Morgan Inc., which owned an interstate petroleum-products pipeline configured as an MLP called SFPP LP, wasn't getting a double income-tax recovery on the rates it charged on the pipeline.

FERC said in a news release Thursday that it acted in response both to the court decision and comments filed following the ruling and will now revise its policy on income-tax allowances.

The decision won't affect pipelines on which rates were directly negotiated between their owners and customers, and won't affect real estate MLPs. Analysts said pipeline companies would likely appeal FERC's decision.

Natural-gas pipelines, whose rates are regulated differently than oil and petroleum products lines, could be immediately affected, according to Clearview Energy Partners. The consultancy said natural-gas pipelines configured as an MLP will have the option to lower their rates voluntarily, or explain why there is no need to do so.

The ruling is the latest blow to MLPs. Pipeline companies have been moving away from them recently as demands from increasing distributions to unit holders have become burdensome. Pipeline companies are trying to shift away from relying on fickle capital markets to fund their projects.

(END) Dow Jones Newswires

March 15, 2018 15:11 ET (19:11 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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