Exxon Mobil Corp. (XOM) won a court order directing the Federal Energy Regulatory Commission to reconsider its denial of a bid to charge market rates on oil carried through the Pegasus pipeline.
The agency’s decision to reject the request was “unreasonable” because the Illinois-to-Texas pipeline doesn’t have the ability to control the market for transporting Canadian crude, the U.S. Court of Appeals ruled today. The 858-mile (1,381-kilometer) system handles 3 percent of the 2.2 million barrels Western Canada produces daily, the court said.
“The record shows that producers and shippers of Western Canadian crude oil have numerous competitive alternatives to Pegasus for transporting and selling their crude oil,” the three-judge panel said, returning the issue to the agency for reconsideration.
Mobil Pipeline, a unit of Irving, Texas-based Exxon Mobil, asked FERC for permission to charges uncapped rates in 2007. The decision may affect other pipeline operators that have announced plans to ship Canadian crude to the U.S. Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) have requested the same type of rate structure for their Seaway system.
Exxon is “pleased with the decision,” Patrick Henretty, a spokesman, said in an e-mailed statement. He declined to comment on the case’s impact on other pipelines. The Pegasus line carries about 66,000 barrels of oil a day, according to the court.
Tamara Young-Allen, a spokeswoman for the commission, declined to comment on the ruling. The agency hasn’t allowed market-based rates on oil pipelines, although it has allowed them on lines that ship refined products such as gasoline, she said.
Unlike standard rates, pipelines with market-based rates can charge whatever the market will bear and change their rates without prior approval from the commission.
Oil producers challenged Pegasus’ request, saying it would give the pipeline operator too much control over transportation prices.
The agency denied Exxon’s request after concluding it had the ability to manipulate rates on Pegasus above competitive levels for a significant period of time because of the lack of competition, the court said.
“The commission jumped the rails by treating the Pegasus pipeline as the rough equivalent of a bottleneck or essential facility for transportation of Western Canadian crude,” Circuit Judge Brett Kavanaugh wrote for the court. “The record thoroughly undermines FERC’s conclusion.”
Other Rate Seekers
In the five years since Pegasus applied for the rate, two other pipelines have been announced that would carry Canadian crude to refiners on the U.S. Gulf Coast.
TransCanada Corp. (TRP)’s Keystone XL pipeline would carry about 830,000 barrels a day from Canada’s oil-sands region to the Gulf. Enbridge plans to ship 850,000 barrels a day to Texas using its Canadian Mainline system and the Seaway pipeline, which it co-owns with Enterprise, the biggest U.S. pipeline operator.
Enbridge and Enterprise have applied for a market-based tariff on the Seaway pipeline, which connects an oil-storage hub at Cushing, Oklahoma, with refineries in Houston. The request has has drawn protests from more than a dozen oil producers and trade groups. TransCanada hasn’t said what rates it will seek on the Keystone line.
The court’s decision on the Pegasus pipeline could affect how the commission decides Seaway and other pipeline tariff requests, said Jack Semrani, an attorney with Ballard Spahr LLP in Washington.
The full impact won’t be known until the agency decides whether to appeal, said Semrani, who represents a group protesting the Seaway tariff request.
“If FERC doesn’t appeal this and this becomes the law, then FERC is going to have to be more careful in withholding market-based rates,” Semrani said in a phone interview today.
TransCanada hasn’t applied for rates on the Keystone line and can’t speculate what form they might take, Shawn Howard, a TransCanada spokesman, wrote in an e-mailed message. Rick Rainey, a spokesman for Enterprise, declined to commented on the company’s tariff request.