UPDATE 1-U.S. regulator denies Magellan's proposal to establish an oil marketing arm

(Adds Magellan’s comment)

NEW YORK, Nov 22 (Reuters) - A U.S. regulator on Wednesday denied a proposal by Magellan Midstream Partners LP to establish a marketing affiliate to buy, sell and ship crude oil, creating uncertainty for pipeline competitors with similar arrangements.

The Federal Energy Regulatory Commission said that while the creation of a marketing affiliate is common in the industry and does not require the commission’s permission, how Magellan proposed to charge its affiliate to use its pipelines would be unlawful.

“In the proposed transactions, the marketing affiliate is essentially offering capacity below cost, which would violate” the Interstate Commerce Act which requires identical rates for the same services, FERC said.

It was not immediately clear whether Magellan could move forward with a marketing arm regardless of this decision, and the company said it was evaluating FERC’s decision.

Most of the top 10 largest U.S. pipeline operators, including Enbridge Inc and Enterprise have already established their own marketing or trading arms. It is not clear how this ruling would affect them.

Several competitors of Magellan’s filed comments with FERC supporting Magellan’s proposal including TransCanada Corp’s Marketlink LLC, Plains All American’s Plains Marketing LP, Enterprise Product Partners LP and Medallion Pipeline Co LLC.

FERC added that Magellan’s proposal appears to ask permission not to publish arrangements between the pipeline and the affiliate, which suggests the proposal would circumvent publication requirements.

Earlier this year, sources told Reuters that U.S. pipeline operators were selling their underused space at steep discounts to keep crude flowing, angering customers and distorting an already opaque market for oil trading.

Magellan said its marketing affiliate would benefit the company as well as shippers on the pipeline by increasing usage of underutilized capacity when it filed the proposal in November 2016. (Reporting by Catherine Ngai; Editing by Jonathan Oatis and Lisa Shumaker)