FERC denies Magellan's proposal to establish an oil marketing arm

NEW YORK (Reuters) - The U.S. Federal Energy Regulatory Commission on Wednesday denied a proposal by Magellan Midstream Partners LP to establish a marketing affiliate to buy, sell and ship crude oil.

Magellan’s proposal, which was first filed in November 2016, argued that its marketing affiliate would benefit the company as well as shippers on the pipeline by increasing usage of underutilized pipeline capacity as well as provide flexibility for producers and marketers and increase access to pipelines.

The Tulsa, Oklahoma-based midstream had said that a number of its pipeline competitors already have similar marketing affiliates that buy and sell crude for the purpose of shipping on their affiliates’ pipelines.

The comments were supported by TransCanada Corp’s Marketlink LLC, as well as Plains All American’s Plains Marketing LP, Enterprise Product Partners LP and Medallion Pipeline Co LLC.

FERC said on Wednesday that while the creation of a marketing affiliate is commonplace in the industry and does not require the commission’s express permission, “the proposed transactions described by Magellan in its petition would constitute an unlawful rebate under the Interstate Commerce Act.”

Under the act, a common carrier, such as a pipeline, cannot give special rates or rebates to any particular shipper or shippers. As a general matter, it added, it is unlawful for a carrier to charge different rates for identical service under the act.

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

It 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.

A Magellan spokesman could not immediately be reached for comment.

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.

Most of the top 10 largest U.S. pipeline operators, including Enbridge and Enterprise have already established their own marketing or trading arms. It was not immediately clear how this ruling would affect those pre-existing marketing arms.

Reporting by Catherine NgaiEditing by Jonathan Oatis