U.S. and Canadian oil producers and shippers are concerned that the owners of a pipeline that could compete with Keystone XL may hike prices for transporting crude oil from Cushing, Okla., to the Gulf Coast.

At issue is Enbridge Inc. and Enterprise Products Partners' request to set rates for how much shippers must pay to transport oil on the Seaway pipeline system from the U.S. oil trading hub at Cushing to the Texas Gulf Coast. In contrast, other oil pipeline companies around the country are locked into cost-based rates that the Federal Energy Regulatory Commission directly oversees.

Enbridge and Enterprise are asking FERC for permission to charge shippers market-based rates rates -- or what the market will bear -- for moving oil on the system. Such a regulatory structure would allow the companies, not FERC, to decide how much to charge shippers.

Enbridge and Enterprise are in the process of reversing flow on the Seaway system and boosting capacity to accommodate up to 450,000 barrels a day, which would help alleviate an oversupply of crude oil at Cushing, possibly boosting North American crude oil prices and offsetting the need for imported crude (Greenwire, March 27).

But when the flow is reversed, the Seaway pipeline will temporarily have a monopoly on the market, which is what worries oil producers and shippers about the companies' request for setting the rates. Seaway could eventually be in competition with the proposed Keystone XL pipeline from Canada to the Gulf of Mexico; while the fate of the overall XL pipeline is still in doubt, the section from Cushing to the Gulf appears to be moving forward.

The Seaway pipeline originally sent oil from the Gulf Coast to Oklahoma. Rick Rainey, a spokesman for Enterprise, said the pipeline was extremely underused and is being retooled to accommodate a flow of 150,000 barrels of crude oil per day by June 1, and up to 400,000 barrels daily by the first quarter of 2013.

Rainey also said he believes that there is plenty of competition for the pipeline and that the companies have a strong case for seeking market-based rate authority.

Enbridge and Enterprise said in their Dec. 2, 2011, application to FERC that competition already exists in both the Oklahoma markets and the Gulf Coast.

Numerous projects are being planned or are under construction, including TransCanada's Keystone XL Project, they said. TransCanada has said it is moving forward with construction of a southern segment of the Keystone XL pipeline project from Cushing to Houston and Port Arthur, Texas (Greenwire, Feb. 27).

Enterprise has a number of pipelines that transport oil and gas from the Eagle Ford Shale area to markets in Texas, and Magellan Midstream Partners LP is considering a project to ship oil from Cushing to refineries in the Gulf Coast, the companies said.

Enbridge and Enterprise also pointed to four projects that would provide competition in the Gulf Coast, including the Kinder Morgan Pipeline from Eagle Ford to Houston. "These potential competitive alternatives further ensure that the Reversed Seaway Pipeline will not be able to exercise market power in its origin market or its destination market," the companies said.

But U.S. shippers and the Canadian Association of Petroleum Producers argued that Enterprise and Enbridge did not go far enough to define the origin and destination markets and that assertions about competition were based on projects that face challenges or have not been built.

James Holt, an attorney for the Canadian Association of Petroleum Producers, wrote in filings to FERC that the companies used "inapt data and insufficient factual support" to show they won't control too much of the market.

The application reveals "numerous uncertainties as to the factual context of the proposed pipeline, including questions surrounding its roster of shippers, prospective competitive circumstances, facilities, and market developments that are anticipated but have not yet transpired," he wrote.

Holt, an attorney with Betts and Holt LLP in Washington, also said Enterprise and Enbridge cannot depend on the construction of the Keystone XL pipeline or other projects to prove the pipeline will face competition because those projects have not been built. The entire Keystone XL pipeline, sponsored by TransCanada Corp., was blocked by President Obama earlier this year (Greenwire, Feb. 24).

"Competitive effects of potential new pipeline projects, such as Keystone XL and a newly announced, Kinder Morgan project from Wyoming to Cushing, are speculative," Holt wrote.

The Independent Petroleum Association of America echoed Holt's comments in a filing to FERC in February, saying insufficient data on the proposed markets and competition make FERC's approval of unregulated rates premature.

IPAA, which represents independent American oil and gas producers, said the reversed pipeline could be useful for the shipment of growing supplies of crude oil in the Mid-Continent region from Oklahoma to the Gulf. But Enbridge and Enterprise failed to show how other projects would curb their market power or specify the types of crude oil that would be transported or processed by those projects, IPAA said.