Mobil owns and operates the Pegasus crude oil pipeline that runs from Illinois to Texas. In response to demand Mobil reverses the flow of the Pegasus pipeline in order to move Canadian crude oil to Texas. Pegasus, however, only transports about three per cent of total Canadian production. Mobil applies to FERC to permission to change market-based rates on Pegasus. The staff recommends approving the application but FERC disagrees arguing that Pegasus possesses market power. Held: reversed. While FERC uses an indexing system to determine what just and reasonable rates are for oil pipelines, indexed rates don't signal individuals on how to efficiently respond to changes in market conditions. Therefore at times, FERC approves market-based rates upon the application of an oil pipeline. FERC Order No. 572 sets forth some guidelines as to when market-based rates should be approved. One factor that FERC considers is whether the oil pipeline lacks market power. Market power analysis focuses on whether there are alternatives to the pipeline's services. The staffs conclusions relating to the existence of market power was based on the small percentage of Canadian crude oil that Pegasus transported when compared with the total production. The court finds that the FERC decision is unreasonable on its face. The court finds it incredulous that a pipeline that carries only three percent of total production, and is a new entrant into the marketplace, can exercise market power. While the market-based rate would be substantially higher than the index-based rate, the court says that the higher rates are not particularly relevant to the existence of non-existence of market power.
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