## Facts

- Mobil Pipe Line Company owned and operated the Pegasus crude-oil pipeline from Patoka, Illinois to Nederland, Texas, transporting predominantly Western Canadian crude oil to the Gulf Coast.
- Mobil applied to FERC for authority to charge market-based rates rather than regulated (indexed/cost-based) rates, asserting Pegasus lacked significant market power in the relevant markets.
- FERC’s trial staff supported approval, emphasizing Pegasus moved about 66,000 barrels per day—roughly 3% of approximately 2.2 million barrels per day of Western Canadian crude production—and that shippers had multiple transportation and refining alternatives.
- An administrative law judge and then FERC denied the application, finding Pegasus had significant market power at the origin based on a narrowly defined origin market and a detailed cost-comparison of alternative routes.
- FERC concluded Pegasus could profitably raise rates by 15% or more above the indexed rate for shipments to the Gulf Coast without losing sufficient business, indicating market power.
- Mobil petitioned for review in the U.S. Court of Appeals for the D.C. Circuit.

## Issues

1. Whether FERC reasonably concluded, based on substantial evidence, that the Pegasus pipeline had significant market power such that Mobil was ineligible to charge market-based rates.
2. Whether FERC adequately explained its departure from record evidence emphasizing broad competitive indicators (including very small market share) and staff analysis supporting market-based rate authority.

## Decision

- The D.C. Circuit granted Mobil’s petition for review and reversed FERC’s order denying market-based rate authority.
- The court held FERC’s market-power determination was unreasonable in light of the record and not supported by substantial evidence.
- The court emphasized that undisputed broad indicators—especially Pegasus’s roughly 3% share of Western Canadian crude production—strongly cut against a finding of significant market power.
- The court found FERC’s granular cost-based assessment of alternatives was applied in a manner that overstated captive demand and understated competitive options, and it did not persuasively overcome the broader structural evidence.
- The court noted that while staff recommendations are not the agency’s final action, staff’s analysis was probative record evidence that the Commission needed to confront with a reasoned explanation.

## Legal Principles

- Agency determinations must be supported by substantial evidence and must reflect reasoned decisionmaking, including a rational connection between facts found and conclusions reached.
- In market-power analysis for market-based rate authority, broad structural indicators such as market share and the presence of alternative outlets are highly probative and must be addressed directly.
- A detailed cost-comparison methodology for assessing transportation alternatives is not categorically improper, but it cannot be applied in a way that conflicts with compelling record evidence of competitive conditions.
- When an agency rejects significant contrary evidence in the record (including its own expert staff’s analysis), it must provide a cogent explanation consistent with the record as a whole.

## Conclusion

The D.C. Circuit reversed FERC’s denial of market-based rate authority to Mobil because FERC failed to justify a finding of significant market power for a pipeline with a very small market share in a competitive basin, and its alternative-route cost analysis did not supply substantial evidence sufficient to overcome the broader market indicators.


Mobil Pipe Line Co. v. Fed. Energy Regul. Comm'n, 676 F.3d 1098 (D.C. Cir. 2012)