Now a dispute over shipping tariffs threatens to turn the pipeline into a symbol of deep industry divisions and the focus of complaints about overreach by government regulators.

Seaway, a 50/50 joint venture between Conservative Portfolio mainstay Enterprise Products Partners (NYSE: EPD) and Canadian pipeline operator Enbridge (NYSE: ENB), is currently charging fees based on a schedule not yet approved by the Federal Energy Regulatory Commission (FERC). If the five-member commission sides with its own staff and administrative law judge as well as the numerous US and Canadian oil producers protesting Seaway’s proposed tariffs, these could be cut by up to 84 percent, requiring the pipeline to offer retroactive refunds – even to shippers who willingly agreed to pay these rates last year.

Enbridge and Enterprise claim this would constitute unprecedented interference in freely negotiated shipping contracts and a major disincentive to future investment in badly needed energy infrastructure. Their opponents, including such paragons of capitalism as Chevron (NYSE: CVX), Apache (NYSE: APA), Suncor (NYSE: SU) and Noble Energy (NYSE: NBL), retort that tariff cuts by the FERC would in fact protect the oil renaissance, while denying Seaway a windfall from its exercise of unfair market power.

As so often in commercial disputes, the truth is in the eye of the wallet holder, and all parties have hired expensive Washington lawyers to cherry-pick legal precedents. We’ll handicap the outcome of this fight and look at its broad implications. But first let’s back up a bit to review how the regulatory sausage gets made in our nation’s capital.

The FERC’s five commissioners are appointed by the president to five-year terms, subject to confirmation by the Senate. No more than three can belong to the same party, and the current commission is made up of three Democrats and two Republicans. All were last appointed by President Obama, including one Republican originally nominated by President George W. Bush.

The FERC has broad discretion to regulate tariffs not just on interstate oil pipelines but on gas pipes and electricity transmission lines as well, under the Interstate Commerce Act. The commission often requires applicants to produce detailed cost-of-service data, and can order exhaustive investigations by its staff as well as adversarial proceedings before in-house administrative law judges to ensure that carriers don’t abuse their market power.

Profits Flow South

Seaway’s sponsors waded into this regulatory minefield rather cavalierly. In November 2011, Enbridge spent $1.1 billon to purchase its 50 percent stake in the Seaway from Conoco Phillips (NYSE: COP). Conoco had insisted that the pipeline continue carrying crude from the south to the north to supply Gulf crude to its Oklahoma refinery. Within a month of the purchase, Enbridge and Enterprise asked the FERC to let them charge market-based rates on the reversed pipeline that would go into operation by May 2012. They claimed Seaway had little to no market power based on a commissioned study that defined the origin and destination markets as broadly as possible, and provided no estimates for the cost of operations. Enbridge and Enterprise also sought a “waiver of any Commission regulations deemed inconsistent with this request.”

The filing was quickly protested by Chevron, Suncor and other oil producers arguing that Seaway’s market analysis was wrong. The drillers also pushed to require the pipeline to furnish cost data as a basis for the tariffs charged to uncommitted shippers – that is, those that didn’t enter into long-term contracts committing them to pay for specified shipment volumes.

The FERC eventually rejected Seaway’s market-based rates application and ordered a probe and hearings on a tariff schedule the pipeline filed based on the committed (long-term) rate it negotiated with one of its customers, Chesapeake Energy (NYSE: CHK).

During these proceedings, the commission staff argued that Seaway had in fact exercised so much market power during last year’s epic crude glut at the pipeline’s Cushing, Oklahoma, northern terminus that the committed contract proceeds alone would earn it an unwarranted long-term windfall. The only way to realistically set the uncommitted (i.e., spot) rates above zero while providing Seaway a merely fair return, argued the staff, would be to cut the committed rates.

This has never happened with an oil pipeline, though it has in other sectors regulated by FERC. In 2008 the Supreme Court held that negotiated long-term power  supply contracts deserved the presumption of being “just and reasonable” but also maintained its longtime stance that contracts could be modified or overturned by FERC if the contracted rate were to “seriously harm the public interest.”

On Sept. 13, an FERC administrative law judge held that Seaway’s committed rates were within her purview and should be drastically cut to prevent the pipeline from earning an unwarranted return.   The case now goes to the five commissioners, who can accept, reject or modify the ruling as they see fit, and either leave Seaway’s committed rates in place or change them.

The stakes are huge. At the current provisional tariff rates the Seaway, with its eventual maximum capacity of 400,000 barrels a day whould generate annual revenue in excess of $400 million. But the cost methodology proposed by the FERC staff and endorsed by the judge would cut those rates by 62 to 84 percent, slashing costing the pipeline’s co-owners hundreds of millions annually in lost profits.

It’s hard to credit that the typically carrier-friendly FERC will go quite that far, and if it does that the decision will survive a court challenge. Investors are assuming as much: the market value of Enterprise and Enbridge was essentially unaffected by the administrative judge’s ruling.

Lowering negotiated oil transport rates would be quite a departure for the commission. On the other hand, Seaway has clearly raised hackles with some of its procedural tactics, and the fact that the staff and the judge are recommending such a drastic rate cut cannot be considered good news.

As for the industry-wide investment chill that Enbridge and Enterprise claim will ensue if their negotiated rates are cut, that sounds unlikely. There are unique factors in this case that will not apply elsewhere , such from Seaway’s ownership structure and large acquisition premium, which the judge held may be partially attributable to expansion plans beyond the Seaway that the purchase made possible.

There are some hints FERC staff may also be trying to make an example of the Seaway because it did not work with the commission informally in designing its committed contract terms and tariff proposal.

There is no deadline for the commission to decide the case, and no matter how it ultimately rules, either the pipeline or the aggrieved uncommitted shippers seem quite likely to challenge a disappointing outcome in the courts. And in the meantime crude will flow and pipelines will continue to be built, albeit by owners who will know better than to take the FERC’s consent on rates for granted.