[Federal Register Volume 62, Number 249 (Tuesday, December 30, 1997)]
[Notices]
[Pages 67868-67872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33872]
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FEDERAL TRADE COMMISSION
[File No. 971-0026]
Shell Oil Company; Texaco Inc.; Analysis To Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed consent agreement.
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SUMMARY: The consent agreement in this matter settles alleged
violations of federal law prohibiting unfair or deceptive acts or
practices or unfair methods of competition. The attached Analysis to
Aid Public Comment describes both the allegations in the draft
complaint that accompanies the consent agreement and the terms of the
consent order--embodied in the consent agreement--that would settle
these allegations.
DATES: Comments must be received on or before March 2, 1998.
ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580.
FOR FURTHER INFORMATION CONTACT:
William Baer, Federal Trade Commission, 6th & Pennsylvania Ave., NW, H-
374, Washington, DC 20580. (202) 326-2932. George Cary, Federal Trade
Commission, 6th & Pennsylvania Ave., NW, H-374, Washington, DC 20580.
(202) 326-3741.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46, and Sec. 2.34 of the
Commission's Rules of Practice (16 CFR 2.34), notice is hereby given
that the above-captioned consent agreement containing a consent order
to cease and desist, having been filed with and accepted, subject to
final approval, by the Commission, has been placed on the public record
for a period of sixty (60) days. The following Analysis to Aid Public
Comment describes the terms of the consent agreement, and the
allegations in the accompanying complaint. An electronic copy of the
full text of the consent agreement package can be obtained from the
Commission Actions section of the FTC Home Page (for December 19,
1997), on the World Wide Web, at ``http://www.ftc.gov/os/
actions97.htm.'' A paper copy can be obtained from the FTC Public
Reference Room, room H-130, Sixth Street and Pennsylvania Avenue, NW.,
Washington, DC 20580, either in person or by calling (202) 326-3627.
Public comment is invited. Such comments or views will be considered by
the Commission and will be available for inspection and copying at its
principal office in accordance with Section 4.9(b)(6)(ii) of the
Commission's Rules of Practice (16 CFR 4.9(b)(6)(ii)).
I. Introduction
The Federal Trade Commission (``Commission'') has accepted from
Shell Oil Co. (``Shell'') and Texaco Inc. (``Texaco'') (collectively
``Proposed Respondents'') an Agreement Containing Consent Order
(``Proposed Consent Order''). The Commission has also entered into a
Hold Separate Agreement that requires Proposed Respondents to hold
separate and maintain certain divested assets. The Proposed Consent
Order remedies the likely anticompetitive effects, in seven geographic
markets, arising from certain aspects of Proposed Respondents' joint
venture.
II. Description of the Parties and the Transaction
Shell, which is headquartered in Houston, TX, is one of the world's
largest integrated oil companies. Among its other businesses, Shell
operates petroleum refineries that make various grades of gasoline,
diesel fuel, and kerosene jet fuel, among other petroleum products, and
Shell sells these products to intermediaries, retailers and consumers.
It owns or leases approximately 3,400 gasoline stations nationally and
sells gasoline to jobbers or gasoline dealers that operate another
5,000 retail outlets throughout the United States. During fiscal year
1996, Shell sold about $8.66 billion of gasoline nationally and had
revenues from downstream operations (refining, transportation, and
marketing of petroleum products) of approximately $22.7 billion.
Texaco, which is headquartered in White Plains, NY, is another of
the world's largest integrated oil companies. Among its other
businesses, Texaco operates petroleum refineries in the United States
that make gasoline, diesel fuel, kerosene jet fuel, and other petroleum
products, and sells those products throughout the midwestern and
western United States. Texaco owns one-half of Star Enterprises, Inc.,
a joint venture between Texaco and Saudi Refining, Inc. Star also
operates refineries and markets gasoline and other petroleum products,
under the Texaco name, in the southeastern and eastern United States.
About 14,000 retail outlets sell Texaco-branded
[[Page 67869]]
gasoline throughout the United States. In fiscal year 1996, Texaco and
Star earned about $207 million in profits from their downstream
operations; in 1996, Texaco had worldwide revenues of approximately
$45.5 billion.
On or about March 18, 1997, Shell and Texaco entered into a
memorandum of understanding to form a limited liability corporation
(``LLC''), to be known as ``Westco,'' into which Shell and Texaco would
transfer their refining and marketing businesses and assets in the
midwestern and western United States, together with their pipeline and
other transportation interests throughout the United States. On or
about July 16, 1997, Shell, Texaco and Saudi Refining entered into a
memorandum of understanding to form a second LLC, to be known as
``Eastco,'' into which Shell and Star would transfer their refining and
marketing businesses and assets in the southeastern and eastern United
States. (Eastco and Westco are referred to jointly or separately as
``Joint Venture.'')
III. The Proposed Complaint and Consent Order
The Commission has entered into an agreement containing a Proposed
Consent Order with Shell and Texaco in settlement of a proposed
complaint. The proposed complaint alleges that the proposed Joint
Venture violates Section 5 of the Federal Trade Commission Act, 15
U.S.C. 45, and that consummation of the Joint Venture would violate
Section 7 of the Clayton Act, 15 U.S.C. 18, and Section 5 of the
Federal Trade Commission Act. The proposed complaint alleges that the
Joint Venture will lessen competition in each of the following markets:
(1) Conventional gasoline and kerosene jet fuel in the Puget Sound area
of Washington State (i.e., the cities of Seattle, Tacoma, Olympia,
Bremerton and surrounding areas); (2) conventional gasoline and
kerosene jet fuel in the Pacific Northwest (i.e., the States of
Washington and Oregon west of the Cascade mountains); (3) CARB gasoline
(specially formulated gasoline required in California) in the State of
California; (4) asphalt in the northern portion of the State of
California (approximately north of Fresno); (5) transportation of
refined light petroleum products to the inland portions of the State of
Mississippi, Alabama, Georgia, South Carolina, North Carolina,
Virginia, and Tennessee (i.e., the portions more than 50 miles from
ports such as Savannah, Charleston, Wilmington and Norfolk) (``inland
Southeast''); (6) CARB gasoline in San Diego County, CA; and (7)
conventional gasoline and diesel fuel on the island of Oahu, HI.
To remedy the alleged anticompetitive effects of the Joint Venture,
the Proposed Consent Order requires Proposed Respondents: (1) To divest
Shell's refinery located in Anacortes, WA (``Anacortes Refinery''), and
to allow all of Shell's branded dealers and jobbers in Washington and
Oregon to enter into supply contracts with the acquirer of that
refinery, notwithstanding the existence of any long-term contracts or
termination penalties; (2) to divest either Texaco's interest in the
Colonial pipeline or Shell's interest in the Plantation pipeline; (3)
to divest gasoline stations in San Diego County representing a
sufficient volume to establish a viable wholesale competitor; and (4)
to divest the terminal and retail operations of either Shell or Texaco
on Oahu. Each divestiture must be made to an acquirer that receives the
prior approval of the Commission and in a manner approved by the
Commission, and must be completed within six months of the Commission's
final issuance of the consent order. Proposed Respondents must also
enter into and maintain a ten-year agreement to supply Huntway Refining
Company with undiluted heavy crude oil. The Proposed Consent Order
provides that no amendment to the Huntway supply agreement relating to
price, volume or termination will be effective until approved by the
Commission.
For ten (10) years after the consent order becomes final, the
Proposed Respondents are prohibited from entering into a joint venture
or other affiliation involving or acquiring petroleum refining or
marketing assets in Alaska, California, Oregon and Washington valued at
$100 million or more, without giving prior notice to the Commission,
where such venture would not be subject to the reporting requirements
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C.
18a.
Proposed Respondents are required to provide the Commission with a
report of compliance with the consent order within sixty (60) days
following the date that the consent order becomes final, every sixty
(60) days thereafter until the divestitures are completed, and annually
for a period of ten (10) years.
Proposed Respondents also have entered into a Hold Separate
Agreement. Under the terms of this Agreement, until the divestiture of
the Shell Anacortes Refinery has been completed, Proposed Respondents
must maintain the Shell Anacortes Refinery as a separate, competitively
viable business, and not combine it with the operations of the Joint
Venture. Under the terms of the Proposed Consent Order, Proposed
Respondents must also maintain the other assets to be divested in a
manner that will preserve their viability, competitiveness and
marketability, must not cause their wasting or deterioration, and
cannot sell, transfer, or otherwise impair the marketability or
viability of the assets to be divested. The Proposed Consent Order and
the Hold Separate Agreement specify these obligations in detail.
The FTC staff conducted the investigation leading to the Proposed
Consent Order in collaboration with the Attorneys General of the States
of California, Hawaii, Oregon and Washington. As part of this joint
effort, Proposed Respondents have entered into agreements with these
States settling charges that the Joint Venture would violate both state
and federal antitrust laws. To avoid conflicts between the Proposed
Consent Order and the State consent decrees, the Commission has agreed
to extend the time for divesting particular assets if all of the
following conditions are satisfied: (1) Proposed Respondents have fully
complied with the Proposed Consent Order; (2) Proposed Respondents
submit a complete application in support of the divestiture of the
assets and businesses to be divested within four months after the
Commission's final approval of the consent order (two months before the
required divestitures must be completed); (3) the Commission has in
fact approved a divestiture; but (4) Proposed Respondents have
certified to the Commission within ten days after the Commission's
approval of a divestiture that a State has not approved that
divestiture. If these conditions are satisfied, the Commission will not
appoint a trustee or seek civil penalties for an additional sixty days,
in order to allow Proposed Respondents either to satisfy the State's
concerns or to produce an acquirer acceptable to the Commission and the
State. If the State remains unsatisfied at the end of that additional
period, the Commission may appoint a trustee and seek penalties.
IV. Resolution of the Competitive Concerns
The Proposed Consent Order alleviates the alleged competitive
concerns arising from the Joint Venture in seven geographic markets,
which are discussed below.
A. Refining of Conventional Gasoline, Kerosene Jet Fuel, and CARB
Gasoline
Four companies operate refineries in and around Seattle, WA, and
one
[[Page 67870]]
company operates a small refinery in Tacoma, WA. Shell and Texaco
operate refineries in Anacortes, WA, and produce conventional gasoline
and kerosene jet fuel, among other products. Shell also produces CARB
gasoline. Conventional gasoline and kerosene jet fuel are each product
markets, because operators of gasoline-fueled automobiles and of jet
aircraft are unlikely to switch to other fuels in response to a small
but significant and nontransitory increase in the price of gasoline or
kerosene jet fuel, respectively.
Puget Sound is a relevant antitrust geographic market for
conventional gasoline because the refiners in this market can
profitably raise prices by a small but significant and nontransitory
amount without losing significant sales to other refiners. The five
Seattle refineries supply virtually all of the conventional gasoline
consumed in the Puget Sound market. The nearest refineries, located in
California, Alaska, and Canada, are unlikely to divert gasoline from
their current markets into Puget Sound in response to a small but
significant and nontransitory increase in price because of
transportation costs and limited access to a sufficient number of
independent retail outlets. A Puget Sound price increase likely would
not be defeated even if Puget Sound refiners were unable to raise price
in Portland, OR, since Puget Sound refiners could price discriminate
between Puget Sound and Portland.
The Joint Venture may also adversely affect competition in the
broader geographic market of the Pacific Northwest. This market is
supplied by the refiners in Washington, one refinery in San Francisco,
and one refinery in Alaska. Other refiners are unlikely to enter this
market. Customers in the Pacific Northwest will not practicably turn
outside the market to obtain supplies for a small but significant and
nontransitory increase in price. After the Joint Venture, the Puget
Sound refiners could coordinate their prices. As measured by refinery
capacity, the Joint Venture will increase the Herfindahl-Hirschman
Index (``HHI'') for conventional gasoline in Puget Sound by 1318 points
to 3812, and increase the HHI in the Pacific Northwest by 561 points to
2896.
The refiners in Puget Sound also supply all of the jet fuel used by
airlines at the Seattle-Tacoma International Airport. Three refiners
bid to supply the airlines flying into that airport, which receives all
of its jet fuel supplies by the Olympic Pipeline. Only four refiners,
including Shell and Texaco, practicably can send jet fuel through that
pipeline. These refiners thus have a cost advantage over more distant
refiners. The Joint Venture will eliminate one of these firms as an
independent bidder, raising the likelihood that the incumbents could
raise prices by a small but significant and nontransitory amount before
alternative supplies flow into the market. The Joint Venture will raise
the HHI in this market by 481 points to 5248.
Airlines in Portland can and do obtain fuel supplies from the
refiners that use the Olympic Pipeline as well as from a refinery in
the San Francisco area. The Joint Venture will eliminate one of these
firms as an independent bidder, thus allowing the remaining bidders to
raise prices above competitive levels. Accordingly, for airlines in
Portland, the relevant geographic market is the Pacific Northwest. The
Joint Venture will raise the HHI in this market by 258 points to 2503.
California requires a special formulation of gasoline, known as
``CARB gasoline,'' which is more expensive to produce than conventional
gasoline. The product market in California is therefore CARB gasoline
because, by law, consumers in that state have no alternative. Most
refiners in California, as well as Shell's refinery at Anacortes, can
make CARB gasoline. Shell and Texaco both market CARB gasoline in
California. Prices would have to rise by more than a small but
significant amount over current and projected levels to induce refiners
outside the West Coast to make CARB gasoline and transport it to
California by tanker. The market is moderately concentrated and will be
moderately concentrated after the Joint Venture. The proposed
transaction will raise the HHI by 154 points to 1635.
For all three fuels in all the geographic markets, the products are
homogeneous, and wholesale prices are publicly available and widely
reported to the industry. Refiners therefore readily can identify firms
that deviate from a coordinated or collusive price. Existing exchange
agreements likely will facilitate identifying and punishing those
deviating from a coordinated or collusive price. Industry members have
raised prices in the past by selling products outside the market,
sometimes at a loss, in order to remove supplies that had been exerting
downward pressure on prices. Entry by a refiner is unlikely to be
timely, likely, and sufficient to defeat an anticompetitive price
increase because of environmental constraints and because new refining
capacity requires substantial sunk costs. The transaction could raise
the costs of conventional and CARB gasoline and kerosene jet fuel in
these markets by more than $150 million.
To remedy the harm, Section II of the Proposed Consent Order
requires the Proposed Respondents to divest Shell's Anacortes refinery,
which refines all of the products at issue (including CARB gasoline)
and sells into all of the relevant markets (including California). This
divestiture will eliminate the refining overlap in the Puget Sound and
Pacific Northwest markets, and reduce the increase in concentration
(HHI) in the California CARB gasoline market to less than 100 points.
The Proposed Consent Order also requires Shell to allow its dealers and
jobbers in Washington and Oregon the opportunity to become affiliated
with the acquirer. This will increase the likelihood that a viable
competitor has access to gasoline and retail outlets from which it can
sell the gasoline.
B. Transportation of Undiluted Heavy Crude Oil to the San Francisco Bay
Area
Texaco owns a heated pipeline (``THPL'') that carries undiluted
heavy crude oil from the San Joaquin Valley of California to refineries
in the San Francisco Bay area. THPL is the only source of undiluted
heavy crude into that area. Huntway Refining Company is an asphalt
refiner in the Bay area, and Shell is the only other refiner of asphalt
in northern California. Shell and Huntway together make about 85
percent of the asphalt used in northern California. Both Shell and
Huntway buy undiluted heavy crude from Texaco, transported by the THPL,
and refine that oil into asphalt (among other products). Northern
California (north of Fresno) is the relevant geographic market for
asphalt because asphalt refineries outside the region are not
competitive alternatives for most customers. The transaction would
allow the Joint Venture to raise Huntway's costs by increasing prices
of undiluted heavy crude to Huntway relative to the price charged to
Shell. (Huntway's costs would increase if it were required to purchase
more expensive lighter crudes or diluted heavy crudes). Shell could
therefore raise prices of asphalt to consumers or prevent Huntway from
cutting its price. Entry is unlikely to defeat this price increase. In
the absence of the Proposed Consent Order, the Joint Venture could
raise costs to asphalt buyers in northern California by more than
three-quarters of a million dollars.
Section VII of the Proposed Consent Order eliminates this risk by
requiring the Proposed Respondents to enter into a 10-year supply
agreement with Huntway, the terms of which must be approved by the
Commission. The
[[Page 67871]]
parties have in fact entered into such an agreement, which constitutes
a confidential exhibit to the Proposed Consent Order. The Proposed
Consent Order prohibits the Joint Venture from increasing the price or
reducing the volume of crude oil supplied to Huntway, and also
prohibits Proposed Respondents from terminating the supply agreement
(except on terms identified in that agreement). The Proposed Consent
Order also provides that any amendment relating to an increase in
price, a decrease in volume, or termination is ineffective until
approved by the Commission.
C. Transportation of Refined Light Petroleum Products to the Inland
Southeast
The inland Southeast receives essentially all of its refined light
petroleum products (including gasoline, diesel fuel and jet fuel) from
either the Colonial pipeline or the Plantation pipeline. These two
pipelines basically run parallel to each other from Louisiana to
Washington, DC, and directly compete to provide petroleum product
transportation services in the inland Southeast. Texaco owns
approximately 14 percent of Colonial and has representation on the
Colonial board of directors. Shell owns approximately 24 percent of
Plantation and has representation on Plantation's board.
The proposed transaction would put the Joint Venture in a position
to influence the decisions of both pipelines. The Proposed Respondents
would also be privy to confidential competitive information of each
pipeline. The effect of the Joint Venture might be substantially to
lessen competition, including price and service competition, between
the two pipelines. The Commission has previously recognized that
control of overlapping interests in these two pipelines might
substantially reduce competition in the market for transportation of
light petroleum products to this section of the country. Chevron Corp.,
104 F.T.C. 597, 601, 603 (1984). To prevent the competitive harm from
the Joint Venture, Section V of the Proposed Consent Order requires the
Proposed Respondents to divest to one or more third parties either
Texaco's interest in Colonial or Shell's interest in Plantation.
D. Local Gasoline Distribution in Oahu, HI
Gasoline and diesel fuel are supplied to Hawaii either by two
refineries on Oahu (owned by Chevron and BHP) or by tanker. Most of the
gasoline consumed on Oahu is produced in the two Oahu refineries.
Shell, Texaco, Tosco, and the two refinery owners buy gasoline from the
refineries and sell gasoline and diesel fuel at wholesale on Oahu.
Terminal capacity on Oahu is essential to wholesale operations on that
island; it is not economically feasible to sell directly from a
refinery or a tanker or from a terminal on another island. Also,
consumers of gasoline on Oahu have no alternative but to buy gasoline
there. Accordingly, the relevant market in which to analyze the
transaction is the wholesale sale (including terminal operations) and
the retail sale of gasoline on Oahu. The markets are highly
concentrated. As measured by gasoline sales from the terminal, the
Joint Venture will raise the HHI by 267 points to 2160.
The market is susceptible to collusion or coordination. The Joint
Venture will reduce the six competitors to five; the product at
wholesale is homogeneous; and product exchanges enable the oil
companies to share cost information and facilitate detection and
punishment of any deviations from prices that might be coordinated. New
entry is unlikely to defeat an anticompetitive price increase. An
entrant would require sufficient terminal capacity and enough retail
outlets to be able to buy gasoline at the tanker-load level, or 225,000
barrels (about 9.5 million gallons). Terminal capacity of this scale is
unavailable in Oahu, and less than 2 percent of existing retail
gasoline stations are available to affiliate with a new entrant at the
wholesale level.
Section IV of the Proposed Consent Order restores competition by
requiring Proposed Respondents to divest either Shell's or Texaco's
terminal and retail assets on Oahu to a third party. In the absence of
such relief, consumers in Hawaii are likely to pay over $2 million more
for gasoline and diesel fuel.
E. Local Gasoline Distribution in San Diego County
Six vertically integrated oil companies control approximately 90
percent of the gasoline sold at both wholesale and retail in San Diego
County. These oil companies require their branded retailers to buy
gasoline at San Diego terminals, where these companies set the
wholesale price. On average, San Diego wholesale prices exceed those in
Los Angeles by more than the cost of pipeline transportation from Los
Angeles to San Diego. There is no bottleneck at the pipeline preventing
additional gasoline from flowing into the market to reduce the price
difference between San Diego County and Los Angeles, suggesting that
prices in San Diego can be and have been affected by the firms in that
market. The wholesale and retail markets in San Diego County will be
highly concentrated as a result of the Joint Venture, which will raise
the HHI by 250 points to 1815.
There are barriers to entry at the retail level because of slow
population growth, limited availability of adequate retail sites,
permitting requirements, and the need to obtain a ``critical mass'' of
stations to compete in the market. Furthermore, the extensive degree of
vertical control, combined with barriers at the retail level, raises
entry barriers at the wholesale level. The Joint Venture likely will
enhance the prospects of collusion and tacit coordination, which could
raise
Section III of the Proposed Consent Order restores competition by
requiring the Proposed Respondents to divest to a single entity
gasoline stations representing enough volume to create a viable
competitor at the wholesale level and reduce concentration levels to
within the thresholds of the Merger Guidelines.
V. Opportunity for Public Comment
The Proposed Consent Order has been placed on the public record for
sixty (60) days for receipt of comments by interested persons. Comments
received during this period will become part of the public record.
After sixty days, the Commission will again review the Proposed Consent
Order and the comments received and will decide whether it should
withdraw from the Proposed Consent Order or make final the agreement's
consent order.
The Commission anticipates that the Proposed Consent Order will
cure the competitive problems alleged in the complaint. The purpose of
this analysis is to invite public comment on the Proposed Consent
Order, including the proposed divestitures, to aid the Commission in
its determination of whether to make final the Proposed Consent Order.
This analysis is not intended to constitute an official interpretation
of the Proposed Consent Order, nor is it intended to modify the terms
of the Proposed Consent Order in any way.
Donald S. Clark,
Secretary.
Separate Statement of Commissioner Mary L. Azcuenaga; Concurring in
Part and Dissenting in Part; in Shell/Texaco/Star, File No. 9710026
Today, the Commission accepts for comment a consent order resolving
allegations that the proposed joint venture of Shell Oil Company with
Texaco Inc. and Star Enterprises would
[[Page 67872]]
violate Section 7 of the Clayton Act and Section 5 of the Federal Trade
Commission Act. I find reason to believe that the joint venture, if
consummated, would affect competition adversely in the refining of
asphalt in Northern California and, therefore, support Paragraph VII of
the order, which provides relief in that market. I do not find reason
to believe the other violations of law alleged in the complaint and,
therefore, dissent from Paragraphs II, III, IV and V of the order,
which require divestitures in other markets. Although the allegation
relating to refineries in the northwestern United States is arguably
valid, on balance, I cannot support it and, therefore, cannot support
Paragraph II of the order. The complaint allegations that support
Paragraphs III, IV and V of the order seem to me far removed from our
usual analysis under the merger guidelines.
I understand that the parties have negotiated identical relief with
various state attorneys general and that the divestitures in the
proposed Commission order will be required in any event. My obligation,
however, is to apply federal law as I see it.
[FR Doc. 97-33872 Filed 12-29-97; 8:45 am]
BILLING CODE 6750-01-M
