FTC Provides Senate Testimony on Initiatives to Protect Competition in the U.S. Petroleum Industry

Testifying today on behalf of the Federal Trade Commission before a hearing of the U.S. Senate Committee on the Judiciary regarding consolidation in the energy industry, Commissioner William E. Kovacic detailed the FTC’s efforts to protect competitive markets in the production, distribution, and sale of gasoline through the agency’s vigilant and comprehensive merger program and other law enforcement initiatives.

“Although we analyze each petroleum merger according to numerous market facts surrounding the transaction, an overall analysis of merger policy in the petroleum industry necessarily takes a longer and broader view,” Kovacic said. “Over the past 20 years, the Commission’s merger policy has been consistent across administrations. Applying sound principles of law and of economics, it has been designed and focused to prevent the accumulation and use of market power to the detriment of consumers.”

“Despite increases in concentration at some production levels over the last two decades, particularly since the mid-1990s,” he continued, “most sectors of the petroleum industry generally remain unconcentrated or moderately concentrated. In addition, the growth of independent marketers and hypermarkets has increased competition at the wholesale and retail levels in many areas.”

While some mergers have led to increased concentration, Kovacic added, an increase in concentration is not by itself a sufficient basis for finding that a merger is anticompetitive. “Where concentration changes raise concerns about potential competitive harm, the FTC conducts a more detailed investigation. When it has concluded that a merger is likely to reduce competition, the FTC has required divestitures or sought preliminary injunctions” to stop the transactions, he said. In many cases, “through carefully crafted divestitures, the Commission has mandated the elimination of competitively problematic overlaps between the merging parties while allowing the competitively unobjectionable – or even efficiency-enhancing – portion of a transaction to proceed.”

The testimony cited several specific enforcement actions the FTC has taken in recent years to protect competition in the petroleum industry. These include, to name a few: dual consent orders related to Unocal patents for reformulated gasoline (RFG) and Chevron’s acquisition of Unocal; a divestiture order concerning the acquisition of Kaneb Services and Kaneb Pipeline Partners by Valero, L.P., the largest petroleum terminal operator in the United States; and settlement of a complaint filed by the Commission in federal district court in Hawaii concerning Aloha Petroleum’s acquisition of Trustreet Properties’ half-interest in an import-capable terminal and retail gasoline assets in Hawaii. In each case, the Commission required divestiture or other conditions before allowing the transactions to proceed. In the case of Unocal, Chevron was required to forgo enforcement of the RFG patents it acquired, potentially saving California consumers hundreds of millions of dollars.

At the direction of Congress, Kovacic said, the FTC also currently is conducting an investigation into recent gasoline price increases, both pre- and post-Hurricane Katrina, to determine whether illegal anticompetitive conduct in the petroleum industry led to price spikes. According to the Commission, a report on the results of the investigation will be issued this spring.

Finally, the testimony noted several important themes that have emerged from the Commission’s study of changes in the petroleum industry over the past two decades. These include: 1) mergers of private oil companies have not significantly affected worldwide concentration in crude oil, which is the chief determinant of gasoline prices; 2) despite some increases over time, concentration for most levels of the U.S. petroleum industry has remained low to moderate; 3) intensive, thorough FTC merger investigations and enforcement have helped prevent further increases in concentration and have helped avoid potentially anticompetitive problems and higher prices for consumers; 4) economies of scale have become increasingly significant in shaping the petroleum industry; 5) industry developments have lessened the incentive to vertically integrate throughout all or most levels of production, distribution, and marketing; and 6) some significant independent refiners have built market share by acquiring refiners that were divested from integrated majors per FTC enforcement orders.

Concluding the testimony, Kovacic said, “The Federal Trade Commission has an aggressive program to enforce the antitrust laws in the petroleum industry . . . The Commission continues to search for appropriate targets of antitrust law enforcement, to analyze and bring cases against any merger that is potentially anticompetitive, and to study this industry in detail.”

The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 5-0.

Copies of the Commission’s testimony are available on the FTC’s Web site at www.ftc.gov. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. P054819)