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Resolving its competitive concerns regarding the proposed $6 billion merger of petroleum refiners Valero Energy Corporation (Valero) and Ultramar Diamond Shamrock Corporation (Ultramar), the Federal Trade Commission today announced a proposed consent order that would allow the transaction to proceed, but requires Valero to divest Ultramar's Golden Eagle Refinery, bulk gasoline supply contracts, and 70 Ultramar retail service stations in Northern California to a Commission-approved buyer. Both Valero and Ultramar are leading refiners and marketers of CARB gasoline in California. The FTC's complaint states that the merger as proposed could cost California consumers more than 150 million dollars annually if the price of CARB gasoline increased just one cent per gallon due to lost competition from the merger.

CARB gasoline meets the specifications of the California Air Resources Board (CARB). CARB 2 gasoline meets the current Phase 2 specifications in effect since 1996, and is the only gasoline that can be sold to California consumers. CARB 3 gasoline meets the proposed Phase 3 specifications scheduled to go into effect on January 1, 2003, after which it will be the only gasoline that can be sold to the state's consumers.

"The Commission's proposed order will effectively remedy competition lost due to the transaction and ensure that California consumers do not pay any more than they have to for CARB gasoline within the state. The result is a win for consumers," said FTC Bureau of Competition Director Joseph J. Simons.

The Parties and the Proposed Transaction

Valero, headquartered in San Antonio, Texas, is an independent U.S. company engaged in national refining, transportation, and marketing of petroleum products and related petrochemical products. In 2000, the company reported net income of $611 million on revenues of nearly $15 billion, with revenues generated almost exclusively in the United States from seven fuel refineries.

Ultramar is an independent North American refining and marketing company that is also headquartered in San Antonio, Texas. Primarily engaged in the refining, marketing, and transportation of petroleum products and petrochemicals, it reported net earnings of $444 million on operating revenues of $17.1 billion in 2000. Ultramar operates seven refineries in the United States and Canada, with a total throughput of 850,000 barrels per day, marketed through a network of more than 5,000 retail stations.

In an agreement and plan dated May 6, 2001, Valero proposed to merge with Ultramar in a transaction valued at approximately $6 billion. Through the merger, Valero would acquire all of the voting stock of Ultramar, becoming one of the largest petroleum refiners in the United States.

FTC's Anticompetitive Concerns

According to the Commission's complaint, the merger of Valero and Ultramar as proposed would violate Section 7 of the Clayton Act and Section 5 of the FTC Act by substantially lessening competition in each of the following markets: 1) the refining and bulk supply of CARB 2 and CARB 3 gasoline for sale in Northern California; and 2) the refining and bulk supply of CARB 2 and CARB 3 gasoline in the State of California. Specifically, the complaint alleges that the merger would violate the antitrust laws in four product and geographic markets, as detailed below.

Count I of the proposed order concerns the refining and bulk supply of CARB 2 and CARB 3 gasoline for sale in Northern California. According to the Commission, Valero and Ultramar both compete within this market. There are no substitutes in California for CARB 2 gasoline and there will be no substitutes for CARB 3 gasoline when Phase 3 specifications go into effect in 2003. The North Coast (Northern California and Northwest refineries) constitutes the geographic market for refining and bulk supply of CARB 2 and CARB 3 gasoline for sale in Northern California. Five California refiners (ChevronTexaco, Equilon, Phillips, Ultramar, and Valero) currently supply more than 94 percent of the CARB gasoline used in Northern California, with two others supplying virtually all of the remainder.

The Commission contends that following the proposed merger, the North Coast CARB gasoline market would be highly concentrated, with entry by a competing refiner neither timely, likely, nor sufficient to prevent the anticompetitive effects of the proposed merger. It further contends that any efficiencies that might be realized through the transaction are small compared to the magnitude of the potential harm and, even if achieved, would not restore the competition lost from the merger. In addition, the complaint charges that the proposed transaction, by reducing competition, would lead to higher CARB wholesale prices gasoline in Northern California by: 1) eliminating direct competition between Valero and Ultramar; 2) increasing the likelihood that the combined company will unilaterally increase prices; and 3) increasing the ability and likelihood of coordinated interaction between the company and its competitors in Northern California. The ultimate result, according to the FTC, could be a substantial increase in the cost of CARB gasoline to Northern California consumers; even a price increase of one cent per gallon would increase the cost to these consumers by approximately $60 million per year.

Count II of the proposed order concerns the refining and bulk supply of CARB 2 and CARB 3 gasoline for sale in California. Valero and Ultramar compete in these markets as well, with seven refiners (BP America, ChevronTexaco, Equilon, ExxonMobil, Phillips, Ultramar, and Valero) supplying more than 97 percent of CARB gasoline consumed in California. Kern Oil and Tesoro supply virtually all of the remainder. The seven refiner-marketers account for more than 95 percent of retail gasoline sales in California through their branded retail stations, according to the complaint. Other refiners would be unlikely to supply CARB gasoline to California in response to a small sustained price increase.

Following the proposed merger, the West Coast (California) market for the refining and bulk supply of CARB 2 gasoline would be in the upper end of the moderately concentrated range, according to the Commission. CARB 3 gasoline refining capacity, however, would be highly concentrated. Entry by a competitor in these markets would be neither timely, likely, nor sufficient to prevent the alleged anticompetitive impacts, and any efficiencies gained would be small compared to the magnitude of competitive harm and unlikely to restore the competition lost from the merger. In addition, the FTC contends that the proposed merger would likely substantially reduce competition in the refining and bulk supply of CARB gasoline for sale in California by: 1) eliminating direct competition between Valero and Ultramar; and 2) increasing the ability and likelihood of coordinated interaction between the combined company and its California competitors. The Commission contends that the merger could raise the cost of CARB gasoline to California consumers by at least $150 million annually for every one cent per gallon price increase.

The Proposed Consent Order

Under the terms of the proposed consent order, Valero must divest: 1) the Ultramar Golden Eagle Refinery, located in Avon, California; 2) all bulk gasoline supply contracts associated with that refinery; and 3) 70 Ultramar retail service stations in Northern California. The bulk supply contracts and retail divestitures would give the buyer sufficient refinery demand to assure that the buyer has incentives equivalent to Ultramar.

According to the Commission, the refinery divestiture would effectively restore the competitive status quo that existed in both markets (detailed above) prior to the merger. Valero and Ultramar are the only major refiners in California with excess capacity beyond their marketing needs. This excess (or "swing") capacity assures competitive supply to non-integrated marketers, local refiners, and wholesalers and helps to dampen price spikes during shortages resulting from refinery outages. By ensuring that this swing production will continue after the merger, the Commission's order would maintain bulk supply competition and help reduce price spikes. The proposed divestiture would also eliminate the combined firm's ability and incentive to unilaterally reduce production and raise prices. In addition, Valero and Ultramar are the primary suppliers of unbranded wholesale gasoline to independent marketers and compete directly for this business in Northern California. As these unbranded marketers provide lower-cost competition to branded refiner-marketers, the order will help ensure that the remaining independent marketers have two vigorous competitors for their business, thus helping them to survive and provide lower cost alternatives for consumers. This competition, according to the FTC, will in turn increase the incentive for Valero and the acquirer of the divested assets to make the investments necessary to maintain and increase production of CARB gasoline.

The divestiture would also complicate the ability of CARB gasoline refiners to coordinate their production, the Commission contends, because there would be more refiners than there would be without the divestiture. Finally, although the divestiture would have the most direct effect in Northern California, according to the FTC, it would also help competition in California as a whole, with maintained production in the northern part of the state leading to more product availability statewide.

Other Terms of the Proposed Order

The proposed order contains other terms designed to ensure the companies' compliance. First, if the companies fail to make the required divestitures, the Commission could appoint a trustee to divest the Golden Eagle refinery package (or a substitute package containing Ultramar's two California refineries and all of its company-owned retail stations). In addition, the companies would be required to meet specific compliance and reporting requirements, and to avoid conflicts between the proposed order and state consent decrees. If a state fails to approve any of the divestitures under the Commission's order, the Commission's divestiture period would be extended for 60 days. Finally, the proposed order also contains an Order to Hold Separate, under which the assets to be divested must be maintained as viable and competitive pending their sale to a Commission-approved buyer.

The Commission conducted its investigation in collaboration with the Attorneys General of California, Oregon and Texas. As part of this joint effort, Valero and Ultramar will enter into state decrees with California and Oregon.

The Commission vote to accept the proposed consent order and place a copy on the public record was 4-0, with Chairman Timothy J. Muris not participating. The order will be subject to public comment for 30 days, until January 18, 2002, after which the Commission will decide whether to make it final. Comments should be sent to: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, D.C. 20580

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

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, D.C. 20580, Electronic Mail:; 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

(FTC File No. 011-0141; Docket No. C-4031)

Contact Information

Media Contact:
Mitchell J. Katz
Office of Public Affairs
Staff Contact:
Peter Richman
Bureau of Competition