In 30 years as an antitrust enforcer, academic, and consultant on antitrust issues, I have rarely seen a report so fundamentally flawed as the GAO study of several oil mergers that the Federal Trade Commission investigated under my predecessor, Robert Pitofsky. As the Commission unanimously said in its August 2003 letter to the GAO, this report has major methodological mistakes that make its quantitative analyses wholly unreliable; relies on critical factual assumptions that are both unstated and unjustified; and presents conclusions that lack any quantitative foundation. As a result, the report does not meet GAO’s own high standards of “accountability, integrity, and reliability” that one expects from its reports and publications.
Under the chairmanships of Robert Pitofsky and myself, the FTC has aggressively scrutinized the petroleum industry for anticompetitive practices. The FTC has been especially concerned about potential non-competitive behavior in the petroleum industry. Moreover, some oil mergers have a uniquely large number of relevant markets that may be at issue in a particular merger, and thus would require an extraordinary amount of time to confirm that anticompetitive effects are likely to arise. In an effort to accommodate the wishes of those who desire to close quickly, while protecting the public interest in competitive markets, the FTC has consistently required that merging parties bear the risk that relief might be over-inclusive, rather than imposing on the public the risk that relief might be under-inclusive. The data released by the FTC in February of this year demonstrate that the standards the Commission has applied to oil industry mergers are significantly more stringent than those applied to other industries.
Regarding the many problems in the GAO report, the Commission sent a detailed critique to GAO last August. The final report fails to correct these fundamental flaws.
First, the models used still do not adequately control for the many factors that cause prices to increase or decrease. The report ignores changes in gasoline formulation and most supply disruptions, such as those caused by pipeline disruptions or refinery outages. For example, in some cases, the pre- and post-merger periods reviewed are limited to either summer, when the demand for gasoline increases, or winter, when the demand decreases. Not surprisingly, the report found that gas prices increased in summer and decreased in winter. To attribute these results to mergers is simply specious.
Second, the price-concentration methodology used in the report suffers from several well-known problems that make it unacceptable as an alternative to a well-conducted event study. (The FTC staff first identified these problems over 18 months ago, in written comments to the GAO.) The FTC’s Bureau of Economics, in fact, performed such a study examining the effects of the Marthon-Ashland joint venture, comparing a year before the transaction to one and two years after the transaction, and compared to three control markets. Unlike the GAO, this retrospective found no increase in the retail prices of gasoline in Louisville.
Third, any reliable price-concentration analysis necessarily requires that concentration be calculated in an economically well-defined market – that is, an area in which change in concentration is likely to have an economic effect. The report makes conclusions based on the unsupported assumption of state-wide geographic markets in oil merger cases. As the Commission wrote to the GAO:
We are not aware of any supporting empirical data that markets generally coincide with state boundaries. Indeed, all of the data with which we are familiar point to the conclusion that wholesale markets in this industry rarely coincide with state limits. Accordingly, while price-concentration analyses may provide some useful information on general industry trends in concentration, they cannot be used to determine if an economically meaningful relationship exists between price and competition.
Finally, the comments on the August 2003 draft report noted a number of instances where the results were not robust – that is, the results in the final report differ substantially from the results in the draft report using equally plausible models or other specifications of the models. The GAO omitted these alternative results from the final report. The results in the final report appear more robust simply because these alternatives are not reported.
The Commission’s extensive antitrust enforcement since 1996 in the petroleum industry has included the following:
- The Commission obtained extraordinary relief in eight mergers involving petroleum products to prevent anticompetitive effects. For example, in the joint venture between Shell and Texaco, which combined the two companies’ domestic refining, transportation, and marketing businesses into two geographically distinct companies (Motiva and Equilon), the Commission required the divestiture of a substantial package of assets;
- The FTC required substantial divestitures prior to clearing the merger of British Petroleum and Amoco Corporation, including nine light petroleum terminals and 134 gasoline stations. In addition, the Commission required certain contractual provisions that allowed branded sellers in 30 markets (representing more than 1,600 gas stations) to switch their gasoline stations to other brands;
- In challenging Exxon’s acquisition of Mobil, the Commission required the divestiture of 2,431 gasoline stations, a refinery in California, Mobil’s interest in the Colonial pipeline or Exxon’s interest in the Plantation pipeline, the terminal operations of Mobil in Boston, Massachusetts, and the Washington, DC, area, and additional assets;
- In challenging the $45 billion merger of Chevron Corp., and Texaco Inc., the Commission required, among other things, the divestiture of all of Texaco's interests in two joint ventures, Equilon Enterprises, LLC and Motiva Enterprises LLC (representing ownership or interest in eight refineries, 115 terminals, 23,700 branded gasoline stations, and various pipelines);
- The FTC also challenged the $6 billion merger of petroleum refiners Valero Energy Corporation and Ultramar Diamond Shamrock Corporation, requiring Valero to divest Ultramar’s Golden Eagle Refinery, bulk gasoline supply contracts, and 70 Ultramar retail service stations in Northern California;
- The Commission most recently challenged the merger of Phillips Petroleum Company and Conoco Inc. Prior to allowing that merger, the Commission required significant relief to protect consumers from anticompetitive harm, including the divestiture of: 1) the Phillips refinery in Woods Cross, Utah, and all of Phillips’ related marketing assets served by that refinery; 2) Conoco's Denver refinery in Commerce City, Colorado, and all of Phillips’ marketing assets in Eastern Colorado; and 3) Phillips’ light petroleum products terminal in Spokane, Washington;
- The FTC sued Union Oil Company of California (Unocal) for allegedly subverting the California regulatory process for gasoline. The case is currently in litigation. If the allegations are upheld, Californians could save hundreds of millions of dollars annually;
- The Commission conducted extensive investigations of pricing practices in the Western and Mid-Western United States, both of which found no evidence of antitrust violations; and
- The FTC monitored gasoline prices daily in 360 cities and 20 wholesale markets, using a model that predicts prices, based on various historical relationships. When we find that prices vary significantly from those predicted, we find out why. If we do not find a natural explanation such as a pipeline break, fuel formulation change, or refinery outage, we look elsewhere. We have investigated conduct for possible antitrust violations.
The Federal Trade Commission has been, and remains, committed to protecting consumers from illegal anticompetitive conduct that is likely to result in higher gas prices. The GAO’s conclusion that consolidation in these industries in the 1990s led to decreased competition and higher prices does not survive scrutiny.
- Media Contact:
- Mitchell J. Katz,
Office of Public Affairs