ANALYSIS OF THE PROPOSED CONSENT ORDER
AND DRAFT COMPLAINT TO AID PUBLIC COMMENT
The Federal Trade Commission ("Commission") has accepted for public comment from The British Petroleum Company p.l.c. (BP) and Amoco Corporation (Amoco) (collectively "the proposed Respondents") an Agreement Containing Consent Order ("the proposed consent order"). The proposed Respondents have also reviewed a draft complaint contemplated by the Commission. The proposed consent order is designed to remedy likely anticompetitive effects arising from the merger of BP and Amoco.
II. Description of the Parties and the Proposed Acquisition
BP, headquartered in London, England, is a diversified energy products company engaged in oil and gas exploration; the development, production and transportation of crude oil and natural gas; the refining, marketing, transportation, terminaling and sale of gasoline, diesel fuel, jet fuel and other petroleum products; and the production, marketing and sale of petrochemicals. BP is a major producer of gasoline and other petroleum products in the United States. BP distributes and markets its gasoline under the BP brand name through terminals and retail service stations in a variety of areas, including areas in the southeastern and midwestern United States.
Amoco, headquartered in Chicago, Illinois, is an integrated petroleum and chemical products company engaged in the exploration, development, and production of crude oil, natural gas, and natural gas liquids; the marketing of natural gas and natural gas liquids; the refining, marketing, and transportation of petroleum products, including crude oil, gasoline, jet fuel, diesel fuel, heating oil, asphalt, motor oil, lubricants, natural gas liquids, and petrochemical feedstocks; the terminaling and sale of gasoline, diesel fuel, and other petroleum products; and the manufacture and sale of various petroleum-based chemical products. Like BP, Amoco is a major producer of gasoline and other petroleum products in the United States. Amoco distributes and markets gasoline under the Amoco brand name through terminals and retail service stations in many of the same areas as does BP.
Pursuant to an agreement and plan of merger dated August 11, 1998, BP intends to acquire all of the outstanding common stock of Amoco in exchange for stock of BP valued at the time of the agreement at approximately $48 billion. The new combined entity is to be renamed BP Amoco p.l.c. As a result of the merger, BPs shareholders will hold approximately 60%, and Amocos shareholders will hold approximately 40%, of the new combined entity.
The Commission has carefully examined all of the areas in which BP and Amocos operations might overlap in or affecting the United States. The Commission found that BPs and Amocos operations do not overlap in many areas. However, the transaction raises competitive concerns in a number of local markets, and the Commission proposes to take action to remedy the potential anticompetitive effects of this merger in these markets.
The Commission considered this transaction in the context of what appears to be a significant trend toward consolidation in the petroleum industry. In recent months, there have been consolidations in this industry involving the refining and marketing operations of Texaco and Shell, Marathon and Ashland, and Tosco and Unocal. Other proposed combinations may occur, including Exxons announced proposed merger with Mobil and Phillips proposed combination of its refining and marketing operations with those of Ultramar Diamond Shamrock. The Commission will continue to examine the effect of proposed consolidations through careful analysis of each specific transaction in the context of the trend toward concentration.
III. The Draft Complaint
The draft complaint alleges that the merger of Amoco and BP would lessen competition in two relevant lines of commerce: (1) the terminaling of gasoline and other light petroleum products in nine specified geographic markets, and (2) the wholesale sale of gasoline in thirty cities or metropolitan areas in the eastern United States.
The draft complaint alleges that one line of commerce (i.e., product market) in which to analyze the merger is the terminaling of gasoline and other light petroleum products, such as diesel fuel and jet fuel.
Petroleum terminals are facilities that provide temporary storage of gasoline and other petroleum products received from a pipeline or marine vessel, and the redelivery of such products from the terminals storage tanks into trucks or transport trailers for ultimate delivery to retail gasoline stations or other buyers. Terminals provide an important link in the distribution chain for gasoline between refineries and retail service stations. According to the complaint, there are no substitutes for petroleum terminals for providing terminaling services.
The complaint identifies nine metropolitan areas that are relevant sections of the country (i.e., geographic markets) in which to analyze the effects of the acquisition on terminaling. These metropolitan areas are: Cleveland, Ohio; Chattanooga and Knoxville, Tennessee; Jacksonville, Florida; Meridian, Mississippi; Mobile and Montgomery, Alabama; and North Augusta and Spartanburg, South Carolina. Amoco and BP both operate terminals that supply each of these nine metropolitan areas with gasoline and other light petroleum products.
The complaint charges that the terminaling of gasoline and other light petroleum products in each of these nine metropolitan areas is either moderately concentrated or highly concentrated, and would become significantly more concentrated as a result of the merger. Premerger concentration in these nine markets, as measured by the Herfindahl-Hirschman Index,(1) ranges from more than 1,300 to more than 2,500. As a result of the merger, concentration would increase in each terminal market by more than 100 points to levels ranging from more than 1,500 to more than 3,600.
According to the draft complaint, entry into the terminaling of gasoline and other light petroleum products in each of these nine metropolitan areas is difficult and would not be timely, likely, or sufficient to prevent anticompetitive effects that may result from the merger.(2)
B. Wholesale Gasoline
The draft complaint alleges that a second line of commerce in which to analyze the competitive effects of the merger is the wholesale sale of gasoline. Gasoline is a motor fuel used in automobiles and other vehicles. It is manufactured from crude oil at refineries in the United States and throughout the world. There are no substitutes for gasoline as a fuel for automobiles and other vehicles that use gasoline.
According to the draft complaint, there are thirty cities or metropolitan areas in which to evaluate the effects of this merger on the wholesale sale of gasoline: Albany, Georgia; Athens, Georgia; Birmingham, Alabama; Charleston, South Carolina; Charlotte, North Carolina; Charlottesville, Virginia; Clarksville, Tennessee; Cleveland, Ohio; Columbia, South Carolina; Columbus, Georgia; Cumberland, Maryland; Dothan, Alabama; Fayetteville, North Carolina; Florence, Alabama; Goldsboro, North Carolina; Hattiesburg, Mississippi; Hickory, North Carolina; Jackson, Tennessee; Memphis, Tennessee; Meridian, Mississippi; Mobile, Alabama; Myrtle Beach, South Carolina; Pittsburgh, Pennsylvania; Raleigh, North Carolina; Rocky Mount, North Carolina; Savannah, Georgia; Sumter, South Carolina; Tallahassee, Florida; Toledo, Ohio; and Youngstown, Ohio (hereinafter collectively referred to as the gasoline markets).
The wholesale sale of gasoline, as alleged in the complaint, is the business of selling branded gasoline to retail dealers. Both BP and Amoco sell branded gasoline at wholesale in the markets alleged in the complaint. In some cases BP or Amoco, or both, sell gasoline on a wholesale basis to retail gasoline stations owned by BP or Amoco, and operated either by employees of BP or Amoco (company operated or owned and operated stations) or by persons who lease the station from BP or Amoco (lessee dealers). In other cases, BP and Amoco sell gasoline to independently owned stations (open dealers) or to intermediaries (jobbers) who deliver gasoline to individual gas stations owned by the jobber or by other persons.
Irrespective of the identity of the wholesale customer, wholesale sellers (BP and Amoco, and their branded and unbranded competitors) set the wholesale price of gasoline paid by retail dealers, and that wholesale price affects the price of gasoline charged to motorists. In the gasoline markets alleged in the complaint, the wholesale sale of gasoline would become significantly more concentrated as a result of the merger, and the relatively small number of remaining wholesalers could tacitly or expressly coordinate price increases. Postmerger concentration, as measured by the Herfindahl-Hirschman Index, would increase by more than 100 points, to levels above 1,400 in five markets and to levels above 1,800 in the remaining markets. In each of the gasoline markets alleged in the complaint, BP and Amoco, and three other firms, would have at least 70% of the wholesale gasoline market.
According to the complaint, entry into the wholesale sale of gasoline in each of these markets is difficult and would not be timely, likely or sufficient to prevent anticompetitive effects that may result from this merger.
IV. Terms of the Agreement Containing Consent Order ("the Proposed Consent Order")
The proposed consent order will remedy the Commission's competitive concerns about the proposed acquisition. Under Pararaph II of the proposed consent order, the proposed Respondents must divest the Amoco terminal serving each of the nine relevant terminal markets to Williams Energy Ventures, Inc., a subsidiary of The Williams Companies (Williams), or to another acquirer approved by the Commission. Williams is a major energy company with substantial experience in operating terminals.
The Commissions goal in evaluating possible purchasers of divested assets is to maintain the competitive environment that existed prior to the acquisition. A proposed buyer must not itself present competitive problems. The Commission believes that Williams is well qualified to operate the divested terminals and that divestiture to Williams will not be anticompetitive in these markets.
The proposed consent order requires that the divestitures occur no later than ten days after the BP/Amoco merger is consummated, or thirty days after the consent agreement is signed, whichever is later. The proposed consent agreement also requires respondents to rescind the transaction with Williams if the Commission, after the comment period, decides to reject Williams as the buyer. If the Williams agreement is rescinded, then respondents are required to divest the terminals within six months from the date the order becomes final, at no minimum price, to an acquirer that receives the prior approval of the Commission and only in a manner that receives the prior approval of the Commission. If respondents have not divested the terminals pursuant to Paragraph II of the order, then the Commission may appoint a trustee to divest the assets.
The proposed consent order obtains relief with respect to the wholesale sale of gasoline in two ways. First, in eight markets where either Amoco or BP (or both) own retail gasoline stations (Charleston, South Carolina; Charlotte, North Carolina; Columbia, South Carolina; Jackson, Tennessee; Memphis, Tennessee; Pittsburgh, Pennsylvania; Savannah, Georgia; and Tallahassee, Florida), Paragraph III of the proposed order requires respondents to divest gasoline stations belonging to either Amoco or BP (as specified in the proposed order) to an acquirer approved by the Commission. These divestitures must be completed within six months of the date on which the parties signed the agreement containing consent order (December 29, 1998).
Second, in all 30 markets, including markets in which neither Amoco nor BP owns retail gasoline stations, Paragraph IV of the order requires Amoco and BP to give their wholesale customers (both jobbers and open dealers) the option of canceling their franchise and supply agreements with Amoco and BP, freeing them to switch their retail gasoline stations to other brands. In order to provide an incentive for these persons to switch to other brands, the order provides that wholesale customers who take advantage of this provision will be released from all debts, loans, obligations and other responsibilities under their agreements with Amoco and BP (other than for fuels actually delivered and other specific debts scheduled by the respondents), if they agree to stop selling Amoco and BP gasoline in the market and not sell any other brand that has more than 20% of the market. The proposed order requires that BP and Amoco provide notice to their wholesale customers upon the Commissions final acceptance of the proposed order (should the Commission do so after the public comment period), and allows these customers thirty days to exercise this option. Should a wholesale customer choose to terminate its relationship with BP or Amoco under the terms of the proposed order, BP and Amoco will not solicit that customer as a reseller of branded gasoline for two years thereafter.
In addition, Paragraph V of the order requires that unless retail gasoline sellers representing a specified volume of sales in Toledo and Youngstown, Ohio agree to switch to other brands, then respondents must divest retail gasoline stations with an equivalent volume of sales to an acquirer acceptable to the Commission.
For a period of ten years from the date the proposed consent order becomes final, the proposed Respondents are required to provide notice to the Commission prior to acquiring terminal assets or gasoline stations located in the markets at issue.
The proposed Respondents are required to provide to the Commission a report of compliance with the proposed consent order within thirty days following the date on which the order becomes final, every thirty days thereafter until the divestitures are completed, and annually for a period of ten years.
V. Opportunity for Public Comment
The proposed consent order has been placed on the public record for sixty 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 agreement and the comments received and will decide whether it should withdraw from the agreement or make the proposed consent order final.
By accepting the proposed consent order subject to final approval, the Commission anticipates that the competitive problems alleged in the complaint will be resolved. The purpose of this analysis is to invite public comment on the proposed consent order, including the proposed sale of terminal assets to Williams, in order to aid the Commission in its determination of whether to make the proposed consent order final. 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.
(1)The Herfindahl-Hirschman Index, or HHI, is a measurement of market concentration calculated by summing the squares of the individual market shares of all participants in the market. Under Section 1.51 of the Horizontal Merger Guidelines issued April 2, 1992, by the Federal Trade Commission and the Department of Justice, the Commission considers concentration levels exceeding 1,800 as highly concentrated and concentration levels between 1,000 and 1,800 to be moderately concentrated.
(2)The Commission has found reason to believe that terminal mergers would be anticompetitive on prior occasions. E.g., Shell Oil Co., C-3803 (1997) (combination of refining and marketing businesses of Shell and Texaco); Texaco Inc., 104 F.T.C. 241 (1984) (Texacos acquisition of Getty Oil Company); Chevron Corp., 104 F.T.C. 597 (1984) (Chevrons acquisition of Gulf Corporation). Indeed, several of the markets involved in this proceeding are markets in which BP acquired terminals that were divested by Chevron in 1984 pursuant to the Commissions order in Chevron.