Statement of Chairman Robert Pitofsky and
BP Amoco plc/
The Commission makes final today a consent order that requires BP Amoco plc ("BP"), as a condition of its acquisition of Atlantic Richfield Company ("ARCO"), to divest all of ARCO's crude oil exploration and production assets in Alaska and related pipeline rights, maritime assets, seismic data and technical information. In effect, BP agrees to divest "all of ARCO" in Alaska. In addition, the consent order requires BP to divest all ARCO pipeline and storage facilities in and around the crude oil marketing and trading hub at Cushing, Oklahoma ("the Cushing assets") to a buyer to be approved by the Commission within 120 days of the date on which BP and ARCO sign the consent order.
The consent order provides that the divested Alaska assets will be acquired by Phillips Petroleum Co. ("Phillips"). Phillips is an integrated petroleum company with oil and gas exploration and production interests in several countries and (as of 1999) assets of about $15 billion and annual revenues of about $13.9 billion. Prior to the divestitures, Phillips had some Alaska oil and gas exploration and production interests of its own, but these were tiny relative to those of BP and ARCO. Phillips is engaged in refining and gasoline marketing in several of the United States, but not on the West Coast. BP selected Phillips as the buyer of ARCO's Alaska assets, and the Commission has unanimously approved Phillips as the buyer.
Since BP and ARCO signed the consent order and the Commission accepted it for public comment, ARCO's Alaska assets have been divested to Phillips and the Cushing assets have been divested, with the Commission's approval, to Texas Eastern Products Pipeline Company, LLC. ("TEPPCO"). Three transitional agreements between BP and Phillips and between BP and TEPPCO, required by the consent order, remain in place, and, pursuant to the consent order, a trustee has been appointed to monitor compliance with those agreements.
In most respects, this consent order achieves all the Commission sought, and all the relief that would likely have been achieved if the Commission prevailed in litigation. But we voted against the Commission's acceptance of the consent order for placement on the public record for comment, and we write separately to express our continuing concern with the majority's decision not to include in the consent order a provision prohibiting BP and Phillips from exporting ANS crude oil at a loss for the purpose of maintaining oil prices on the West Coast of the United States.(1)
Before the merger and the divestitures, BP had the largest share -- about 40% -- of all crude oil produced on the Alaska North Slope ("ANS"); had the largest interest -- about 50% -- in the Trans-Alaska Pipeline System ("TAPS") that is used to transport crude oil to port at Valdez, Alaska; and had the largest fleet available for transporting ANS crude oil from Alaska to refineries in the rest of the United States. ARCO was its largest rival in each of these respects, with a share of over 30% of ANS crude production; a 22% stake in TAPS; and the second largest available fleet. BP and ARCO's dominance of the market was even greater when measured in terms of exploration assets and operatorships in Alaska. BP, which did not own any West Coast refineries, sold all of its ANS crude in the merchant market. ARCO, which owned two of the largest refineries on the West Coast, consumed the bulk of its ANS production internally. However, ARCO also sold on the merchant market, thereby, according to the Commission's complaint, serving as "the firm most likely to constrain BP's exercise of monopoly power," a constraint that "likely would increase" over time but for the merger.(2)
Because it provided for Phillips to acquire all of ARCO's assets in Alaska, the consent order is likely to restore competition on the Alaska North Slope. In the market for the supply of ANS crude oil to targeted refineries on the West Coast, Phillips will be in a different position from ARCO because, unlike ARCO, Phillips is neither a refiner nor a gasoline marketer on the West Coast. This difference should leave Phillips with more crude oil to sell on the open market than ARCO previously had after supplying its own refineries, and, if not undermined by private conduct, may actually improve upon the level of competition in that market. In Cushing, a clean sweep of ARCO's pipeline and storage assets to TEPPCO should also suffice to restore competition.
Negotiations leading to this settlement were extensive and complicated. Nevertheless, once the outline of a settlement was agreed upon - that is, divestiture of "all of ARCO" in Alaska and in and around Cushing - BP, ARCO and Commission staff worked out the details with dispatch.
In one respect, however, the Commission's action in this matter is disappointing. In its original complaint and in its memorandum supporting the complaint, the Commission alleged that BP systematically and over an extended period of time exported ANS crude at a loss in Asia and to other regions in the United States in order to curtail or tighten supply to refiners on the U.S. West Coast and to maintain crude oil prices in that market.(3) The Commission was prepared to substantiate its charge with a series of documents, cited in its memorandum supporting the complaint but currently under seal in the United States District Court.(4) The Commission alleged that the pattern of exports reflected BP's market power, and that such market power would increase as a result of the proposed merger.
When litigation was suspended for settlement negotiations, the issue of exports designed to raise price was addressed. BP and Phillips reportedly stated publicly that they would not export U.S. crude resources out of PADD V (the technical term for the U.S. West Coast market, specifically, the States of Alaska, Arizona, California, Hawaii, Nevada, Oregon and Washington).(5)
We believe that the Commission should follow the logic of its own complaint and require BP and Phillips to affirm their public statements in our consent agreement in this matter. That would require the following provision in the order:
This provision is narrower than the parties' public statements, thereby assuring that it would in no way affect normal, competitive business conduct, such as exporting oil abroad when the price offered abroad (net of transportation and other costs) is higher than on the West Coast. Instead, it would target the systematic export of United States' crude oil to Asia or elsewhere at a loss (relative to the profit that could have been obtained on the same crude oil within PADD V) for the purpose of raising U.S. West Coast prices - a practice that we consider an extraordinary exercise of market power. If engaged in through coordinated action - and the Commission's memorandum alleges that BP "mop[ped] up 'excess' supplies of ANS" crude from others(8) -- such conduct would be illegal per se. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 190-91, 216, 218-28 (1940) (holding illegal per se agreements to purchase "distress gasoline" in order to raise prices or prevent price decreases). Regardless of its legality, exporting at a loss in order to raise West Coast prices plainly threatens competition in a market where this agency has a duty to ensure that competition is fully restored. See, e.g., Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972); United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961).
Because the Commission was prepared to prove that intentional manipulation of supply on the West Coast occurred in the past, and could occur again in the future, the provision would be appropriate relief for the Commission to require. See, e.g., FTC v. National Lead Co., 352 U.S. 419, 429, 430 (1957) (a remedy is proper if it bears a "'reasonable relation to the unlawful practices found to exist'" and "decrees often suppress a lawful device when it is used to carry out an unlawful purpose") (citations omitted); cf. FTC v. Ruberoid Co., 343 U.S. 470, 473 (1952) ("[I]f the Commission is to obtain the objectives Congress envisioned, it cannot be required to confine its road block to the narrow lane the transgressor has traveled; it must be allowed effectively to close all roads to the prohibited goal, so that its order may not be by-passed with impunity.").
Notwithstanding the substantial evidence of manipulation supporting the allegations in the complaint and memorandum, a majority of the Commission declines to require this provision. In omitting any provision concerning exports, we do not understand our fellow Commissioners to condone the practices that we identified in our complaint. But we see no good reason for the omission.
First, the majority suggests that the divestitures ordered today eliminate the competitive overlap that was the central competitive concern raised by the proposed merger. While we believe that the divestiture to Phillips is effective and appropriate relief, and may even improve competition, we would also address directly the competitive concerns raised by past and potentially future exporting practices aimed at exploiting precisely the market power that the BP-ARCO merger places at issue. The consent made final today permits both a realignment of operatorship interests on the Alaska North Slope and a vertical realignment, whereby BP's crude supply will now be aligned with what were ARCO's downstream assets, and ARCO's successor, Phillips, will likely replace BP as the principal supplier to the merchant (i.e., non-vertically-integrated) market on the West Coast. How those realignments will affect the incentives and opportunities of BP and Phillips to continue BP's past practice of exporting to maintain West Coast prices is uncertain, as are future fluctuations in their production and reserves on the Alaska North Slope and their likely effects on those incentives and opportunities.
The majority believes that it is unnecessary to impose any restriction on exports(9) because "BP likely will need to use most of its ANS crude oil production" in the ARCO refineries it is acquiring on the West Coast, and because "Phillips will have a much smaller share of ANS crude oil production than did BP." (We understand Phillips' initial share of ANS crude oil production to be between 30 and 35%.) Even if true today, there is no assurance that in the future either company, in an uncertain and evolving marketplace, will not find itself in a position to engage in the same conduct BP engaged in previously. Any such risk should not be borne by the consumer.
Second, as noted above, precedent establishes that conduct relief ancillary to structural relief may be appropriate in a merger case to address related competitive concerns, even when the conduct restriction may, in doing so, restrain some lawful conduct.(10) Such relief is especially appropriate where, as in this case, the merger creates uncertainties in a market already characterized by exercises of market power that may harm consumers and where the relief imposed will increase the likelihood that competition will be fully restored. See, e.g., Ford Motor Co., 405 U.S. at 578 (approving district court relief aimed at "nurtur[ing]" lost competition over an objection that the forces in the marketplace might suffice to restore it).(11)
Third, we believe that a narrow export-at-a-loss restriction like the one set forth above would effectively protect, and would in no way inhibit, free and vigorous competition.(12) We recognize that in 1995, Congress repealed an export ban on ANS crude oil, and we have no intention of undermining that repeal. However, as we have noted above, a consent agreement provision that narrowly prohibits exports (1) reasonably anticipated to be at a loss and (2) made "knowingly and intentionally . . . for the purpose of increasing the Spot Price of ANS crude oil in PADD V" is far removed from a general export ban, and would leave firms entirely free to engage in normal, competitive export activities both within PADD V and elsewhere. Further, although the provision that we propose would be narrow, we believe that it would be effective. The proviso requiring that sales be reasonably anticipated to be at a loss to be suspect would give both the parties and FTC enforcement staff an objective benchmark, while the intent and purpose requirements - requirements familiar to antitrust law, see, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 602 (1985) - would ensure that normal competitive conduct would be unaffected.
Under normal circumstances we favor structural rather than behavioral remedies. That approach underlies the substantial structural relief that the Commission unanimously requires in this case. However, we believe that in addition, the above-described export restriction is appropriate and warranted by the facts and circumstances of this case. Accordingly, we dissent from the majority decision not to include in the consent order a provision restraining in the future the manipulation of ANS crude supply to the West Coast that we believe occurred in the past.
1. The provision that we would favor is explained, and its terms defined, further below.
2. See FTC v. BP Amoco plc, Civ. No. 00-0416-SI (N.D.Cal. filed Feb. 4, 2000), Compl. ¶ 18.
3. See FTC v. BP Amoco plc, Compl. ¶¶ 18, 23; Points and Authorities in Support of FTC Motion for a Preliminary Injunction at 7, 9-11.
4. See id. at 7, n.13, 9-10 & nn. 16-18. (The public version of the FTC's Points and Authorities, with the parties' confidential information redacted, is available at <http://www.ftc.gov/os/bpamoco/index.htm>. All references in this statement to the memorandum supporting the complaint are to that version.)
5. See, e.g., H. Josef Hebert, "Company ties offer to halt exporting Alaska crude to merger" (Associated Press, March 24, 2000) (citing a letter from BP to U.S. Representative Don Young of Alaska); Associated Press, "BP Amoco Would End Alaska Exports" (March 24, 2000); Reuters, "BP Amoco, Phillips to halt Alaskan oil exports" (March 24, 2000) (citing a letter from BP to U.S. Representative George Miller of California).
6. "Sell for Export" and "Sale for Export" would be defined terms, referring to the sale, exchange, delivery or transfer of ANS crude oil for refining at a refinery located outside of PADD V, PROVIDED, however, that they would not include any sale, exchange, delivery or transfer of ANS crude oil in return for which ANS crude oil from another person is tendered or delivered to Respondents at a location in PADD V.
7. "Spot Price" would be a defined term, referring to the amount paid for a single delivery of crude oil as part of an arms-length transaction as reported by Reuters, Telerate or Platts.
8. FTC v. BP Amoco plc, Points and Authorities in Support of FTC Motion for a Preliminary Injunction at 10.
9. The provision that we advocate is not, of course, an export ban. It is, rather, a narrow restriction, targeted at exports that entail an extraordinary exercise of market power.
10. It is well established that the Commission has a broad remedial discretion that would, where appropriate, permit substantial further relief against conduct that does not independently violate the antitrust laws. See, e.g., Ford Motor Co., 405 U.S. at 575; E.I. du Pont de Nemours, 366 U.S. at 344. Courts have approved a variety of remedies against potentially lawful conduct as ancillary to structural relief, including future lawful participation in a market previously entered by means of unlawful merger, Ford Motor Co, 405 U.S. at 575-76, an injunction against further acquisitions, United States v. Grinnell Corp., 384 U.S. 563, 580 (1966), requirements of prior Commission approval for future joint ventures, mergers or acquisitions, Yamaha Motor Co. v. FTC, 657 F.2d 971, 984-85 (8th Cir. 1981); Luria Bros. & Co. v. FTC, 389 F.2d 847, 865-66 (3d Cir. 1968), and prohibitions of sales between joint venture partners, United States v. Alcan Aluminum Ltd., 605 F. Supp. 619 (W.D. Ky. 1985).
11. The majority emphasizes that "it is not the Commission's mandate to use merger enforcement as a vehicle for imposing its own notions of how competition may be 'improved.'" We of course agree that merger enforcement is not an appropriate vehicle for "improving" markets in ways unrelated to the merger. But as the precedents cited in footnote 10, above, exemplify, it is equally fundamental that mergers must be viewed, and the competitive concerns that they raise addressed, in the practical and dynamic context of the markets in which they occur. See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 321-23 (1962).
12. The majority expresses concern that our provision would not "apply equally to all producers" of ANS crude oil. It is true that our provision would place restrictions on the two parties before us, who will also be the two largest producers of ANS crude oil, that would not apply to smaller competitors. But our narrow restriction would not prevent them from competing vigorously -- only from engaging in a practice that the Commission's complaint identified as an exercise of market power that distorted competition. Because the mandate of this agency is to protect competition, not the individual interests of particular competitors, we are not concerned about inhibiting BP and Phillips' ability to exercise market power by manipulating West Coast prices.