[Federal Register Volume 66, Number 248 (Thursday, December 27, 2001)]
[Notices]
[Pages 66899-66902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-31779]


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FEDERAL TRADE COMMISSION

[File No. 011 0141]


Valero Energy Corporation, et al.; Analysis to Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint that accompanies the consent agreement and the terms of the 
consent order--embodied in the consent agreement--that would settle 
these allegations.

DATES: Comments must be received on or before January 18, 2002.

ADDRESSES: Comments filed in paper form should be directed to: FTC/
Office of the Secretary, Room 159-H, 600 Pennsylvania Avenue, N.W., 
Washington, D.C. 20580. Comments filed in electronic form should be 
directed to: consent [email protected], as prescribed below.

FOR FURTHER INFORMATION CONTACT: Peter Richman, FTC, Bureau of 
Competition, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580, 
(202) 326-2563.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal 
Trade Commission Act, 38 Stat, 721, 15 U.S.C. 46(f), and Section 2.34 
of the Commission's Rules of Practice, 16 CFR 2.34, notice is hereby 
given that the above-captioned consent agreement containing a consent 
order to cease and desist, having been filed with and accepted, subject 
to final approval, by the Commission, has been placed on the public 
record for a period of thirty (30) days. The following Analysis to Aid 
Public Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for December 18, 2001), on the World Wide Web, at http://www.ftc.gov/os/2001/12/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, N.W., Washington, 
D.C. 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. Comments filed in paper form should 
be directed to: FTC/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, N.W., Washington, D.C. 20580. If a comment 
contains nonpublic information, it must be filed in paper form, and the 
first page of the document must be clearly labeled ``condfidential.'' 
Comments that do not contain any nonpublic information may instead be 
filed in electronic form (in ASCII format, WordPerfect, or Microsoft 
Word) as part of or as an attachment to email messages directed to the 
following email box: consent [email protected]. Such comments will be 
considered by the Commission and will be available for inspection and 
copying at its principal office in accordance with Section 
4.9(b)(6)(ii) of the Commission's Rules of Practice, 16 CFR 
4.9(b)(6)(ii)).

Analysis of Proposed Consent Order to aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'' or ``FTC'') has issued 
a complaint (``Complaint'') alleging that the proposed merger of Valero 
Energy Corporation (``Valero'') and Ultramar Diamond Shamrock 
Corporation Corporation (``Ultramar'') (collectively ``Respondents'') 
would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, 
and Section 5 of the Federal Trade Commission Act, as amended, 15 
U.S.C. 45, and has entered into an agreement containing consent orders 
(``Agreement Containing Consent Orders'') pursuant to which Respondents 
agree to be bound by a proposed consent order that requires divestiture 
of certain assets (``Proposed Consent Order'') and a hold separate 
order that requires Respondents to hold separate and maintain certain 
assets pending divestiture (``Hold Separate Order''). The Proposed 
Order remedies the likely anticompetitive effects arising from 
Respondent's proposed merger, as alleged in the Complaint. The Hold 
Separate Order preserve competition pending divestiture.

II. Description of the Parties and the Transaction

    Valero, headquartered in San Antonio, Texas, is an independent 
domestic refining company. Valero is engaged in national refining, 
transportation, and marketing of petroleum products and related 
petrochemical products. Valero reported 2000 net income of $611 million 
on revenues of nearly $15 billion. Valero's revenues are generated 
almost exclusively in the United States from seven fuel refineries.
    Ultramar is an independent North American refining and marketing 
company also headquartered in San Antonio, Texas. It is primarily 
engaged in the refining, marketing and transportation of petroleum 
products and petrochemicals. Ultramar reported 2000 net earnings of 
$444 million on operating of $17.1 billion. 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 over 5,000 
branded retail stations.
    Pursuant to and agreement an plan of merger dated May 6, 2001, 
Valero proposed to merge with Ultramar in a transaction valued at 
approximately $6 billion. Valero intends to acquire 100% of the voting 
stock of Ultramar. As a result of the merger, Valero will be one of the 
largest refiners in the United States.

III. The Investigation and the Compliant

    The Complaint alleges that the merger of Valero and Ultramar would 
violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and 
Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 
45, by substantially lessening competition in each of the following 
markets: (1) the refining and bulk supply of CARB 2 and CARD 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.
    To remedy the alleged anticompetitive effects of the merger, the 
Proposed Order requires Respondents to divest the Ultramar Golden Eagle 
refinery located in Avon,

[[Page 66900]]

California. Along with refinery assets, Respondents will divest bulk 
gasoline supply contracts and 70 Ultramar Northern California retail 
service stations. This will assure the new entrant a consistent CARB 
gasoline demand to assure that the entrant possesses the same 
incentives to produce CARB gasoline that Ultramar had pre-merger.
    The Commission's decision to issue the Complaint and enter into the 
Agreement Containing Consent Orders was made after an extensive 
investigation in which the Commission examined competition and the 
likely effects of the merger in the markets alleged in the Complaint 
and in several other markets, including markets for asphalt refining 
and pipeline transportation, and terminaling or marketing of gasoline 
or other fuels in sections of the country other than those alleged in 
the Complaint. The Commission has concluded that the merger is unlikely 
to reduce competition significantly in markets other than those alleged 
in the Complaint.
    The Commission conducted the investigation leading to the Complaint 
in collaboration with the Attorneys General of the States of California 
and Oregon. As part of this joint effort, Respondents have entered into 
State Decrees with these States settling charges that the merger would 
violate both state and federal antitrust laws.
    The Complaint alleges that the merger would violate the antitrust 
laws in four product and geographic markets, each of which is discussed 
below. The analysis applied in each market generally follows the 
analysis set forth in the FTC and U.S. Dep't of Justice Horizontal 
Merger Guidelines (1997) (``Merger Guidelines'').
Count I--Refining Bulk Supply of CARB 2 and CARB 3 Gasoline for Sale in 
Northern California
    Valero and Ultramar compete in the refining and bulk supply of CARB 
gasoline for sale in Northern California.\1\ Refining and bulk supply 
of CARB 2 and CARB 3 gasoline are relevant products markets. CARB 
gasoline meets the specifications of the California Air Resources Board 
(``CARB''). CARB 2 automotive gasoline meets the current Phase 2 
specifications in effect since 1996 and is the only gasoline that can 
be sold to California gasoline consumers. CARB 3 automotive gasoline 
meets the proposed Phase 3 specifications that are scheduled to go into 
effect on January 1, 2003. After that date, CARB 3 will be the only 
gasoline that can be sold to California gasoline consumers. Thus, there 
are no substitutes for CARB 2 gasoline today and there will be no 
substitutes for CARB 3 gasoline. In the current investigation and in 
past decisions, the Commission concluded that the refining and bulk 
supply of CARB 2 gasoline is a relevant market.\2\
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    \1\ A bulk supply market consists of firms that have the ability 
to deliver large quantities of gasoline on a regular and continuing 
basis, such as pipelines or local refineries.
    \2\ Shell Oil Co., C-3803 (1998); Exxon, C-3907 (2000); 
(Chevron), C-4023 (Proposed Order 2001).
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    The North Coast (Northern California and Northwest refineries) 
constitutes a relevant geographic market for the refining and bulk 
supply of CARB 2 and CARB 3 gasoline for sale in Northern California. 
The North Coast refiners can profitably raise prices in Northern 
California by a small but significant and nontransitory amount without 
losing significant sales to other bulk suppliers. Five California 
refiners (Chevron Texaco (Chevron), Equilon (Shell/Texaco), Phillips 
(Tosco), Ultramar, and Valero) supply more than 94% of the CARB 
gasoline consumed in Northern California; Kern Oil (Bakersfield, 
California) and Tesoro (Anacortes, Washington) supply virtually all the 
remainder during normal market operations. The next closest refineries, 
located in the Los Angeles area, are unlikely to supply CARB gasoline 
to Northern California in response to a small but significant and 
nontransitory increase in price because of the transportation costs to 
ship from Southern California.
    The North Coast market would be highly concentrated following the 
proposed merger.\3\ Based on current CARB refining capacity, the 
proposed merger would increase concentration for the refining of CARB 2 
gasoline by Northern California and Northwest refineries by more than 
750 points to an HHI level above 2,700. Based on forecasted CARB 3 
refining capacity, the proposed merger would increase concentration for 
the refining and bulk supply of CARB 3 gasoline by Northern California 
and Northwest refineries by more than 1,050 points to an HHI level 
above 3,050.
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    \3\ The Commission measures market concentration using the 
Herfindahl-Hirschman Index (``HHI''), which is calculated as the sum 
to the squares of the shares of all firms in the market. FTC and 
Department of Justice Horizontal Merger Guidelines (``Merger 
Guidelines'') Sec. 1.5. Markets with HHIs between 1000 and 1800 are 
deemed ``moderately concentrated,'' and markets with HHIs exceeding 
1800 are deemed ``highly concentrated.'' Merger Guidelines 
Sec. 1.51.
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    Entry is difficult and would not be timely, likely, or sufficient 
to prevent anticompetitive effects arising from the proposed merger. 
Building a new refinery is extremely unlikely due to the severe 
environmental constraints and substantial sunk costs. Imports of CARB 
gasoline from outside California are unlikely because of substantial 
import barriers, including (1) geographic isolation from potential 
outside sources; (2) cost and difficulty of producing CARB gasoline; 
(3) lack of potential customers because of the extensive integration of 
refining and marketing that has eliminated most independent gasoline 
marketers and retailers; and (4) price risk stemming from spot market 
volatility in Northern California.
    The efficiency claims of the Respondents, to the extent they relate 
to these markets, are not cognizable under the Merger Guidelines, are 
small compared to the magnitude of the potential harm, and would not 
restore the competition lost by the merger even if the efficiencies 
were achieved.
    The Complaint charges that the proposed merger would likely 
substantially reduce competition in refining the bulk supply of CARB 
gasoline for sale in Northern California, thereby increasing wholesale 
prices of CARB gasoline by (1) eliminating direct competition between 
Valero and Ultramar; (2) increasing the likelihood that the combined 
company will unilaterally raise prices, and (3) increasing the ability 
and likelihood of coordinated interaction between the combined company 
and its competitors in Northern California. The proposed merger would 
create a highly concentrated market in Northern California. The 
combined company would control between 40 and 45% of CARB gasoline 
refining capacity in Northern California. Under the Merger Guidelines, 
these figures trigger a presumption that ``the merger will create or 
enhance market power or facilities its exercise * * *'' Merger 
Guidelines Sec. 1.51(c). These anticompetitive effects could result 
either from unilateral action by the combined firm or from coordinated 
interaction among the remaining refiners. Valero's post-merger market 
share supports a presumption under the Merger Guidelines that it would 
have the ability and incentive to unilaterally reduce supply in 
Northern California and raise prices. It could do this in a variety of 
ways, including reducing or eliminating capacity expansions at the Bay 
Area refineries, running the refineries at below capacity, or exporting 
gasoline out of the market.
    The merger increases the likelihood of coordinate interaction in 
Northern California by reducing the number of

[[Page 66901]]

significant refiners in the market from five to four. The market 
exhibits characteristics that are conducive to coordinated interaction, 
including (1) homogenous product; (2) small number of market 
participants; (3) high concentration; (4) recognition by participants 
that individual output decisions impact the market; (5) difficult entry 
conditions that insulate the market from outside supply; (6) vertical 
integration that eliminates potential low-cost competitors and creates 
a finite and identifiable collusive group; and (7) industry practices 
and conditions that allow the collusive group to easily detect and 
punish cheating on the tacit agreement.
    The merger could raise the costs of CARB gasoline to Northern 
California consumers substantially; even a one cent per gallon price 
increase would cost Northern California consumers more than $60 million 
annually. To remedy the harm, the Proposed Order requires the 
Respondents to divest Ultramar's Golden Eagle refinery, which refines 
CARB gasoline, and 70 Ultramar retail service stations supplied from 
the Golden Eagle refinery, as described more fully below. This 
divestiture will eliminate the refining and bulk supply overlap in the 
North Coast market otherwise presented by this merger.
Count II--Refining and Bulk Supply of CARB Phase 2 and CARB Phase 3 
Gasoline for Sale in California
    Valero and Ultramar compete in refining and bulk supply of CARB 
gasoline for sale in California. As explained in Count I, only CARB 
gasoline can be sold legally in California. Refining and bulk supply of 
CARB 2 and CARB 3 gasoline are relevant product markets.
    The West Coast constitutes a relevant antitrust geographic market 
for refining and bulk supply of CARB 2 and CARB 3 gasoline for sale in 
California. The West Coast refiners can profitably raise prices by a 
small but significant and nontransitory amount without losing 
significant sales to other refiners. Seven California refiners (BP 
(Arco), Chevron Texaco (Chevron), Equilon (Shell/Texaco), ExxonMobil, 
Phillips (Tosco), Ultramar, and Valero) supply more than 97% of the 
CARB gasoline consumed in California; Kern Oil (Bakersfield, 
California) and Tesoro (Anacortes, Washington) supply virtually all the 
remainder during normal market operations.
    The seven refiner-marketers also account for more than 95% if 
retail gasoline sales in California through their branded retail 
stations. One effect of the close integration between refining and 
marketing in California is that refiners outside the West Coast cannot 
easily find outlets for imported cargoes of CARB gasoline, since nearly 
all the outlets are controlled by incumbent refiner-marketers. 
Likewise, the extensive integration of refining, marketing and bulk 
storage makes it more difficult for the few non-integrated marketers to 
turn to imports as a source of supply, since the few remaining 
independent marketers lack the scale to import cargoes economically and 
thus must rely on California refiners for their usual supply.
    Other than the California refineries and one Washington refinery, 
no other refineries regularly produce CARB gasoline in significant 
quantities. The next closest refineries, located in the U.S. Virgin 
Islands, Texas and Louisiana, do not supply CARB gasoline to California 
except during significant price spikes caused by supply disruptions at 
California refineries. These refineries are unlikely to supply CARB 
gasoline to California except during significant price spikes caused by 
supply disruptions at California refineries. These refineries are 
unlikely to supply CARB gasoline to California in response to a small 
but significant and nontransitory increase in price due to (1) 
transportation costs from other refineries; (2) limited access to 
marine and bulk storage facilities; (3) lack of potential customers 
because of the extensive integration of refining and marketing that has 
eliminated most independent gasoline marketers and retailers; and (4) 
price risk stemming from spot market volatility in California.
    The West Coast market for the refining and bulk supply of CARB 2 
gasoline would be at the upper end of the moderately concentrated range 
following the proposed merger. Based on current refining capacity, the 
proposed merger would increase concentration for the refining of CARB 2 
gasoline by California and Washington refineries by more than 325 
points to an HHI level above 1,750. Based on forecasted CARB 3 refining 
capacity, the proposed merger would result in a highly concentrated 
market, increasing concentration for the refining and bulk supply of 
CARB 3 gasoline by California and Washington refineries by more than 
390 points to an HHI level above 1,850.
    Entry is difficult and would not be timely, likely, or sufficient 
to prevent anticompetitive effects arising from the proposed merger. 
Building a new refinery is unlikely due to the severe environmental 
constraints and substantial sunk costs. Imports of CARB gasoline from 
outside California are unlikely because of the substantial import 
barriers listed above.
    The efficiency claims of the Respondents, to the extent they relate 
to these markets, are not cognizable under the Merger Guidelines, are 
small compared to the magnitude of the potential harm, and would not 
restore the competition lost by the merger even if the efficiencies 
were achieved.
    The Complaint charges that the proposed merger would likely reduce 
competition in refining and bulk supply of CARB gasoline for sale in 
California, thereby increasing wholesale prices of CARB gasoline 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 competitors in California. This 
market exhibits the same characteristics conducive to coordinated 
interaction identified in Count I. The proposed merger reduces the 
number of CARB gasoline refiners in California and increases 
concentration, thereby increasing the likelihood of coordination.
    The merger could raise the costs of CARB gasoline to all California 
consumers substantially; even a one cent per gallon price increase 
would cost California consumers more than $150 million annually. To 
remedy the harm, the Proposed Order requires the Respondents to divest 
the refining and marketing assets identified above in Count I. This 
divestiture will eliminate the refining and bulk supply overlap in the 
West Coast market otherwise presented by this merger.

IV. Resolution of the Competitive Concerns

A. CARB Gasoline Refining and Bulk Supply
    The Commission has provisionally entered into the Agreement 
Containing Consent Orders with Valero and Ultramar in settlement of the 
Complaint. The Agreement Containing Consent Orders contemplates that 
the Commission would issue the Complaint and enter the Proposed Order 
and the Hold Separate Order for the divestiture of certain assets 
described below. The Commission will appoint R. Shermer & Company, Inc. 
as the hold separate trustee.
    To remedy the lessening of competition in refining and bulk supply 
of CARB 2 and CARB 3 gasoline alleged in Counts I and II of the 
Complaint, Paragraph II of the Proposed Order requires Respondents to 
divest Ultramar's Golden Eagle refinery and 70 Ultramar-owned and 
operated gas

[[Page 66902]]

stations supplied from the Golden Eagle refinery to an acquirer 
approved by the Commission. (para. II.A.) The retail divestiture is 
ordered to maintain the likelihood that the owner of the Golden Eagle 
refinery will have incentives to produce CARB gasoline and other 
petroleum products equivalent to Ultramar's pre-merger incentives. The 
divestiture of Ultramar's Golden Eagle refinery, with associated 
Ultramar retail assets, will not significantly reduce the amount of 
gasoline available to non-integrated marketers, since the refinery will 
likely continue to produce CARB gasoline and other products and will 
need outlets for its sale.
    Divestiture of the Golden Eagle refinery will effectively restore 
the competitive status quo ante in both markets. Valero and Ultramar 
are the only major refiners in California with excess capacity above 
their direct marketing needs. This excess (or ``swing'') capacity helps 
to dampen price spikes during shortages resulting from refinery 
shutdowns. Elimination of this swing production would lead to greater 
and longer price spikes during refinery outages. The divestiture will 
eliminate the combined company'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, in Northern California, they compete 
directly for this business. These unbranded marketers provide lower-
cost competition to the branded refiner-marketers. The divestiture will 
insure that the remaining independent marketers have two vigorous 
competitors for their business, thus helping them to survive and 
continue to provide a lower-cost alternative for consumers. This 
competition, in turn, will increase the incentive for Valero and the 
acquirer to supply more CARB gasoline, thus, increasing swing capacity. 
The divestiture will complicate the ability of the Northern California 
refiners to coordinate their production because there will be more 
refiners than there would be without the divestiture. Valero and the 
acquirer will likely have different incentives than the integrated 
refiner-marketers and may be less willing to coordinate output 
decisions with the refiner-marketers. Although the divestiture will 
have the most direct effect in Northern California, it will also help 
competition in California as a whole; since supplies are longer in 
Northern California, CARB gasoline typically flows north to south. 
Maintaining production in Northern California will therefore result in 
more product availability throughout the state.
    In considering an application to divest the Ultramar Golden Eagle 
refinery and associated marketing assets to an acquirer, the Commission 
will consider the acquirer's ability and incentive to invest and 
compete in the businesses in which Ultramar was engaged in California. 
The Commission will consider, inter alia, whether the acquirer has the 
business experience, technical judgment and available capital to 
continue to invest in the refinery in order to maintain CARB gasoline 
production even in the event of changing environmental regulation.
B. Other Terms
    Paragraphs III-VII of the Proposed Order detail certain general 
provisions. Pursuant to Paragraph III, if Respondents fail to comply 
with the divestiture ordered in Paragraph II, the Commission may 
appoint a trustee to effectuate the divestiture of the Golden Eagle 
Refinery and the 70 retail stations, or substitute a package containing 
Ultramar's two California refineries and all of Ultramar's company-
operated retail stations. Paragraph IV requires the Respondents to 
provide the Commission with a report of compliance with the Proposed 
Order every sixty days until the divestitures are completed.
    Paragraph V provides for notification to the Commission in the 
event of any changes in the corporate Respondents. Paragraph VI 
requires that Respondents provide the Commission with access to their 
facilities and employees for the purposes of determining or securing 
compliance with the Proposed Order. Finally, to avoid conflicts between 
the Proposed Order and the State consent decrees, Paragraph VII 
provides that if a State fails to approve any of the divestitures 
contemplated by the Proposed Order, then the period of time required 
under the Proposed Order for such divestiture shall be extended for 
sixty days.

V. Opportunity for Public Comment

    The Proposed Order has been placed on the public record for thirty 
(30) days for receipt of comments by interested persons. The 
Commission, pursuant to a change in its Rules of Practice, has also 
issued its Complaint in this matter, as well as a Hold Separate Order. 
Comments received during this thirty day comment period will become 
part of the public record. After thirty (30) days, the Commission will 
again review the Proposed Order and the comments received and will 
decide whether it should withdraw from the Proposed Order or make final 
the Proposed Order.
    By accepting the Proposed 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 Order, including the proposed 
divestitures, and to aid the Commission in its determination of whether 
it should make final the Proposed Order contained in the agreement. 
This analysis is not intended to constitute an official interpretation 
of the Proposed Order, nor is it intended to modify the terms of the 
Proposed Order in any way.

    By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 01-31779 Filed 12-26-01; 8:45 am]
BILLING CODE 6750-01-M