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entitled 'Energy Markets: Analysis of More Past Mergers Could Enhance
Federal Trade Commission's Efforts to Maintain Competition in the
Petroleum Industry' which was released on September 26, 2008.
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
September 2008:
Energy Markets:
Analysis of More Past Mergers Could Enhance Federal Trade Commission's
Efforts to Maintain Competition in the Petroleum Industry:
GAO-08-1082:
GAO Highlights:
Highlights of GAO-08-1082, a report to congressional requesters.
Why GAO Did This Study:
During the late 1990s, many petroleum companies merged to stay
profitable while crude oil prices were low, and in recent years mergers
have continued. Congress and others have concerns about the impact
mergers might be having on competition in U.S. petroleum markets. The
Federal Trade Commission (FTC) has the authority to maintain
competition in the petroleum industry and reviews proposed mergers to
determine whether they are likely to diminish competition or increase
prices, among other things. GAO was asked to examine (1) mergers in the
U.S. petroleum industry and changes in market concentration since 2000
and (2) the steps FTC uses to maintain competition in the U.S.
petroleum industry, and the roles other federal and state agencies play
in monitoring petroleum industry markets. In conducting this study, GAO
worked with petroleum industry experts to delineate regional markets
and to develop estimates of refinery gasoline production capacity in
order to calculate market concentration. GAO used public and private
data as well as interviews for its analyses.
What GAO Found:
More than 1,000 U.S. mergers occurred in the petroleum industry between
2000 and 2007, mostly between firms involved in crude oil exploration
and production. According to experts and industry officials, mergers in
this segment were generally driven by the challenges associated with
producing oil in extreme physical environments, such as deepwater, as
well as increasing concerns about competition with national oil
companies and access to oil reserves in regions of relative political
instability. Industry officials from the segments of the petroleum
industry that transport, refine, and sell petroleum products reported
that mergers were generally driven by the desire for greater efficiency
and cost savings. Despite these gains, mergers have the potential to
enhance a firm’s ability to exercise “market power,” which potentially
allows it to raise prices without being undercut by other firms. GAO
measured market concentration with an index that FTC uses, where market
regions with few, large firms are considered to be highly concentrated
and have a greater potential for market power. Conversely, market
regions with many smaller firms are considered to have low or moderate
concentration and generally have less potential for firms to exercise
market power. GAO found that market concentration changed little but
varied by industry segment and market region. GAO found that market
concentration among firms involved in crude oil exploration and
production was low and stable between 2000 and 2006, while
concentration among refiners was generally moderate across those years.
Regarding wholesale gasoline suppliers on a state-by-state basis, 35
states were moderately concentrated in their number of wholesale
gasoline suppliers in 2007, and this number was fairly stable from
2000. GAO found that the following 8 states had highly concentrated
wholesale gasoline supplier markets in 2007: Alaska, Hawaii, Indiana,
Kentucky, Michigan, North Dakota, Ohio, and Pennsylvania.
While FTC reviews evidence and considers a number of competitive
factors to predict a merger’s potential effects on competition in its
analyses of proposed mergers, it does not regularly look back at past
merger decisions to assess the actual effects of the merger on
competition or prices after the merger has been completed. Although
these reviews can be resource intensive, experts, industry
participants, and FTC agree that regular retrospective reviews would
allow the agency to better inform future merger reviews and to better
measure its success in maintaining competition. In addition to FTC’s
efforts in reviewing proposed mergers, other federal agencies,
including FTC, and some states also monitor aspects of petroleum
industry markets. For example, the Federal Energy Regulatory Commission
monitors petroleum product pipeline markets and regulates pipeline
rates accordingly.
What GAO Recommends:
To enhance FTC’s effectiveness in maintaining competition in the U.S.
petroleum industry, GAO is recommending that FTC (1) conduct more
regular analyses of past petroleum industry mergers and (2) develop
risk-based guidelines to determine when to conduct them. FTC reviewed a
draft of this report and said that the recommendations were consistent
with its self-evaluation initiative, and that it would consider them as
part of that process.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1082]. For more
information, contact Mark Gaffigan at gaffiganm@gao.gov, (202) 512-3841
or Tom McCool at mccoolt@gao.gov, (202) 512-2642.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
More than 1,000 U.S. Mergers Occurred in the Petroleum Industry between
2000 and 2007, and Market Concentration Changed Little but Varied by
Market Region and Industry Segment:
FTC Primarily Reviews Proposed Mergers to Maintain Petroleum Industry
Competition, While FTC and Other Agencies Also Have Roles in Monitoring
Petroleum Industry Markets:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Defining Geographic Refinery Markets:
Appendix III: Comments from the Federal Trade Commission:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Federal Antitrust Statutes--Merger Enforcement:
Table 2: U.S. Petroleum Mergers Valued at over $10 Billion (2000-2007):
Table 3: Top U.S. Midstream Petroleum Mergers, by Value (2000-2007):
Table 4: Top U.S. Downstream Petroleum Mergers, by Value (2000-2007):
Table 5: FTC's Concentration Guidelines for Initial Analysis of
Proposed Mergers:
Table 6: Other Federal Agencies That Monitor Petroleum Industry Markets
and Examples of Their Roles:
Figures:
Figure 1: FTC's Premerger Review Program:
Figure 2: U.S. Petroleum Mergers (2000-2006):
Figure 3: U.S Petroleum Mergers, by Transaction Value (2000-2007):
Figure 4: U.S. Petroleum Mergers, by Segment (2000-2007):
Figure 5: Percentage of Global Upstream Petroleum Mergers, by Region or
Country (2000-2007):
Figure 6: U.S. Midstream Petroleum Mergers (2000-2006):
Figure 7: U.S. Downstream Petroleum Mergers, by Subsegment (2000-2007):
Figure 8: Upstream Market Concentration, Based on Worldwide Crude
Production (2000-2006):
Figure 9: Changes in U.S. Regional Refinery Concentration (2000 to
2007):
Figure 10: Number of States with Unconcentrated, Moderately
Concentrated, or Highly Concentrated Wholesale Gasoline Supply Markets
(2000-2007):
Figure 11: Wholesale Gasoline Supplier Concentration Levels (2000 and
2007):
Abbreviations:
CFTC: Commodity Futures Trading Commission:
CRS: Congressional Research Service:
DOJ: Department of Justice:
EIA: Energy Information Administration:
EPA: Environmental Protection Agency:
FCC: fluid catalytic cracker:
FERC: Federal Energy Regulatory Commission:
FTC: Federal Trade Commission:
GPRA: Government Performance and Results Act of 1993:
HHI: Herfindahl-Hirschman Index:
NAAG: National Association of Attorneys General:
OPIS: Oil Price Information Service:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
September 25, 2008:
The Honorable Herb Kohl:
Chairman:
Subcommittee on Antitrust, Competition Policy and Consumer Rights:
Committee on the Judiciary:
United States Senate:
The Honorable Henry Waxman:
Chairman:
Committee on Oversight and Government Reform:
House of Representatives:
The Honorable Charles E. Schumer:
Chairman Joint:
Economic Committee United States Congress:
The Honorable Dianne Feinstein:
United States Senate:
During the late 1990s, a wave of mergers swept through the petroleum
industry as a number of companies combined their operations to stay
profitable while crude oil prices were low. During this time, large oil
companies such as Exxon and Mobil merged, as did British Petroleum and
Amoco, leaving fewer major petroleum industry players. In recent years,
petroleum companies have continued to merge, despite strong profits.
Because the petroleum industry plays a critical role in providing the
transportation fuel that moves people and products throughout the
United States, and with oil prices reaching record levels, Congress and
others have questioned whether more recent mergers have allowed
petroleum companies to control too large a share of the markets in
which they participate, thus reducing their incentive to provide
competitively priced fuel.
The Federal Trade Commission (FTC) and the Department of Justice (DOJ)
have the authority to enforce federal antitrust laws to generally
maintain competition in all industries, including the petroleum
industry. To that end, FTC and DOJ generally review proposed mergers
that are likely to impact U.S. markets to determine whether they are
likely to diminish competition or increase prices. FTC has lead
responsibility for federal reviews of petroleum industry mergers, and
has said publicly that it scrutinizes mergers in the energy industry
more closely than those in any other industry.[Footnote 1] In reviewing
a proposed merger, FTC generally looks at the participants' market
shares--the percentage of the same products that companies supply to a
particular geographic market--and other factors that affect
competition. FTC uses the market shares to develop an index of market
concentration, where firms with large market shares are weighted more
heavily. Market areas with a number of small firms would be
unconcentrated or moderately concentrated, while areas with fewer large
firms would be highly concentrated. Other things being equal, mergers
that cause a market area to become highly concentrated potentially
allow one firm, or a small group of firms, to exercise "market power"
and control the market to increase consumer prices above competitive
levels. On the other hand, mergers that lead to a more highly
concentrated market might also improve efficiency and reduce costs, and
firms may pass these savings on to consumers in the form of lower
prices. Federal antitrust authorities try to predict the impact of a
merger on competition, including the impact on prices, before allowing
the merger to take place. After a merger is completed, an agency may
review past merger decisions to monitor how well the agency achieved
its goals.[Footnote 2] In fact, federal government standards for
internal control require federal agencies, including FTC and others, to
establish goals and measure performance to improve management and
program effectiveness. [Footnote 3]
Antitrust enforcement agencies generally examine concentration in the
petroleum industry by first defining the segment of the industry
involved and then defining the geographic region where this portion of
the industry operates. More specifically, the industry is divided into
three segments: the crude oil exploration and production segment
(upstream), the refining and marketing segment (downstream), and a
segment that consists of the infrastructure used to transport crude oil
and petroleum products to customers (midstream). Some companies operate
in all three segments of the petroleum industry and are deemed "fully
vertically integrated," while others operate in only one or two of the
industry segments and may be referred to as "independent," among other
things. Chevron is an example of a fully integrated petroleum company,
with operations in all three segments, while Wawa--the convenience
store chain--is an example of a firm operating in only one market
segment as a downstream independent fuel retailer. A proposed merger
between companies in the same industry segment and geographic market
region would likely spur FTC to look at each company's market shares
and other competitive factors in that geographic market region.
In this context, we were asked to examine (1) mergers in the U.S.
petroleum industry, and changes in market concentration since 2000, and
(2) the steps that FTC uses to maintain competition in the U.S.
petroleum industry, and the roles other federal and state agencies play
in monitoring petroleum industry markets. GAO will examine the
potential effect of mergers and market concentration on wholesale
gasoline prices in a forthcoming report.
To examine U.S. mergers since 2000, we purchased and analyzed petroleum
industry merger data from John S. Herold, Inc.[Footnote 4] (J.S.
Herold), and interviewed a number of industry experts and market
participants. U.S. mergers included mergers that had a reported
location in the United States or were diversified across multiple
countries, but we had reasonable evidence to believe included a United
States location. We decided this definition coincided with mergers that
would affect U.S. markets and, hence, that FTC could potentially
review. We also limited our analysis to mergers (1) that occurred
between January 2000 and May 2007, (2) that had a transaction value of
$10 million or more, and (3) whose key asset was not related to natural
gas or other natural gas products. In examining changes in market
concentration, we focused on the upstream crude oil production segment
and two downstream subsegments: gasoline refiners and wholesale
gasoline suppliers. We did not examine changes in concentration in the
midstream segment because of a lack of available data. We purchased
data on upstream crude oil production from the Oil and Gas Journal, and
used data from the Department of Energy's Energy Information
Administration (EIA) on downstream gasoline refining and wholesale
gasoline suppliers. We worked with petroleum industry experts to define
geographic market regions in order to calculate market concentration in
these segments of the industry. We calculated changes in concentration
in a single global market for upstream crude oil producers, seven U.S.
"spot market" regions for gasoline refiners, and U.S. states for
wholesale gasoline suppliers. The markets we defined were intended to
provide an overview of petroleum industry concentration and would not,
in many cases, correspond to geographic markets that FTC might use to
inform its judgments about anticompetitive market conditions for the
purposes of enforcement. We assessed the reliability of the data we
collected and found it sufficiently reliable for the purposes of this
report. To examine FTC's steps for maintaining competition and other
federal and state agencies' roles, we interviewed FTC staff; reviewed
official agency documents; and interviewed experts in the fields of
antitrust and industrial organization, as well as petroleum industry
officials. In addition, we reviewed documents and interviewed officials
from other federal and state agencies that have roles in monitoring
petroleum industry markets, such as the Federal Energy Regulatory
Commission (FERC) and the Commodity Futures Trading Commission (CFTC),
who are involved in monitoring pipeline and futures markets,
respectively. See appendix I for more detailed information on our
objectives, scope, and methodology. We conducted this performance audit
from March 2007 to September 2008 in accordance with generally accepted
government auditing standards. Those standards require that we plan and
perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
Results in Brief:
More than 1,000 U.S. mergers occurred in the petroleum industry between
2000 and 2007, and we found that market concentration changed little
but varied by industry segment and market region. Most of the mergers,
as well as the mergers of greatest value, occurred in the upstream
segment, including 6 mergers valued at more than $10 billion each.
According to many of the experts and industry officials with whom we
spoke, key drivers of upstream mergers included challenges associated
with exploring and producing oil in extreme physical environments, such
as deepwater, as well as concerns about competition with national oil
companies and access to oil reserves in regions of political
instability. Petroleum industry experts with whom we spoke noted that
mergers can better position oil companies to successfully explore in
extreme environments and compete in the global oil market, as well as
diversify their exploration interests across multiple countries or
regions. U.S. mergers in the midstream and downstream segments were
less numerous and had lower overall transaction values than the
upstream segment. Mergers in these segments were reportedly driven by
the desire to improve efficiencies and reduce costs, particularly in
the pipeline, refining, and marketing subsegments. Despite the gains
that can result from mergers in the petroleum industry, officials and
experts reported that mergers have the potential to allow companies to
exercise market power and raise consumer prices. Regarding industry
market concentration, concentration levels in the crude oil producing
segment of the industry remained relatively low and stable between 2000
and 2006, while concentration among refiners in several regions
throughout the United States also changed little but was generally
moderate. Regarding wholesale gasoline suppliers on a state-by-state
basis, 35 states were moderately concentrated in their number of
wholesale gasoline suppliers in 2007, and this number was fairly stable
from 2000. The following 8 states had a highly concentrated number of
wholesale gasoline suppliers in 2007: Alaska, Hawaii, Indiana,
Kentucky, Michigan, North Dakota, Ohio, and Pennsylvania.
FTC primarily reviews proposed mergers to maintain petroleum industry
competition, while other federal and state agencies, including FTC,
have roles in monitoring petroleum industry markets. While FTC reviews
evidence and considers a number of competitive factors to predict a
merger's potential effects on competition in its analysis of proposed
mergers, it does not regularly look back at past merger decisions to
assess the actual effects of the merger on prices--there have been only
three such reviews, despite the many mergers that occurred in the
petroleum industry between 2000 and 2007. Although these reviews can be
resource intensive, experts, industry participants, and FTC agree that
regular retrospective reviews would allow the agency to better inform
future merger reviews and better measure its success in maintaining
competition. However, FTC does not plan to develop guidelines for more
frequently conducting these retrospective reviews and told us it has
limited resources to devote to such reviews. FTC also performs
supplemental activities to monitor petroleum industry markets in
general--not necessarily related to mergers. For example, FTC staff
told us the agency monitors wholesale gasoline prices in some locations
to identify and investigate unusual price spikes. Other federal
agencies also monitor petroleum industry markets; for example, FERC
monitors petroleum product pipeline markets and regulates pipeline
rates accordingly. Some states also monitor petroleum industry markets,
although they generally do so in response to complaints from consumers,
and the level of monitoring varies from state to state. Some states
actively monitor market competition and fuel prices on a continual
basis, while other states do not monitor the petroleum industry at all.
To enhance FTC's effectiveness in maintaining competition in the U.S.
petroleum industry and make efficient use of FTC's resources, we are
recommending in this report that FTC (1) conduct more regular
retrospective analyses of past petroleum industry mergers and (2)
develop risk-based guidelines to determine when to conduct these
analyses given its limited resources. In general, the FTC Chairman
commented that the recommendations in this report were consistent with
the goals outlined in a current self-evaluation initiative, and that
the agency would consider our recommendations to conduct more regular
retrospective analyses of petroleum industry mergers using a risk-based
approach along with other recommendations resulting from this
initiative.
Background:
In 2007, the United States produced an average of 8.5 million barrels
of petroleum per day, or about 10 percent of the global average
production of 84.4 million barrels per day. As a percentage of total
world consumption, the United States was the largest consumer of crude
oil and petroleum products in 2007, with an average consumption of 20.7
million barrels per day. According to EIA statistics, imports provide
the United States with about 60 percent of its overall petroleum needs.
Of the petroleum refined in the United States, approximately 46 percent
is used for gasoline, primarily for use in the transportation sector.
Second to gasoline, distillate fuel oil (including diesel)--which is
used for a variety of heating, energy, and transportation purposes--
accounts for 21 percent of petroleum refined in the United States,
followed by kerosene-type jet fuel at 9 percent. The remaining 24
percent of crude is used to make other products, such as heavy fuel oil
or asphalt.
Firms operating in the petroleum industry range widely, from large
corporations that operate in multiple countries and across various
segments of the industry, to small firms that operate exclusively in
the United States or in only one segment of the industry. Companies
operating in the upstream segment--which includes the exploration and
production of crude oil--include fully vertically integrated companies
as well as independent producers. Fully vertically integrated companies
are generally large, multibillion-dollar publicly traded companies,
such as Exxon Mobil. By contrast, independent producers range from
extremely small, privately owned operations to multibillion-dollar
publicly traded companies, such as Occidental.
Companies operating in the midstream segment--which includes the
transport of crude oil and refined petroleum products--include firms
that manage pipelines, marine tankers and barges, railways, and trucks.
Midstream companies also range widely in size and can include large,
vertically integrated companies as well as smaller independent
operators of pipelines or other modes of transportation. Pipelines are
the most common, and considered the most efficient, mode of
transporting crude oil and petroleum products in the United States from
production points to refineries and from refineries to storage
terminals. Nationwide, there are about 200,000 miles of pipeline across
all 50 States, through which approximately 66 percent of petroleum
products are transported.[Footnote 5]
Companies operating in the downstream segment include firms that refine
crude oil as well as firms that market refined petroleum products.
Refining involves the transformation of crude oil into the various
petroleum products, such as gasoline, distillate fuel oil, and jet
fuel, as well as heavier products, such as asphalt. According to data
from EIA, as of January 1, 2008, there were 150 operable refineries in
the United States. In 2002, about 60 firms, including large, fully
vertically integrated companies and independent firms, owned these
refineries. For example, as of January 2007, ConocoPhillips owned 12
U.S. refineries and 19 refineries worldwide. Petroleum marketing
involves purchasing refined petroleum products from refiners and
selling them to wholesaler and retail firms. There are different
classes of wholesale gasoline purchasers in the United States, and the
prices they pay depend, in part, on the type of relationship they have
with the refiners.
Given the nation's dependence on gasoline and other petroleum products,
competition among petroleum industry firms has long been considered of
paramount importance to the economy. In 1890, Congress passed the
Sherman Act[Footnote 6] to counter anticompetitive practices in several
industries, including some of Standard Oil's practices in the petroleum
industry. In 1914, Congress expanded its antitrust authority by
creating FTC and enacting the Clayton Act.[Footnote 7] As such, merger
activity in all three segments of the industry and the potential for
anticompetitive behavior through industry consolidation has long been
the subject of interest on the part of many industry observers and
government regulators.
FTC is the federal antitrust agency that is responsible for reviewing
proposed mergers in the petroleum industry, with the goal of
maintaining industry competition. FTC reviews mergers of firms in the
petroleum industry if their operations are likely to impact U.S.
markets, and the agency enforces various antitrust laws. Although FTC
says that it scrutinizes mergers in the petroleum industry more than
any other industry, FTC's statutory authority to review proposed
mergers in the petroleum industry is the same as in other industries.
FTC has enforcement and administrative responsibilities from over 60
laws, but uses 3 statutes to guide its review of all proposed mergers-
-the Clayton Act, the Federal Trade Commission Act, and the Hart-Scott-
Rodino Act--as outlined in table 1.
Table 1: Federal Antitrust Statutes--Merger Enforcement:
Statute: Clayton Act[A];
Description: Enacted in 1914, Section 7 of the Clayton Act, 15 U.S.C. §
18, prohibits an acquisition of stock or assets by any person engaged
in commerce or in any activity affecting commerce, in any section of
the country, when the effect of such acquisition may be substantially
to lessen competition, or tend to create a monopoly.
Statute: Hart-Scott-Rodino Act[B];
Description: Enacted in 1976, Section 201 of Hart-Scott-Rodino added
Section 7A to the Clayton Act, 15 U.S.C. § 18a, which established
premerger notification and waiting requirements for persons making an
acquisition of stock or assets. Both the parties to the acquisition and
the amount of the acquisition must meet statutory threshold amounts to
be subject to the premerger notification and waiting requirements. The
2001 amendments to Hart-Scott-Rodino, among other things, raised the
threshold size of person and size of transaction amounts and specified
that they would be adjusted annually on the basis of the prior year's
Gross National Product.
Statute: Federal Trade Commission Act[C];
Description: Section 5 of the FTC Act, 15 U.S.C. § 45, prohibits unfair
methods of competition in or affecting commerce and unfair or deceptive
acts or practices in or affecting commerce. Generally, if an action
violates Section 7 of the Clayton Act, it is also likely to violate
Section 5 of the FTC Act.
Source: GAO analysis of FTC documents.
[A] See footnote 7 of this report.
[B] Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. §
18a.
[C] Federal Trade Commission Act of 1914, 15 U.S.C. §§ 41-58.
[End of table]
While the three statues help direct FTC's review of proposed mergers in
all industries, Hart-Scott-Rodino provides the framework for the
premerger review. Hart-Scott-Rodino requires all persons contemplating
a merger valued at $50 million or more and meeting certain other
conditions to formally notify FTC and DOJ. The act imposes a 15-day
waiting period for cash tender offers and a 30-day waiting period for
most other transactions to allow FTC and DOJ to review the proposed
merger in an effort to predict its potential effect on competition.
[Footnote 8] If the initial review does not indicate a need for further
investigation, the merger can be completed. To ease compliance with
Hart-Scott-Rodino, FTC and DOJ established a premerger notification
program in 1978 that set a systematic process for FTC to follow in
reviewing all proposed mergers and allows the agencies to avoid the
difficulties and expense of challenging mergers that harm competition
after they are completed. This gives them the ability to challenge
proposed mergers before they are completed when remedial action would
be most effective, if warranted. See figure 1 below for a summary of
FTC's merger review procedures.
Figure 1: FTC's Premerger Review Program:
[See PDF for image]
This figure provides a description of FTC's Premerger Review Program,
as follows:
Reporting:
A party is required to report a merger to FTC if:
* the parties to the transaction meet the statutory size thresholds (as
adjusted) and;
* the transaction meets the statutory size threshold (as adjusted).
Waiting Period:
Filing parties must provide certain financial and legal documents
pertaining to the merger and must observe a 15-day waiting period
related to cash tender offers and a 30-day waiting period for all other
transaction types.
Initial Review (15-30 days):
The agency substantively reviews the filing using the information
provided by the parties as well as publicly available data. Merger can
be completed if the agency determines that the merger will not harm
competition.
Second Request:
The agency requests additional detailed information if the initial
filing did not capture the merger’s full impact on competition.
Response To Second Request:
Once the parties respond to the second request, the agency has 10 or 30
days to seek an injunction, unless an extension is negotiated. In some
cases, this stage lasts between 9 and 12 months and then the agency
takes action.
Agency Actions:
* Allow the merger to be completed.
* Challenge the merger legally.
* Require remedial actions, such as divestures, and then allow the
merger.
Source: GAO analysis of FTC documents.
[End of figure]
FTC staff and DOJ officials told us that they divided their merger
review portfolio, and that FTC handles all of the petroleum industry
merger review cases because it has more expertise in that area.
[Footnote 9] FTC's merger review process is conducted by staff in
various bureaus and offices throughout the agency, but mainly by the
Bureau of Economics and the Bureau of Competition. The agency also has
a Merger Screening Committee composed of at least the Director of the
Bureau of Competition, section heads of that bureau's divisions,
representatives from the Bureau of Economics, and other relevant FTC
staff. The purpose of the group is to determine whether to recommend
that the Chairman approve and issue a request for additional
information and to decide other policy matters.
FTC often calculates market concentration as the first step in
providing insight into potentially anticompetitive market conditions
during merger reviews, although each review also involves examining a
unique set of circumstances and competitive factors that correspond to
the specific merger. In general, high levels of market concentration--
a small number of firms controlling a large percentage of the product
and geographic market share--have the potential to allow these firms to
raise prices because the remaining firms are too few to "discipline"
the market by offering lower-priced products. When firms are able to
raise prices, either unilaterally or by collusion without other
producers undercutting them, they are said to have market power. FTC
and DOJ jointly developed merger guidelines that use the Herfindahl-
Hirschman Index (HHI) as a key initial measure to evaluate market
concentration. HHI is based on the market shares and number of firms
that sell similar products in a given geographic market.[Footnote 10]
Calculating HHI not only requires estimating market share by firm, it
also involves identifying the appropriate geographic markets in which
the firms operate. Firms selling a given product may compete at the
global level--in which case, the relevant geographic market includes
sellers worldwide--or in regional, statewide, or smaller markets. For
example, FTC staff told us that they generally consider crude producers
to compete globally, refiners to compete regionally, and wholesale
gasoline suppliers to compete at a more local level. FTC and DOJ merger
guidelines define three broad categories of market concentration as
measured by HHI: an unconcentrated market has an HHI of less than
1,000; a moderately concentrated market has an HHI between 1,000 and
1,800; and a highly concentrated market has an HHI over 1,800.
[Footnote 11]
More than 1,000 U.S. Mergers Occurred in the Petroleum Industry between
2000 and 2007, and Market Concentration Changed Little but Varied by
Market Region and Industry Segment:
More than 1,000 U.S. mergers occurred in the petroleum industry between
2000 and 2007. The largest number and greatest value mergers occurred
in the upstream segment, primarily due to increasingly challenging
conditions for oil exploration, while midstream and downstream mergers
were primarily driven by the desire to improve efficiencies and reduce
costs. We also found in our analysis of the upstream crude oil
production segment of the industry and the downstream refining and
wholesale gasoline supply segments of the industry that, in most
regions, petroleum industry market segments were moderately
concentrated. Lacking data on midstream, we were not able to determine
concentration in this segment of the industry.
Mergers in the Petroleum Industry between 2000 and 2007 Primarily
Occurred in the Upstream Segment in Response to Increasingly
Challenging Conditions for Oil Exploration:
Between January 2000 and May 2007, 1,088 U.S. mergers occurred in the
petroleum industry.[Footnote 12] The number of mergers that occurred
each year during this period[Footnote 13] generally increased over the
period, from 124 mergers in 2000 to 167 in 2006,[Footnote 14] as shown
figure 2.
Figure 2: U.S. Petroleum Mergers (2000-2006):
[See PDF for image]
This figure is a line graph depicting the following data:
Year: 2000;
Number of Mergers: 124.
Year: 2001;
Number of Mergers: 131.
Year: 2002;
Number of Mergers: 133.
Year: 2003;
Number of Mergers: 148.
Year: 2004;
Number of Mergers: 142.
Year: 2005;
Number of Mergers: 171.
Year: 2006;
Number of Mergers: 167.
Source: GAO analysis of J.S. Herold data from 2000 through 2006.
[End of figure]
About 75 percent of these mergers were asset mergers, or mergers where
one firm purchases only a portion of another firm's assets, such as
Tesoro's purchase of 140 retail gasoline stations in California from
USA Petroleum in early 2007. The remaining 25 percent were corporate
mergers, or mergers where one firm generally acquires all of another
firm's stock and assets such that the two firms become one firm. For
example, in 2002, Phillips Petroleum acquired all of Conoco's stock,
creating the new firm ConocoPhillips.
Reported transaction values for U.S. petroleum mergers during this
period ranged widely, from $10 million to over $10 billion. As shown in
figure 3, the greatest number of mergers during this period were valued
between $10 million and $49 million, and between $100 million and $499
million, accounting for 39 percent and 29 percent of merger activity,
respectively. Overall, 61 percent of mergers were valued at more than
$50 million, which is the threshold above which merging firms are
required to notify FTC so that it can review them for potential
anticompetitive effects.[Footnote 15] The average value for mergers
during this period was $497 million, while the median value for mergers
during this period was $72 million.
Figure 3: U.S Petroleum Mergers, by Transaction Value (2000-2007):
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
U.S. Dollars in millions: $10-49;
Number of mergers: 429.
U.S. Dollars in millions: $50-99;
Number of mergers: 192.
U.S. Dollars in millions: $100-499;
Number of mergers: 316.
U.S. Dollars in millions: $500-999;
Number of mergers: 70.
U.S. Dollars in millions: $1,000-9,999;
Number of mergers: 75.
U.S. Dollars in millions: $10,000+;
Number of mergers: 6.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
[End of figure]
Corporate mergers comprised the top 11 most valuable mergers, including
6 mergers valued at over $10 billion each. The largest merger was the
2001 corporate merger of Chevron and Texaco; it was valued at $45
billion. This merger and the other 5 corporate mergers that were valued
at over $10 billion during this period are highlighted in table 2.
Table 2: Table 2: U.S. Petroleum Mergers Valued at over $10 Billion
(2000-2007) (Dollars in billions):
Buyer: Chevron Corporation;
Seller: Texaco, Inc.; Year: 2001;
Transaction value: $45.
Buyer: ConocoPhillips;
Seller: Burlington Resources Incorporated; Year: 2006;
Transaction value: $36.
Buyer: Statoil ASA;
Seller: Norsk Hydro ASA; Year: 2007;
Transaction value: $32.
Buyer: Phillips Petroleum Company;
Seller: Conoco Incorporated; Year: 2002;
Transaction value: $31.
Buyer: Chevron Corporation;
Seller: Unocal Corporation; Year: 2005;
Transaction value: $20.
Buyer: Anadarko Petroleum Corporation;
Seller: Kerr-McGee Corporation; Year: 2006;
Transaction value: $20.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
[End of table]
The upstream segment of the industry--comprised of oil exploration and
production endeavors--accounted for approximately 69 percent of the
1,088 mergers. The midstream segment of the industry--mainly comprised
of firms that operate pipelines and other infrastructure used to
transport oil and gas--accounted for about 13 percent. The downstream
segment of the industry--comprised of firms that refine crude oil and
market petroleum products--accounted for 18 percent. Figure 4
highlights this distribution across the segments.
Figure 4: U.S. Petroleum Mergers, by Segment (2000-2007):
[See PDF for image]
This figure is a pie-chart depicting the following data:
U.S. Petroleum Mergers, by Segment (2000-2007):
Upstream: 69%;
Downstream: 18%;
Midstream: 13%.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
[End of figure]
Upstream Segment:
In the U.S. upstream petroleum segment, some trends were similar to
those that we previously discussed for the industry overall, with the
number of mergers over the period generally rising and asset mergers
comprising approximately 75 percent of all mergers. Upstream mergers
had the highest transaction values of the three segments, accounting
for the six most valuable mergers highlighted in table 2 that exceeded
$10 billion in value. Overall, the average value for upstream mergers
was $539 million, while the median value was $67 million.
A key reported driver of U.S. mergers in the upstream segment was the
increasing challenge associated with exploring and producing oil in
extreme physical environments. Industry officials at oil companies
reported that reserves that can be easily and economically produced are
declining, and that remaining exploration opportunities are
increasingly located in physically extreme environments, making the
development of new petroleum resources more costly and technologically
challenging. Extreme physical environments, such as offshore oil
reserves in deep water, require costly capital investments in
specialized drills, pipes, and platforms equipped to operate in deep
marine environments; operating costs in these environments can be 3.0
to 4.5 times higher than costs for typical shallow water rigs. In
addition, extreme physical environments can include "nonconventional"
oil reserves, such as oil sands,[Footnote 16] that require the use of
additional and expensive technologies--including additional mining and
heating--to produce crude oil. Academics and industry officials
reported that mergers better position oil companies to acquire capital
and achieve the organizational efficiencies that help enable successful
exploration and production in these environments.
Another reported driver of U.S. mergers in the upstream segment was the
increasing challenge associated with reliably accessing oil reserves
worldwide. As national oil companies increasingly expand their
exploration efforts and contend for access to reserves in third-party
countries, researchers and industry representatives reported that
national firms, operating on behalf of their home country, often have
access to more capital, have fewer financial constraints, and have more
bargaining power via political influence. In light of these reported
negotiating advantages, companies reported that being large provides
them with more capital and influence with which to directly compete
with the national oil companies. Representatives from oil companies
also reported concerns about political uncertainties in regions where
key oil reserves are located, because more than 60 percent of world oil
reserves are in countries where relatively unstable political
conditions could constrain oil exploration and production.[Footnote 17]
For example, in 2007, ConocoPhillips abandoned a multibillion-dollar
investment in Venezuela, after a breakdown in negotiations with the
government and the national oil company, PDV, resulting in a $4.5
billion loss for the firm. In light of these concerns, academic and
industry representatives reported that large firms are better
positioned to diversify their exploration interests across multiple
countries or regions, thereby lessening the risk their interests face
in any one country.
Despite these rationales, it is uncertain whether mergers have yielded
the desired results in the upstream segment. One group of academic
researchers reported that large, international companies have not
generally expanded their exploration efforts, since exploration
spending by these companies has not increased above premerger levels
and some have been unable to replace their reserve assets in recent
years. These researchers noted in a report on oil companies[Footnote
18] that this may be a result of the decline in the number of
accessible large oil fields that afford big companies a comparative
advantage, due to the increased presence of national oil companies and
the increasing restrictions on some oil assets worldwide. The report
noted that smaller production companies have been able to replace their
existing reserves in recent years, suggesting that large companies are
not necessarily better positioned for increased exploration in the
current market. Furthermore, according to industry publications,
private capital is increasingly available, thereby challenging the
notion that firms must be large to have access to capital for expensive
exploration projects. As a result of these concerns, industry and
academic experts noted that smaller participants in the upstream
segment remain an effective and competitive force in developing new
projects, raising questions about the viability of large oil mergers in
the future.
Given that the upstream market is a global market, we also briefly
examined global upstream mergers from January 2000 through May 2007.
Worldwide, there were 1,722 mergers in the upstream segment during this
period, the geographic distribution of which is highlighted in figure
5. As shown in the figure, U.S. mergers comprised about 41 percent of
total global merger activity in the upstream segment.
Figure 5: Percentage of Global Upstream Petroleum Mergers, by Region or
Country (2000-2007):
[See PDF for image]
This figure is a pie-chart depicting the following data:
Percentage of Global Upstream Petroleum Mergers, by Region or Country
(2000-2007):
United States: 40.7%;
Canada: 31.1%;
Former Soviet Union: 6.5%;
Europe: 5.9%;
Asia: 5.1%;
Africa: 3.1%;
Globally diversified: 2.6%;
South America: 2.5%;
Australia and Oceania: 2.0%;
Caribbean: 0.3%;
Central America: 0.06%.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
[End of figure]
Second to the United States, Canada had the highest number of upstream
mergers, at 31 percent of total upstream merger activity. Taken
together, this evidence highlights that upstream merger activity during
this period was heavily concentrated in North America. According to
industry reports and academic researchers, recent high levels of merger
activity in Canada have been driven by strong growth in the production
of crude oil from oil sands, previously considered too technically
complicated and expensive, but of growing interest to oil companies
given the high price of oil. This activity was also driven out of
concern for reliable access to oil, since Canada is considered more
politically stable than many other regions of the world with oil
reserves.
Midstream Segment:
In the U.S. midstream petroleum segment, the number of asset mergers
was slightly higher than for the industry overall, accounting for 81
percent of total U.S. midstream merger activity. Over the period, the
number of midstream mergers varied somewhat, from a low in 2000 of 6
mergers, to a high in 2005 of 26 mergers (see fig. 6).
Figure 6: U.S. Midstream Petroleum Mergers (2000-2006):
[See PDF for image]
This figure is a line graph depicting the following data:
Year: 2000;
Number of Mergers: 6.
Year: 2001;
Number of Mergers: 18.
Year: 2002;
Number of Mergers: 20.
Year: 2003;
Number of Mergers: 23.
Year: 2004;
Number of Mergers: 12.
Year: 2005;
Number of Mergers: 26.
Year: 2006;
Number of Mergers: 18.
Source: GAO analysis of J.S. Herold data from 2000 through 2006.
[End of figure]
The top reported transaction values for midstream mergers were the
lowest of the three segments, with the most valuable midstream merger
totaling $2.8 billion, and a total of eight midstream mergers that
exceeded $1.0 billion (see table 3). Overall, the average midstream
merger was valued at $252 million, while the median value was $92
million. Looking at the subsegment level, merger activity was split
fairly evenly across the pipelines and tankers/other transportation
subsegments, with pipelines accounting for 47 percent of mergers and
tankers/other transportation accounting for 53 percent.
Table 3: Top U.S. Midstream Petroleum Mergers, by Value (2000-2007)
(Dollars in billions):
Buyer: NuStar Energy LP;
Seller: Kaneb Services LLC; Kaneb Pipeline Partners LP;
Year: 2005;
Transaction value: $2.8.
Buyer: Plains All American Pipeline LP;
Seller: Pacific Energy Partners LP; LB Pacific LP;
Year: 2006;
Transaction value: $2.3.
Buyer: Enterprise Products Partners LP;
Seller: Williams Companies, Inc.;
Year: 2002;
Transaction value: $1.2.
Buyer: Kinder Morgan Energy Partners LP;
Seller: GATX Corporation;
Year: 2001;
Transaction value: $1.2.
Buyer: EPCO, Inc.;
Seller: Duke Energy Corporation; ConocoPhillips;
Year: 2005;
Transaction value: $1.1.
Buyer: Enterprise GP Holdings LP;
Seller: EPCO, Inc.; Year: 2007;
Transaction value: $1.1.
Buyer: Borealis; Inter Pipeline Fund; Ontario Teachers Pension Plan
Board; Terasen, Inc.;
Seller: EnCana Corporation;
Year: 2003;
Transaction value: $1.0.
Buyer: Williams Energy Partners LP;
Seller: Williams Companies, Inc.;
Year: 2002;
Transaction value: $1.0.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
[End of table]
In the midstream segment, industry representatives reported that U.S.
mergers have been driven in part by the desire to improve the overall
financial performance of midstream operators.[Footnote 19] According to
one industry report, developments in recent years have prompted a
renewed focus on risk mitigation and portfolio management in the
midstream segment, thereby prompting pipeline and other midstream
operators to pursue merger activity. The industry report also noted
that midstream merger activity has been further encouraged by the
increased involvement of investment banks and the availability of
private equity in such endeavors. Furthermore, a government report
noted that reduced domestic production of oil has created excess
capacity for many U.S. pipelines, which, according to one firm, has
prompted pipeline operators to pursue mergers as a means to remain
economically viable.
Downstream Segment:
In the U.S. downstream petroleum segment, trends generally followed
those for mergers overall, with asset mergers, comprising approximately
73 percent of all downstream U.S. mergers and the annual number of
mergers rising from 27 to 32 mergers from 2000 to 2006. Top transaction
values for the downstream segment fell between those for the upstream
and midstream segments, with the largest downstream merger valued at
$9.8 billion, for the Phillips Petroleum Company and the Tosco Corp. As
shown in table 4, the top 6 downstream mergers each totaled over $5
billion in transaction value.
Table 4: Top U.S. Downstream Petroleum Mergers, by Value (2000-2007):
(Dollars in billions):
Buyer: Phillips Petroleum Company;
Seller: Tosco Corp;
Year: 2001;
Transaction value: $9.8.
Buyer: Ineos Group Holdings Plc;
Seller: BP plc;
Year: 2005;
Transaction value: $9.0.
Buyer: Valero Energy Corporation;
Seller: Premcor, Inc.;
Year: 2005;
Transaction value: $7.6.
Buyer: Valero Energy Corporation;
Seller: Ultramar Diamond Shamrock Corp;
Year: 2001;
Transaction value: $6.4.
Buyer: Access Industries;
Seller: Royal Dutch Shell plc; BASF Aktiengesellschaft;
Year: 2005;
Transaction value: $5.7.
Buyer: RAG AG;
Seller: EON AG;
Year: 2005;
Transaction value: $5.3.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
[End of table]
Looking at downstream mergers by subsegment, the terminals/storage
subsegment drove the most merger activity, totaling 37.5 percent of
mergers during this period (see fig. 7). Second to terminals/storage,
the refining subsegment totaled 21.5 percent of all the downstream
mergers that we examined, followed by mergers in the gasoline service
stations subsegment at 16.0 percent.
Figure 7: U.S. Downstream Petroleum Mergers, by Subsegment (2000-2007):
[See PDF for image]
This figure is a pie-chart depicting the following data:
U.S. Downstream Petroleum Mergers, by Subsegment (2000-2007):
Terminals/storage: 37.5%;
Refining: 21.5%;
Gasoline service stations: 16.0%;
Petrochemical: 14.0%;
Retailing/marketing miscellaneous: 11.0%.
Source: GAO analysis of J.S. Herold data from January 2000 through May
2007.
Note: The retailing/marketing - misc. and refining subsegments include
gasoline wholesale suppliers, according to EIA.
[End of figure]
In the downstream segment, industry officials reported that key drivers
of U.S. mergers included a need to increase efficiencies and costs
savings in the petroleum refining and marketing segments. On the
refining end, industry officials reported that mergers can help achieve
operational efficiencies through the integration of refinery operations
and infrastructure. For example, officials reported that a larger
refinery system allows firms to use feedstocks and blending stocks
across refineries, which can improve efficiencies at individual
refineries. In addition, industry representatives reported that
purchasing crude oil for multiple facilities can allow refiners to
secure volume discounts that yield cost savings. On the marketing end,
industry representatives reported that mergers can better position
marketers for competition through economies of scale and improved
efficiencies. According to one industry official, refiners prefer
larger marketers because (1) they are usually a lower credit risk than
their smaller counterparts and (2) it is more efficient to sell larger
volumes of fuel through fewer entities, because transaction and
administrative costs can be minimized. One marketer reported that,
after mergers occurred, the larger refiners made it clear that they
only wanted to deal with marketers that bought fuel in quantities above
a certain minimum. Smaller marketers that were not able to meet these
minimums found it difficult to compete, and many were subsequently
purchased by other marketers. In addition, some marketer
representatives with whom we spoke said that they operate on slim
profit margins, as little as 1 cent per gallon, and the economies of
scale that can be achieved via mergers help improve profitability.
Despite the gains that mergers can provide in the downstream segment,
as well as in the upstream and midstream segments, policy makers and
industry officials reported that mergers can also allow companies to
exercise market power and reduce competition in the industry.
Market Concentration Changed Little, but Varied by Market Region and
Industry Segment:
We found that the upstream market segment for crude oil production was
unconcentrated and remained so between 2000 and 2006. We looked at all
the sellers that produce crude oil worldwide because the price of crude
oil is set in global markets. We calculated each firm's relative market
share of worldwide crude oil production and then calculated HHIs from
2000 to 2006. We found relatively unconcentrated HHIs (i.e., below
1,000 according to FTC's merger guidelines) in this segment of the
industry and that these numbers remained stable over time, despite the
mergers that occurred in this segment (see fig. 8). In addition, we
found that individual crude suppliers throughout the world have
relatively low market share compared with other suppliers worldwide.
Even a relatively large producer such as Saudi Arabia had only about 13
percent of global crude production in 2006, according to our analysis
of Oil and Gas Journal data. However, the coordination among global
crude producers that are members of the Organization of the Petroleum
Exporting Countries cartel can contribute to their ability to exercise
market power beyond what the market concentration figures would
indicate.
Figure 8: Upstream Market Concentration, Based on Worldwide Crude
Production (2000-2006):
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Year: 2000;
HHI: 382.164.
Year: 2001;
HHI: 415.978.
Year: 2002;
HHI: 385.532.
Year: 2003;
HHI: 408.618.
Year: 2004;
HHI: 424.913.
Year: 2005;
HHI: 430.911.
Year: 2006;
HHI: 430.412.
Source: GAO analysis of Oil and Gas Journal data.
[End of figure]
Although global crude oil markets appear to be unconcentrated, in some
instances smaller, landlocked refineries, such as those in Oklahoma,
rely heavily on only local crude producers. Under these circumstances,
the crude supplier market would be more concentrated, and there could
be more potential for the crude producers to raise prices. We heard
from some industry experts and one small, independent refiner that it
can sometimes be difficult to purchase crude oil under these
circumstances because of the limited choice of suppliers.
We found that between 2000 and 2007, in the downstream gasoline
refining segment, market regions in the United States were stable and
generally moderately concentrated. We analyzed concentration in what
experts consider key market regions: Los Angeles, San Francisco, the
Gulf Coast, New York Harbor (East Coast), Chicago, Tulsa (or the Mid-
continent), and the Pacific Northwest.[Footnote 20] Although
concentration was generally moderate in these regions between 2000 and
2007, the New York and San Francisco regions had concentrations above
or near 1,800, which FTC considers highly concentrated (see fig. 9).
Petroleum industry experts consider refinery market analysis
particularly important because most U.S. refiners have minimal spare
capacity, and the barriers to entry for new refiners are high.
[Footnote 21]
Figure 9: Changes in U.S. Regional Refinery Concentration (2000 to
2007):
[See PDF for image]
This figure is a map of the United States with vertical bar graphs
depicted for each key market region, as follows (HHI under 1,000 is
considered unconcentrated; HHI between 1,000 and 1,800 is considered
moderately concentrated; HHI over 1,800 is considered highly
concentrated):
Market: New York Harbor;
Year: 2000;
HHI: 1630.
Year: 2001;
HHI: 1615.
Year: 2002;
HHI: 1543.
Year: 2003;
HHI: 1643.
Year: 2004;
HHI: 1630.
Year: 2005;
HHI: 1938.
Year: 2006;
HHI: 2100.
Year: 2007;
HHI: 2104.
Market: Chicago;
Year: 2000;
HHI: 1417.
Year: 2001;
HHI: 1427.
Year: 2002;
HHI: 1344.
Year: 2003;
HHI: 1374.
Year: 2004;
HHI: 1362.
Year: 2005;
HHI: 1357.
Year: 2006;
HHI: 1350.
Year: 2007;
HHI: 1268.
Market: Mid-Continent;
Year: 2000;
HHI: 1029.
Year: 2001;
HHI: 989.
Year: 2002;
HHI: 1059.
Year: 2003;
HHI: 1062.
Year: 2004;
HHI: 1018.
Year: 2005;
HHI: 1013.
Year: 2006;
HHI: 976.
Year: 2007;
HHI: 882.
Market: Gulf Coast;
Year: 2000;
HHI: 761.
Year: 2001;
HHI: 701.
Year: 2002;
HHI: 810.
Year: 2003;
HHI: 811.
Year: 2004;
HHI: 850.
Year: 2005;
HHI: 854.
Year: 2006;
HHI: 966.
Year: 2007;
HHI: 938.
Market: Los Angeles;
Year: 2000;
HHI: 1460.
Year: 2001;
HHI: 1431.
Year: 2002;
HHI: 1444.
Year: 2003;
HHI: 1444.
Year: 2004;
HHI: 1429.
Year: 2005;
HHI: 1442.
Year: 2006;
HHI: 1449.
Year: 2007;
HHI: 1285.
Market: San Francisco;
Year: 2000;
HHI: 1775.
Year: 2001;
HHI: 1518.
Year: 2002;
HHI: 1998.
Year: 2003;
HHI: 1833.
Year: 2004;
HHI: 1851.
Year: 2005;
HHI: 1853.
Year: 2006;
HHI: 1768.
Year: 2007;
HHI: 1772.
Market: Pacific Northwest;
Year: 2000;
HHI: 1775.
Year: 2001;
HHI: 1518.
Year: 2002;
HHI: 1998.
Year: 2003.
HHI: 1833.
Year: 2004;
HHI: 1851.
Year: 2005;
HHI: 1853.
Year: 2006;
HHI: 1768.
Year: 2007;
HHI: 1772.
Source: GAO analysis of EIA data.
[End of figure]
Between 2000 and 2007, the HHI for the New York Harbor region increased
from 1,630 to 2,104, but because foreign and Gulf Coast refineries ship
a significant amount of gasoline into the East Coast (around 60 percent
of consumption), the high measure of concentration probably overstates
the actual concentration for the market.[Footnote 22] The potential for
market power is likely lower than the HHI would indicate because
refiners from outside of this region have the ability to challenge
potentially anticompetitive behavior from local refiners over longer
periods of time by providing lower-priced gasoline. Calculating HHI
with these potential competing refiners included would provide a more
accurate representation of concentration levels in this region.
Between 2000 and 2007, the HHI for the Chicago region went from 1,417
to 1,268, keeping it moderately concentrated throughout the period of
our study. In addition, this region--which serves large parts of the
Midwest, according to industry experts--also receives shipments of
gasoline from the Gulf Coast via pipeline, and, according to our
analysis of EIA data, shipments from outside of the region accounted
for about 28 percent of the gasoline consumed in the Midwest region.
[Footnote 23] This indicates that numerous refiners outside of the
Chicago region help to keep the market supplied and could provide
adequate gasoline to prevent long-run price increases.
Between 2000 and 2007, the HHI for the Gulf Coast region, which
includes refineries in Texas, Louisiana, and Alabama, went from 761 to
938, an increase of 177 points. This region remained unconcentrated
throughout our study period and has, by far, the greatest number of
refineries. As a result, the Gulf Coast region generally produces more
gasoline than it uses, and about two-thirds of it is shipped outside of
the region,[Footnote 24] mostly to the Midwest and East Coast.
Between 2000 and 2007, the HHI for the Mid-continent region went from
1,029 to 882, a decrease of 147 points. This region became
unconcentrated during our study period. However, some experts mentioned
that some Mid-continent refineries in states such as Montana, Utah, and
Wyoming primarily supply only their local regions, making these regions
subject to potentially more highly concentrated local market conditions
rather than lower concentrated regional Mid-continent conditions.
In general, the West Coast of the United States was moderately
concentrated. Between 2000 and 2007, the Pacific Northwest region was
moderately concentrated, although the HHI increased 293 points, from
1,146 to 1,439. In addition, the HHI for the San Francisco region
remained in "nearly" highly concentrated territory over the entire span
of our study. The HHI for the Los Angeles region went from 1,460 to
1,285, keeping it firmly in the moderately concentrated range between
2000 and 2007. As is the case with the New York Harbor region, West
Coast regions have some access to imported gasoline, and gasoline can
also move between West Coast regions. This clearly helps to mitigate
potential issues of high concentration, according to experts with whom
we spoke. Imports to California markets, however, are limited by the
state's unique gasoline specifications and many refineries outside of
the state are not able to produce gasoline for California.
In our analysis of downstream wholesale gasoline suppliers, we found
that most states had a moderately concentrated number of wholesale
gasoline suppliers between 2000 and 2007. However, markets for
wholesale gasoline marketing may not correspond to states; therefore,
in some cases, the relevant geographic market would be either larger or
smaller than state boundaries, according to some petroleum industry
experts with whom we spoke. Fewer states were unconcentrated or highly
concentrated, and this overall trend was fairly stable over time (see
fig. 10). In addition, we found that eight states in 2007 were highly
concentrated: Alaska, Hawaii, Indiana, Kentucky, Michigan, North
Dakota, Ohio, and Pennsylvania (see fig. 11), although we were not able
to link concentration levels to gasoline prices. To calculate these
market concentrations for wholesale gasoline supply, we used EIA data
that contained the gasoline volumes sold in every state, by wholesale
supplier. EIA only collects these data by state.
Figure 10: Number of States with Unconcentrated, Moderately
Concentrated, or Highly Concentrated Wholesale Gasoline Supply Markets
(2000-2007):
[See PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Year: 2000;
unconcentrated: 11;
moderately concentrated: 30;
concentrated: 10,
Year: 2001;
unconcentrated: 10;
moderately concentrated: 32;
concentrated: 9.
Year: 2002;
unconcentrated: 5;
moderately concentrated: 37;
concentrated: 9.
Year: 2003;
unconcentrated: 7;
moderately concentrated: 35;
concentrated: 9.
Year: 2004;
unconcentrated: 10;
moderately concentrated: 32;
concentrated: 9.
Year: 2005;
unconcentrated: 4;
moderately concentrated: 38;
concentrated: 9.
Year: 2006;
unconcentrated: 6;
moderately concentrated: 37;
concentrated: 8.
Year: 2007;
unconcentrated: 7;
moderately concentrated: 35;
concentrated: 9.
Source: GAO analysis of EIA data.
[End of figure]
Figure 11: Wholesale Gasoline Supplier Concentration Levels (2000 and
2007):
[See PDF for image]
This figure contains maps of the United States indicating wholesale
gasoline supplier concentration levels by state for 2000 and 2007, as
follows:
Wholesale Gasoline Supplier Concentration by State for 2000:
Unconcentrated:
Arkansas:
Iowa:
Kansas:
Missouri:
Nebraska:
New Hampshire:
New Jersey:
New York:
South Dakota:
Texas:
Moderately concentrated:
Alabama:
Arizona:
California:
Colorado:
Connecticut:
Delaware:
District of Columbia:
Florida:
Georgia:
Idaho:
Illinois:
Louisiana:
Maine:
Maryland:
Massachusetts:
Minnesota:
Mississippi:
Nevada:
New Mexico:
North Carolina:
Oklahoma:
Oregon:
Pennsylvania:
Rhode Island:
South Carolina:
Tennessee:
Utah:
Vermont:
Virginia:
Washington:
Wisconsin:
Wyoming:
Highly concentrated:
Alaska:
Hawaii:
Indiana:
Kentucky:
Michigan:
Montana:
North Dakota:
Ohio:
West Virginia:
Wholesale Gasoline Supplier Concentration by State for 2007:
Unconcentrated:
Arizona:
Arkansas:
Florida:
Iowa:
New York:
South Carolina:
South Dakota:
Moderately concentrated:
Alabama:
California:
Colorado:
Connecticut:
Delaware:
District of Columbia:
Georgia:
Idaho:
Illinois:
Kansas:
Louisiana:
Maine:
Maryland:
Massachusetts:
Minnesota:
Mississippi:
Missouri:
Montana:
Nebraska:
Nevada:
New Hampshire:
New Jersey:
New Mexico:
North Carolina:
Oklahoma:
Oregon:
Rhode Island:
Tennessee:
Texas:
Utah:
Vermont:
Virginia:
Washington:
West Virginia:
Wisconsin:
Wyoming:
Highly concentrated:
Alaska:
Hawaii:
Indiana:
Kentucky:
Michigan:
North Dakota:
Ohio:
Pennsylvania:
Source: GAO analysis of EIA data; Map Resources (map).
[End of figure]
We were not able to calculate market concentration in the midstream
segment of the petroleum industry, which transports crude oil and
refined products throughout the United States, because of a lack of
comprehensive data on pipeline and barge ownership and associated
transportation markets. In addition, many petroleum product pipelines
are considered "common carriers"; therefore, they are subject to FERC
rates if they cross state boundaries and state-mandated rates if they
remain within state boundaries, which FERC officials told us limits the
ability of pipeline owning firms to increase prices anticompetitively.
However, in some cases, pipeline firms can apply for "market-based"
rates, although they have to demonstrate to FERC that they ship fuel
between locations where there are ample shipping alternatives. This is
not very often the case, and, according to FERC officials, there are
few pipeline firms that charge market-based rates as a result.
However, despite the lack of data, experts raised some important
considerations regarding competition in the midstream segment. For
example, petroleum marketers told us that in some instances, pipeline
firms also own the terminals that connect to their pipelines and have
the ability to set their own prices for fuel storage or other terminal-
related services, potentially leaving shippers with few alternatives
but to pay. In addition, according to some oil industry experts with
whom we spoke, some pipeline companies are master limited partnerships-
-publicly traded limited partnerships, not subject to corporate income
tax--which may have little interest in the long-term viability of their
business, and, according to some industry experts with whom we spoke,
may defer maintenance and limit increases in pipeline capacity to
maximize profits in the short term. We noted in a 2007 report on energy
markets that, in some states, such as Arizona, California, Colorado,
and Nevada, there was a systemic lack of pipeline capacity that was
insufficient in meeting increases in demand, creating conditions of
higher prices and price volatility.[Footnote 25] Like refining,
midstream infrastructure often has very high barriers to entry, thereby
making it difficult for new competitors to enter the market. For
example, it is difficult to get regulatory permits to build or expand
pipelines, and the costs can run $1 million or more per mile, according
to pipeline companies and other industry experts.
FTC Primarily Reviews Proposed Mergers to Maintain Petroleum Industry
Competition, While FTC and Other Agencies Also Have Roles in Monitoring
Petroleum Industry Markets:
FTC primarily reviews proposed mergers to maintain competition in the
petroleum industry, while other federal and state agencies, including
FTC, have roles in monitoring petroleum industry markets. FTC does a
review to predict the effects of proposed mergers on competition, but
generally does not look back to evaluate the actual effects after the
merger has been completed, even though experts and FTC agree that
postmerger reviews would allow the agency to better inform future
merger reviews and to better measure its success in maintaining
competition. In addition, the agency also conducts other activities to
monitor petroleum product markets, such as monitoring wholesale
gasoline prices for evidence of unusual price spikes. Other federal and
state agencies also have roles in monitoring petroleum industry
markets.
FTC Reviews Proposed Mergers, but Does Not Regularly Review the Effects
of Past Merger Decisions:
In reviewing proposed mergers, FTC follows guidelines that it developed
jointly with DOJ for predicting the effects of mergers--including
petroleum industry mergers--on competition. The unifying theme in the
guidelines is that mergers should not be permitted to enhance a firm's
market power or to make it easier for a firm to exercise market power.
The guidelines describe the analytical process that FTC will use in
determining whether to challenge a merger, and they outline five broad
areas for FTC to consider: (1) defining markets and analyzing
concentration, (2) predicting potential adverse effects on competition,
(3) evaluating barriers to new market entrants, (4) evaluating
potential gains in efficiency, and (5) giving consideration to
potentially failing firms. We discuss these five areas in the following
text:
Defining markets and analyzing concentration: FTC initially defines
merging companies' markets and analyzes their market concentration. To
do this, FTC first reviews merging firms' products; identifies any
similar products they sell; and identifies the geographic markets in
which the firms operate, which it defines as the area in which a
company could monopolize the market and impose a small price increase
without competing firms bringing prices back down by adding supply to
the market. FTC then determines the industry market share--the
percentage of products that companies supply to one geographic market
area--and calculates an index of market concentration, HHI, where firms
with larger market shares are weighted more heavily. If the proposed
merger were to substantially raise HHI, there would be a greater
likelihood that one firm, or a small group of firms, could exercise
market power and increase consumer prices above competitive levels.
This situation may trigger FTC to request more information from the
merging firms to look more closely at several factors affecting market
competition (see table 5).
Table 5: FTC's Concentration Guidelines for Initial Analysis of
Proposed Mergers:
Postmerger HHI: Less than 1,000;
Degree of market concentration: Unconcentrated;
Change in HHI that would result from the proposed merger: Not
applicable;
Potential competitive consequences and likely need for further DOJ/FTC
analysis: Ordinarily no further analysis.
Postmerger HHI: Between 1,000 and 1,800;
Degree of market concentration: Moderately concentrated;
Change in HHI that would result from the proposed merger: Increase
<100;
Potential competitive consequences and likely need for further DOJ/FTC
analysis: Ordinarily no further analysis.
Postmerger HHI: Between 1,000 and 1,800;
Degree of market concentration: Moderately concentrated;
Change in HHI that would result from the proposed merger: Postmerger
HHI Greater than 1,800: Increase >100;
Potential competitive consequences and likely need for further DOJ/FTC
analysis: Could raise significant competitive concerns, depending on
other factors.
Postmerger HHI: Greater than 1,800;
Degree of market concentration: Highly concentrated;
Change in HHI that would result from the proposed merger: Increase <50;
Potential competitive consequences and likely need for further DOJ/FTC
analysis: Ordinarily no further analysis.
Postmerger HHI: Greater than 1,800;
Degree of market concentration: Highly concentrated;
Change in HHI that would result from the proposed merger: Increase >50;
Potential competitive consequences and likely need for further DOJ/FTC
analysis: Could raise significant competitive concerns, depending on
other factors.
Postmerger HHI: Greater than 1,800;
Degree of market concentration: Highly concentrated;
Change in HHI that would result from the proposed merger: Increase
>100;
Potential competitive consequences and likely need for further DOJ/FTC
analysis: Likely to create or enhance market power or facilitate its
exercise.
Sources: FTC and DOJ.
Note: FTC staff told us that they do not ordinarily conduct further
analysis in the specific HHI regions listed in this table, but they can
do so if there are other factors that indicate a merger would likely
harm competition.
[End of table]
Predicting potential adverse effects on competition: FTC's second step
is to predict the nature of adverse effects of a merger on competition
in the petroleum industry. To do this, FTC examines whether market
conditions would be conducive for firms to coordinate or to act
unilaterally to raise prices. The analysis of competitive harm at the
retail level might involve looking for the presence of firms with
different business models than their rivals, which would indicate less
likelihood for coordination. For example, FTC noted that the presence
of "big-box" retailers that sell discount gasoline and groceries, such
as Costco or Wal-Mart, generally boost competition because they tend to
sell large volumes of fuel at lower prices than traditional service
stations. FTC might allow a merger to take place in a retail market
with a large number of such retailers that it would otherwise challenge
in a different market.
Evaluating barriers to entry for new market entrants: FTC's third step
is to evaluate the barriers to market entry for potential new
competitors. When FTC identifies that it is unlikely that new firms
could enter a market in a relatively short time, they consider the
market to be less competitive and, therefore, would be less likely to
approve a merger. FTC staff told us the petroleum industry is generally
hard to enter because of the high capital costs; for example, building
a new refinery could take 6 years and cost $10 billion, according to
estimates for one proposed new facility. In general, FTC staff told us
that because of factors like the high barriers to entry in the
petroleum industry, they challenge mergers at lower levels of
concentration than they do in other industries. As a result, the FTC
staff said that they scrutinize the petroleum industry more closely
than other industries, while still using the same merger review
guidelines.
Evaluating potential gains in efficiency: FTC's fourth step is to
evaluate any claims from the merging parties' that the merger would
improve efficiency in the petroleum industry. For example, some mergers
have the potential to make the merged firms more efficient in their
daily operations by allowing them to achieve economies of scale, and
this may result in lower prices for consumers. If FTC determines that a
merger could result in substantial efficiency gains, it may allow a
merger that would otherwise potentially harm consumers. However, the
guidelines acknowledge that these efficiency gains may not be realized
in the way that merging firms claim.
Considering potential failing assets argument: FTC's fifth step is to
evaluate whether the merger will result in a firm remaining in the
market that would have otherwise gone out of business. FTC would be
less likely to challenge such a merger if it would allow a firm to
remain a viable market participant, according to FTC staff with whom we
spoke.
To determine the extent of the competitive factors that we have
previously discussed, FTC staff told us they work closely with
petroleum industry participants, often review thousands of pages of
evidence, and work with antitrust officials in the states affected by
the merger. The merger review process could last under 30 days if the
agency does not request additional information from the merging
parties; however the process could last 12 months or more if extensive
analysis is needed and the agency issues a second request for more
information, according to FTC staff. After analysis of the factors in
the guidelines, FTC has three options: (1) allow the merger; (2)
challenge the merger in court; or (3) allow the merger with certain
remedial actions, such as requiring firms to sell off, or divest,
overlapping assets that have the greatest potential to harm
competition. For example, in the petroleum industry, this might mean
requiring one of the merging firms to sell a product terminal in an
area where the merging partner owns one.
According to FTC data, between 2000 and 2007, there were 360 mergers in
the petroleum industry that were required to file with the agency.
[Footnote 26] After reviewing these proposed mergers, FTC opened
investigations in 64 mergers and issued second requests in 24 of them.
FTC allowed 9 mergers to proceed with remedial actions, while the
threat of agency challenges led to the abandonment of 5 of them. FTC
allowed the rest to proceed without modification. To make these
decisions, FTC performed prospective merger reviews to predict the
effects of the mergers before they were completed. However, we found
that after reviewing proposed mergers, FTC does not regularly look back
at past decisions to determine the actual effects of the merger on
competition or prices. In 2004, we reported that FTC had released its
first retrospective review[Footnote 27] of any kind for approved
mergers in the petroleum industry.[Footnote 28] FTC has since released
two additional retrospective reviews of petroleum industry mergers. The
first one, in 2004, was of a 1998 joint venture between Marathon Oil
Company and Ashland Incorporated; the second one, in 2005, was of a
1999 acquisition of Ultramar Diamond Shamrock Corporation by Marathon
Ashland Petroleum; and the third one, in 2007, was of the 1997
acquisition of Thrifty Oil Company by ARCO. According to its published
reports on these studies, FTC chose to review these mergers because
evidence suggested there was a chance that they might have led to
higher gasoline prices in areas affected by the mergers. None of the
studies found that the mergers had any adverse effects on gasoline
prices, although FTC indicated that the studies provided important
lessons that would inform their future merger review work.
A number of petroleum industry experts, industry participants, and FTC
all view retrospective merger reviews as a potentially valuable part of
FTC's efforts to maintain competition in the petroleum industry. An FTC
commissioner, who is now the FTC Chairman, noted in a 2006 article that
without retrospective reviews, it is rarely possible to determine
whether the assumptions and hypotheses that motivated a merger review
decision were sound.[Footnote 29] Some experts also noted that
examining mergers retrospectively can provide valuable insights that
FTC can apply during subsequent merger reviews. Specifically,
retrospective reviews bring to light any effects that do not occur as
predicted. For example, a study that FTC published in 1999 looked back
at a number of cases where it had required divestitures in a variety of
industries and found that only three-quarters of divestitures succeeded
to some degree, which would leave fewer competitors than predicted and
potentially harm competition. In addition, as noted in FTC and DOJ's
Merger Guidelines, efficiency gains that could mitigate the harmful
effects of a merger may not always be realized. Retrospective reviews
would allow FTC to identify such situations, and this could help inform
the agency's future merger reviews.
FTC staff told us that if they find anticompetitive behavior in
retrospective reviews, they have the ability to pursue corrective
action to reintroduce competition into the market. For example, FTC has
the power to pursue actions, such as forced divestures or conduct-based
remedies, to bring competition back into the market place. In fact, FTC
has identified anticompetitive behavior in retrospective merger reviews
it conducted in other industries and has taken corrective actions. In
2005, FTC, using results from a retrospective review of a hospital
merger in suburban Chicago, found that the merged hospital used market
power to set prices in an anticompetitive manner.[Footnote 30] Using
these findings, FTC filed suit and the courts issued numerous cease-and-
desist orders to the hospitals, which brought price competition back
into the healthcare market according to FTC staff.
In addition, some experts with whom we spoke said that retrospective
merger reviews would allow FTC to better measure the success of its
merger review program. The Government Performance and Results Act of
1993 (GPRA)[Footnote 31] emphasizes that agencies need to establish and
measure performance toward results-oriented goals, which in FTC's case
means that the agency should not measure success by how many mergers it
reviews, but rather by whether merger reviews achieved the goal of
maintaining competition.[Footnote 32] Currently, FTC's key measure of
its merger review performance is to determine the number and the value
of potentially anticompetitive mergers that it successfully challenged.
However, this measure does not involve an evaluation of mergers that
ended up being harmful, but that the agency did not challenge after
predicting they would be harmless. In addition, in cases where mergers
proceed with remedial actions, FTC's key performance measure indicates
a successful outcome, even though remedial actions, such as
divestitures, may not always succeed. Using retrospective merger
reviews to look at the actual effects of completed mergers on
competition would better show whether the program achieved the goal of
maintaining competition.
However, FTC does not have--and does not plan to develop--formal
guidelines or criteria on how often retrospective reviews should occur
or how to conduct them, instead the agency relies on an informal
approach. For example, staff reported that in the past two
retrospective reviews, staff chose to review completed mergers that FTC
subjected to careful antitrust investigation, but did not challenge;
otherwise, there are no defined guidelines. In the absence of regular
retrospective reviews, FTC may not be able to regularly apply lessons
learned from past merger decisions to future reviews, assess the
performance of its merger review program, or take remedial actions in
instances where completed mergers ended up harming competition. FTC
staff cited a lack of time and resources as the primary challenge to
its ability to conduct retrospective reviews. Specifically, staff
reported that it was difficult to devote the time and staff resources
required to conduct these types of reviews, and stated that
retrospective reviews of mergers in the petroleum industry are
important, yet lower priority, compared with other mission-central
activities, such as premerger reviews. In addition, according to
economists with whom we spoke, developing the statistical models needed
to conduct retrospective reviews is complex and time consuming. They
indicated that there are numerous factors affecting the price of
gasoline that must be controlled for in order to attribute any changes
in price to a particular merger. Nonetheless, we have reported in prior
work that agencies with limited resources can implement risk-based
guidelines to selectively look back at agency decisions.[Footnote 33]
Risk-based guidelines provide criteria for taking action based on the
likelihood that agency goals were not met. These would allow FTC to
selectively use resources to evaluate past merger decisions in
circumstances where it deems there is greater likelihood, and hence
risk, that the goal of maintaining competition was not met.
FTC Performs Other Supplemental Activities to Monitor Petroleum
Industry Markets:
In addition to its efforts to maintain competition through merger
review, FTC also performs other activities to monitor petroleum
markets, including monitoring fuel prices, conducting special
investigations, and engaging in consumer protection activities. FTC
implemented a price-monitoring program in 2002 for wholesale and retail
prices of gasoline in an effort to identify possible anticompetitive
activities and determine whether a law enforcement investigation was
warranted. The program tracks retail gasoline and diesel prices in 360
cities across the nation and wholesale prices in 20 major urban areas.
FTC's Bureau of Economics staff receives daily data from the Oil Price
Information Service (OPIS), receives weekly information from the
Department of Energy's public Gas Price Hotline, and reviews other
relevant information that might be reported to FTC directly by the
public or other federal or state government entities. FTC uses a
statistical model to determine whether current retail and wholesale
prices each week are consistent with historical patterns and to alert
FTC staff when gasoline prices are out of expected ranges for that
region. Staff can then conduct more in-depth analyses to determine
whether there are violations of antitrust laws. Since its establishment
in 2002, the price-monitoring program has not identified any price
anomalies that would violate the antitrust laws; it attributes most
price anomalies to refinery or pipeline outages or changes in air
quality standards. FTC staff reported that outside economists and FTC
staff reviewed the program's methodology and found it to be effective.
FTC's staff indicated that they also conduct special investigations of
the petroleum industry when warranted. Occasionally, such
investigations are requested by Congress. For example, in 2006, the
agency published a congressionally mandated report entitled
Investigation of Gasoline Price Manipulation and Post Katrina Gasoline
Price Increase that evaluated price anomalies after Hurricanes Katrina
and Rita. This investigation did not find evidence of anticompetitive
behavior in any of the industry segments during or after the
disruptions. The agency also completed an investigation into gasoline
and diesel prices in the Pacific Northwest in 2006 and 2007 that found
prices appeared to be consistent with ordinary market conditions. In
addition to their special investigations, the agency also publishes
various reports on the petroleum industry that are, mainly, agency-
driven. For example, in 2004, FTC published a report on mergers and its
antitrust enforcement activities in the petroleum industry.[Footnote
34] Furthermore, the Commission's Bureau of Consumer Protection has
brought actions to protect consumers from false or unsubstantiated
advertising claims regarding the effectiveness or energy-saving of
fuels or automotive products.
In addition, on August 13, 2008, FTC issued a proposed rule that would
make it unlawful for any person to engage in fraudulent or deceptive
acts in connection with the purchase or sale of crude oil, gasoline, or
petroleum distillates to manipulate wholesale petroleum markets.
Therefore, fraudulent or deceptive acts--including false reporting to
private reporting services or misleading announcements by refineries,
pipelines, or investment banks--may be covered by the proposed rule.
However, it is not yet clear how this rule will impact FTC's
enforcement or monitoring in petroleum industry markets.
Other Federal and State Agencies Also Monitor Petroleum Industry
Markets:
Besides FTC, other federal agencies have a role in monitoring petroleum
industry markets. Table 6 provides general examples of three federal
agencies' responsibilities regarding petroleum markets. Some states are
also involved in monitoring petroleum markets that affect their
constituents.
Table 6: Other Federal Agencies That Monitor Petroleum Industry Markets
and Examples of Their Roles:
Federal agency: Federal Energy Regulatory Commission;
Examples of roles in monitoring petroleum industry markets: Determines
pipeline shipping rates by regulating the terms of contracts for
pipelines to create open access to all parties.
Federal agency: Commodity Futures Trading Commission;
Examples of roles in monitoring petroleum industry markets: Monitors
futures markets to encourage their competitiveness and efficiency and
to protect market participants against fraud, manipulation, and abusive
trading practices.
Federal agency: Energy Information Administration;
Examples of roles in monitoring petroleum industry markets: Collects,
analyzes, and forecasts petroleum data to allow for market monitoring,
to promote sound policy making, and to create efficient energy markets.
Source: GAO analysis of agency documents.
[End of table]
FERC has a role in monitoring and regulating petroleum industry markets
at the midstream level--where crude oil and petroleum products are
transported--by ensuring that all parties have access to common-carrier
pipelines.[Footnote 35] While FERC does not proactively monitor
pipeline markets, it regulates the open access to pipelines by
determining and enforcing tariffs--that is, the rates charged and the
terms under which shippers send their products through the pipelines
and the rules governing pipeline access. According to FERC officials,
pipeline companies establish their initial rates either (1) by filing
an application with FERC requesting a rate based on the total cost-of-
service for the pipeline or (2) by proving to FERC that shippers have
agreed to pay another proposed rate. As we have previously discussed,
FERC also allows some pipelines to charge market-based rates in regions
where it deems there is adequate competition. FTC still has the
authority to enforce antitrust legislation and review mergers to
maintain competition in this segment of the industry. In some
instances, FERC can also intervene to prevent potentially
anticompetitive behavior. For example, FERC officials cited an instance
where a pipeline company denied access to a crude oil producer who
wanted to ship high sulfur crude oil out of the Gulf Coast. The
pipeline company said that it did not want to have high sulfur crude
contaminating its pipeline, although the shipper alleged that the
pipeline company was acting in collusion with a rival crude oil
producer by restricting access to the pipeline. After receiving the
complaint, FERC officials worked with the parties to resolve the
matter.
The Commodity Futures Trading Commission (CFTC) monitors futures
markets to ensure competitiveness and efficiency, and protects market
participants against fraud, manipulation, and abusive trading
practices.[Footnote 36] Participants in futures markets, such as the
New York Mercantile Exchange, often use futures contracts,[Footnote 37]
which contribute to the smooth functioning of petroleum product markets
throughout the United States. Buyers and sellers in the futures markets
primarily enter into futures contracts to lock in prices on volatile
goods or to speculate rather than to exchange physical goods, which is
the primary activity of the spot markets.
CFTC has several divisions that monitor and enforce competition in the
futures markets. The Division of Enforcement investigates and
prosecutes alleged violations of the Commodity Exchange Act and
Commission regulations. One example of market manipulation in the crude
oil markets occurred in 2003, when one company attempted to manipulate
the spot market price of West Texas Intermediate crude oil. The case
was brought by CFTC and settled in 2007 for a $1 million civil penalty.
In addition, CFTC has created advisory committees to provide input and
make recommendations to the Commission on a variety of regulatory and
market issues that affect the integrity and competitiveness of U.S.
markets. These committees include an Energy Markets Advisory Committee
that was created in 2008 to advise CFTC on important new developments
in energy markets that may raise new regulatory issues, and on the
appropriate regulatory response to protect market competition, increase
efficiency, and create opportunities in the futures markets.
The Department of Energy's EIA also has a role in analyzing and
monitoring petroleum industry markets. Specifically, EIA collects,
analyzes, and forecasts data on the supply, demand, and prices of crude
oil and petroleum products, including inventory levels, refining
capacity and utilization rates, and product movements into and within
the United States. EIA's reports are prepared independently of
Administration policy, and EIA does not provide conclusions or
recommendations in its analyses. FTC relies on EIA's comprehensive and
independent data and several state agencies with whom we spoke use
these data to review mergers, conduct market concentration analysis,
and analyze wholesale and retail gasoline markets. For example, FTC
uses EIA data to support enforcement action cases and, in 2007, 33
cases were pursued, the highest number of cases in the last 5 years.
[Footnote 38]
In addition to the agencies that monitor petroleum industry markets,
the Environmental Protection Agency (EPA) also has a role in helping to
maintain the flow of petroleum products during emergency supply crises
by providing waivers for refineries to allow them to sell products that
would not normally meet environmental standards. For example, after
supply disruptions resulting from Hurricanes Katrina and Rita, EPA
indicated that it met with local market participants and, following
review of the market circumstances, granted waivers on environmental
quality specifications. According to EPA, this ensured there were no
regulatory obstacles to providing an adequate supply of gasoline and
diesel to the affected regions.
Most states do not proactively monitor petroleum industry markets,
although the level of monitoring varies from state to state, according
to the National Association of Attorneys General (NAAG). Some states do
not monitor fuel prices or other aspects of the petroleum industry at
all, while other states actively monitor market structure or fuel
prices on a continual basis.[Footnote 39] Financial, political, and
other factors may be the reason for whether and how actively states
monitor petroleum industry markets. State agency officials with whom we
spoke described a number of steps they can take in monitoring their
petroleum industry markets.
First, some states collect and analyze data on the industry--especially
at the gasoline wholesale and retail levels. For example, after
Hurricane Katrina, according to the Pennsylvania Office of Attorney
General, the state decided to monitor retail gasoline prices during
that period of reduced gasoline supply. The state ended up bringing
charges against retailers that were allegedly setting unfair prices.
States may also enact legislation to make it mandatory for companies to
provide data on wholesale gasoline sales. For example, Maine
implemented a statute called the Petroleum Market Share Act, which
requires petroleum wholesalers and refiners to provide annual reports
to the attorney general who uses this information to calculate market
concentration for fuel suppliers, ensuring that the state has
historical data to proactively track market concentrations. Second,
states may enact legislation to prosecute unfair practices that lead to
very high prices, that is, "price gouging." According to a study by the
Congressional Research Service (CRS),[Footnote 40] at least 28 states,
the District of Columbia, and 2 U.S. territories have some form of
price gouging legislation, although several states we spoke with said
it was generally difficult to prove that unfair pricing had occurred.
Currently, there is no federal price gouging law, but the 110th
Congress has proposed several bills that address the issue. Third, most
of the states we contacted also develop gasoline pricing reports to
inform the public of the changes in the petroleum industry. For
example, the state of Washington published a comprehensive interagency
report in 2008 to address how gasoline prices have increased over the
years and identified in a comparative analysis the different components
contributing to the rising prices. Finally, several states often
collaborate with FTC on merger reviews because they have local
knowledge of the companies and provide expertise that federal agencies
may lack. For example, the California Attorney General has worked
cooperatively with FTC to review a number of mergers, including large
mergers such as the Exxon Mobil merger, and provided legal and
technical expertise on the California market, such as knowledge of the
intricacies of California pipelines. Overall, states are interested in
improving their monitoring of petroleum industry markets in their
areas, according to NAAG.
Conclusions:
Because there are few substitutes for transportation fuels such as
gasoline, consumers have little choice but to pay higher prices when
they rise. As a result, consumers want assurance that the prices they
pay are determined in a competitive and fair marketplace. FTC plays a
key role in maintaining petroleum industry competition and in assuring
the public that mergers have not led to unfair price increases.
Maintaining competition in the petroleum industry requires FTC to fully
understand the effects of its merger decisions on competition and fuel
prices. While FTC considers the potential effects of mergers during its
proposed merger review, the agency does not routinely look back to
determine whether the actual effects of the merger reflect what the
agency predicted. It is possible that the actual effects of a completed
merger could be different and not realized until much later. Without
more regular retrospective reviews, the agency does not know whether a
completed merger contributed to fuel price increases or decreases or
whether the merger improved or harmed competition. In addition, FTC
cannot apply lessons learned to future merger reviews and is unable to
effectively monitor its own performance in delivering the intended
result of "maintained" competition. We believe, along with the experts
with whom we spoke, including those at FTC, that regular retrospective
analyses would help the agency better understand the actual impacts of
mergers. While not all completed mergers would likely warrant
retrospective reviews, an approach that uses risk-based guidelines
would allow the agency to selectively review key mergers with the goal
of maintaining competition in the petroleum industry.
Recommendations for Executive Action:
To enhance FTC's effectiveness in maintaining competition in the U.S.
petroleum industry, and to make efficient use of FTC's resources, we
recommend that the FTC Chairman lead efforts to (1) conduct more
regular retrospective analyses of past petroleum industry mergers and
(2) develop risk-based guidelines to determine when to conduct them.
Agency Comments:
We provided a copy of our draft report to FTC for its review and
comment. FTC's Chairman provided written comments, which are reproduced
in appendix III, along with our responses. In general, the Chairman
commented that the recommendations in this report were consistent with
the goals outlined in FTC's current self-evaluation initiative, and
that FTC would consider our recommendations to conduct more regular
retrospective analyses of petroleum industry mergers using a risk-based
approach along with other recommendations resulting from this
initiative. The Chairman also noted that analyzing market concentration
is just the starting point in FTC's antitrust analysis, and emphasized
that each merger involves a unique set of facts and other competitive
factors that the agency considers. He also noted the difficulties in
delineating geographic antitrust markets, and we responded to each of
these concerns in appendix III. We clarified other material in this
report in response to technical comments by the Chairman as
appropriate.
We are sending copies of this report to interested congressional
committees and the FTC Chairman. Copies of this report will be made
available to others upon request. In addition, this report is available
at no charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact us at (202) 512-3841, gaffiganm@gao.gov, or (202) 512-2642,
mccoolt@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix IV.
Signed by:
Mark E. Gaffigan:
Director, Natural Resources and Environment:
Signed by:
Thomas McCool:
Director, Center for Economics Applied Research and Methods:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of this report were to examine (1) mergers in the U.S.
petroleum industry and changes in market concentration since 2000 and
(2) the steps that the Federal Trade Commission (FTC) uses to maintain
competition in the U.S. petroleum industry, and the roles other federal
and state agencies play in monitoring petroleum industry markets.
To examine U.S. petroleum industry mergers since 2000, we primarily
used merger data that we purchased from John S. Herold, Inc. (J.S.
Herold), an independent research and consulting firm that collects data
and conducts analyses for the energy sector. J.S. Herold collects
information on all publicly announced mergers in the petroleum industry
and records key financial and operational data about these mergers in a
large database. Prior to purchasing information from this database, we
assessed the reliability of these data and found them sufficiently
reliable for the purposes of this report. The data purchased from J.S.
Herold included extensive information on all petroleum industry mergers
from 1991 through 2007, including but not limited to, company names,
locations, merger values, and key assets involved in the mergers. The
J.S. Herold data were limited to mergers that exceeded $10 million in
value, and we limited our review to mergers that were principally
located in the United States or that we had reason to believe involved
U.S. locations.[Footnote 41] In addition, we excluded mergers whose
main asset was natural gas or a natural gas product as well as mergers
that occurred before 2000. For the remaining data, we conducted a
variety of analyses to better understand merger activity. These
analyses included, but were not limited to, evaluating the number,
type, and transaction value of mergers over time as well as evaluating
the distribution of mergers across industry segments and subsegments.
To better understand and contextualize the results of our analysis of
the J.S. Herold data, we also reviewed industry journal articles and
conducted interviews with industry officials and experts to better
interpret merger activity over time.
To examine the rationale for petroleum industry mergers since 2000, we
conducted interviews with various representatives from all three
segments of the petroleum industry. For information on the upstream
segment, we interviewed representatives from large, vertically
integrated oil companies as well as a smaller, independent exploration
and production company. For information on the midstream segment, we
primarily relied on industry publications because midstream operators-
-including pipeline and tanker operators--were less available for
interviews or comment. For information on the downstream segment, we
interviewed representatives from vertically integrated companies. In
addition, we interviewed a number of other firms operating in the
downstream segment, including refiners, marketers, and retailers of
petroleum. To better contextualize the information provided in these
interviews, we also conducted a literature search of articles that
addressed rationales for petroleum industry mergers from 2000 through
2007. Lastly, we interviewed a number of experts--including academics
specializing in the petroleum industry or antitrust matters as well as
industry representatives--for additional context and information on
recent merger activity.
To calculate market concentrations (HHI) at the upstream level, we
purchased data from the Oil and Gas Journal containing crude oil
production information for the 100 largest international companies
between 2000 and 2006. These data included state-owned oil companies,
such as those in Iran and Saudi Arabia. After conducting data
reliability assessments, such as looking for out-of-range and missing
values, we found these data to be sufficiently reliable for our use in
calculating upstream HHI. We used a single global market to calculate
HHI in this segment because, according to experts with whom we spoke,
crude oil prices are set on world markets.
Because of the lack of readily accessible data on the midstream
petroleum industry, which simultaneously includes the pipeline, barge,
and trucking industries, we were not able to calculate HHI in this
segment.
To calculate HHI for the refining segment we defined geographic markets
(see app. II for more details on how we defined geographic markets),
and then estimated the gasoline production capacity of United States
refineries by using annual data from EIA that contained capacity
information for refineries in the United States and the Caribbean.
After conducting data reliability assessments, such as looking for out-
of-range and missing values, we found these data to be sufficiently
reliable for our use in calculating HHI.
After discussions with the Department of Energy's Energy Information
Administration (EIA), we chose to look specifically at the capacity of
the following three units that account for most gasoline production
capacity at U.S. refiners:
1. Catalytic reformer.
2. Fluid catalytic cracker.
3. Alkylation unit.
Because, according to EIA, two of these three units do not exclusively
contribute to gasoline capacity, we had to adjust their output values
in the data. For example, according to EIA estimates, only about 65
percent of fluid catalytic cracker (FCC) output is likely to contribute
to gasoline capacity, while 90 percent of a catalytic reformer's output
is likely to contribute to gasoline capacity. These values can vary
from refinery to refinery, but they were sufficient for our purposes.
Footnote 42] For most refineries, we followed EIA's guidance and
multiplied the capacity of the catalytic reformer by 0.9, the capacity
of FCC by 0.65, and the capacity of the alkylation unit by 1.0.
[Footnote 43] By summing these three values, we were able to estimate
the relative gasoline production capacity of each refinery. [Footnotes
44 and 45]
EIA completed the HHI calculations for wholesale gasoline suppliers at
the state level for us, due to the proprietary nature of these data.
EIA used its prime supplier data to make these calculations, which
contain the gasoline volumes sold in every state by wholesale supplier.
[Footnote 46] After discussions with EIA officials, we found these data
to be sufficiently reliable for EIA to calculate HHI for us.
To examine FTC's processes for ensuring competition in the petroleum
industry, we interviewed FTC staff on several occasions regarding their
merger review procedures. In addition, we asked FTC staff a series of
questions in writing, and they provided us with detailed written
responses. We also analyzed a number of official agency documents.
Finally, we interviewed experts in the fields of antitrust and
industrial organization, and petroleum industry officials who provided
us with comments on FTC's merger review procedures.
To identify federal and state agencies' role in monitoring petroleum
industry markets, we conducted interviews and reviewed studies and
reports from several federal and state agencies. We chose certain
federal agencies to be studied on the basis of their regulatory
involvement with the various segments of the petroleum industry. We
contacted the Federal Energy Regulatory Commission, Commodity and
Futures Trading Commission, Environmental Protection Agency, Department
of Transportation, Department of Energy, EIA, and Federal Maritime
Commission because of their potential involvement in monitoring
petroleum industry markets. We reviewed the federal agency Web sites,
press releases, and reports published by these agencies before the
interviews to understand their role in monitoring the petroleum
industry markets and whether they would be good resources for further
exploration. We conducted interviews with several federal officials
from the aforementioned federal agencies. The questions were tailored
to effectively obtain the information necessary to understand their
involvement in monitoring.
To identify state agencies' role in monitoring petroleum industry
markets, we conducted interviews and reviewed studies and reports from
several state attorneys general and energy-specific agencies. We chose
the states to be studied on the basis of whether we thought they (1)
had significant crude oil extraction and production; (2) had numerous
refineries; (3) had isolated markets; (4) had coastal port terminals;
and (5) were, according to expert opinion, progressive or proactive, or
both, in monitoring competition in the segment of the petroleum
industry active in their state. We also wanted to make sure that we had
adequate geographic coverage of the country. The selected state
attorneys general were from Alaska, California, Connecticut, Louisiana,
Maine, New York, Pennsylvania, Texas, and the state of Washington.
During the interviews with the selected states, we conducted a snowball
sample where we asked our many interviewees if they knew of other
states that had proactive market monitoring. We also asked if their
state had an energy commission or another authority to monitor the
petroleum industry. We also interviewed an official with the National
Association of Attorneys General (NAAG), who catalogues information on
individual state roles in monitoring petroleum industry competition.
Before each interview, we reviewed the state agency Web sites, press
releases, and reports published by the agencies and developed
semistructured questions that addressed monitoring petroleum industry
markets.
We conducted this performance audit from March 2007 to September 2008
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Defining Geographic Refinery Markets:
To define geographic refinery regions for the purposes of calculating
HHI, we collaborated with staff from the Oil Price Information Service
(OPIS), EIA, and FTC who had expertise on petroleum product markets,
and who helped us to assign individual refineries to market regions.
Our methodology used "spot markets" as the basis for defining
geographic refinery regions. Spot markets reflect the historical
grouping of U.S. refineries into seven refining centers. Energy traders
consider gasoline available for delivery at these refining spot markets
in order to price gasoline that is bought and sold at the wholesale
level, and gasoline production in these refining groups drives prices
on the spot markets. The seven spot markets in the United States, which
we used as our refinery regions, are in Los Angeles, San Francisco, the
Gulf Coast, New York Harbor, Chicago, Tulsa (or Mid-continent), and the
Pacific Northwest. Most refineries in each region are able to supply
gasoline to the larger geographic region that surrounds them, which
also includes areas to which they are linked via pipeline.[Footnote 47]
In addition, gasoline can flow between regions, although, according to
experts with whom we spoke, under normal market conditions (i.e.,
absent a supply disruption, such as a hurricane) refiners are usually
unable to ship gasoline to other regions in short notice to discipline
the market because of the following reasons:
* Gasoline specifications in one region may not be suitable for other
regions.
* Many refiners operate at near maximum capacity and may not have the
ability to increase production to meet additional demand in other
markets.
* Transportation options between regions may be nonexistent or too
costly to ensure a profit with only small price differentials between
gasoline in each region.
* When pipelines are present, it may not be feasible to use them
because of the following:
* The refinery may not have a link to the pipeline.
* The refinery may not have the rights to an adequate allocation of
pipeline space.
* It may take too long for gasoline shipped via pipeline to arrive in
another region, and experts with whom we spoke said that the industry
is reluctant to respond to what it often perceives as temporary price
increases.
Despite these factors that support using spot markets as the basis for
geographic refinery regions, there are still limitations. For example,
according to experts, there are certain areas of the country where
isolated refiners cannot send gasoline to any of the seven spot market
centers and end up selling it locally, which suggests that there are,
in addition to the seven spot markets, other smaller local refinery
markets. Experts from EIA, FTC, and OPIS, mentioned that refineries in
states like Alaska and Hawaii primarily supply their local regions,
making them more subject to local market conditions, rather than larger
regional factors. As a result, we removed these refineries from our
calculations.[Footnote 48] In a number of cases, we counted a refinery
in two spot markets. For example, according to the experts with whom we
spoke, refineries in Bakersfield, California, can supply either the San
Francisco region or the Los Angeles region.[Footnote 49] However,
according to one OPIS official, gasoline suppliers still tend to
predict their future fuel costs based on prices in one of the seven
regional spot markets that we described, even though the fuel they buy
may come only from a local refinery. In addition, FTC staff indicated
that for merger review purposes, they would define more specific
geographic markets, often using private company data, although they
indicated that the markets we defined here are still useful for looking
at U.S. refinery market concentration more broadly.
[End of section]
Appendix III: Comments from the Federal Trade Commission:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
Federal Trade Commission:
The Chairman:
Washington, DC 20580:
September 17, 2008:
Mr. Mark E. Gaffigan:
Director, Natural Resources and Environment:
United States Government Accountability Office:
Washington, D.C. 20548:
Mr. Thomas McCool:
Director, Center for Economics Applied Research and Methods:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Messrs. Gaffigan and McCool:
The Federal Trade Commission ("FTC" or "Commission") is grateful for
the opportunity to comment on the draft report submitted by the
Government Accountability Office ("GAO") to the Commission on September
2, 2008, and entitled: Energy Markets: Analysis of More Past Mergers
Could Enhance Federal Trade Commission's Efforts to Maintain
Competition in the Petroleum Industry (GAO-08-1082) ("Report"). The
Report discusses market concentration in various segments of the
petroleum industry from 2000 to 2007 and the steps the FTC takes to
maintain competition in the petroleum industry. [Footnote 50]
The Commission staff has been pleased to work with GAO staff conducting
this review since March 2007, by providing information and discussing
the processes that the Commission uses in reviewing mergers and
acquisitions in the petroleum industry.[Footnote 51] The Commission
believes that the Report will add to the understanding of the complex
petroleum industry and the Commission's role in enforcing the antitrust
laws related to mergers in that industry. Finally, as discussed in more
detail below, the Commission thinks that GAO's recommendation that the
FTC conduct regular reviews of some past petroleum mergers using risk-
based criteria is consistent with the Commission's self-evaluation
initiative currently underway in connection with the upcoming 100th
anniversary of the Commission's creation. The Commission provides below
more detailed comments on the draft Report.[Footnote 52]
I. Comments On The GAO Report:
Description of the Petroleum Industry and Mergers in the Petroleum
Industry:
GAO's purpose in looking at the industry was to describe the general
competitive status of the petroleum industry for the period 2000-2007.
The Report describes segments of the petroleum industry and concludes
that concentration has not changed significantly during the period
January 2000-May 2007.
Concentration is just the starting point for the Commission's antitrust
analysis of a merger or acquisition. [See comment 1] The Commission
notes that when it describes a petroleum market for antitrust law
enforcement purposes, the Herfindahl-Hirschman Index ("HHI") numbers
must relate to a relevant antitrust market. HHI numbers that do not
describe relevant antitrust markets have little competitive
significance. Even in properly delineated antitrust markets, the
Commission would look beyond the HHI numbers to the competitive
behavior of the participants in a given market and several other
factors, including, but not limited to, barriers to entry and product
differentiation, in order to determine whether the antitrust laws have
been violated. As modem District Court and Court of Appeals decisions
have emphasized, using HHI numbers alone to assess the competitiveness
of a petroleum market sector provides a one-dimensional view rather
than the multifaceted picture required for a thorough analysis of
competitive conditions in a market. Before the Commission could draw
any conclusions about the competitive effects of a particular merger,
the law would also require the Commission to examine, among other
things, the barriers to entry, the relationship of the players in a
given market, and how closely the merging parties' products or services
can substitute for one another. Accordingly, the Report's utility as a
guide to conducting an antitrust assessment of a specific market or
transaction is constrained. [See comment 1]
Description of the FTC's Processes in Reviewing Petroleum Mergers and
Monitoring the Industry:
The Report describes five steps that the FTC takes in reviewing
petroleum mergers: (1) defining markets and analzying competition; (2)
predicting potential adverse effects on competition; (3) evaluating
barriers to entry for new market entrants; (4) evaluating potential
gains in efficiency; and (5) considering potential failing assets. The
Report does not make clear that each merger involves a unique set of
facts particular to that transaction, or that the factors to be
analyzed in an antitrust evaluation of a merger - market concentration,
barriers to entry, efficiencies, etc. - may vary in relative
significance in each case. For example, the Report uses the HHI
extensively to describe the markets and the first step of the FTC
analysis. This measure of concentration is used only very initially in
the antitrust analysis of a merger and may not play a determinative
role in the final analysis. See, e.g., Commentary on the Merger
Guidelines 2 (Mar. 2006), available at [hyperlink,
http://www.ftc.gov/os/2006/03/CommentaryontheHorizontalMergerGuidelinesM
arch2006.pdf]. [See comment 2]
For example, the Report identifies seven U.S. "spot market" regions in
which to evaluate changes in concentration. As the Report correctly
notes, these regions do not correspond to properly delineated antitrust
geographic markets. In other words, the refining regions described in
the Report should not be read to suggest that one of these regions is
more or less likely to include the indicia required to demonstrate that
any potential merger may have adverse competitive effects.
Significantly, the refiners GAO associates with the New York region do
not include a large number of actual and potential suppliers of bulk
gasoline shipments that would affect the NY Harbor spot price data used
in the Report. Moreover, although GAO also identifies states as
geographic markets for wholesale supply, relevant wholesale markets are
unlikely to conform with state boundaries. In some situations,
wholesale markets may consist of only a part of a state; in other
cases, they may consist of at least parts of more than one state. [See
comment 3]
To the extent that appropriate product and geographic markets are
defined, other factors significant to competitive outcomes seem to be
ignored if the analysis relies too heavily on simple concentration
measures. [See comment 1] For example, despite a seemingly significant
market share based on a first-cut HHI measurement, a competitor that
cannot expand its output in response to a price increase may have very
limited significance as a constraining factor in the market. In this
case, the HHI may severely understate a merger's competitive
significance. On the other hand, consider a market that allows quick
and easy access by suppliers from outside the market; players that have
a very small market share but an ability to provide additional product
in response to a price increase could have a significant effect in
constraining the behavior of market participants. In yet another
scenario, a merger between parties with significant shares could pose
little antitrust concern where the products offered by each firm are
highly differentiated from each other. Market differentiation affects
the ability of one firm to substitute its product for another in a
given market. This condition would mitigate concern arising from a
simple calculation of market shares in an undifferentiated market. In
sum, HHIs or other arithmetic measures of market concentration may end
up playing minor roles in the overall analysis in such instances. [See
comment 1]
Generally, steps 4 and 5 as described in the GAO Report (efficiencies
and failing assets) are defenses that the merging parties raise in
response to evidence that suggests that the merger may be
anticompetitive. For example, if the FTC is convinced that efficiencies
produced by the merger outweigh its potential harm, or if the acquirer
provides the least anticompetitive acquisition of a failing firm that
would prevent its assets from exiting the market, these factors may
shift the balance in determining whether the merger would potentially
violate the antitrust laws.
Other Considerations:
Footnote 15 to GAO's draft Report mentions that the FTC can - and
does - challenge mergers that are not subject to the Hart-Scott-Rodino
("HSR") Act's filing requirements. This point deserves greater
emphasis, because some large transactions can escape the HSR filing
requirements because of the structure of the transaction. In addition,
the FTC sometimes investigates mergers between firms that operate in
different, but related, segments of the industry. This concept also is
not captured in GAO's analysis of the market segments. [See comment 1]
The Gasoline and Diesel Price Monitoring Project:
The Report also recognizes that the Commission staff monitors petroleum
industry markets. The methodology that the staff uses in the Gasoline
and Diesel Price Monitoring Project was extensively reviewed by FTC
staff (including the Director of the Bureau of Economics) and by
several outside economists, as noted in staff's written response to GAO
questions on that Project.
Retrospective Reviews of Petroleum Mergers:
Since 2004, the Commission staff has released publicly three
retrospective reviews of petroleum mergers.[Footnote 53] FTC staff
chose to review the 1998 joint venture between Marathon and Ashland,
the 1999 acquisition of Ultramar Diamond Shamrock by Marathon Ashland
Petroleum, and the 1997 acquisition of Thrifty Oil Company by ARCO. FTC
staff chose to review these acquisitions because these transactions'
structural impact suggested the potential for significant competitive
concerns or because commenters suggested that they possibly had led to
higher gasoline prices in the geographic areas affected by the mergers.
The studies found, however, that none of the mergers had any adverse
effect on gasoline prices.
The Report notes that not all consummated mergers would likely warrant
retrospective reviews. We agree. As discussed below, the Commission's
current self-evaluative initiatives cover not only petroleum mergers
but all of the Commission's activities.
II. The FTC'S Continuing And Evolving History Of Self-Evaluation:
The Commission's Self-evaluative Initiatives:
The Commission is first and foremost a law enforcement agency. Its
primary task is to enforce the laws with respect to both competition
and consumer protection. The Commission also recognizes that the design
and implementation of future law enforcement efforts can benefit
substantially from efforts to evaluate past enforcement decisions. As
indicated below, the Commission actively seeks to achieve a sensible
balance in the allocation of its resources between law enforcement and
other activities, including retrospectives as part of its self-
evaluation process.
Beyond the three Bureau of Economics retrospectives on the petroleum
industry mentioned above, the Commission has a longstanding history of
evaluating its activities, particularly with respect to antitrust law
enforcement in the merger area.[Footnote 54] For example, in 1999 the
Commission authorized release of the staff report, A Study of the
Commission's Divestiture Process, which examined Commission orders
issued from 1990 to 1994 that required divestiture to remedy the
anticompetitive effects resulting from a merger. The study recommended
a number of changes in the FTC's divestiture process and divestiture
order provisions. Following this effort, the Commission continued to
examine merger remedies and to adjust its policies accordingly.
[Footnote 55] The Commission conducted retrospectives of the hospital
industry to determine whether the harms alleged to arise from certain
transactions came to fruition when the FTC did not obtain the relief it
sought. The amount of effort and expertise that the Commission has
devoted to evaluations of its actions has increased over time.
Recently, the Commission has provided additional stimulus for putting
evaluation into its decision-making processes. On June 18, 2008, the
Commission formally announced the agency's latest self-evaluative
initiative.[Footnote 56] A two-day roundtable entitled The FTC at 100:
Into Our Second Century was held on July 29-30, 2008. This ongoing
Commission self-assessment will focus on six general questions: (1)
When we ask how well the Commission is carrying out its
responsibilities, by what criteria should we assess its work? (2) What
techniques should we use to measure the agency's success in meeting
these normative criteria? (3) What resources - personnel, facilities,
equipment - will the FTC need to perform its duties in the future? (4)
What methods should the FTC use to select its strategy for exercising
its powers? (5) How can the FTC strengthen its processes for
implementing its programs? (6) How can the FTC better fulfill its
duties by improving links with other governmental bodies and
nongovernment organizations? This fall, the Commission plans to hold
additional roundtable discussions within the United States and
overseas.[Footnote 57] Among other ends, this initiative seeks to
identify the best techniques for evaluation and ensure that the
Commission incorporates them into its competition program.
The Commission will consider GAO's recommendations along with other
recommendations, including those resulting from the current self-
evaluations. The Commission anticipates that the ongoing self-
assessment will provide the framework for, among other things,
evaluating past mergers in the petroleum industry and in other
industries.
By direction of the Commission.
Signed by:
William E. Kovacic:
Chairman:
Enclosure: [See comment 4]
The following are GAO's comments on the Federal Trade Commission's
letter dated September 17, 2008.
GAO Comments:
1. The FTC Chairman commented that HHI concentration numbers are just
the starting point for merger antitrust analysis and noted that FTC
considers other competitive factors when examining a merger. We agree
with these points and note that we calculated petroleum industry market
HHIs to shed light on the general level of concentration in the
petroleum industry, not to conduct an antitrust analysis regarding
specific mergers or market regions or to provide a guide for conducting
antitrust assessments. Such analysis would have involved looking at
other competitive factors as noted in the Chairman's letter, such as
barriers to entry or examining mergers between firms that operate in
different, but related, segments of the industry, which was beyond the
scope our work. Nonetheless, we believe that concentration analysis for
broader regions, which may not exactly correspond to antitrust markets,
is useful for assessing regional concentration in the same way that
national-level indicators of unemployment or Gross Domestic Product
growth are useful in examining the economic health of the country. Our
report, therefore, indicates that there are regions that may have more
or less potential for firms to exercise market power, and we did not
draw further conclusions about the impact of market concentration on
competition in any given region. In addition, FTC conducted
concentration analysis with similar market definitions for such
purposes in its 2004 report on competition in the petroleum industry.
We made no changes to the report for this comment.
2. The FTC Chairman commented that each merger involves analyzing a
unique set of facts, such as examining barriers to entry or efficiency
gains. We agree that each merger inevitably involves a unique set of
circumstances and correspondingly unique considerations. We added
language to the report to clarify this point.
3. The FTC Chairman commented on the difficulties of delineating
geographic antitrust markets and noted, in this regard, that we did not
include a large number of suppliers that could affect the New York
Harbor refining market. We recognize the difficulty of delineating
markets and understand that the use of spot markets for evaluating
market concentration in the refining subsegment includes a number of
limitations, most notably that spot market regions do not necessarily
correspond to geographic regions that could be used as antitrust
markets. On the basis of our consultations with experts at OPIS, EIA,
and the Chairman's own experts at FTC, and for the reasons highlighted
in appendix II, we decided that spot market HHIs were appropriate for
analysis of the general state of concentration in the refining
industry. We also recognize that there are other factors, in addition
to market concentration, that are important in evaluating the
competitive conditions in a given market. In our reporting of spot
market concentrations we presented other factors that were unique to
each spot market, including--for example, in the New York market--the
sizable shipments of gasoline into this market from foreign and Gulf
Coast refineries. Since the draft report already noted these
limitations, which were raised by the FTC Chairman, we made no change
for this comment.
4. The announcement of FTC's self-evaluation initiative, The FTC at
100: Into Our Second Century, which FTC enclosed with this letter, can
be found at: [hyperlink, [hyperlink,
http://www.ftc.gov/speeches/kovacic/080618ftcat100.pdf].
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Mark Gaffigan, (202) 512-3841 or gaffiganm@gao.gov; Thomas McCool,
(202) 512-2642 or mccoolt@gao.gov.
Staff Acknowledgments:
In addition to the individuals named above, Godwin Agbara (Assistant
Director), Daniel Haas (Assistant Director), John Karikari (Assistant
Director), Michael Kendix, Christopher Klisch, Robert Marek, Micah
McMillan, Mark Metcalfe, Michelle Munn, Bintou Njie, Alison O’Neill,
Frank Rusco, Rebecca Sandulli, Jeremy Sebest, and Barbara Timmerman
made important contributions to this report.
[End of section]
Footnotes:
[1] A merger, as defined in this study, involves either the sale of all
or part of the stock or assets of a company to another. FTC generally
uses the term “merger” to refer to the purchase of all of the stock of
one company by another company and uses the terms “asset acquisition”
or “partial stock acquisition” to describe other types of transactions.
[2] Antitrust enforcement agencies can also challenge completed mergers
if they violate antitrust laws.
[3] For an example of the need for internal control, see: GAO,
Financial Audit: Restated Financial Statements—Agencies’ Management and
Auditor Disclosures of Causes and Effects and Timely Communication to
Users, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-91]
(Washington, D.C.: Oct. 5, 2006).
[4] John S. Herold, Inc., is an independent research firm specializing
in the energy sector that provides financial and operational data for,
as well as analyses of, more than 400 oil and gas companies.
[5] Richard Rabinow, a report prepared for the Association of Oil
Pipelines, The Liquid Pipeline Industry in the United States: Where
It’s Been, Where It’s Going (2004).
[6] Sherman Antitrust Act, 15 U.S.C. §§ 1-7.
[7] Clayton Antitrust Act of 1914, 15 U.S.C. §§ 12–27, 29 U.S.C. §§
52–53.
[8] The threshold for transaction size was $50.0 million in 2000, but
changes on the basis of the prior year’s Gross National Product. For
2008, the threshold was $63.1 million. Because our review covered a
range of years and the actual thresholds varied from year to year, we
often refer to the 2000 baseline.
[9] DOJ has responsibility for investigating mergers, joint ventures,
and potentially anticompetitive conduct in the oil field services and
equipment industry. Companies in this industry provide services to the
petroleum exploration and production industry but do not produce
petroleum themselves. Examples of oil field services include the
manufacture and supply of oil rigs and oil rig drilling equipment,
diving support for offshore rigs, and pipeline services.
[10] HHI gives proportionally greater weight to firms with larger
market shares. For example, if there are two firms that sell products
in a market with market shares of 60 percent and 40 percent,
respectively, the calculation of HHI would be 602+402 = 5,200.
[11] The maximum value for HHI is 10,000, which occurs when a single
market participant has 100 percent of the market share.
[12] As we have previously mentioned, for the purpose of this report,
“U.S. mergers” includes mergers that had a reported location in the
United States or were diversified across multiple countries, but that
we had reasonable evidence to believe included a United States
location. We decided this definition coincided with mergers that would
affect U.S. markets, and, hence, FTC could potentially review. FTC
staff noted that many of these mergers might not have any competitive
overlap and, therefore, would not pose antitrust concerns.
[13] Unless otherwise noted, we use the term “this period” to refer to
the January 2000 through May 2007 time frame throughout this section of
the report.
[14] Given that our analysis included mergers through May 2007, we only
show the total number of mergers for 2006.
[15] Despite the threshold for premerger notification under Hart-Scott-
Rodino, FTC staff said that they can still review mergers of any size
to determine whether they violate antitrust laws.
[16] While there is no universally agreed-upon definition of what is
meant by conventional versus nonconventional oil, the International
Energy Agency states that “conventional” sources are considered to be
those that can be produced using today’s mainstream technologies, while
“nonconventional” sources require more complex or more expensive
technologies to extract, such as oil sands and oil shale.
[17] Estimates of oil reserves are based on data from Oil and Gas
Journal, as reported in GAO, Crude Oil: Uncertainty about Future Oil
Supply Makes It Important to Develop a Strategy for Addressing a Peak
and Decline in Oil Production, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-07-283] (Washington, D.C.: Feb. 28, 2007).
[18] Amy Myers-Jaffe and Ronald Soligo, The International Oil
Companies, The James A. Baker III Institute for Public Policy (Rice
University, November 2007).
[19] Less information is provided on the rationale for mergers in the
midstream segment, relative to the information provided for the
upstream and downstream segments. This is due to a number of factors,
including but not limited to the following: (1) less information was
publicly available on the rationale for mergers in the midstream
segment and (2) midstream operators were generally less available for
interviews and comment.
[20] These refining regions are based on historical groupings of U.S.
refiners. FTC staff indicated that these regions would not always
correspond to bulk gasoline supply markets, which would include the
supply of gasoline that comes from outside refiners. See appendix II
for a more detailed discussion of how we defined “spot markets” and the
limitations of this approach.
[21] Over the past 25 years, spare refinery capacity has been reduced,
in part, because no new refineries have been built in the United States
since the 1970s. Industry officials cited stringent environmental
regulations and low expectations of profitability as the reason that
they have not built any new refineries. In addition, refiners have been
reluctant to invest the billions of dollars needed to build new
facilities when faced with uncertain demand growth in the future. There
has been, however, a steady expansion of existing refinery capacity
since the 1970s. Despite these expansions, refineries often run at or
near 90 percent capacity.
[22] There are no reliable data sources for the size of these shipments
by refinery or for the origins of imported fuel into the United States.
EIA collects data on the basis of the name of the fuel shipper, which
is often different than the name of the refining company in the country
of origin. It was, therefore, not possible for us to accurately
calculate HHIs with foreign refiners included. The 60 percent
consumption rate is based on 2007 EIA data as of August 20, 2008.
[23] This percentage is based on 2007 EIA data as of August 20, 2008.
[24] This percentage is based on 2007 EIA data as of August 20, 2008.
[25] GAO, Energy Markets: Increasing Globalization of Petroleum
Products Markets, Tightening Refining Demand and Supply Balance, and
Other Trends Have Implications for U.S. Energy Supply, Prices, and
Price Volatility, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-
14] (Washington, D.C.: Dec. 20, 2007).
[26] These data reflect the increasing merger value thresholds for
filings required under Hart-Scott-Rodino.
[27] We define “retrospective review” to be a quantitative post merger
analysis to determine the effects on price or competition, if any,
resulting from a completed merger.
[28] GAO, Energy Markets: Effects of Mergers and Market Concentration
in the U.S. Petroleum Industry, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-04-96] (Washington, D.C.: May 17, 2004), 130.
[29] William Kovacic, “Using Ex Post Evaluations to Improve the
Performance of Competition Policy Authorities,” The Journal of
Corporation Law (Winter 2006).
[30] Federal Trade Commission, In the Matter of Evanston Northwestern
Healthcare Corporation, Docket 9315. In 2007, FTC affirmed the 2005
ruling by an administrative law judge finding that the merger was
anticompetitive and violated antitrust law.
[31] Government Performance and Results Act of 1993, Pub. L. No. 103-
62.
[32] Enacted in 1993, GPRA is designed to inform congressional and
executive decision making by providing objective information on the
effectiveness and efficiency of federal programs and spending. GPRA
requires agencies to measure performance toward the achievement of
annual goals and report on their progress in annual program performance
reports.
[33] GAO, Utility Oversight: Recent Changes in Law Call for Improved
Vigilance by FERC, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-
289] (Washington, D.C.: Feb. 25, 2008).
[34] Federal Trade Commission, The Petroleum Industry: Mergers,
Structural Change, and Antitrust Enforcement, An FTC Staff Study
(August 2004).
[35] Common-carrier pipelines allow access to any potential fuel
shipper. FERC does not have the authority to regulate privately owned
pipelines.
[36] For more information, see GAO, Commodity Futures Trading
Commission: Trends in Energy Derivatives Markets Raise Questions about
CFTC’s Oversight, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-
25] (Washington, D.C.: Oct. 19, 2007).
[37] A futures contract is a financial contract in which a buyer and
seller agree to buy or sell a commodity, such as crude oil, in the
future for a particular price. Almost all futures contracts change
ownership without the actual physical delivery of the commodity.
[38] FTC staff indicated that they obtain permission from private firms
before using data reported to EIA for law enforcement purposes.
[39] States can monitor petroleum markets through their state energy
commissions or through their state attorneys general offices.
[40] Angie A.Welborn and Aaron M. Flynn, Gasoline Price Increases:
Federal and State Authority to Limit “Price Gouging,” CRS Report for
Congress (May 18, 2006).
[41] In support of our analysis of the upstream segment, we conducted
one analysis of global petroleum industry mergers that exceeded $10
million in value.
[42] These calculations did not take into account a refinery’s ability
to produce gasoline blends designed to meet specific regional air
quality requirements, such as those in states like California.
[43] Our capacity data used “barrels per stream day,” which reflects
the number of barrels processed in a refinery on an average day when it
is in operation.
[44] In general, if a refinery did not have one of these three units,
we did not assign it any gasoline production capacity. Refineries
without one of these units most likely do not produce any gasoline
(i.e., asphalt refineries). However, there are some older refineries
that use hydrocrackers to produce gasoline, rather than the more common
FCC. We worked with EIA to identify these and then used data from
company publications to account for the gasoline production capacity of
these refineries. We did not include capacities from the isomerization
units or cokers because, according to our discussion with EIA
officials, these units feed into reformers and FCCs, which we capture
in our approach.
[45] According to EIA, our capacity estimates are more relative than
actual because we were not able to account for the light components
(hydrocarbons with four to six carbon atoms) that make up a portion of
blended gasoline depending on the fuel’s vapor pressure and octane
requirements. Therefore, a refinery’s actual gasoline capacity will be
slightly more than our estimates. However, the capacities of refineries
relative to one another will not be significantly affected because we
treated all of the refineries the same by not including the light
components, and the estimates will be accurate for the purposes of
calculating HHI. EIA agreed that our overall approach is better than
using total operable, or operating, capacity to estimate refinery
gasoline production.
[46] Fuel “exchanges” are not included in the wholesale supply data.
During an exchange, fuel is sold under a different brand than where it
originated. Exchanges allow refiners to have retail locations where
they do not have any refining presence. These volumes are recorded as
being sold by the original producer. For example, if ConocoPhillips
were to agree to sell fuel to Chevron dealers who rebrand the fuel as
Chevron, the prime supply data would still list the fuel sale under the
name ConocoPhillips.
[47] A refinery’s ability to serve a spot market is based on its
ability to supply fuel to the market in 7 to 10 days and to do so with
a profit margin of less than 5 cents per gallon, according to one OPIS
official. FTC staff told us that their market definitions for antitrust
enforcement usually involve profit margins of 1 to 2 cents per gallon,
and longer supply windows, usually 1 to 2 years.
[48] We also removed from our calculations refineries in Kentucky,
Montana, Nevada, and West Virginia that, according to the experts, only
supplied their local regions.
[49] In addition, some refineries in the Pacific Northwest can also
produce gasoline that meets California specifications, and it is
periodically shipped to either California market. We included these
refineries in the California regions where appropriate. Also, we
included a number of Mid-continent refineries in the Pacific Northwest
region if they were also able to ship gasoline to that region. We also
included some Texas refineries in the Mid-continent market if they had
access to the Magellan pipeline. We made the above inclusions on the
basis of comments from EIA and FTC.
[50] Law enforcement involving both merger and non-merger cases is a
key component of the FTC's program to maintain competition in the
petroleum industry. The FTC carefully analyzes proposed mergers,
reviewing all pertinent facets of the relevant petroleum markets, and
challenges transactions that likely would substantially reduce
competition or result in higher prices. Similarly, the FTC focuses on
anticompetitive conduct and other activities involving pricing and
competition in the petroleum industries. All told, in the past year,
between 125 and 150 FTC staff members - attorneys, economists,
paralegals, research analysts, and others - have worked on matters
involving antitrust and pricing issues in the oil and natural gas
sector. Most notably, in the past year, two transactions were
abandoned - one after the Commission challenged the proposed
acquisition in court, and the other during the Commission's
investigation. See FTC. v. Equitable Resources, Inc., Dominion
Resources, Inc. et al., Civ. Action No. 07-cv-490 (W.D. Pa.), vacated
as moot (3d Cir. Feb. 5, 2008) (parties advised the FTC that they were
abandoning the transaction), available at [hyperlink,
http://www.ftc.gov/os/closings/staff/0810052marathonclosingletter_stepto
e.pdf]. The Commission last year sought unsuccessfully to block a
merger involving New Mexico refining. Federal Trade Commission v.
Foster et al., No. Civ. 07-352 JB/ACT (D.N.M. May 29, 2007), available
at 2007 WL 1793441. The Commission also recently concluded an
investigation into gasoline and diesel prices in the Pacific Northwest,
and the agency continues its Gasoline and Diesel Price Monitoring
Project (discussed in more detail below). The Commission fully expects
to maintain its intensive antitrust scrutiny of the energy sector.
[51] For this letter, we will use the term "merger" to include both
stock and asset acquisitions, as GAO did in its Report.
[52] The Commission's staff has already provided technical comments to
GAO staff on the draft Report.
[53] Taylor et al., Vertical Relationships and Competition in Retail
Gasoline Markets, FTC Bureau of Economics Working Paper No. 291 (2007)
(ARCO-Thrifty), available at [hyperlink,
http://ftc.gov/be/workingpapers/wp291.pdf]; Simpson et al., Michigan
Gasoline Pricing and the Marathon-Ashland and Ultramar Diamond Shamrock
Transaction, FTC Bureau of Economics Working Paper No. 278 (2005),
available at [hyperlink, http://www.ftc.gov/be/workingpapers/wp278.pdf];
Taylor et al., The Economic Effects of the Marathon-Ashland Joint
Venture: The Importance of Industry Supply Shocks and Vertical
Market Structure (rev'd 2004), FTC Bureau of Economics Working Paper
No. 270, available at [hyperlink,
http://www.ftc.gov/be/workingpapers/wp270.pdf].
[54] See William E. Kovacic, Using Ex Post Evaluations to Improve the
Performance of Competition Policy Authorities, 31 J. Corp. L. 503, 522-
30 (2006) (describing various FTC evaluation initiatives over the past
30 years).
[55] See, e.g., Richard G. Parker and David A. Balto, The Evolving
Approach to Merger Remedies (May 2000), available at [hyperlink,
http://www.ftc.gov/speeches/other/remedies.shtm]; Robert Pitofsky, The
Nature and Limits of Restructuring in Merger Review, Prepared Remarks
before Cutting Edge Antitrust Conference (Feb. 17, 2000), available at
[hyperlink, http://www.ftc.gov/speeches/pitofsky.restruct.htm] These
and other Commission self-evaluations of merger remedies led to the
2003 release of the Statement of the Federal Trade Commission's Bureau
of Competition on Negotiating Merger Remedies, available at [hyperlink,
http://www.ftc.govr/bc/bestpractices030401.htm].
[56] William E. Kovacic, Chairman, Federal Trade Commission, "The
Federal Trade Commission at 100: Into Our Second Century," before the
21e Annual Western Conference of the Rutgers University Center for
Research in Regulated Industries, Monterey, California. A copy of this
speech is enclosed with this letter, available at [hyperlink,
http://www.ftc.gov/speecheslkovacic/080618ftcatl00.pdf.
[57] Information concerning the Roundtables on The FTC at 100. Into Our
Second Century is available at [hyperlink,
http://www.ftc.gov/ftc/workshops/ftcl00,index.shtm].
[End of section]
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