Interim Report of the Federal Trade Commission
The Federal Trade Commission is investigating the causes of the sharp rises in gasoline prices in certain Midwest markets in the spring and early summer of this year. A principal purpose of the investigation is to determine whether those price rises were caused in whole or in part by antitrust violations. This interim report to Congress sets forth the reasons the Commission launched this investigation and provides a status report on the ongoing investigation, including progress to date and a description of the work remaining. In testimony before the House Committees on the Judiciary, Commerce, and Government Reform on June 28, 2000, and the Senate Committee on Energy and Natural Resources on July 13, 2000, Chairman Robert Pitofsky and Bureau of Competition Director Richard G. Parker confirmed the promise made to several members to deliver an interim report to Congress before the end of July.
In the spring and early summer of 2000, gasoline prices increased in markets all over the country. Gasoline prices have long been seasonally cyclical, rising in late spring and early summer as consumer demand increases with the onset of the summer driving season. However, the increases this year in some local markets, particularly in the Midwest, eclipsed those experienced in past years, and were much greater than those experienced in other U.S. markets. Consumers in markets such as Chicago and Milwaukee saw significant price spikes at the retail level, both for the Phase II reformulated gasoline ("RFG"), required under the Clean Air Act for those markets, and for conventional gasoline, which is used in other local markets in the Midwest.
The national average retail price of RFG increased from $1.29 to $1.67 per gallon from November 1999 to June 12, 2000, before declining to $1.61 on July 17, 2000.(1) In Chicago, however, the average RFG price rose from $1.85 per gallon on May 30 to $2.13 on June 20, before falling to $1.57 on July 24, 2000.(2) From May 30 to June 20 in Milwaukee the average RFG price increased from $1.74 to $2.02, but by July 24 had fallen to $1.48.(3)
Conventional gasoline prices in the Midwest also have risen substantially from late 1999 levels, although they also have receded significantly since the highs in mid-June. National average retail prices increased from $1.25 to $1.61 per gallon for conventional gasoline between November 1999 and June 12, 2000, and then eased to $1.51 on July 17, 2000.(4) Average conventional gasoline retail prices in the Midwest rose from $1.55 to $1.85 per gallon from May 29 to June 19, 2000, but had decreased to $1.48 by July 17, 2000.(5) The price runup was intense, but brief, with prices peaking during the week of June 18-24.
The sheer magnitude of the price increases, their particular intensity in one section of the country, and their occurrence in conventional gasoline as well as in RFG, prompted the Commission's Bureau of Competition to consider the reasons for the price increases and, specifically, whether price fixing or other illegal activity might have occurred. A bipartisan group of Senators and Representatives strongly urged the Commission to investigate these matters.
In early June 2000, Commission staff began a preliminary investigation, relying initially on publicly available data and consumer complaints. Staff interviewed persons knowledgeable about factors that may have contributed to these price spikes, industry structure, and the regulatory environment. Staff also met with representatives of the Environmental Protection Agency and the Department of Energy. A principal focus of that preliminary investigation, and of the ensuing formal investigation, has been to determine whether there is sufficient evidence to conclude that the antitrust laws have been violated and that such violations caused all or part of the price spikes in the Midwest. Commission staff also have sought information on other potential causes of the price spikes.
The staff's initial inquiry suggested several factors as potential contributors to Midwest gasoline price spikes. The first is the reduced global supply of crude oil. In the second half of 1999, OPEC countries, joined by several non-OPEC oil exporting countries, curtailed the global supply of crude oil. During the same period, worldwide demand for petroleum products increased significantly, as economies in Asia and Europe recovered and economic growth in the United States continued. As a result, worldwide consumption of crude oil has exceeded production, and world and U.S. inventories have been drawn down.(6) Refiners responded to the price increases caused by the crude shortage in the same way they had responded to past supply reductions -- by cutting gasoline production and using inventories of gasoline to meet demand, in the expectation that inventories could be replenished when crude oil prices drop as some OPEC members exceed their quotas.(7) This series of events contributed to exceptionally tight supply situations in many countries, particularly in the United States.(8)
In the last two months, the OPEC countries,(9) and Saudi Arabia individually,(10) agreed to increase production in an effort to moderate the price of crude petroleum. It remains to be seen whether, when, and to what extent OPEC's and Saudi Arabia's announcements of crude supply increases will reduce prices in the medium to long run. In the short run, crude oil prices have moderated slightly, from $33.55 per barrel on June 23 to $31.31 on July 14.(11) OPEC actions likely cannot fully explain the exceptional price spikes that occurred in the Midwest, because such actions would be expected to affect prices in all sections of the United States in a broadly similar way.
A factor specific to the Midwest markets that may have contributed to the price increases was the introduction of EPA Phase II regulations for summer-blend reformulated gasoline in high ozone urban areas. These regulations went into effect on May 1, 2000 at the wholesale level in both Chicago and Milwaukee. The new, more-stringent regulations may have contributed to abnormally low inventories for several reasons. They required that winter-blend gas be drained from storage tanks before the summer-blend supply could be added, which led to lower inventories than usual. According to some reports, summer-blend Phase II RFG is proving more difficult to refine than anticipated, causing refinery yields to be less than expected. The ethanol-based RFG used in Chicago and Milwaukee is reportedly even more difficult to produce. Further, St. Louis entered the RFG program for the first time this year, adding additional demand to an already tight Midwest RFG supply situation.(12) Moreover, the recent federal court of appeals decision upholding Unocal's patent for some formulations of RFG may have caused some refineries to change RFG blends to avoid infringement or high royalty payments, leading to production delays and decreased refinery throughput.(13) RFG-related issues seem unlikely, however, to provide a complete explanation for recent Midwestern gas price increases, because in the Midwest as a whole, conventional gasoline prices rose more dramatically than RFG prices from May to the end of June.(14)
Another possible contributor to the Midwest price increases was the break in the Explorer pipeline in March. Explorer moves refined petroleum products from the Gulf of Mexico through St. Louis to Chicago and other parts of the Midwest.(15) The pipeline break caused a disruption in the supply of gasoline to the already tight Midwest markets. That could have contributed to tight supply and rising prices throughout the region.
Although it is likely that each of these supply factors contributed to the dramatic recent price spikes in the Midwest, no single factor appears from staff's preliminary investigation to be likely to provide a full explanation, and staff does not yet have sufficient information to assess the impact of these factors in combination. Accordingly, it is prudent to investigate the possibility of collusion or tacit coordination, conduct that could be illegal under section 5 of the Federal Trade Commission Act. In order to investigate this and other possible causes of the price spikes in the Midwest, on June 21, 2000, the Commission initiated a formal investigation.(16) Because of the multiplicity of potential interrelated causes, this investigation is likely to consume, at a minimum, another three or four months.
II. The Commission's Investigation
This investigation is being conducted pursuant to the Commission's authority under the Federal Trade Commission Act.(17) The Bureau of Competition is treating it as a top priority matter and has assigned experienced attorneys, economists, investigators and paralegals to the investigation. The Commission chose its Midwest Regional Office, located in Chicago, to spearhead the investigation because they are well-situated to work with local refiners and witnesses and with other law enforcement agencies in the region. Attorneys and economists from the West Coast Regional Office in San Francisco and our headquarters in Washington, D.C. with particular expertise in the oil industry are assisting the Midwest Office. In all, 12 to 14 Commission attorneys, economists, and paralegals are working on the investigation. We are also coordinating our efforts with the Attorneys General of Wisconsin, Illinois, Michigan, Ohio, Indiana, Missouri, Iowa, Minnesota, Kentucky, South Dakota and West Virginia. The Commission has approved the use of compulsory process in this investigation, permitting the issuance of both subpoenas and Civil Investigative Demands, and the taking of depositions under oath.
The objective of the investigation is to consider the causes of the price increases, and determine whether there was any illegal contact, communication, signaling, or understandings among competitors. With regard to proving illegal conduct, the Commission must show more than parallel behavior among market participants. Standing alone, proof that all companies raise prices at the same time is not sufficient evidence of collusion. The courts have held that some "plus factor" must be present to demonstrate that an agreement was reached. Behavior that would be unprofitable "but for" collusion may be evidence that such an agreement exists.
Consistent with the necessity of protecting the confidentiality of information from participants in the investigation, as well as protecting the legal staff's work product, we can report the following information about the investigation to date.(18)
Staff is using process to take testimony and gather evidence from the various entities that refine, transport and distribute gasoline in the Midwest, as well as suppliers and customers and other knowledgeable or affected persons. The Commission issued a first round of subpoenas to nine refiners that supply Midwest markets on June 29. A substantial number of documents have already been produced. In less than a month, staff has received approximately 200 boxes of documents. The bulk of the documents from the first round of subpoenas should be in our hands by the middle of August. Staff is carefully reviewing these documents. The Commission issued a second round of subpoenas to other refiners last week. We have also recently issued CIDs to the refiners, requesting compilations of data and answers to written questions.
We issued another set of subpoenas, this time to the entities that own or control the pipelines serving the Midwest markets, on July 25. We expect responsive documents to begin arriving shortly. Staff also has conducted approximately 15 interviews with market participants, consumers, corporate users of gasoline, and others with knowledge of relevant facts, and is in the process of obtaining industry-wide data from the Oil Price Information Service (OPIS). Staff also conducted a site visit at a refinery on July 20. Once the documentary material has been analyzed, staff will take depositions under oath of key decision-making personnel throughout the gasoline distribution chain in the Midwest. The Commission has retained, and is working with, an outside economic consultant with expertise in this industry.
Our investigation is comprehensive. Prices spiked in the Midwest for one or more reasons. Staff is attempting to identify those reasons. Staff is investigating any and all aspects of the distribution chain in which firms could have colluded to increase prices directly or colluded to reduce capacity or supply, or otherwise to take advantage of a tight supply situation and rising prices. For example, staff is examining supply and inventory evidence from integrated oil companies and independent refineries serving the Midwest to determine if supply was manipulated by agreement or understanding such that insufficient product was available to meet increased summer demand in the Midwest and prices spiked as a result. Staff is also considering whether pipeline capacity constraints and allocation decisions were the result of accidental and market-driven factors or, in whole or in part, the product of a collusive agreement designed to restrict supply in local markets. These are but examples of the kinds of inquiries staff is pursuing. At this point, no conclusions, however tentative, have been reached.
Much work remains to be done in order to complete this investigation. The scope of the investigation, the volume of the information that has been or will be produced, and the complexity of the issues under investigation suggest that the investigation likely will consume at least three or four more months. The Commission is treating this investigation as a matter of top priority, but answers in antitrust investigations do not typically come quickly or easily. If staff uncovers reason to believe that an antitrust violation has occurred, however, the Commission will act promptly.
1. Energy Information Administration, Office of Oil and Gas Daily Price Report (June 12, 2000; July 3, 2000; July 24, 2000). In comparing average RFG prices at different times and different places, it should be noted that RFG requirements may differ between summer and winter and also among localities.
2. EPA Data, RFG-CG Price Information, based on Oil Price Information Service data (June 14, 2000, June 23, 2000).
3. Id. During the week of June 19, RFG prices at some Chicago gas stations apparently rose as high as $2.50, although they have since receded. See R. Kemper & K. Mellen, "As Pressure Builds, Price of Gas Falls," Chicago Tribune (June 23, 2000).
4. EPA Data, RFG-CG Price Information (June 14, 2000, July 10, 2000, July 24, 2000).
5. Energy Information Administration, Motor Gasoline Watch (June 21, 2000, July 10, 2000, July 24, 2000) at 2.
6. Organisation for Economic Cooperation and Development ("OECD"), International Energy Agency, Monthly Oil Market Report (July 11, 2000) at 5, www.iea.org.
7. Id. ("Refiners do not really believe today's prices are sustainable, and hesitate to run crude for product restocking.").
8. Id. Gasoline stocks in the United States for the fourth quarter of 2000 are estimated to be 37 percent below the level of the fourth quarter of 1999, while Europe's stocks dropped 27 percent in the same period.
9. "OPEC Agrees to Increase Oil Production," Wall Street Journal (June 22, 2000) at A3.
10. "Saudi Plan to Raise Oil Output Stirs Up Debate," Wall Street Journal (July 5, 2000) at A2.
11. Energy Information Administration, Weekly Petroleum Status Report, Table 13 (July 20, 2000) (WTI-Cushing spot prices).
12. St. Louis received EPA waivers to delay implementation of Phase II RFG until early June, because of a break in the Explorer pipeline which serves the region. St. Louis uses primarily MTBE-based RFG, which many observers believe to be less costly than ethanol-based RFG. St. Louis did not experience price increases as great as those in Chicago and Milwaukee.
13. Union Oil Co. v. Atlantic Richfield Co., 208 F.3d 989 (Fed. Cir. March 29, 2000).
14. According to Energy Information Administration figures, average retail prices throughout PADD II (the Midwestern Petroleum Administration for Defense District) rose 18.9 cents for RFG and 29.4 cents for conventional gasoline from May 29 to June 19. See Energy Information Administration, Motor Gasoline Watch (June 21, 2000) at 2.
15. Environment News Service, "Gasoline Spill Threatens Dallas Water Supply" (March 13, 2000).
16. Midwest Gasoline Price Investigation, FTC File No. 001 0174.
17. 15 U.S.C. § 41 et seq. The Commission does not have criminal enforcement authority. The Antitrust Division of the Department of Justice has exclusive responsibility for criminal enforcement of the antitrust laws, pursuant to authority granted under the Sherman Act. 15 U.S.C. § 1 et seq. If staff were to uncover evidence of criminal activity, such as hard-core price fixing, staff would forward the matter to the Antitrust Division.
18. The Commission is statutorily obligated to protect confidential information it receives in a law enforcement investigation. See Sections 6(f) and 21 of the Federal Trade Commission Act, 15 U.S.C. §§ 46(f), 57b-2. In addition, the Commission protects information that reveals the agency's deliberative process, its attorney work product and information whose disclosure could interfere with a law enforcement proceeding. See Exemptions 5 and 7 of the Freedom of Information Act, 5 U.S.C. § 552(b)(5), (7); Commission Rule 4.10, 16 C.F.R. 4.10. See also Commission Operating Manual § 126.96.36.199 (investigations are ordinarily nonpublic unless the Commission orders otherwise). The Commission may release certain deliberative or investigational information, consistent with the needs of the investigation, and has voted to do so with this report.