FTC Orders Significant Divestitures in Clearing Valeros Acquisition of Kaneb Services and Pipe Line Partners

The Federal Trade Commission today announced that Valero L.P. (Valero) has agreed to make three major divestitures to settle a Commission complaint that its proposed $2.8 billion acquisition of Kaneb Services LLC (KSL) and Kaneb Pipe Line Partners (KPP) would violate federal law. The divestitures will preserve existing competition for petroleum transportation and terminaling in Northern California, Pennsylvania, and Colorado, and avoid a potential increase in bulk gasoline and diesel prices. The order also requires Valero, the largest petroleum terminal operator and second-largest operator of liquid petroleum pipelines in the United States, to develop an information firewall and maintain open, non-discriminatory access to two retained Northern California terminals, in order to ensure access to ethanol terminaling in Northern California following its acquisition of Kaneb.

“The strong relief provided by the Commission’s order will ensure that transportation and terminaling competition is maintained in key areas of the United States’ energy markets,” said Susan A. Creighton, Director of the FTC’s Bureau of Competition. “The order illustrates the Commission’s continuing commitment to protecting consumers from higher prices for transportation fuels arising from potentially anticompetitive mergers in this important sector of the economy.”

The Proposed Transaction

Under the terms of agreements between Valero and the Kaneb companies, Valero will pay $525 million for all partnership units of KSL, and will exchange $1.7 billion in Valero partnership units for all outstanding units of KPP. As a result, both KSL and KPP will become wholly owned subsidiaries of Valero, and Valero Energy, which currently owns 46 percent of Valero L.P.’s common units, will continue to own the general partner and maintain a 23 percent equity stake in Valero L.P. Valero Energy’s key businesses will continue to be concentrated in the refining, transportation, and marketing of petroleum and other petrochemical products nationwide.

The FTC’s Complaint

According to the Commission’s complaint, the transaction as originally proposed would eliminate competition in violation of the Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended, in each of the following markets: 1) terminaling services for bulk suppliers of light petroleum products in the greater Philadelphia Area; 2) pipeline transportation and terminaling services for bulk suppliers of light petroleum products in the Colorado Front Range; 3) terminaling services for bulk suppliers of refining components, blending components, and light petroleum products in Northern California; and 4) terminaling for bulk ethanol in Northern California. A description of the Commission’s specific competitive concerns in each of these markets can be found in the Analysis to Aid Public Comment for this matter, which can be found as a link to this press release on the FTC’s Web site.

In each market, the Commission contends that any efficiencies achieved by the transaction would not offset the resulting harm to competition and that new entry into these markets would not be likely, timely, nor sufficient to offset the competitive concerns raised by the acquisition.

The Consent Order

To address the possible anticompetitive effects of the transaction, the consent order requires the parties to divest the following assets: 1) in the greater Philadelphia Area, Kaneb’s Paulsboro, New Jersey; Philadelphia North; and Philadelphia South terminals; 2) in Colorado’s Front Range, Kaneb’s West Pipeline system, which originates in Casper, Wyoming, and delivers petroleum products to Rapid City, South Dakota; Cheyenne, Wyoming; Denver, Colorado; and Colorado Springs, Colorado; and 3) in Northern California, Kaneb’s Martinez and Richmond terminals. In addition, the order requires Valero not to discriminate in favor of or otherwise prefer Valero Energy in bulk ethanol terminaling services, and to maintain customer confidentiality at the Selby and Stockton terminals in Northern California.

Other Terms of the Order

The consent order also contains an order to hold separate and maintain assets, which will preserve the viability, marketability, and competitiveness of the assets to be divested. In addition, it contains terms allowing the Commission to appoint a trustee to oversee the divestiture of the assets, and a hold separate trustee agreement between the trustee and the parties. The order requires the companies to notify the FTC before acquiring the Paulsboro, New Jersey; Philadelphia North; or Philadelphia South terminals, or any part of them. It also requires them to provide the FTC with reports regarding their compliance with the order, to notify the Commission of any other conditions that may affect their obligations under the order, and to allow the FTC to access their facilities to monitor compliance. Finally, the order provides for a time extension of any divestiture challenged by a state.

The Commission vote to accept the consent agreement and place a copy on the public record was 4-0-1, with Chairman Deborah Platt Majoras recused. The order will be subject to public comment for 30 days, until July 14, 2005, after which the Commission will decide whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, consent agreement, and an analysis to aid public comment are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No.: 051-0022)