011 0011 ANALYSIS OF PROPOSED CONSENT ORDER I. Introduction The Federal Trade Commission ("Commission" or "FTC") has issued a complaint ("Complaint") alleging that the proposed merger of Chevron Corporation ("Chevron") and Texaco Inc. ("Texaco") (collectively "Respondents") would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, and has entered into an agreement containing consent orders ("Agreement Containing Consent Orders") pursuant to which Respondents agree to be bound by a proposed consent order that requires divestiture of certain assets ("Proposed Consent Order") and a hold separate order that requires Respondents to hold separate and maintain certain assets pending divestiture ("Hold Separate Order"). The Proposed Order remedies the likely anticompetitive effects arising from Respondents' proposed merger, as alleged in the Complaint. The Hold Separate Order preserves competition pending divestiture. II. Description of the Parties and the Transaction Chevron, headquartered in San Francisco, California, is one of the world's largest integrated oil companies. Chevron is engaged, either directly or through affiliates, in the exploration for, and production of, oil and natural gas; the pipeline transportation of crude oil, natural gas, and natural gas liquids; the refining of crude oil into refined petroleum products, including gasoline, aviation fuel, and other light petroleum products; the transportation, terminaling, and marketing of gasoline and aviation fuel; and other related businesses. During fiscal year 1999, Chevron had worldwide revenues of approximately $35.4 billion and net income of approximately $2.1 billion. Chevron sold its natural gas and natural gas liquids transportation, distribution and marketing operations to NGC Corporation in 1996 and retained a stock interest in the company. NGC subsequently became Dynegy Inc. Dynegy is engaged in the gathering, processing, fractionation, transmission, terminaling, storage, and marketing of natural gas and natural gas liquids. Chevron owns approximately 26% of Dynegy. Chevron has a long-term strategic alliance with Dynegy for the marketing of Chevron's natural gas and natural gas liquids, and the supply of natural gas and natural gas liquids to Chevron's refineries in the lower 48 states of the United States. Chevron has three positions on Dynegy's Board of Directors. This relationship gives Chevron access to information concerning Dynegy's business and allows Chevron to participate in Dynegy's business decisions. Texaco, headquartered in White Plains, New York, is one of the world's largest integrated oil companies. Among its other businesses, Texaco is engaged, either directly or through affiliates, in the exploration for, and production of, oil and natural gas; the pipeline transportation of natural gas and natural gas liquids; the pipeline transportation of crude oil; the refining of crude oil into refined petroleum products, including gasoline, aviation fuel, and other light petroleum products; the transportation, terminaling, and marketing of gasoline and aviation fuel; and other related businesses. During fiscal year 1999, Texaco had worldwide revenues of approximately $35.7 billion and net income of approximately $1.2 billion. In 1998, Texaco contributed its U.S. petroleum refining, marketing and transportation businesses to two joint ventures and retained an interest in the ventures. The joint ventures are Equilon Enterprises, LLC ("Equilon"), which is owned by Texaco and Shell Oil Company ("Shell"), and Motiva Enterprises, LLC ("Motiva"), which is owned by Shell, Texaco, and Saudi Refining, Inc. ("SRI"). The two joint ventures are referred to collectively as "the Alliance." Equilon consists of Texaco's and Shell's western and midwestern U.S. refining and marketing businesses, and their nationwide transportation and lubricants businesses. Texaco and Shell jointly control Equilon. Equilon's major assets include full or partial ownership in four refineries, seven lubricants plants, about 65 terminals, and various pipelines. Equilon markets through approximately 9,700 branded gasoline retail outlets in the U.S. Motiva consists of Texaco's, Shell's, and SRI's U.S. eastern and Gulf Coast refining and marketing businesses. Texaco, Shell and SRI jointly control Motiva. Motiva's major assets include full or partial ownership in four refineries and about 50 terminals. Motiva markets through approximately 14,000 branded gasoline retail outlets. Pursuant to an agreement and plan of merger dated October 15, 2000, Chevron has agreed to acquire all of the outstanding common stock of Texaco in exchange for stock of Chevron. As a result of the merger, Chevron's shareholders will hold approximately 61%, and Texaco's shareholders will hold approximately 39%, of the new combined entity. III. The Investigation and the Complaint The Complaint alleges that the merger of Chevron and Texaco would violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 45, by substantially lessening competition in each of the following markets: (1) the marketing of gasoline in the western United States (including the States of Arizona, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming), the southern United States (including the States of Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, Tennessee, Texas, Virginia, and West Virginia), the States of Alaska and Hawaii, and smaller areas contained therein; (2) the marketing of CARB gasoline in the State of California; (3) the refining and bulk supply of CARB gasoline for sale in the State of California; (4) the refining and bulk supply of gasoline and jet fuel in the Pacific Northwest, i.e., the States of Washington and Oregon west of the Cascade mountains; (5) the bulk supply of Phase II Reformulated Gasoline ("RFG II") in the St. Louis metropolitan area; (6) the terminaling of gasoline and other light petroleum products in Arizona (Phoenix and Tucson), California (San Diego and Ventura), Mississippi (Collins), and Texas (El Paso), and the islands of Hawaii, Kauai, Maui, and Oahu in Hawaii; (7) the pipeline transportation of crude oil from California's San Joaquin Valley; (8) the pipeline transportation of crude oil from portions of the Eastern Gulf of Mexico; (9) the pipeline transportation of offshore natural gas to shore from locations in the Central Gulf of Mexico; (10) the fractionation of raw mix into natural gas liquids specification products in the vicinity of Mont Belvieu, TX; and (11) the marketing and distribution of aviation fuel, including aviation gasoline and jet fuel, to general aviation customers in the western United States, including the States of Alaska, Arizona, California, Idaho, Nevada, Oregon, Utah, and Washington, and the southeastern United States, including the States of Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee, and smaller areas contained therein. To remedy the alleged anticompetitive effects of the merger, the Proposed Order requires Respondents to divest all of Texaco's interests in the Alliance (including both Equilon and Motiva), which includes (among other businesses) all of Texaco's interests in the following: (a) gasoline marketing in the States of Alaska and Hawaii, in the Western United States (Arizona, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming), and the Southern (Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, Tennessee, Texas, Virginia, and West Virginia); (b) marketing of CARB gasoline in California; (c) refining and bulk supply of CARB gasoline for sale in California; (d) refining and bulk supply of gasoline and jet fuel in the Pacific Northwest; (e) the Explorer Pipeline and the bulk supply of RFG II into St. Louis; (f) terminaling of gasoline and other light products in ten metropolitan areas in Arizona, California, Mississippi, and Texas, and four islands in Hawaii; (g) the Equilon pipeline that transports crude oil from California's San Joaquin Valley; and (h) the Equilon crude oil pipeline in the Eastern Gulf of Mexico. In addition to its interest in the Alliance, Texaco must divest its one-third interest in the Discovery pipeline system; its interest in the Enterprise fractionating plant in Mont Belvieu; and its general aviation business in fourteen states (Alaska, Alabama, Arizona, California, Florida, Georgia, Idaho, Louisiana, Mississippi, Nevada, Oregon, Tennessee, Utah, and Washington) to Avfuel Corporation. The Complaint alleges in 11 counts that the merger would violate the antitrust laws in various lines of business and sections of the country, each of which is discussed below. A. Count I - Marketing of Gasoline Chevron and Texaco, through its ownership interest in the Alliance (including Equilon and Motiva), are competitors in the marketing of gasoline in the Western and Southern United States and in the States of Alaska and Hawaii. The marketing of gasoline in numerous markets within these areas would become highly concentrated, or significantly more concentrated, as a result of the proposed merger.(1) For example, in some markets in the states of Louisiana, Mississippi, Oregon and Washington, the proposed merger would increase concentration by more than 1,000 points to HHI levels above 3,000. In many other markets, the proposed merger would result in significant increases in concentration to levels at which competition may be harmed. Complete divestiture of Texaco's ownership interest in the Alliance is the most practical solution to resolve the anticompetitive effects in these markets that would result from the proposed acquisition. This total divestiture will achieve relief in all markets where the merger would substantially lessen competition. The marketing of gasoline is a relevant line of commerce, i.e., a relevant product market, for which the proposed merger may lead to an increase in price. Gasoline is a motor fuel used in automobiles and other vehicles. It is produced in various grades and types, including conventional unleaded gasoline, reformulated gasoline ("RFG"), California Air Resources Board ("CARB") gasoline, and others. There is no substitute for gasoline as a fuel for automobiles and other vehicles that are designed to use gasoline. The Complaint alleges that the proposed transaction would lessen competition in the western United States (Arizona, Idaho, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming), the southern United States (Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, Tennessee, Texas, Virginia, and West Virginia), the States of the Alaska and Hawaii, and in smaller areas contained therein. Numerous metropolitan areas in the western United States(2) and the southern United States,(3) would be affected by the proposed acquisition. The Commission used metropolitan statistical areas ("MSAs") as a reasonable approximation of geographic markets for gasoline marketing in Shell Oil Co., C-3803 (1998), British Petroleum Co., C-3868 (1999), and Exxon, C-3907 (2000). The marketing segment of the business involves the wholesale and retail sale of branded and unbranded gasoline. Branded gasoline is sold under an oil company trade name (or "flag") such as Chevron, Texaco, Exxon or Shell. Unbranded gasoline is typically sold under a private label or independent trade name. Gasoline is generally sold to the general public through several different types of retail outlets, including: (1) company-operated stations, which are owned and operated by the parent oil company; (2) lessee-dealers, stations leased from the parent oil company, but operated by independent dealers; (3) open dealers, stations owned and operated by independent dealers under a franchise agreement with the parent oil company or under a supply agreement with a distributor; and (4) distributors (or "jobbers"), who own and operate a network of stations in a particular area under a franchise agreement with the parent oil company. Branded oil companies set the retail prices of gasoline on a station-by-station basis at the stores they operate. Lessee-dealers and many open dealers purchase from the branded company at a delivered price ("dealer tank wagon" or "DTW"). DTW prices charged by major oil companies are typically set using "price zones." Price zones, and the prices used within them, take account of the competitive conditions faced by particular stations or groups of stations and are generally unrelated to the cost of hauling fuel from the terminal to the retail store. Distributors or jobbers typically purchase branded gasoline from the branded company at a terminal (paying a terminal "rack" price), and deliver the gasoline to their own stations or to jobber-supplied stations at prices set by the distributor. New entry is unlikely to constrain anticompetitive behavior in the markets at issue. New entrants typically face significant obstacles to becoming effective competitors, including obtaining a reliable supply of gasoline at a competitive price, and gaining access to a sufficient number of retail outlets. As a result, it is unlikely that entry will constrain a price increase resulting from the merger. The Complaint alleges that Texaco, through the Alliance, and Chevron are direct competitors in the marketing of motor gasoline in the relevant geographic areas. The Commission is concerned that the proposed merger would increase the likelihood of coordination among the few participants in the relevant areas, by effectively combining the Chevron, Texaco and Shell brands, which would lead to an increase in the price of gasoline in the affected areas. To address the overlap in gasoline marketing between Chevron and Texaco in the relevant markets, the Proposed Order requires Texaco to divest its interest in Equilon and Motiva. B. Count II - Marketing of CARB Gasoline Texaco, through Equilon, and Chevron are competitors in the marketing of CARB gasoline for sale throughout the State of California. The merger would result in highly concentrated markets throughout the State of California.(4) Concentration in some markets, such as Bakersfield, Fresno-Visalia, and Palm Springs, would increase to HHI levels above 2,500. The proposed merger would increase concentration in each of the California markets alleged in the complaint by more than 100 points to HHI levels above 2,000. The refining and marketing of gasoline in California is tightly integrated, and there are only a small number of independent retail outlets that might purchase from an out-of market firm attempting to take advantage of a price increase by incumbent refiner-marketers. The extensive integration of refining and marketing makes it more difficult for the few non-integrated marketers to turn to imports as a source of supply, since individual independents lack the scale to import cargoes economically and thus must rely on California refiners for their usual supply. Refiners that lack marketing in California, and marketers that lack refineries in these relevant markets, do not effectively constrain the price and output decisions of incumbent refiner-marketers. Entry is not likely to constrain an anticompetitive price increase. The marketing of CARB gasoline in metropolitan areas in California is a relevant market. CARB gasoline is a motor fuel used in automobiles that meets the specifications of the California Air Resources Board ("CARB"). CARB gasoline is cleaner burning and causes less air pollution than conventional gasoline. Since 1996, the sale or use of any gasoline other than CARB gasoline has been prohibited in California. There are no substitutes for CARB gasoline as a fuel for automobiles and other vehicles that use gasoline in California. In the current investigation and in past decisions, the Commission concluded that the marketing of CARB gasoline in metropolitan areas in California is a relevant market.(5) More than 90% of the CARB gasoline sold in California is refined by seven vertically-integrated refiners (Chevron, Equilon, BP, Ultramar, Valero, ExxonMobil and Tosco). These seven firms also control more than 90% of retail sales of gasoline in California through gas stations under their brands. CARB gasoline is a homogeneous product, and wholesale and retail prices are publicly available and widely reported to the industry. Integrated refiner-marketers carefully monitor the prices charged by their competitors' retail outlets, and therefore can readily identify firms that deviate from a coordinated or collusive price. California is largely isolated from most external sources of supply. CARB gasoline is generally manufactured primarily at refineries in California and at one other refinery located in Anacortes, Washington. The next closest refineries, located in the U.S. Virgin Islands and in Texas and Louisiana, do not supply CARB gasoline to California except during supply disruptions at California refineries. Non-West Coast refineries are unlikely to supply CARB gasoline to California in response to a small but significant and nontransitory increase in price because of the price volatility risks associated with opportunistic shipments. The Complaint charges that the proposed merger, absent relief, is likely to result in an increased likelihood of coordination in the marketing of CARB gasoline on the West Coast, and is likely to lead to higher prices of CARB gasoline in California. The Complaint further charges that Chevron/Texaco would likely be able to unilaterally increase prices in California in the absence of coordination. To remedy the likely harm, the Proposed Order requires Texaco to divest its interest in Equilon, which holds Texaco's marketing interests in the State of California. C. Count III - Refining and Bulk Supply of CARB Gasoline Texaco, through Equilon, and Chevron are competitors in the refining and bulk supply of CARB gasoline for sale in the State of California.(6) The market for the refining and bulk supply of CARB gasoline would be highly concentrated following the proposed merger. Based on CARB refining capacity, the proposed merger would increase concentration for the refining of CARB gasoline by West Coast refineries by more than 500 points to an HHI level above 2,000. The refining and bulk supply of CARB gasoline is a relevant product market, and the West Coast is a relevant geographic market. As explained in Count II, only CARB gasoline can be legally sold in the State of California. No refineries outside of California and one Washington refinery regularly produce CARB gasoline in significant quantities. The relevant geographic market is the West Coast. The West Coast is geographically isolated, and California's volatile wholesale gasoline prices discourage imports. Refiners outside of the West Coast are unlikely to bring in CARB gasoline to defeat a price increase. The extensive integration of refining and marketing makes it more difficult for the few non-integrated marketers to turn to imports as a source of supply, since individual independents lack the scale to import cargoes economically and thus must rely on California refiners for their usual supply. Entry is difficult and unlikely. New refineries are not likely to be built, and the lack of independent buyers in California makes it unlikely that regular supplies would be brought to California by a non-West Coast refiner. A new refinery would face severe environmental constraints and substantial sunk costs. The Complaint charges that the proposed merger would likely reduce competition in the refining and bulk supply of CARB gasoline in California, thereby increasing wholesale prices of CARB gasoline. The proposed merger increases the likelihood of coordination among refiners, as well as unilateral reduction in output by Chevron/Texaco. The Proposed Order requires Texaco to divest its interest in Equilon, which holds Texaco's interest in the refineries that produce CARB gasoline for sale in California. D. Count IV - Refining and Bulk Supply of Gasoline and Jet Fuel Texaco, through Equilon, and Chevron are competitors in the refining and bulk supply of gasoline and jet fuel in the Pacific Northwest, i.e., the States of Washington and Oregon west of the Cascade mountains. The market for the refining and bulk supply of gasoline and jet fuel for the Pacific Northwest would be highly concentrated following the proposed merger. The proposed merger would increase concentration in this market by more than 600 points to an HHI level above 2,000. Gasoline and jet fuel constitute relevant product markets. There are no substitutes for gasoline in gasoline-fueled automobiles. Jet fuel is a motor fuel used in jet engines. Jet engines must use fuel that meets stringent specifications and cannot switch to any other type of fuel. There is no substitute for jet fuel for jet engines designed to use such fuel. The Pacific Northwest is a relevant geographic market. Customers in the Pacific Northwest cannot practicably turn outside of the market to obtain supplies in sufficient quantities in response to a small but significant and nontransitory increase in price. Entry by a refiner would not be likely, timely or sufficient to defeat an anticompetitive price increase. The West Coast as a whole is supply-constrained both in terms of available local production and its geographic isolation from other refining centers. A new entrant would face severe environmental constraints and substantial sunk costs. The Complaint charges that the proposed merger would eliminate direct competition in the refining and bulk supply of gasoline and jet fuel between Chevron and Texaco, and would increase the likelihood of collusion or coordinated interaction between Respondents and their competitors, which would likely result in increased prices for the refining and bulk supply of gasoline and jet fuel in the Pacific Northwest. The Proposed Order requires Texaco to divest its interest in Equilon, which holds Texaco's interest in the Alliance's West Coast refineries, to remedy the overlap presented by the merger. E. Count V - Bulk Supply of Phase II Reformulated Gasoline Phase II Reformulated Gasoline, referred to as "RFG II," is a motor fuel used in automobiles. RFG II is cleaner burning than some other types of gasoline and causes less air pollution. The United States Environmental Protection Agency requires the use of RFG II in certain areas, including the St. Louis metropolitan area. RFG II is supplied in bulk from facilities that have the ability to deliver large quantities of the product on a continuing basis, such as pipelines or local refineries. The bulk supply of RFG II is a relevant product market. There are no substitutes for pipelines or refineries for the bulk supply of RFG II. Smaller facilities that deliver RFG II in small quantities, such as tank trucks, are not cost competitive with pipelines or refineries. One area in which RFG II is required is the St. Louis metropolitan area. Customers in the St. Louis area cannot turn to RFG suppliers outside of the area in response to a small but significant and nontransitory increase in the price of RFG II in the St. Louis area. Texaco, through Equilon, and Chevron each hold substantial interests in the market for the bulk supply of RFG II in the St. Louis metropolitan area. Chevron owns approximately 16.7% of Explorer Pipeline, and Texaco holds interests totaling approximately 35.9% of Explorer. The Explorer Pipeline is the largest pipeline provider of bulk RFG II supply in the St. Louis metropolitan area. Equilon also has a long-term contract through which it obtains supplies of RFG II for the St. Louis metropolitan area. The market for the bulk supply of RFG II into the St. Louis metropolitan area is highly concentrated and would become significantly more concentrated following the proposed merger. The proposed merger would increase concentration in this market by more than 1,600 points to an HHI level of 5,000. Entry would not be likely, timely or sufficient to prevent anticompetitive effects resulting from the proposed merger. The Complaint charges that the proposed merger would substantially lessen competition in the market for the bulk supply of RFG II in the St. Louis metropolitan area by eliminating direct competition between Chevron and Texaco, and by increasing the likelihood of collusion or coordinated interaction in the bulk supply of RFG II in the St. Louis area. The Proposed Order requires Texaco to divest Equilon, which will prevent the increase in concentration that would result from the merger. F. Count VI - Terminaling Texaco, through the Alliance, and Chevron are competitors in the terminaling of gasoline and other light petroleum products in metropolitan areas in Arizona, California, Mississippi, and Texas, and on certain islands in the State of Hawaii. The terminaling of gasoline and other light petroleum products in each of these markets would be highly concentrated following the proposed merger. The proposed merger would increase concentration in each of these markets by more than 300 points to HHI levels above 2,000. The terminaling of gasoline and other light petroleum products is a relevant product market. Terminals are specialized facilities with large storage tanks used for the receipt and local distribution of large quantities of gasoline and other products. There are no substitutes for terminals for these uses. The proposed merger would be likely to lessen competition in Phoenix and Tucson, AZ, San Diego and Ventura, CA, Collins, MS, and El Paso, TX, and on the islands of Hawaii, Kauai, Maui, and Oahu, HI. Entry is not likely to defeat an anticompetitive increase in the cost of terminaling in the affected areas. The combination of sunk costs, significant scale economies, and environmental regulations make terminal entry unlikely. The Complaint alleges that the effect of the proposed merger would be to substantially lessen competition in the terminaling of gasoline and other light petroleum products in the relevant markets. Respondents, either unilaterally or in coordination with other terminal operators, would likely be able to increase the price of terminaling gasoline and other light petroleum products in the relevant sections of the country as a result of the merger. The Proposed Order requires Texaco to divest its interests in the Alliance, which holds its interests in the terminals in the relevant areas. G. Count VII - Crude Oil Pipelines Out of San Joaquin Valley, CA Texaco, through Equilon, and Chevron are competitors in the pipeline transportation of crude oil from California's San Joaquin Valley. This market is highly concentrated and would become significantly more concentrated as a result of the proposed merger. The proposed merger would increase concentration in this market by more than 800 points to an HHI level above 3,300. Crude oil pipelines are specialized pipelines for the transportation of crude oil from production fields to refineries or to locations where the crude oil can be transported to refineries by other means. Chevron and Equilon each own a crude oil pipeline that transports crude oil out of the San Joaquin Valley in California. There are no alternatives to pipelines for the transportation of crude oil out of the San Joaquin Valley. New entry is unlikely to constrain anticompetitive behavior in this market. New pipeline construction requires substantial sunk costs, and existing pipelines have a significant cost advantage over new entrants. The Complaint alleges that the proposed merger eliminates direct competition between Chevron and Texaco and that the merger, if consummated, increases the likelihood of coordinated interaction for the pipeline transportation of crude oil from the San Joaquin Valley. In order to remedy the anticompetitive effects arising from the proposed merger, the Proposed Order requires Texaco to divest its interest in Equilon, which owns one of the pipelines that transports crude oil from the San Joaquin Valley. H. Count VIII - Crude Oil Pipelines from the Eastern Gulf of Mexico Texaco, through Equilon, and Chevron are competitors in the pipeline transportation of crude oil from portions of the Eastern Gulf of Mexico to on-shore terminals. The pipeline transportation of crude oil from locations in the Eastern Gulf of Mexico is highly concentrated and would become significantly more highly concentrated as a result of the proposed merger. The proposed merger would give the combined Chevron/Texaco substantial ownership interests in the only two pipelines that compete to transport crude oil from certain locations in the Eastern Gulf of Mexico. A relevant product market is the pipeline transportation of crude oil. A relevant geographic market consists of locations in the Eastern Gulf of Mexico, including the Main Pass, Viosca Knoll, South Pass and West Delta Areas, as defined by the Department of Interior Minerals Management Service. There are two pipeline systems that transport crude oil from locations in the Eastern Gulf of Mexico to on-shore terminals: the Delta Pipeline System and the Cypress Pipeline System. The Delta system is wholly owned by Equilon. Chevron owns 50% of the Cypress system and is the operator. There are no alternatives to these two pipelines for the transportation of crude oil from locations in the Eastern Gulf of Mexico to on-shore terminals. Moreover, new entry into this market is unlikely because of the large economies of scale enjoyed by existing pipeline carriers. The Complaint alleges that Chevron and Texaco are direct competitors in the pipeline transportation of crude oil from portions of the Eastern Gulf of Mexico to on-shore terminals, and that the proposed merger would give Respondents the ability to unilaterally raise prices for the pipeline transportation of crude oil from locations in the Eastern Gulf. To remedy the Commission's concerns, the Proposed Order requires Texaco to divest its interest in Equilon, which owns the Delta pipeline system. J. Count IX - Offshore Pipeline Transportation of Natural Gas Chevron and Texaco own interests in competing offshore natural gas pipelines in the Central Gulf of Mexico. Chevron and its affiliate Dynegy own a combined 77% interest in the Venice Gathering System. Texaco owns approximately 33% of the Discovery Gas Transmission System. Texaco's ownership share is sufficient to allow it to effectively exercise veto control over important aspects of the business of the Discovery pipeline. The pipeline transportation of offshore natural gas to shore from each of the markets alleged in the Complaint is highly concentrated and would become significantly more concentrated as a result of the proposed merger. The proposed merger would give the combined Chevron and Texaco controlling interests in the only two pipelines, or two of only three pipelines, in each of these markets. The pipeline transportation of natural gas from locations in the Central Gulf of Mexico is a relevant market. Natural gas pipelines are specialized pipelines used to transport natural gas from offshore producing platforms to shore for processing and distribution. There are no alternatives to pipelines for the transportation of natural gas from offshore locations to shore. The affected areas are certain individual lease blocks(7) in the Central Gulf of Mexico, in areas including the South Timbalier and Grand Isle Areas, and their South Additions, as defined by the Department of Interior Minerals Management Service. Producers within these areas have few or no alternatives to the Discovery and Venice pipelines for transporting natural gas to shore. Entry is difficult and unlikely. New pipeline construction requires substantial sunk costs, giving existing pipelines a significant cost advantage over new entrants. The Complaint alleges that the proposed merger will decrease competition in the offshore pipeline transportation of natural gas from the specified blocks in the affected areas. The proposed merger would enable the combined Chevron/Texaco to unilaterally increase price for those areas that have no alternative to Respondents' pipelines, and would increase the likelihood of coordination among pipelines for producers who have only limited alternatives to Respondents' pipelines. To remedy the Commission's competitive concerns, the Proposed Consent Order requires Respondents to divest Texaco's entire interest in the Discovery System, including the offshore natural gas pipeline, processing plant and fractionation plant. K. Count X - Fractionation of Natural Gas Liquids at Mont Belvieu, TX Texaco competes with Chevron's affiliate, Dynegy, in the market for the fractionation of natural gas liquids at Mont Belvieu, Texas. Fractionators are specialized facilities that separate raw mix natural gas liquids into specification products such as ethane or ethane-propane, propane, iso-butane, normal-butane, and natural gasoline by means of a series of distillation processes. These specification products are ultimately used in the manufacture of petrochemicals, in the refining of gasoline, and as bottled fuel, among other uses. There are no substitutes for fractionators for the conversion of raw mix natural gas liquids into individual specification products. Mont Belvieu, TX, is an important hub for the fractionation of raw mix natural gas liquids and the subsequent sale of fractionated specification products. Producers of raw mix natural gas liquids throughout the areas served by Mont Belvieu, which includes much of Texas, New Mexico, and other states, would not likely turn to fractionators located outside Mont Belvieu for their fractionation needs. There are four facilities providing fractionation services at Mont Belvieu. Chevron's affiliate Dynegy owns large interests in two of the Mont Belvieu fractionators, the Cedar Bayou fractionator and the Gulf Coast fractionator. Chevron's 26% ownership of Dynegy gives it representation on Dynegy's Board of Directors as well as a direct financial stake in Dynegy's prices and profits. Texaco owns a minority interest in another fractionator known as the Enterprise fractionator. Competitive concern arises from the ability of a firm in Chevron's position to lessen competition among the few separate facilities in this market. Competitive vigor could be compromised if, for example, sensitive information about one competitor's plans or costs were to become known by another competitor in the market. Also, Texaco's minority interest could provide a swing vote that could prevent the Enterprise fractionating facility from making a competitive move against either of the other two facilities affiliated with Chevron. The Complaint charges that the proposed merger would lessen competition by eliminating direct competition between Texaco and Chevron's affiliate Dynegy in the fractionation of natural gas liquids at Mont Belvieu; by providing Dynegy with access to sensitive competitive information about one of its most important competitors in Mont Belvieu; by providing Chevron, through its control of Texaco's voting at the fractionator in which Texaco has an interest, with the ability to prevent competition from that fractionator against the other fractionators in Mont Belvieu in which Dynegy has an interest; and by increasing the likelihood that the combination of Chevron and Texaco will unilaterally exercise market power. The Proposed Order requires Chevron to divest Texaco's interest in the Enterprise fractionator within six months to a purchaser approved by the Commission. L. Count XI - Marketing of Aviation Fuel Chevron and Texaco are competitors in the marketing of aviation gasoline and jet fuel to general aviation customers in the western United States (Alaska, Arizona, California, Idaho, Nevada, Oregon, Utah, and Washington) and the southeastern United States (Alabama, Florida, Georgia, Louisiana, Mississippi, and Tennessee). Aviation fuel is used as a motor fuel for aircraft. There are two types of aviation fuel: aviation gasoline and jet fuel. Aviation gasoline is used in piston-powered aircraft engines, while jet fuel is used in jet engines. There are no substitutes for aviation gasoline or jet fuel for aircraft designed to use such fuels. Aviation fuel is sold through several channels of distribution, including the general aviation channel. This channel consists of fixed base operators ("FBOs") that sell fuel at retail to customers at airports, and distributors that sell to FBOs. FBOs in turn sell fuel to general aviation customers such as corporate aircraft, crop dusters, owners of private airplanes, and similar users (other than commercial airlines and military aircraft). Chevron and Texaco are among only a few marketers of aviation fuel to general aviation customers in the western and southeastern United States. The marketing of aviation fuel to general aviation customers in each of these markets would be highly concentrated as a result of the merger. The proposed merger would increase concentration in the southeastern United States by more than 250 points to an HHI level above 1,900, and would increase concentration in the western United States by more than 1,600 points to an HHI level above 3,400. The Complaint alleges that the proposed merger will likely lessen competition in the marketing and distribution of aviation fuel to general aviation customers in the western United States and the southeastern United States, by increasing the likelihood that the merged firm will unilaterally exercise market power, and by increasing the likelihood of collusion or coordinated interaction. The Proposed Consent Order requires Respondents to divest Texaco's general aviation business in the western and southeastern United States to an up-front buyer, Avfuel Corporation, within ten (10) days following the merger, to remedy the Commission's concerns. IV. Resolution of the Competitive Concerns The Commission has provisionally entered into the Agreement Containing Consent Orders with Chevron and Texaco in settlement of the Complaint. The Agreement Containing Consent Orders contemplates that the Commission would issue the Complaint and enter the Proposed Order and the Hold Separate Order for the divestiture of certain assets described below. A. The Alliance The proposed combination of Chevron and Texaco would effectively combine the downstream operations of Chevron, Shell, and Texaco in the United States. In order to deal with the overlap issues involving the downstream segments of the businesses, Paragraphs II - III of the Proposed Order require Respondents to divest Texaco's entire interest in the Alliance. Paragraph IV contains provisions dealing with the licensing of the Texaco brand and Chevron's ability to compete for dealers and distributors using the Texaco brand following the merger. Paragraph II of the Proposed Order requires Respondents to divest either (a) the Alliance interests to Shell (and SRI in the case of Motiva) no later than the date of the Chevron/Texaco merger, or (b) within eight months after the Chevron/Texaco merger, at no minimum price, either (i) the Alliance interests to Shell (and SRI in the case of Motiva), or (ii) the Texaco subsidiaries that own the Alliance interests (TRMI and TRMI East)(8) to an acquirer or acquirers approved by the Commission. Shell and SRI are appropriate buyers of the assets because they already are partners with Texaco in the Alliance. All assets in each portion of the Alliance already are under common ownership and control, and divestiture of these interests to Shell and SRI would closely maintain the situation that currently exists. If the required divestitures occur prior to or on the date of the Chevron/Texaco merger, they are to be accomplished by Respondents; if they occur after the merger date, they are to be accomplished by a divestiture trustee pursuant to the provisions of Paragraph III of the Proposed Order. Paragraph II further provides that Chevron and Texaco may not consummate the merger unless and until Texaco has either divested the Alliance interests to Shell and/or SRI, or has transferred TRMI and TRMI East to a trustee. The paragraph also contains provisions that ensure that Shell's and SRI's rights under the agreements establishing the Alliance will be protected. It also provides that, if the trust is rescinded, unwound, dissolved or otherwise terminated at any time before the divestitures have been accomplished, then Respondents will hold TRMI and TRMI East separate and apart from Respondents pursuant to the Hold Separate Order. If the divestiture has not occurred before the merger, Paragraph III of the Proposed Order requires Respondents to enter into a trust agreement and transfer TRMI and TRMI East to the trustee. A divestiture trustee will then have the sole and exclusive power and authority to divest the Alliance interests, subject to the prior approval of the Commission. The trustee will have eight months to accomplish the divestitures, at no minimum price, to a buyer or buyers approved by the Commission (which could still include Shell and/or SRI). Respondents' transfer of the Alliance interests into trust does not prevent Shell and/or SRI from exercising any rights they may have under the applicable joint venture agreement to acquire Texaco's interests in Equilon or Motiva. Further, if Shell or SRI decline to exercise their rights to acquire Equilon or Motiva under the joint venture agreements, then they may offer to acquire the interests from the trustee, on equal footing with any other interested buyers. The trust will have a divestiture trustee to accomplish the divestitures, and two operating trustees (one for TRMI and one for TRMI East) to manage and operate the Alliance interests separate and apart from Respondents' operations. The proposed Divestiture Trustee is Robert A. Falise, who most recently has been Chairman and Managing Trustee of the Manville Personal Injury Settlement Trust. Mr. Falise is an attorney and businessman with extensive experience in mergers and acquisitions. The proposed Operating Trustees are Joe B. Foster and John Linehan. Mr. Foster is the Chairman of Newfield Exploration Company, a Houston-based oil and gas exploration and production company that he founded in 1989. Mr. Linehan most recently served as Executive Vice President and Chief Financial Officer of Kerr-McGee Corporation. Both Mr. Foster and Mr. Linehan have extensive experience in the types of business engaged in by the Alliance. Paragraph IV of the Proposed Order deals with issues concerning the licensing of the Texaco brand. It provides that Respondents shall offer to extend the license for the Texaco brand provided to Equilon and Motiva, on terms and conditions comparable to those in existence when the Agreement Containing Consent Orders was signed, on an exclusive basis until June 30, 2002 for Equilon and June 30, 2003 for Motiva. These dates correspond with the dates when the franchise agreements expire for many of the Equilon and Motiva distributors. If Equilon agrees to waive certain provisions in its contracts with distributors and dealers requiring the distributors and dealers to repay money that has been paid or reimbursed by Equilon for various Alliance programs during the past few years, such as station re-imaging, and if it agrees to waive any deed restrictions prohibiting or restricting the sale of motor fuel not sold by Equilon at any retail outlet that does not agree to become a Shell branded outlet, then Texaco shall offer Equilon an additional year of exclusivity (so exclusivity would expire at the same time for both Equilon and Motiva). If Equilon and Motiva waive the provisions described above, Texaco shall offer additional license extensions, on a non-exclusive basis, until June 30, 2006, for all retail outlets for which Equilon and Motiva have entered into agreements for re-branding under the Shell brand. If Equilon or Motiva do not waive the contract provisions requiring repayment from dealers and distributors, then Respondents are required to indemnify the dealers and distributors for all such amounts (plus litigation and arbitration costs), provided that (1) the dealer or distributor has declined a request for payment from Equilon or Motiva, (2) Equilon or Motiva has commenced litigation or arbitration to compel payment, and (3) the dealer or distributor has either defended the litigation or afforded Respondents the right to do so. In addition, no indemnification need be provided for any retail outlet (1) as to which the dealer or distributor terminates its brand relationship prior to the date on which Equilon and Motiva lose their license exclusivity for the Texaco brand (June 30, 2002 or June 30, 2003), (2) which becomes a Shell branded outlet, or (3) which receives compensation for such amounts from another source. Paragraph IV also provides that, for a period of one year following the date on which Equilon or Motiva stops supplying gasoline under the Texaco brand to any retail outlet branded Texaco as of the date the Agreement Containing Consent Orders is executed by Respondents, Respondents shall not enter into any agreement for the sale of branded gasoline to such retail outlet, sell branded gasoline to such retail outlet, or approve the branding of such retail outlet, under the Texaco brand or under any brand that contains the Texaco brand, unless either (1) such agreement, sale, or approval would not result in an increase in concentration in the sale of gasoline in any metropolitan area (or county outside a metropolitan area), or (2) there are no sales of Chevron branded gasoline in that market. The purpose of this provision is to prevent Respondents from defeating the purpose of the Proposed Order by supplying Texaco-branded gasoline to the same stations that resulted in the original violation. By requiring divestiture of Texaco's interests in the Alliance, the Proposed Order remedies anticompetitive effects in the following markets: (a) gasoline marketing in markets in the western United States, the southern United States, and the States of Alaska and Hawaii; (b) the marketing of CARB gasoline in California; (c) the refining and bulk supply of CARB gasoline for sale in California; (d) the refining and bulk supply of gasoline and jet fuel in the Pacific Northwest; (e) the bulk supply of RFG II gasoline into St. Louis; (f) the terminaling of gasoline and other light products in markets in the States of Arizona, California, Hawaii, Mississippi, and Texas; (g) the pipeline transportation of crude oil from California's San Joaquin Valley; and (h) the transportation of crude oil from locations in the Eastern Gulf of Mexico. B. The Non-Alliance Operations Paragraphs V through VIII of the Proposed Order deal with the divestitures that are required outside of the Alliance. 1. Pipeline Transportation of Offshore Louisiana Natural Gas Paragraph V of the Proposed Order requires Texaco to divest its interest in the Discovery pipeline, including the associated processing plant and fractionator (collectively the "Discovery System"), within six months of the date of the merger, at no minimum price, to a buyer or buyers that receive the approval of the Commission and only in a manner that receives the prior approval of the Commission. The purpose of the divestiture of Texaco's interest in the Discovery System is to eliminate the overlap of ownership between the Discovery System and the Venice System and to remedy the lessening of competition resulting from the proposed merger as alleged in the Commission's Complaint. The Proposed Order also provides that Texaco shall resign its position as operator of the Discovery System immediately after it obtains the approvals of the other partners in the Discovery System. In addition, prior to divestiture of Texaco's interest in the Discovery System, Respondents are to offer to enter into an agreement with the acquirer for the purchase, sale or exchange of natural gas liquids that is no less favorable for the acquirer than the terms of an existing contract with one of Texaco's partners in the Discovery System. Texaco owns a natural gas liquids pipeline that transports liquids away from the Discovery fractionator. Williams, a co-owner of the Discovery System, currently has a contract with Texaco for the disposition of its natural gas liquids that are processed at the Discovery fractionator. The purpose of this provision is to ensure that Respondents do not attempt to impose rates or terms for pipeline transportation to markets from the Discovery System's fractionating plant that would impede the ability of the Discovery System to compete for natural gas transportation from the relevant areas in the Central Gulf of Mexico. 2. Fractionation of Natural Gas Liquids at Mont Belvieu, Texas Paragraph VI of the Proposed Order requires Respondents to divest Texaco's interest in the Enterprise fractionator at Mont Belvieu, at no minimum price, within six months after the merger, to an acquirer that receives the prior approval of the Commission and in a manner that receives the prior approval of the Commission. The purpose of the divestiture of Texaco's interest in the Enterprise fractionator is to eliminate the overlap of ownership between the Enterprise fractionator and other fractionating plants at Mont Belvieu, Texas, in which Respondents or their affiliates own interests, and to remedy the lessening of competition resulting from the proposed merger. 3. Marketing of Aviation Fuel Paragraph VII of the Proposed Order requires Respondents to divest, within ten days of the merger date, Texaco's general aviation business in 14 states (Alabama, Alaska, Arizona, California, Florida, Georgia, Idaho, Louisiana, Mississippi, Nevada, Oregon, Tennessee, Utah, and Washington), to an up-front buyer, Avfuel Corporation ("Avfuel"). Respondents must sell Texaco's general aviation business to Avfuel pursuant to an agreement approved by the Commission. Avfuel is an existing marketer of aviation fuel that, unlike most other marketers, is not vertically integrated into the production of aviation gasoline or jet fuel. The company is well regarded as an independent competitive force in the industry, and appears to be particularly well situated to purchase just the assets relating to these 14 states and successfully integrate them into its business. An up-front buyer is preferable for these assets because they consist largely of contractual relationships rather than an on-going divestible business. In addition, because the business being divested consists largely of contractual relationships, an existing participant in the business is likely to have advantages with respect to maintaining and growing these relationships. In the event Respondents fail to divest Texaco's general aviation business in the relevant areas to Avfuel, the Proposed Order requires Respondents to divest an alternative asset package that is broader than the initial divestiture assets. The broader package consists of Texaco's entire general aviation marketing business in the United States. The package is broader than the package being divested to Avfuel because other buyers may need the entire business in order to be viable. If this broader package is divested, the Order requires that the divestiture be accomplished within four months of the merger date, at no minimum price, to an acquirer that receives the prior approval of the Commission. If neither the divestiture to Avfuel nor the divestiture of the broader package has occurred within four months after the merger, then the Commission will appoint a trustee to divest Texaco's entire general aviation marketing business in the United States. If the business is not sold to Avfuel pursuant to the agreement, Respondents are required to assign to the other post-merger acquirer all agreements used in or relating to Texaco's domestic general aviation business. If Respondents fail to obtain any such assignments, Respondents are to substitute arrangements sufficient to enable the acquirer to operate the business in the same manner and at the same level and quality as Texaco operated it at the time of the merger's announcement. At the option of the acquirer, Respondents are to enter into an agreement that grants the acquirer, for a period of up to ten years from the date of such agreement, a license to use the Texaco brand in connection with the operation of Texaco's general aviation business in the U.S. For twelve months following the discontinuation of the supply of Texaco-branded aviation fuel to a fixed base operator or distributor, Respondents may not enter into any contract or agreement for the supply of Texaco-branded aviation fuel to such fixed base operator or distributor, or approve the branding of such fixed base operator or distributor with the Texaco brand. In addition, for six months following the consummation of any post-merger divestiture, Respondents are not to compete for the direct supply of branded aviation fuel to any fixed base operator or distributor that had an agreement for the sale of Texaco-branded aviation fuel in the U.S. Pursuant to Paragraph VIII of the Proposed Order, if Respondents have failed to divest either: (1) Texaco's general aviation business in the relevant overlap areas, or (2) Texaco's domestic general aviation business within four months of the merger date, the Commission may appoint a trustee to divest Texaco's domestic general aviation business, at no minimum price, to a buyer approved by the Commission. The purpose of the divestiture of Texaco's general aviation business in the affected areas, or of Texaco's entire domestic general aviation business, is to ensure the continuation of such assets in the same business in which the assets were engaged at the time of the announcement of the merger by a person other than Respondents, and to remedy the lessening of competition alleged in the Complaint. C. Other Terms Paragraphs IX - XIII of the Proposed Order detail certain general provisions. Pursuant to Paragraph IX, Respondents are required to provide the Commission with a report of compliance with the Proposed Order every sixty days until the divestitures are completed. Paragraph X requires that Respondents provide the Commission with access to their facilities and employees for the purposes of determining or securing compliance with the Proposed Order. Paragraph XI provides that, no less than 30 days prior to the merger, Respondents must notify Shell and SRI of the projected merger date and provide copies of the Agreement Containing Consent Orders and all non-confidential documents attached thereto to Shell and SRI. Paragraph XII provides for notification to the Commission in the event of any changes in the corporate Respondents. Finally, Paragraph XIII provides that if a State fails to approve any of the divestitures contemplated by the Proposed Order, then the period of time required under the Proposed Order for such divestiture shall be extended for sixty days. V. Opportunity for Public Comment
By accepting the Proposed Order subject to final approval, the Commission anticipates that the competitive problems alleged in the Complaint will be resolved. The purpose of this analysis is to invite public comment on the Proposed Order, including the proposed divestitures, and to aid the Commission in its determination of whether it should make final the Proposed Order contained in the agreement. This analysis is not intended to constitute an official interpretation of the Proposed Order, nor is it intended to modify the terms of the Proposed Order in any way. Endnotes: 1. The Commission measures market concentration using the Herfindahl-Hirschman Index ("HHI"), which is calculated as the sum of the squares of the shares of all firms in the market. FTC and Department of Justice Horizontal Merger Guidelines ("Merger Guidelines") § 1.5. Markets with HHIs between 1000 and 1800 are deemed "moderately concentrated," and markets with HHIs exceeding 1800 are deemed "highly concentrated." Merger Guidelines § 1.51. 2. Phoenix and Tucson, AZ; Boise, ID; Las Vegas and Reno, NV; Albuquerque-Santa Fe, NM; Eugene, Klamath Falls-Medford, and Portland, OR; Salt Lake City, UT; Seattle-Tacoma, Spokane, and Yakima, WA; and Casper-Riverton, WY. In addition, in Alaska, the relevant areas are Anchorage, Fairbanks, Juneau, Ketchikan, and Sitka. In Hawaii, there are four individual islands, Hawaii, Kauai, Maui, and Oahu, that would be affected by the proposed transaction. 3. Anniston, Birmingham, Decatur-Huntsville, Dothan, and Montgomery, AL; Mobile-Pensacola, AL/FL; Fort Lauderdale-Miami, Fort Pierce-West Palm Beach, Gainesville, and Panama City, FL; Albany, Atlanta, Columbus, Macon, and Savannah, GA; Lexington and Paducah, KY; Alexandria, Baton Rouge, El Dorado-Monroe, Lafayette, Lake Charles, New Orleans, and Shreveport, LA; Biloxi-Gulfport, Columbus-Tupelo-West Point, Hattiesburg-Laurel, Jackson, and Meridian, MS; Greenville-New Bern-Washington, NC; Ada-Ardmore, OK; Lawton-Wichita Falls, OK/TX; Chattanooga, TN; Bristol-Johnson City-Kingsport, TN/VA; Abilene-Sweetwater, Amarillo, Austin, Beaumont-Port Arthur, Brownsville-Harlingen-Weslaco, Corpus Christi, Dallas, El Paso, Fort Worth, Houston, Lubbock, Midland-Odessa, San Angelo, San Antonio, Temple-Waco, and Tyler, TX; Lynchburg-Roanoke and Petersburg-Richmond, VA; and Beckley-Bluefield-Oak Hill, WV. 4. The metropolitan areas alleged in the Complaint are Bakersfield, Chico-Redding, Fresno-Visalia, Los Angeles, Modesto-Sacramento-Stockton, Monterey-Salinas, Oakland-San Francisco-San Jose, Palm Springs, San Diego, and San Luis Obispo-Santa Barbara-Santa Maria. 5. Shell Oil Co., C-3803 (1998); Exxon, C-3907 (2000). 6. A bulk supply market consists of firms that have the ability to deliver large quantities of gasoline on a regular and continuing basis, such as pipelines or local refineries. 7. South Timbalier Blocks 30, 37, 38, 44, 45, 58, 59, 61-63, 86-88, 123-35, 151-53, 157, 158, 178-80, 185-87, and 205-08; South Timbalier South Addition Blocks 223-27, 231, 233-37, 248, 251, 256, and 257; Grand Isle Blocks 52, 53, 59, 62, 63, 70-76, 84, and 85; and Grand Isle South Addition Block 86. 8. Texaco's interest in the Alliance is held by a Texaco subsidiary, Texaco Refining and Marketing, Inc. ("TRMI"). A subsidiary of TRMI, known as TRMI East, holds Texaco's interest in Motiva. |