Tuesday, June 05, 2007

FTC Fails To Preliminarily Enjoin Merger of Petroleum Refiners

This posting was written by Darius Sturmer, editor of CCH Trade Regulation Reporter.

The Federal Trade Commission failed to show that it could prove—in an administrative proceeding before an Administrative Law Judge—that a proposed merger between petroleum refiners Western Refining, Inc. and Giant Industries, Inc. would reduce the bulk supply of gasoline in parts of New Mexico, the federal district court in Albuquerque has ruled. The Commission's request for a preliminary injunction to block the transaction was denied.

Geographic Market

The geographic market proposed by the FTC—13 counties in northern New Mexico—was inadequate, in the court's view. It did not match the geographic markets defined by either the Commission's economic or industry expert, and no other witness explained why the borders of any of these respective markets were appropriate.

Neither Western, nor Giant, nor any other firm the FTC identified as a market participant, operated refineries within the FTC's proposed market. Furthermore, gasoline was both trucked into the FTC's relevant market from supply sources outside the proposed market and trucked out from within the market area. The FTC excluded from its relevant market significant suppliers who currently served, or could potentially serve, northern New Mexico.

Relevant Product Market

The FTC also failed to provide evidence that Western and Giant were in competition in the relevant product market, the court noted. Though they did compete for bulk petroleum supply, evidence indicated that Western was Giant's supplier and that Giant and its subsidiary were both customers of Western. Western did not participate in the wholesale and retail gasoline markets in which Giant operated. The proposed merger would not have dramatically increased concentration in the relevant market.

By acquiring Giant's New Mexico refining, terminaling, and marketing assets, Western would “not be eliminating an important restraint on its ability to raise prices and increase margins,” the court observed. Other firms could replace any competitive void left by Giant's elimination. Thus, there was no significant increase in the likelihood that Western had achieved, or would be able to exercise, market power, either in coordination with other firms or unilaterally. The defendants rebutted any presumption of anticompetitive effects by showing the ease of entry into the market, the court added.

The FTC did not attempt to prove anticompetitive coordinated effects, the court found. As for unilateral effects, evidence indicated that other suppliers would respond sternly to any unilateral attempt to divert output or increase prices. The amount of gasoline that the FTC alleged would be diverted from Albuquerque as a result of the transaction—900 barrels a day—was small and would have little or no significant impact on price. There was “an ample supply of gasoline available to the northern New Mexico market,” from many different suppliers, the court explained. Moreover, major customers like Chevron and Shell would discipline any unilateral attempt to reduce output.

Analysis of Unilateral Effects

The Commission's theoretical analysis of unilateral effects was not based on reasonable assumptions, in the court's view. The testimony of the FTC's industry expert was problematic in that he was not an economist, an economic expert, or a refinery expert. He did not evaluate trucking as a supply response, instead looking only at the limited trucking data that the Commission gave him.

Further, the court decided, the agency's econometric analysis was flawed in many respects, failing to account accurately or at all for market participants' past or likely future behavior.

Likelihood of Success

Consequent to these myriad shortcomings, it was plain that the FTC had not demonstrated a likelihood of succeeding on the merits of its Clayton Act case against the refiners in an administrative proceeding. Therefore, a granting of preliminary injunctive relief would not have been appropriate. Injunctive relief was not necessary to protect the public's interest, the court added.

The May 31 decision is FTC v. Foster, Western Refining, Inc., and Giant Industries, Inc., No.CIV 07-352JB/ACT, 2007-1 Trade Cases ¶75,725.

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