On March 18, 2015, the Federal Trade Commission (FTC) ordered Par Petroleum Corporation to terminate its storage and throughput rights at a key gasoline terminal in Hawaii. This action will settle FTC charges seeking to prevent Par’s acquisition of Koko’oha Investments, Inc. Notably, the market structure created as a result of this remedy mirrors a market structure that was deemed anticompetitive in a 2005 FTC action. The two differing approaches to the same market highlight a key trend in the FTC’s merger enforcement: the focus on competitive effects of a transaction, as opposed to the resulting market structure.
The Market for Hawaii-Grade Gasoline Blendstock
The allegedly anticompetitive transaction affects the market for Hawaii-grade gasoline blendstock. Gasoline blendstock is produced by refining crude oil and is later combined with ethanol to make finished gasoline. The finished gasoline is sold to Hawaiian consumers.
Prior to the transaction, there were four competitors in the market for Hawaii-grade gasoline blendstock. Par and another oil company competed by operating refineries and producing the blendstock on the Hawaiian Islands. The other two competitors, Mid Pac Petroleum, LLC, and Aloha Petroleum, Ltd., competed by sharing access to the only commercial gasoline terminal on the Islands not owned by a refinery and capable of receiving full waterborne shipments of gasoline blendstock. This terminal, the Barbers Point Terminal, was owned by Aloha, but Mid Pac shared access through a long-term storage and throughput agreement.
The two oil refiners produced more gasoline than was consumed in Hawaii. As a result, importing gasoline blendstock was unnecessary. However, Mid Pac and Aloha were able to constrain the price of gasoline blendstock purchased from the Hawaiian refiners by maintaining their ability to import gasoline blendstock through the Barbers Point Terminal.
The Proposed Transaction and the FTC Challenge
On June 2, 2014, Par agreed to acquire Koko’oha for $107 million. As part of this transaction, Par would acquire Koko’oha’s 100 percent membership interest in Mid Pac and, therefore, Mid Pac’s rights to access the Barbers Point Terminal. The FTC filed a complaint alleging this transaction was likely to substantially lessen competition in the bulk supply of Hawaii-grade gasoline blendstock.
The basis of the FTC’s action was that “[t]he Acquisition would weaken the threat of imports as a constraint on local refiners’ [gasoline blendstock] prices.” By acquiring Mid Pac’s throughput and storage rights at Barbers Point Terminal, Par would have an incentive to use those rights strategically to weaken Aloha’s ability to constrain the price of gasoline blendstock. The specific competitive concern the FTC cited was that Par would store substantial amounts of gasoline in the Barbers Point Terminal for extended periods of time. By doing so, Par would tie up the capacity at the terminal and thereby reduce the size of import shipment that Aloha could receive at the terminal. “This would force Aloha to spread substantial fixed freight costs over a smaller number of barrels of gasoline, which would significantly increase its cost-per-barrel of importing.”
On March 18, 2015, the FTC and Par entered a Consent Agreement that will settle the FTC’s charges. The order requires Par to terminate its throughput and storage agreement with Aloha, effectively providing Aloha sole control of the Barbers Point Terminal. According to the FTC, this proposed consent order is narrowly tailored to address the specific competitive concerns and would not eliminate any of the efficiencies arising from the acquisition.
Significance of the Proposed Remedy
The FTC remedy demonstrates a significant trend in the FTC’s evaluation of the competitive impacts of acquisitions: a greater focus on a transaction’s likelihood of creating adverse competitive effects, rather than on market structure (i.e., the number of remaining competitors).
In 2005, Aloha agreed to acquire the 50 percent interest in the Barbers Point Terminal that it did not already own at that time, which would provide it with sole control over the terminal. The FTC sought an injunction in federal court blocking the transaction. According to the FTC’s 2005 complaint, Aloha’s acquisition would result in higher prices for Hawaiian consumers, largely as a result of the decrease in the number of competitors from five to four. The FTC dropped its challenge after Aloha announced it would enter a 20-year throughput agreement with Mid Pac, maintaining five competitors in the market.
The FTC’s remedy in its 2015 challenge allows Aloha to gain sole control over the Barbers Point Terminal—the acquisition it blocked in 2005—and reduces the number of competitors from four to three. The FTC did not explain the rationale behind these two different results. It is possible that there has been a substantial change in the industry over the last 10 years—the FTC recently allowed a retail transaction to proceed without challenge when it had obtained an injunction to block that combination in the 1990s, because the market had changed significantly in the intervening years.
Another potential reason the current Hawaii case allowed a result that was challenged in 2005 is the trend in merger enforcement to focus on the potential competitive effects of a transaction. The FTC and U.S. Department of Justice’s 2010 revisions to the Horizontal Merger Guidelines, which were published halfway between the two Hawaii gasoline decisions, illustrate this trend. In the 2010 revisions, there was a new section added to the Horizontal Merger Guidelines entitled “Evidence of Adverse Competitive Effects.” In this section, which immediately follows the Guidelines’ introductory section, the agencies point to the importance of predicting the likely competitive outcomes of the transaction. The 2010 Guidelines elevated the importance of the competitive effects analysis compared to the traditional market definition/market structure analysis contained in the previous Guidelines.
As noted previously, the FTC’s complaint against Par expressly stated “[t]he Acquisition would weaken the threat of imports as a constraint on local refiners’ [gasoline blendstock] prices.” It appears that the FTC determined that the key to preserving competition was maintaining a viable waterborne option as a third competitor to constrain the refineries, rather than retaining four suppliers. The FTC’s order in its review of Par’s transaction specifically focuses on maintaining a credible import threat to the oil refiners in Hawaii. Even though the order revises the transaction in a way that still reduces the number of competitors from four to three, the exact competitive harm that the FTC cited in its complaint was remedied.
The remedy ordered by the FTC in Par’s acquisition indicates that the antitrust agencies will consider remedies that address their specific theory of competitive harm, even where the revised transaction generates more concentrated market structures.
The full and original memorandum was published by McDermott Will & Emery on March 30, 2015 and is available here.