Valero L.P., Valero Energy Corporation, Kaneb Services LLC, and Kaneb Pipe Line Partners, L.P.; Analysis of Proposed Consent Order To Aid Public Comment, 36176-36181 [05-12381]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 70, Number 119 (Wednesday, June 22, 2005)]
[Notices]
[Pages 36176-36181]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-12381]


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FEDERAL TRADE COMMISSION

[File No. 051 0022]


Valero L.P., Valero Energy Corporation, Kaneb Services LLC, and 
Kaneb Pipe Line Partners, L.P.; Analysis of Proposed Consent Order To 
Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged 
violations of Federal law prohibiting unfair or deceptive acts or 
practices or unfair methods of competition. The attached Analysis to 
Aid Public Comment describes both the allegations in the draft 
complaint and the terms of the consent order--embodied in the consent 
agreement--that would settle these allegations.

DATES: Comments must be received on or before July 14, 2005.

ADDRESSES: Interested parties are invited to submit written comments. 
Comments should refer to ``Valero Kaaneb, et al., File No. 051 0022,'' 
to facilitate the organization of comments. A comment filed in paper 
form should include this reference both in the text and on the 
envelope, and should be mailed or delivered to the following address: 
Federal Trade Commission/Office of the Secretary, Room 159-H, 600 
Pennsylvania Avenue, NW., Washington, DC 20580. Comments containing 
confidential material must be filed in paper form, must be clearly 
labeled ``Confidential,'' and must comply with Commission Rule 4.9(c). 
16 CFR 4.9(c) (2005).\1\ The FTC is requesting that any comment filed 
in paper form be sent by courier or overnight service, if possible, 
because U.S. postal mail in the Washington area and at the Commission 
is subject to delay due to heightened security precautions. Comments 
that do not contain any nonpublic information may instead be filed in 
electronic form as part of or as an attachment to e-mail messages 
directed to the following e-mail box: consentagreement@ftc.gov.
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    \1\ The comment must be accompanied by an explicit request for 
confidential treatment, including the factual and legal basis for 
the request, and must identify the specific portions of the comment 
to be withheld from the public record. The request will be granted 
or denied by the Commission's General Counsel, consistent with 
applicable law and the public interest. See Commission Rule 4.9(c), 
16 CFR 4.9(c).
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    The FTC Act and other laws the Commission administers permit the 
collection of public comments to consider and use in this proceeding as 
appropriate. All timely and responsive public comments, whether filed 
in paper or electronic form, will be considered by the Commission, and 
will be available to the public on the FTC Web site, to the extent 
practicable, at https://www.ftc.gov. As a matter of discretion, the FTC 
makes every effort to remove home contact information for individuals 
from the public comments it receives before placing those comments on 
the FTC Web site. More information, including routine uses permitted by 
the Privacy Act, may be found in the FTC's privacy policy, at https://
www.ftc.gov/ftc/privacy.htm.

FOR FURTHER INFORMATION CONTACT: Phillip Broyles, Bureau of 
Competition, 600 Pennsylvania Avenue, NW., Washington, DC 20580, (202) 
326-2805.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal 
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46(f), and Sec.  2.34 of 
the Commission Rules of Practice, 16 CFR 2.34, notice is hereby given 
that the above-captioned consent agreement containing a consent order 
to cease and desist, having been filed with and accepted, subject to 
final approval, by the Commission, has been placed on the public record 
for a period of thirty (30) days. The following Analysis to Aid Public 
Comment describes the terms of the consent agreement, and the 
allegations in the complaint. An electronic copy of the full text of 
the consent agreement package can be obtained from the FTC Home Page 
(for June 15, 2005), on the World Wide Web, at https://www.ftc.gov/os/
2005/06/index.htm. A paper copy can be obtained from the FTC Public 
Reference Room, Room 130-H, 600 Pennsylvania Avenue, NW., Washington, 
DC 20580, either in person or by calling (202) 326-2222.
    Public comments are invited, and may be filed with the Commission 
in either paper or electronic form. All comments should be filed as 
prescribed in the ADDRESSES section above, and must be received on or 
before the date specified in the DATES section.

Analysis of Agreement Containing Consent Order To Aid Public Comment

I. Introduction

    The Federal Trade Commission (``Commission'' or ``FTC'') has issued 
a complaint (``Complaint'') alleging that Valero L.P.'s proposed 
acquisition of Kaneb Services LLC and Kaneb Pipe Line Partners, L.P. 
(collectively ``Kaneb'') 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

[[Page 36177]]

Containing Consent Orders'') pursuant to which Valero L.P., Valero 
Energy, and Kaneb (collectively ``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 Consent Order 
remedies the likely anticompetitive effects arising from the proposed 
acquisition, as alleged in the Complaint. The Hold Separate Order 
preserves competition pending divestiture.

II. Description of the Parties and the Transaction

    Valero L.P. is a publicly traded master limited partnership based 
in San Antonio, Texas. Valero L.P. shares its headquarters with Valero 
Energy, which owns 46% of Valero L.P.'s common units. Valero L.P. is 
engaged in the transportation and storage of crude oil and refined 
petroleum products and currently derives 98% of its total revenues from 
services provided to Valero Energy. The remaining 2% of revenue is 
generated from third parties who pay fees to use Valero L.P.'s 
pipelines and terminals. Valero L.P. reported 2004 net income of $78.4 
million on total revenue of $221 million.
    Respondent Valero Energy Corporation is an independent domestic 
refining company, headquartered in San Antonio, Texas. It is engaged in 
national refining, transportation, and marketing of petroleum products 
and related petrochemical products. Valero Energy reported 2004 net 
income of $1.8 billion on revenues of nearly $55 billion.
    Kaneb is a single company represented by two publicly traded 
entities: Kaneb Pipe Line Partners, L.P. (``KPP'') and Kaneb Services 
LLC (``KSL''). Kaneb owns and operates refined petroleum product 
pipelines and petroleum and specialty liquids storage and terminaling 
facilities. KPP is a master limited partnership that owns Kaneb's 
pipeline and terminaling assets. KSL owns the general partnership in 
KPP and five million of KPP's limited partnership units. KSL's wholly 
owned subsidiary, Kaneb Pipeline Company LLC, manages and operates 
KPP's pipeline and terminaling assets. KSL reported 2004 consolidated 
net income of $24 million on total revenue of approximately $1 billion.
    Pursuant to the terms of the Agreements and Plans of Merger between 
Valero L.P. and the Kaneb entities, (1) Valero L.P. will pay $525 
million in cash for the entirety of KSL's partnership units, and (2) 
Valero L.P. will exchange $1.7 billion in Valero L.P. partnership units 
for all outstanding KPP partnership units. As a result of the 
transactions, both KSL and KPP will be wholly owned subsidiaries of 
Valero L.P., and Valero Energy's equity ownership in Valero L.P. would 
be reduced to 23%.

III. The Investigation and the Complaint

    The Complaint alleges that the merger of Valero L.P. and Kaneb 
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) 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.
    To remedy the anticompetitive effects of the merger, the Proposed 
Consent Order requires Respondents to divest the following assets: (1) 
In the Greater Philadelphia Area, Kaneb's Paulsboro, New Jersey, 
Philadelphia North, and Philadelphia South terminals; (2) in the 
Colorado Front Range, Kaneb's West Pipeline system, which originates in 
Casper, Wyoming, and terminates in Rapid City, South Dakota, and 
Colorado Springs, Colorado, and includes Kaneb's terminals in Rapid 
City, South Dakota, Cheyenne, Wyoming, Denver, Colorado, and Colorado 
Springs, Colorado; and (3) in Northern California, Kaneb's Martinez and 
Richmond terminals. Finally, the Order also requires Valero L.P. not to 
discriminate in favor of or otherwise prefer Valero Energy in bulk 
ethanol terminaling services and to maintain customer information 
confidentiality at the Selby and Stockton terminals.
    The Commission's decision to issue the Complaint and enter into the 
Agreement Containing Consent Orders was made after an extensive 
investigation in which the Commission examined competition and the 
likely effects of the merger in the markets alleged in the Complaint 
and in other markets.\2\ The Commission has concluded that the merger 
is unlikely to reduce competition significantly in markets other than 
those alleged in the Complaint.
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    \2\ The Commission conducted the investigation leading to the 
Complaint in collaboration with the Attorney General of the State of 
California. As part of this joint effort, Respondents have entered 
into a State Decree with California settling charges that aspects of 
the transaction affecting California consumers would violate both 
State and Federal antitrust laws.
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    The Complaint alleges that the merger would violate the antitrust 
laws in four product and geographic markets, each of which is discussed 
below. The analysis applied in each market requiring structural relief 
follows the analysis set forth in the FTC and U.S. Department of 
Justice Horizontal Merger Guidelines (1997) (``Merger Guidelines''). 
The relief obtained in the bulk ethanol terminaling market is 
consistent with the Commission's past remedies in similarly-structured 
mergers.
    In addition, the Commission focused on the identity and corporate 
control of the merging parties. Valero Energy owns the general partner 
of Valero L.P. The general partner is presumed to exercise all 
operational rights afforded by the partnership agreements and 
applicable state corporation law. In light of this relationship, and 
for purposes of competitive analysis, the Commission attributes Valero 
Energy's assets and incentives to Valero L.P. The Commission further 
determined that Valero Energy may have incentives to operate the Valero 
L.P. assets less competitively than would Kaneb, by maximizing product 
prices rather than terminal or pipeline revenues. Given the trend 
toward master limited partnerships holding midstream petroleum 
transportation and terminaling assets, Commission staff will continue 
to scrutinize the ownership and control of limited partnerships in its 
evaluation of midstream asset transactions. Where it appears an 
operator's interests may be more closely aligned with downstream output 
reductions than increased transportation and terminaling throughput, 
the Commission will apply the analysis conducted during this 
investigation.

Count I Terminaling Services for Bulk Suppliers of Light Petroleum 
Products in the Greater Philadelphia Area

    The Complaint charges that the proposed merger would likely reduce 
competition in the market for terminaling services for bulk suppliers 
of light petroleum products in the Greater Philadelphia Area, thereby 
increasing the price for terminaling services and bulk supply of 
transportation fuels, by (1) eliminating direct competition between 
Valero L.P.

[[Page 36178]]

and Kaneb; and (2) increasing the ability and likelihood of coordinated 
interaction between the combined company and its competitors in the 
Greater Philadelphia Area. The proposed merger reduces the number of 
suppliers of terminaling services for transportation fuels and 
eliminates Kaneb as a source of imported transportation fuel, thereby 
increasing the likelihood of coordination.
    Valero L.P. and Kaneb compete in the supply of terminaling services 
for bulk suppliers of light petroleum products in the Greater 
Philadelphia Area, a relevant antitrust market. Terminaling customers 
such as refiner-marketers, independent marketers, and traders rely on 
terminals to supply transportation fuel to the area. There are no 
substitutes for terminals in supplying and distributing transportation 
fuels in the Greater Philadelphia Area.
    The Greater Philadelphia Area includes the city of Philadelphia, 
the Philadelphia suburbs, and portions of southern New Jersey and 
northern Delaware. Terminals outside the Greater Philadelphia Area are 
not economic substitutes for terminals within the area because of 
additional costs of transporting product by truck from more distant 
terminals. Post-merger, the remaining terminal operators could 
profitably impose a small but significant and nontransitory price 
increase in terminaling services for transportation fuels because no 
additional terminals can serve the Greater Philadelphia Area without 
significantly raising the cost of distributing fuel.
    Seven firms currently provide terminaling services for 
transportation fuels in the Philadelphia area: Valero L.P., Kaneb, 
Sunoco, ConocoPhillips, Hess, Premcor, and ExxonMobil. Each of these 
firms owns or has contractual rights to one or more terminals in the 
Greater Philadelphia Area. The proposed merger would significantly 
increase market concentration, and post-merger the market would be 
highly concentrated. The change in market concentration understates the 
competitive significance of the merger because Kaneb is the only 
terminal system in the Greater Philadelphia Area capable of 
facilitating imports into the market.
    Valero L.P.'s purchase of Kaneb's terminals in the Greater 
Philadelphia Area would allow the remaining terminaling owners to 
profitably impose a small but significant and nontransitory price 
increase in the price of terminaling services. Eliminating Kaneb as an 
independent terminaling service competitor would have additional 
anticompetitive effects in the sale of bulk supplies of transportation 
fuels. Kaneb does not own or market any of the product in its terminals 
and earns its revenue solely from providing terminaling services to 
third parties. The other terminaling services providers, including 
Valero, also provide bulk supply to the market and sell their own 
transportation fuels through downstream marketing assets. These 
terminal owners use their terminal assets primarily for their own 
marketing needs and often do not provide terminaling services to third 
parties.
    Because Kaneb does not earn any revenue from the sale of product, 
it has no economic interest in the price of the product. Kaneb's 
incentive is strictly to obtain as much third party terminaling 
business as it can. Thus, third party marketers can reliably use the 
Kaneb terminals to receive and throughput bulk supplies imported by 
pipeline and by water from outside the Greater Philadelphia Area. These 
imports are critical in maintaining a competitive market and to keeping 
prices low for transportation fuels in the Greater Philadelphia Area. 
The proprietary terminal operators have different incentives from 
Kaneb. As downstream marketers, higher product prices increase their 
profitability from their marketing operations, which typically accounts 
for a much larger portion of their business than terminaling. Post-
merger, Valero would control the Kaneb terminals and could restrict 
access by third parties to these terminals. Without open access to the 
Kaneb terminals, it would be much more difficult for third party 
marketers to import product into the Greater Philadelphia Area. The 
elimination of imports would reduce competitive pressure on the local 
bulk suppliers, including Valero, thereby allowing them to maintain 
higher prices for bulk supplies of transportation fuel in the Greater 
Philadelphia Area.
    Entry into the terminaling market is difficult and would not be 
timely, likely, or sufficient to preclude anticompetitive effects 
resulting from the proposed merger. Building a new terminal requires 
significant sunk costs and would be a very long process, in part due to 
lengthy permitting requirements. Converting a non-transportation fuel 
terminal is also expensive and time consuming, and would not be likely 
in the Greater Philadelphia Area.
    The efficiencies proposed by the Respondent, to the extent they 
relate to this market, are not cognizable under the Merger Guidelines, 
and are small compared to the extent of the potential anticompetitive 
harm. Even if the proposed efficiencies were achieved, they would not 
be sufficient to reverse the merger's potential to raise the price of 
bulk supply and terminal services.

Count II Pipeline Transportation and Terminaling Services for Bulk 
Suppliers of Light Petroleum Products in the Colorado Front Range

    The Complaint charges that the proposed acquisition would likely 
substantially reduce competition in pipeline transportation and 
terminaling services for bulk suppliers of light petroleum products in 
Denver and Colorado Springs by (1) eliminating direct competition 
between Valero L.P. and Kaneb, (2) increasing the ability and 
likelihood of coordinated interaction between the combined company and 
its competitors in the Denver area, and (3) eliminating all competition 
in Colorado Springs, making Valero L.P. a monopolist in pipeline 
transportation and terminaling services. While the relevant market is 
pipeline transportation and terminaling services, any purchaser of 
light petroleum products would have to pay for the product to get to 
the market through pipeline transportation and/or terminals. Therefore, 
a price increase in these relevant markets would also cause an increase 
in light petroleum products prices.
    Valero L.P. and Kaneb compete in the pipeline transportation and 
terminaling services for bulk suppliers of light petroleum products in 
both Denver and Colorado Springs. While light petroleum products can be 
trucked to Denver and Colorado Springs, pipeline transportation is the 
only economic means to ship bulk supplies of light petroleum products 
to either Denver or Colorado Springs. There is no economically feasible 
substitute to pipeline transportation to reach these geographic areas.
    Light petroleum products reach Denver and Colorado Springs through 
terminals that can receive product from either pipelines or refineries. 
Tank trucks pick up the light petroleum products from these local 
terminals and deliver them short haul distances to retail outlets and 
other customers. Terminals outside of Denver and Colorado Springs 
cannot economically supply those areas due to the costs of shipping 
light petroleum products by truck. Therefore, terminaling services 
provided by those terminals in the Denver and Colorado Springs areas is 
a relevant market.
    Following the merger, the combined firm would control a significant 
share of bulk supply and terminaling services for light petroleum 
products in the

[[Page 36179]]

Colorado Front Range. The proposed transaction would significantly 
increase market concentration, and post-merger the market would be 
highly concentrated. Moreover, the proposed transaction would result in 
the combined firm having a monopoly in the Colorado Springs area. The 
change in market concentration underestimates the likely competitive 
harm because it does not take into account how Valero L.P.''s 
incentives differ from Kaneb's current incentives in operating the 
Kaneb West Pipeline system.
    Entry is difficult and would not be timely, likely, or sufficient 
to prevent anticompetitive effects arising from the proposed 
acquisition. Pipeline entry in Denver or Colorado Springs is very 
unlikely because of the high expense of constructing a new pipeline to 
these geographically isolated areas. It is highly improbable, if not 
impossible, that a new pipeline originating in a distant market could 
be both approved and constructed within the two-year period required by 
the Merger Guidelines.
    Terminal entry in Denver or Colorado Springs is also very unlikely. 
Each refinery in and each pipeline to the Denver and Colorado Springs 
markets is accommodated by an existing terminal. Given the sufficient 
terminal capacity for the existing refinery and pipeline 
infrastructure, it is highly unlikely that a potential entrant could 
find a financial incentive to make a major investment, involving high 
sunk costs, in the construction of a new terminal.
    The efficiency claims of the Respondents, to the extent they relate 
to these markets, are not cognizable under the Merger Guidelines, are 
small as compared to the magnitude of the potential harm, and would not 
be sufficient to reverse the merger's potential to raise the price of 
bulk supply and terminal services.
    The proposed acquisition would create a highly concentrated market 
in Denver and Colorado Springs and create a presumption that the 
acquisition ``will create or enhance market power or facilitate its 
exercise * * * '' Merger Guidelines Sec.  1.5(c). These anticompetitive 
effects could result from the coordinated interaction between Valero 
L.P. and the remaining firms with enough excess capacity to defeat a 
price increase in Denver, and from a unilateral reduction in supply or 
price increase instituted by Valero L.P. in Colorado Springs.

Count III Terminaling Services for Bulk Suppliers of Refining 
Components, Blending Components, and Light Petroleum Products in 
Northern California

    The Complaint charges that the proposed acquisition would likely 
substantially reduce competition in terminaling services for bulk 
suppliers of refining components, blending components, and light 
petroleum products in Northern California by (1) eliminating direct 
competition between the firms in the provision of terminaling services 
for bulk suppliers of refining components, blending components, and 
light petroleum products, and (2) increasing the ability and likelihood 
of coordinated interaction between the combined company and its 
competitors in Northern California. Downstream effects will likely 
result in increased prices for light petroleum products.
    Valero L.P. and Kaneb compete in providing terminaling services for 
bulk suppliers of refining components, blending components, and light 
petroleum products in Northern California. Refiner-marketers, 
independent marketers, and traders use Kaneb's three marine-accessible 
Northern California terminals to receive and store imported products 
and to distribute light petroleum products via pipeline to other 
Northern California terminals. In addition, refiners use the Kaneb 
terminals to store refining components, blending components, and light 
petroleum products that are needed to optimize production from their 
refineries. There are no substitutes for terminaling services for these 
products.
    Northern California is a relevant geographic market. Due to 
trucking costs, firms need access to the Kinder Morgan intrastate 
pipeline to distribute bulk volumes of California gasoline and other 
light petroleum products throughout the state, and Southern California 
terminals are not connected to Kinder Morgan's Northern California 
pipeline network. In addition, constraints in Southern California 
terminal infrastructure make it unlikely that Southern California 
terminals could handle excess volume in the event of a Northern 
California terminal services price increase.
    The market for terminaling services for bulk suppliers of refining 
components, blending components, and light petroleum products in 
Northern California will be highly concentrated following the proposed 
acquisition. Participants in the market include Kaneb and the five San 
Francisco Bay Area refiners (Valero Energy, Chevron Corp., 
ConocoPhillips, Shell, and Tesoro). Other terminals lack sufficient 
capacity into the Kinder Morgan pipeline system to transport excess 
product in the event of a price increase. The proposed acquisition 
would significantly increase market concentration, and post-merger the 
market would be highly concentrated.
    Post-acquisition, Valero L.P. would have an incentive to increase 
light petroleum prices by restricting products moving into and through 
the three marine-accessible Kaneb terminals in Northern California. 
Valero L.P. could limit the amount of product reaching that market by 
(1) limiting out-of-state marine shipments of California-grade gasoline 
and other products into Northern California; (2) limiting the volume of 
product entering the Kinder Morgan pipeline system in Northern 
California; and (3) limiting the ability of other Bay Area refiners to 
produce California-grade gasoline by restricting their storage for 
refining components, blending components, and other products needed to 
optimize refinery output.
    The acquisition increases the likelihood of coordinated interaction 
among the remaining market participants by eliminating the terminal 
services provider with different incentives. Kaneb is the only market 
participant that does not also own or market light petroleum products 
in Northern California. Because after the merger all market 
participants will benefit from higher prices for light petroleum 
products, Valero L.P.'s restriction of terminaling services would 
likely not trigger an offsetting response from its terminaling 
competitors.
    Entry into the market for Northern California terminaling services 
for these products would not be likely or timely, for the reasons 
discussed in other terminal markets. Indeed, if anything, entry is even 
more difficult in California, given that the state imposes an extensive 
and costly permitting process that would prolong any attempt to secure 
and develop new terminal space.
    The efficiency claims of the Respondents, to the extent they relate 
to any of these three markets with horizontal overlaps, are not 
cognizable under the Merger Guidelines, are small as compared to the 
magnitude of the potential harm, and would not be sufficient to reverse 
the merger's potential to raise the price of bulk supply and terminal 
services.

[[Page 36180]]

Count IV Terminaling for Bulk Ethanol in Northern California

    The Complaint charges that the proposed acquisition would likely 
substantially reduce competition in terminaling services for bulk 
ethanol in Northern California by changing the owner of Kaneb's Selby 
and Stockton terminals. Ethanol is a necessary input in producing 
California-grade ``CARB'' gasoline. This is the Commission's first 
opportunity to examine a merger's competitive effects on ethanol since 
California adopted it as the preferred oxygenate.
    In Northern California, Kaneb's Selby, Stockton, and Richmond 
terminals are the only terminals capable of receiving and storing bulk 
quantities of ethanol. From these terminals, ethanol is offloaded from 
large rail or marine shipments, placed into storage tanks, and loaded 
onto trucks for delivery to other nearby terminals. Once the ethanol 
reaches these other terminals, ethanol is blended at the truck rack to 
produce CARB gasoline.
    Terminal services for bulk ethanol is the relevant product market. 
There are no substitutes for these services; large quantities of 
ethanol received from producers must be broken into smaller volumes for 
distribution to remote gasoline terminals. Because remote terminals 
must receive ethanol supplies by truck, the geographic market is 
limited to Northern California. It is simply not feasible to supply 
Northern California terminals with ethanol trucked from Southern 
California terminals. Similarly, customers currently using Kaneb's 
Stockton terminal would face additional trucking costs if forced to use 
either of Kaneb's Selby or Richmond terminals.
    The proposed acquisition raises vertical issues relating to ethanol 
terminaling services with likely effects in finished gasoline sales. 
Valero Energy and the other Northern California refiners do not offer 
ethanol terminaling services that compete with Kaneb and would not 
likely be able to do so in the event of a price increase. Post-
acquisition, Valero L.P.'s ownership of the Kaneb terminals would give 
it control over an input necessary to finish gasoline for portions of 
Northern California. Valero Energy refines and markets CARB gasoline. 
By virtue of the merger, Valero L.P. could use control over bulk 
ethanol terminaling to limit access to ethanol storage by refusing to 
renew storage agreements with terminaling customers, by canceling 
contracts at some terminals to force competitors to truck longer 
distances, or by simply raising prices or abusing confidential 
information for ethanol terminaling. Because a percentage of ethanol 
must be added to CARB gasoline where oxygenation is required, any of 
these actions could increase the price of finished gasoline in Northern 
California. Because Kaneb does not market CARB gasoline, Kaneb 
currently has no incentive to manipulate ethanol access in these ways.
    New entry into the market for Northern California bulk ethanol 
terminaling services would not be likely or timely, for the same 
reasons that entry would not be timely or likely for terminaling 
services for refining components, blending components, and light 
petroleum products in Northern California.

IV. The Proposed Consent Order

    The Commission has provisionally accepted the Agreement Containing 
Consent Orders executed by Valero L.P., Valero Energy, and Kaneb in the 
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. Under the terms of the Proposed Order, 
the merged firm must: (1) Divest Kaneb's Paulsboro, New Jersey, 
Philadelphia North, and Philadelphia South terminals; (2) divest the 
Kaneb West Pipeline System; (3) divest Kaneb's Martinez and Richmond 
terminals; (4) ensure that customers and prospective customers have 
non-discriminatory access to commingled terminaling of ethanol at its 
retained San Francisco Bay terminals, on terms and conditions no less 
advantageous to those given to Valero Energy; and (5) create firewalls 
that prevent the transfer of competitively sensitive information 
between the merged firm and Valero Energy. The Commission will appoint 
James F. Smith as the hold separate trustee.

A. Kaneb's Paulsboro, Philadelphia North, and Philadelphia South 
Terminals

    To remedy the lessening of competition in the supply of terminaling 
services for bulk suppliers of light petroleum products in the Greater 
Philadelphia Area alleged in Count I of the Complaint, Paragraph III of 
the Proposed Order requires Respondents to divest Kaneb's Paulsboro, 
New Jersey, Philadelphia North, and Philadelphia South terminals. The 
assets to be divested include the three terminals, and all assets 
located at or used in connection with these terminals, including truck 
racks, local connector pipelines, storage tanks, real estate, 
inventory, customer contracts, and real estate.
    The divestiture is designed to ensure that, post-merger, the same 
number of players will compete in supplying terminaling services as at 
present. In addition, divesting the Philadelphia area package to an 
independent terminal operator that does not benefit from higher product 
prices will complicate the ability of the integrated terminal owners in 
the Greater Philadelphia Area to coordinate their bulk supply decisions 
and will maintain the pre-merger competition in this market.
    These terminal assets must be divested within six months of the 
date the merger is effectuated to a buyer that receives that prior 
approval of the Commission. In a separate Order to Hold Separate and 
Maintain Assets, Respondents are required to hold all assets to be 
divested separate and to maintain the viability and marketability of 
the assets until they are divested.

B. Kaneb West Pipeline System

    To remedy the lessening of competition in pipeline transportation 
and terminaling services for bulk suppliers of light petroleum products 
in the Colorado Front Range alleged in Count II of the Complaint, 
Paragraph II of the Proposed Order requires Respondents to divest the 
Kaneb West Pipeline System. The assets to be divested include: (1) A 
refined products pipeline originating near Casper, Wyoming, and 
terminating in Rapid City, South Dakota, and Colorado Springs, 
Colorado; (2) refined products terminals in Rapid City, South Dakota; 
Cheyenne, Wyoming; Dupont, Colorado; and Fountain, Colorado. The assets 
to be divested also include all assets located at, or used in 
connection, with these pipelines and terminals, including truck racks, 
local connector pipelines, storage tanks, real estate, inventory, 
customer contracts, and real estate.
    This divestiture is designed to maintain the likelihood that the 
new owner of the Kaneb West Pipeline System will not restrict Montana 
and Wyoming refiners' ability to send product to Denver and Colorado 
Springs. The divestiture will eliminate the ability of the combined 
company to raise light petroleum product prices in Denver and Colorado 
Springs by restricting access to the West Pipeline System. It also 
ensures that the current competition for pipeline transportation to and 
terminaling services in Denver and Colorado Springs will be maintained, 
with the same number of competitors post-acquisition as pre-

[[Page 36181]]

acquisition. The divestiture of the West Pipeline System will also 
complicate the ability of the terminal and pipeline owners in these 
markets to coordinate in raising their pipeline transportation or 
terminaling service fees. Finally, the divestiture prevents Valero L.P. 
from controlling light petroleum product pipeline transportation to and 
terminaling in Colorado Springs. It effectively maintains the pre-
merger competition in this market.
    These pipeline and terminal assets must be divested within six 
months of the date the merger is effectuated to a buyer that receives 
the prior approval of the Commission. In a separate Order to Hold 
Separate and Maintain Assets, Respondents are required to hold all 
assets to be divested separate and to maintain the viability and 
marketability of the assets until they are divested.

C. Kaneb's Martinez and Richmond Terminals

    To remedy the lessening of competition in terminaling services for 
bulk suppliers of refining components, blending components, and light 
petroleum products in Northern California as alleged in Count III of 
the Complaint, Paragraph IV of the Proposed Order requires Respondents 
to divest Kaneb's Martinez and Richmond terminals to a Commission-
approved buyer. The assets to be divested include both terminals, and 
all assets located at or used in connection with these terminals, 
including truck racks, local connector pipelines, storage tanks, real 
estate, inventory, customer contracts, and real estate.
    The divestiture is ordered to maintain the likelihood that the new 
owner of these terminals does not restrict access to these terminals or 
otherwise limit imports into the Northern California market. The 
divestiture also complicates the ability of the remaining terminal 
owners in the market to coordinate to raise the prices of terminaling 
services. Although Valero L.P. will acquire Kaneb's Selby terminal, the 
presence of an independent operator of Martinez and Richmond will check 
Valero L.P.'s incentive and ability to restrict access at that 
terminal.
    These terminal assets must be divested within six months of the 
date the Merger is effectuated to a buyer that receives the prior 
approval of the Commission. In a separate Order to Hold Separate and 
Maintain Assets, Respondents are required to hold all assets to be 
divested separate and to maintain the viability and marketability of 
the assets until they are divested.
    In considering an application to divest any of these three asset 
packages, to one or more buyers, the Commission will consider factors 
such as the acquirer's ability and incentive to invest and compete in 
the businesses in which Kaneb was engaged in the relevant geographic 
markets alleged in the Complaint. The Commission will consider whether 
the acquirer has the business experience, technical judgment, and 
available capital to continue to invest in the terminals in order to 
maintain current levels of competition.

D. Terminaling Services for Bulk Ethanol in Northern California

    To remedy the lessening of competition in terminaling services for 
bulk ethanol in Northern California alleged in Count IV of the 
Complaint, Paragraph VI of the Proposed Order requires Respondents to 
maintain an information firewall. The Paragraph also requires that the 
Respondents not discriminate in offering access to commingled 
terminaling of ethanol at its retained Northern California terminals in 
Stockton and Selby, and offer access to third parties on terms and 
conditions no less advantageous to those given to Valero Energy. This 
remedy is ordered to ensure that the Respondents do not use 
confidential business information or limit access to ethanol storage to 
maintain competition in the terminaling of ethanol and the sale of 
finished gasoline in Northern California.

E. Other Terms

    Paragraph VII requires the Respondents to provide written 
notification prior to acquiring the Paulsboro, New Jersey, Philadelphia 
North, or Philadelphia South terminals, or any portion thereof. It 
further requires Respondents to provide reports to the Commission 
regarding compliance with the Proposed Order. Paragraph IX requires the 
Respondents to provide written notification prior to any proposed 
dissolution, acquisition, merger, or consolidation, or any other change 
that may affect compliance obligations arising out of the Proposed 
Order. Paragraph X requires the Respondents to provide the Commission 
with access to their facilities and employees for purposes of 
determining or securing compliance with the Proposed Order. Paragraph 
XI provides for an extension of time to complete divestitures required 
under the Proposed Order if the particular divestiture has been 
challenged by a State.

V. Opportunity for Public Comment

    The Proposed Order has been placed on the public record for thirty 
days for receipt of comments by interested persons. Comments received 
during this period will become part of the public record. After thirty 
days, the Commission will again review the Proposed Order and the 
comments received and will decide whether it should withdraw from the 
Proposed Order or make it final. 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, to aid the Commission in 
its determination of whether to make the Proposed Order final. 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.

    By direction of the Commission, Chairman Majoras recused.
Donald S. Clark,
Secretary.
[FR Doc. 05-12381 Filed 6-21-05; 8:45 am]
BILLING CODE 6750-01-P