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 [...]