Oliva-magellanshell

UNITED STATES OF AMERICA BEFORE FEDERAL TRADE COMMISSION In the Matter of Magellan Midstream Partners, L.P. and Shell Oil Company FTC File No. 041-0164 COMMENTS OF CITIZENS FOR VOLUNTARY TRADE Proposed Order announced September 28, 2004 Comments filed November 1, 2004 Citizens for Voluntary Trade files the following comments in response to the Federal Trade Commission's proposed decision and order in the above-captioned matter. Introduction On June 23, 2004, Shell Oil Company (Shell) agreed to sell a package of refined petroleum pipeline and terminal assets to Magellan Midstream Partners, L.P. (Magellan). Magellan is a publicly traded limited partnership that provides “midstream” energy services, including the storage and transportation of light petroleum products. The partnership's estimated 2003 revenue was $485.16 million. Among the assets in Shell's package to Magellan was a refined lite petroleum terminal in Oklahoma City, Oklahoma. The Federal Trade Commission issued an administrative complaint against Magellan and Shell, claiming Magellan's acquisition of the Oklahoma City terminal violated Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, and Section 7 of the Clayton Act, 15 U.S.C. § 18. Magellan and Shell agreed to a proposed order whereby Magellan must divest the former Shell Oklahoma City terminal, at no minimum price, to a buyer approved by FTC.

In the Matter of Magellan Midstream Partners, L.P. and Shell Oil Company COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

Comments This is the second FTC prosecution in the past month of a refined petroleum terminal sale by Shell to a midstream partnership. Just last week, CVT filed comments on FTC's proposed order against Shell and Buckeye Partners, L.P.1, over an abandoned sale of a terminal in Niles, Michigan. FTC is clearly micromanaging the midstream industry through antitrust regulation, although the Commission can demonstrate no economic benefits to this approach. There is no evidence in the record, either in this case or in the Buckeye prosecution, that violent intervention by FTC yields superior economic outcomes to those created by the free market. FTC's “competitive” concerns about the sale of the Oklahoma City terminal relies almost exclusively on the Commission's use of the Herfindahl index.2 The index purports to measure market concentration by adding the squares of the market shares of the existing competitors. For example, if a market has four competitors with market shares of 30%, 30%, 20%, and 20%, then the Herfindahl index number will be 900+900+400+400 or 2,600. FTC would define this theoretical market as “highly concentrated,” because the index exceeds 1,800. If two of the four competitors—say the two firms with 30% shares—were to merge, FTC would probably object because this would increase the index number from 1,800 to 4,400. Any post-merger increase in the index of more than 100 in a “highly concentrated” market is deemed suspect because the merger is considered “likely to create or enhance market power or facilitate its exercise.”3 In this case, FTC claims Magellan's acquisition of Shell's Oklahoma City terminal would increase the Herfindahl index number from 3,100 to 4,300, an 1,200-point increase in a “highly 1 FTC File No. 041-0162. 2 Also called the Herfindahl-Hirschman index. 3 U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines at 1.5. (Available at www.usdoj.gov/atr/public/guidelines/horiz_book/15.html).

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In the Matter of Magellan Midstream Partners, L.P. and Shell Oil Company COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

concentrated” market. Because FTC doesn't provide any information about how the Herfindahl index was calculated here —i.e. the total number of competitors and their exact market shares—it is impossible to verify the pre- and post-merger numbers given. Assuming, arguendo, that the Herfindahl index numbers given in the complaint are valid, this alone does not constitute proof of any “market power” or justify FTC's intervention. The Herfindahl index is nothing more than a predictor of whether FTC (or the Department of Justice) will pursue legal action. As economics professor Dominick Armentano explained, there is no objective economic merit in the Herfindahl index: Although the general public has the impression that there must be some good reason for the antitrust authorities' choice of particular limits in the Herfindahl Index of market concentration, those limits are completely arbitrary. No one—and certainly not the antitrust authorities—can ever know whether a merger of firms that creates, say, a 36-percent market share, or one that raises the Herfindahl Index by 150 points, can create sufficient economic power to reduce market output and raise market price. No one knows, or can know, whether monopoly power begins at a 36 percent market share or a 36.74-percent market share. Neither economic theory nor empirical evidence can justify any merger guideline or prohibition.4 FTC—an agent of the United States Government—is seeking to restrict or prohibit the right of private businesses to enter into an enforceable contract. If Shell decides to sell its property to Magellan, that is their business, not the publics. Property rights have no meaning if they are subject to arbitrary and capricious 4 Dominick T. Armentano, Antitrust: The Case for Repeal, pp. 85-86 (2nd ed., Ludwig Von Mises Institute 1999).

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In the Matter of Magellan Midstream Partners, L.P. and Shell Oil Company COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

violation by the state. FTC cannot, consistent with the Constitution and free-market economic principles, condition an exchange of private property on whether a buyer or seller owns “too much” property according to an arbitrary formula. If that were the case, then no property is safe from government seizure on the grounds that ownership is “highly concentrated.” The federal government could conceivably seize private homes by claiming the homeowners own “too much” property according to some index that purports to measure market concentration of real estate. Indeed, FTC's exclusive reliance on the Herfindahl index to establish market power here raises a curious question. If the premerger index number is 3,100—a full 1,300 points over the threshold for declaring a market “highly concentrated”--then why can't FTC, consistent with its own mandate, force Magellan or Shell to divest their existing properties in the Oklahoma City area? In other words, what is to stop FTC from breaking up companies, without the pretext of merger review, to ensure the Herfindahl index stays below 1,800 at all times? The practical answer is that were FTC to simply seize private property and redistribute it according to its own whims, the agency (and antitrust policy generally) would risk losing congressional and popular support. Without the facade of merger review, FTC's actions would be portrayed for what they are—central economic planning and the forced redistribution of property. The other prong of FTC's argument in favor of violent intervention here is the alleged “barriers to entry” that would prohibit a new firm from entering the Oklahoma City market to compete with Magellan. FTC claims, “[e]ntry into the market . . . is difficult and would not be timely, likely or sufficient,” because, among other factors, there are “regulatory and supply constraints” that would impede construction of terminaling assets.

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In the Matter of Magellan Midstream Partners, L.P. and Shell Oil Company COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

None of these alleged “barriers” have anything to do with Magellan and Shell's transaction. They did not create the supply constraints or impose the regulations. Thus, it is unfair to condition their exercise of property rights on factors beyond their control. Supply constraints are inherent in any market; scarcity, after all, is what necessitates economic systems in the first place. And blaming private firms for the government's regulatory barriers is the type of accusation more appropriate to a budding totalitarian state (which always require scapegoats) than it is to a republic founded on the principles of individual rights. As with the Herfindahl index, FTC's alleged entry barriers assume the agency possesses perfect knowledge and can predict, with reasonable certainty, economic outcomes. But in a free market, the lack of perfect knowledge is accepted, and economic outcomes are determined through the continuous interaction of buyers and sellers. Outcomes are not predetermined, as FTC models attempt to do. For example, FTC claims no firm will enter the market in a “timely, likely or sufficient” manner to counteract Magellan's market power in Oklahoma City. But what would FTC consider “timely”? The term is indefinite. How fast must a potential competitor enter the market to satisfy FTC's whims? One month? One year? FTC's very market definition exposes the limits of central economic planning. Paragraph 10 of the complaint states that buyers of light petroleum products in Oklahoma City “have no effective alternative” to local terminals. This may be true today, but it need not be true in perpetuity. At one time, the idea of transporting goods of any type from, say, New York to Georgia would have been cost-prohibitive for many buyers and sellers. But technology and markets evolved to overcome those limitations. Yet a theoretical regulator in 1801 trying to arbitrarily define markets could not have foreseen the transportation innovations of the next 50 years or been able to calculate their impact on the market.

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In the Matter of Magellan Midstream Partners, L.P. and Shell Oil Company COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

FTC seeks instant gratification with respect to economic competition. Any quantity of competition “lost” today must be replaced immediately, lest the market change too much before the status quo can be restored. There is no attempt to understand how the competition developed in the first place or how violent intervention will distort future economic outcomes. This approach to regulation violates free market principles and demonstrates the breadth of FTC's contempt for private property and wealth creation. No amount of hysterics over alleged entry barriers or fancy-sounding statistical indexes alters this basic truth. Conclusion For the reasons discussed above, FTC should withdraw the proposed order from consideration and dismiss the complaint against Magellan and Shell.

Respectfully Submitted, CITIZENS FOR VOLUNTARY TRADE Post Office Box 66 Arlington, VA 22210 Tel/Fax: (703) 740-8309 Dated: November 1, 2004

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