Legislature(1999 - 2000)

01/18/2000 01:12 PM Senate MER

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
         JOINT SPECIAL COMMITTEE ON MERGERS                                                                                     
                  January 18, 2000                                                                                              
                     1:12 P.M.                                                                                                  
                                                                                                                                
MEMBERS PRESENT                                                                                                                 
                                                                                                                                
Senator Rick Halford, Chairman                                                                                                  
Representative Joe Green, Vice-Chairman                                                                                         
Senator Drue Pearce                                                                                                             
Senator Johnny Ellis                                                                                                            
Representative Beth Kerttula                                                                                                    
Representative Brian Porter                                                                                                     
Representative Jim Whitaker                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                  
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                           
                                                                                                                                
Senator Mike Miller                                                                                                             
Senator Randy Phillips                                                                                                          
Senator Gary Wilken                                                                                                             
Senator Loren Leman                                                                                                             
Senator Robin Taylor                                                                                                            
Senator Jerry Ward                                                                                                              
Senator Lyda Green                                                                                                              
Senator Pete Kelly                                                                                                              
Senator Jerry Mackie                                                                                                            
Senator John Torgerson                                                                                                          
Senator Kim Elton                                                                                                               
Representative Lisa Murkowski                                                                                                   
Representative Harold Smalley                                                                                                   
Representative Bill Hudson                                                                                                      
Representative Scott Ogan                                                                                                       
Representative Sharon Cissna                                                                                                    
Representative Eric Croft                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                              
                                                                                                                                
Discussion of BP Amoco ARCO merger by the Legislative Consultants:                                                              
Mr. Fred Boness, Attorney from Preston Gates and Ellis                                                                          
Mr. William MacLeod, Attorney, Collier, Shannon, Rill and Scott                                                                 
Dr. David Scheffman, economist and Professor, Ownen Graduate School                                                             
of Management, Vanderbuilt University                                                                                           
Mr. George Schink, Economist and Independent Consultant                                                                         
                                                                                                                                
                                                                                                                                
PREVIOUS ACTION                                                                                                                 
                                                                                                                                
See the Joint Special Committee on Mergers minutes dated 6/11/99,                                                               
7/28/99, 9/24/99, 9/25/99, 11/18/99, 11/19/99, and 1/12/00.                                                                     
                                                                                                                                
ACTION NARRATIVE                                                                                                                
                                                                                                                                
TAPE 00-02, SIDE A                                                                                                              
Number 001                                                                                                                      
                                                                                                                                
CO-CHAIRMAN HALFORD called the Joint Committee on Mergers meeting                                                               
to order at 1:12 p.m. and introduced the consultants.  He said a                                                                
lot of the information they used has been confidential.                                                                         
                                                                                                                                
MR. FRED BONESS, Preston, Gates and Ellis, said he had been a                                                                   
lawyer for 25 years and worked in the Attorney General's office in                                                              
oil and gas and anti-trust issues.  He said the merger was                                                                      
announced in early spring of 1999 and the Legislature created the                                                               
special committee to look into it.  The charge given them by the                                                                
Committee was to consider what was in the best interests of Alaska                                                              
and to analyze the issues as they saw them.                                                                                     
                                                                                                                                
Under the Hart, Scott, Rodino Act, the companies are required, if                                                               
asked by the Justice Department and the Federal Trade                                                                           
Commission(FTC), to produce documents in response to questions.                                                                 
This is a fairly routine process, although the documents are very                                                               
sensitive. They also received public testimony and input from a                                                                 
variety of people in Alaska, from the Administration, and from the                                                              
companies.  The  issue raised by the merger is from the competitive                                                             
perspective of anti-trust.  When the Governor announced his initial                                                             
Charter, they prepared a review of it and they have reviewed the                                                                
amended Charter.  In the review, they have adhered to a relatively                                                              
small number of basic propositions.  One is that competition                                                                    
provided by ARCO and BP here in Alaska is in Alaska's best                                                                      
interests.  So, if the merger creates competitive issues, and it                                                                
does, how does the proposed fix compare to the status quo.  They                                                                
also considered whether the benefits of the merger could be                                                                     
achieved in means other than the merger.                                                                                        
                                                                                                                                
MR. WILLIAM MACLEOD, Partner in Collier, Shannon, Rill and Scott,                                                               
said he was a practicing anti-trust lawyer for over 20 years and                                                                
had spent eight of those years with the Federal Trade Commission,                                                               
one of the two agencies in Washington, D.C. that reviews mergers in                                                             
the national economy.  The other is the Anti-trust Division of the                                                              
Department of Justice.                                                                                                          
                                                                                                                                
Anti-trust laws start from the same proposition that competition is                                                             
the fundamental policy that guides the economic activity of the                                                                 
United States. Any act, practice, or merger that tends to reduce                                                                
competition will be considered for prosecution by the FTC.  They                                                                
asked if the merger would tend to reduce competition in any markets                                                             
here in Alaska when ARCO is no longer a competitor of BP/Amoco.                                                                 
They have not looked at markets elsewhere in the United States or                                                               
in the world.                                                                                                                   
                                                                                                                                
MR. MACLEOD said that all parties had been very cooperative during                                                              
the review of the transaction and that it is unprecedented for the                                                              
legislature of any state to have engaged in a review of this depth                                                              
of a merger while at the same time it was being reviewed by anti-                                                               
trust authorities.  They have roughly 2,000 boxes of documents for                                                              
review.  He said their charge was to analyze whether the merger                                                                 
would have an impact and whether that impact was good or not good                                                               
for the State of Alaska.  They, then, analyzed the Charter to see                                                               
if their concerns would be resolved by it.                                                                                      
                                                                                                                                
They took one proposition to the Charter and that is that although                                                              
they are experts, they have only a limited ability to determine how                                                             
best an industry should be structured and how best to put together                                                              
a properly functioning competitive industry whatever it is.  In the                                                             
U.S. that is left to free market forces and competition among                                                                   
independent players.  If it has been determined that a proposed                                                                 
transaction is likely to limit or impair competition, they, then,                                                               
have to ask if there is some way to remedy the damage to                                                                        
competition they identified.  This is very difficult to determine.                                                              
                                                                                                                                
MR. MACLEOD said they have concluded that the merger, itself,                                                                   
represents an unacceptable decrease in competition and that would                                                               
work to the detriment of the people of Alaska.  The Governor's                                                                  
Charter does not have adequate assurance that the competition that                                                              
has been lost would be regained.  He said their comments today are                                                              
limited by confidentiality and the fact that there may be on-going                                                              
discussions regarding the Charter that they have not been informed                                                              
of, yet.                                                                                                                        
                                                                                                                                
Number 280                                                                                                                      
                                                                                                                                
DR. DAVID SCHEFFMAN, Economist, said they brought no preconception                                                              
to this analysis. He said anti-trust things are really simple and                                                               
the question is if this would be in the best interest of Alaska or                                                              
not.                                                                                                                            
                                                                                                                                
He said the citizens of Alaska rely on the oil industry to                                                                      
responsibly develop oil resources of the State.  The State retains                                                              
the services of all the companies in the oil industry in a                                                                      
competitive way to responsibly develop the resources of the State.                                                              
Alaska is the customer with BP and ARCO being the biggest                                                                       
suppliers.  "If it's a merger involving two competitors, you think                                                              
real hard about what your customers are going to think."  You also                                                              
ask your suppliers what they think about it. Very often the major                                                               
customer says they don't think it's a good idea.  Anti-trust has a                                                              
role when there are complicated issues like in Alaska where there                                                               
is the Governor, the Attorney General, and the Legislature.  "It's                                                              
hard to figure out what the customer thinks."  He said he thought                                                               
it was uncontroversial among Alaskans that the merger as originally                                                             
proposed was not a good idea.                                                                                                   
                                                                                                                                
There is general agreement that vertical integration is very                                                                    
important in competition in Alaska; and both BP/Amoco and ARCO are                                                              
vertically integrated companies.  The revision of the Charter                                                                   
explicitly recognizes that.  So there is agreement there.  There is                                                             
no agreement on whether the merger could be fixed suitably.  Their                                                              
conclusion is that the status quo is fine.  Both companies are                                                                  
doing fine although the price of oil is down.  They have a lot of                                                               
questions about the "fix."                                                                                                      
                                                                                                                                
Both BP/Amoco and ARCO stick out in their size in Alaska by the                                                                 
fact that they are vertically integrated from development to                                                                    
marketing and TAPS and in their long-standing commitment and                                                                    
resulting success in Alaska.  What would happen as a result of the                                                              
merger is that ARCO would disappear and the question would be what                                                              
would stand in its place.                                                                                                       
                                                                                                                                
Number 400                                                                                                                      
                                                                                                                                
DR. SCHEFFMAN distributed a map showing the various ownerships on                                                               
the North Slope to the Committee.  He noted that BP is a dominant                                                               
owner.  He also presented a bar chart that measured things three                                                                
different ways:  pre merger, post merger, and third, a calculation                                                              
as a result of the charter as they understand it.  He reiterated                                                                
that this situation is unusual because of the size of Alaska and                                                                
the overall world market, the challenges of exploration and                                                                     
development in Alaskan conditions.  There are two parties that have                                                             
been very successful and a number who have been quite small.  The                                                               
combined companies' production would be quite large.  He said the                                                               
two big companies "had done a good job by Alaska in responsibly                                                                 
developing Alaska's resources."                                                                                                 
                                                                                                                                
Alaskans "...count on the competition between these two and other                                                               
players in the oil industry in a very competitive environment -                                                                 
even though we have regulation of TAPS."  We have government                                                                    
oversight, royalty, and severance, and auditing.                                                                                
                                                                                                                                
TAPS was set up in part to encourage competition. It's very hard to                                                             
have successful regulatory oversight over large multi-national                                                                  
vertically integrated companies.  One of the advantages to                                                                      
competition is you get to see different companies do different                                                                  
things for different reasons.  It helps the State to view the                                                                   
different approaches in having oversight.                                                                                       
                                                                                                                                
DR. SCHEFFMAN said his conclusion would be "You're fine suppliers.                                                              
I like you just the way you are."  He would encourage them to work                                                              
together to reduce costs because it's in their interests as well as                                                             
the State's.                                                                                                                    
                                                                                                                                
In anti-trust they have to define markets and measure shares.  They                                                             
would have to show the merger would restrict competition through                                                                
increase in market share and other things that would impact.  They                                                              
have looked at those things and have come to the conclusion that                                                                
there is an anti-trust issue.                                                                                                   
                                                                                                                                
He asked what if BP were the only oil company in Alaska and would                                                               
that be a good thing.  Alaska as a market could be monopolized if                                                               
you had a single producer, although he wasn't saying that would be                                                              
the result of the transaction.  There is other competition.  ARCO                                                               
has a unique position and it is difficult to see how that would be                                                              
replaced.                                                                                                                       
                                                                                                                                
The "fix" proposed in the charter is a difficult process.  "As a                                                                
regulatory or government authority, you don't want to get into the                                                              
business of making choices of what the market would otherwise                                                                   
choose.....Divestiture is not just about rearranging assets and                                                                 
losing market shares."   The charter significantly reduces BP                                                                   
Amoco's size from what it would otherwise be, but what you're                                                                   
trying to do in the cure is create something that would cure the                                                                
problem that the merger would pose.  Selling assets in itself                                                                   
doesn't necessarily solve anything.  "Companies are made up of                                                                  
people, expertise, knowledge, organization..."                                                                                  
                                                                                                                                
TAPE 00-2, SIDE B                                                                                                               
Number 580                                                                                                                      
                                                                                                                                
DR. SCHEFFMAN continued his testimony as follows.                                                                               
     You would be trying to create something that could stand in                                                                
     the shoes of ARCO because it would have the effect of ARCO,                                                                
     that is, it would be a resourceful company committed to                                                                    
     Alaska, committed to responsibly developing Alaska's resources                                                             
     with the record of expertise.  I think it would be very                                                                    
     difficult, in oversight of the Charter, to figure our whether                                                              
     that would be the result.                                                                                                  
                                                                                                                                
     First of all, the Charter doesn't contemplate creating                                                                     
     anything like ARCO.  It contemplates creating two entities                                                                 
     which are much smaller than ARCO is now, in terms of being                                                                 
     vertically integrated which I think is going to be much                                                                    
     smaller.  Will there be major oil companies stepping up and                                                                
     want to buy that - those?  Yes, I'm sure there will be.                                                                    
                                                                                                                                
DR. SCHEFFMAN said he thought it would be difficult for the State                                                               
to  to determine if these new companies will "have the commitment                                                               
and put in the resources and hire the expertise, etcetera, to                                                                   
accomplish what ARCO and the competition from ARCO created....                                                                  
Will other companies buy the assets?"                                                                                           
                                                                                                                                
"Of course," he said, "most of the assets are overwhelmingly                                                                    
production assets."                                                                                                             
                                                                                                                                
Big oil companies buy production everyday, but it's very complex                                                                
about what gets put together with what.  DR. SCHEFFMAN continued,                                                               
"The revised Charter has in mind, properly I think, that again the                                                              
entities would have to be vertically integrated so it's putting                                                                 
together production assets with TAPS positions with potential                                                                   
development acres."                                                                                                             
                                                                                                                                
ARCO was created by decisions made by ARCO in a competitive                                                                     
environment and a little luck. ARCO has made decisions based on                                                                 
years of expertise competing in Alaska and using that expertise to                                                              
get the position it has.                                                                                                        
                                                                                                                                
The Charter with most of the assets being production are saleable,                                                              
but would that necessarily result in a buyer that's going to be a                                                               
competitive spur to BP Amoco that ARCO has been.                                                                                
                                                                                                                                
DR. SCHEFFMAN said that the revised Charter does not contemplate                                                                
recreating ARCO, but inviting two smaller integrate parties instead                                                             
of the big one.  He cautioned that a great deal of time and                                                                     
oversight would have to take place.  He had never really dealt with                                                             
issues as complicated as this, like the levels of production,                                                                   
marine transportation, acreages in different areas, and what the                                                                
customer actually wants to get.                                                                                                 
                                                                                                                                
CHAIRMAN HALFORD asked if the consultants had been told that they                                                               
wanted a package that didn't require a continuous layer of                                                                      
oversight because the FTC does not want to be a regulatory agency.                                                              
                                                                                                                                
DR. SCHEFFMAN replied that two issues are involved.  First, the FTC                                                             
does not want to be a regulatory agency so it would not consider a                                                              
solution in which it would have to be a de facto regulator of TAPS                                                              
rates.  Second, the FTC does not want to get into the business of                                                               
choosing what is a viable and competitive business that would                                                                   
substitute for the reduction and competition of the merger.  That                                                               
is best left to the market.                                                                                                     
                                                                                                                                
MR. MACLEOD added that to say the FTC does not want to put itself                                                               
in that role is an understatement.  The FTC has walked down that                                                                
path now and then and has repeatedly discovered that regulatory                                                                 
oversight by any agency does not work as well as competition and an                                                             
antitrust agency is clearly not capable of employing the kind of                                                                
discipline that the marketplace can employ.  When one looks at the                                                              
performances contemplated in the Charter, when the media reports on                                                             
contracts that are being offered in exchange for concerns about                                                                 
pricing four or five years down the road, these are the things that                                                             
leave all of the important details for some later date, such as                                                                 
will the prices be the right prices or will the purchasers of the                                                               
assets be strong purchasers?  If it takes too long to negotiate,                                                                
who will step in and take over and make those decisions?  The FTC                                                               
could find a trustee, and the Charter contemplates finding a                                                                    
trustee if the actions contemplated in the Charter do not happen                                                                
quickly enough, but all of a sudden, instead of a company like                                                                  
ARCO, who has been making decisions successfully and competitively                                                              
for a number of years, an official appointed by an agency or a                                                                  
court would suddenly be running one of the most complicated                                                                     
businesses.  The FTC has learned that it does not do nearly as good                                                             
a job as competing companies do.  That is why the FTC insists on                                                                
remedies in which a recognizable and competitive entity can be spun                                                             
off and its performance can be well predicted and one which will                                                                
not require oversight over the years.                                                                                           
                                                                                                                                
MR. MACLEOD offered to answer questions.                                                                                        
                                                                                                                                
REPRESENTATIVE PORTER stated the consultants' analysis began with                                                               
the proposal for acquisition as opposed to the status quo.  He                                                                  
asked whether their analysis included a review of whether the                                                                   
status quo is "re-achievable."                                                                                                  
                                                                                                                                
MR. MACLEOD replied they looked at the question of whether the                                                                  
status quo was in some sort of danger that could only be remedied                                                               
by the transaction.  A doctrine of antitrust law, named the                                                                     
"failing firm defense," applies to a transaction in which a                                                                     
decrease in competition as a result of a merger would be permitted                                                              
because one of the companies was perceived as a failing firm that                                                               
would disappear anyway.  He and the other consultants do not see                                                                
any evidence that the failing firm defense applies to ARCO.  ARCO                                                               
is, and has been, a very viable and profitable company and it is                                                                
entering into a period of record profits.  The single most                                                                      
profitable aspect of ARCO's operations have consistently been its                                                               
operations in the State of Alaska.  The consultants have little                                                                 
doubt that the combination of resources that make up ARCO today in                                                              
Alaska is something the market would support.  The question posed                                                               
by the antitrust laws is whether the BP-ARCO merger is the only                                                                 
remedy for what ARCO might perceive to be in its strategic interest                                                             
to become a larger worldwide competitor.  If the answer is no, then                                                             
the failing firm defense would apply, nor would the antitrust laws                                                              
recognize the strategic desire of ARCO to become part of a larger                                                               
company.                                                                                                                        
                                                                                                                                
DR. SCHEFFMAN added that from his viewpoint, if the merger were not                                                             
to proceed, ARCO will suffer from a short-run disadvantage but he                                                               
expects it will quickly recover.  He believes ARCO would eventually                                                             
engage in a transaction with another company, but that any other                                                                
transaction will not pose the problem posed by the BP-ARCO merger.                                                              
One likelihood is that ARCO could be purchased by a larger                                                                      
internationally diversified oil company.  The decisions those                                                                   
companies make in Alaska are governed by portfolio decisions made                                                               
at headquarters.  He noted the advantage, from Alaska's                                                                         
perspective, of having ARCO separate is that Alaska is better off                                                               
having two such companies making independent choices; one company                                                               
may decide to allocate resources away from Alaska while the other                                                               
may not.  No other transaction, however, would result in a                                                                      
significant reduction of competition in Alaska.                                                                                 
                                                                                                                                
Number 447                                                                                                                      
                                                                                                                                
REPRESENTATIVE GREEN asked if there has to be either divestiture or                                                             
a different purchaser from the upstream side, and whether that                                                                  
situation could get "crossways" with someone doing something on the                                                             
downstream side.  Could the consultants see a way out of such a                                                                 
dilemma?  He expressed concern that a new purchaser of ARCO might                                                               
be a problem downstream because of marketing.                                                                                   
                                                                                                                                
DR. SCHEFFMAN answered this transaction poses unusually difficult                                                               
problems for the "antitrusters."  All of the major oil mergers in                                                               
the past have required spinning off refineries, terminals, or                                                                   
stations which is fairly easy.  Any oil industry company that                                                                   
contemplates purchasing ARCO with a downstream problem would know                                                               
it would have to spin off some assets.                                                                                          
                                                                                                                                
REPRESENTATIVE GREEN asked whether the sum of the removal of the                                                                
independent pieces (crude supply, transportation, refining, and                                                                 
market) equal the value of the fully integrated company.                                                                        
                                                                                                                                
DR. SCHEFFMAN replied in general, no, but it depends on the                                                                     
purchaser.  The issue from Alaska's perspective is that all of the                                                              
pieces are critical other than the West Coast refining and the                                                                  
other ARCO assets outside of the United States.  A number of other                                                              
oil companies exist for which the downstream position of the West                                                               
Coast would not present a significant problem.                                                                                  
                                                                                                                                
MR. BONESS noted the Charter provides for the removal of half of                                                                
the production assets in Alaska and the creation of one or two                                                                  
companies that represent half of what ARCO was at one point.  If                                                                
the choice is to maintain all of the production assets here in                                                                  
Alaska as ARCO has developed and defined it but, because of West                                                                
Coast problems, the acquiring company has to divest the refinery,                                                               
it would be better for Alaska that the production assets remain                                                                 
whole and the divestiture occur at the downstream end.  The                                                                     
vertical integration in Alaska is what is important from Alaska's                                                               
perspective and the BP-ARCO transaction creates unique problems                                                                 
because ARCO will be dismembered.  That would not happen with any                                                               
other transaction.                                                                                                              
                                                                                                                                
CHAIRMAN HALFORD said it is hard to know what is on the table in                                                                
negotiations, but one item that has not been discussed is, if the                                                               
FTC required Mobil to divest its three percent pipeline interest                                                                
when it joined Exxon which has a 20 plus percent pipeline interest,                                                             
whether it is a given that the FTC will require BP to divest the 22                                                             
percent interest of ARCO which would be added to the 50 percent                                                                 
interest already there.                                                                                                         
                                                                                                                                
MR. MACLEOD responded that pipeline overlaps are always dissolved                                                               
so divestiture of the 22 percent interest has been a given.                                                                     
Everything about this deal is complicated because without                                                                       
production to put in the pipeline, one has nothing.                                                                             
                                                                                                                                
CHAIRMAN HALFORD questioned why, if that is a given, no one has                                                                 
heard about it.                                                                                                                 
                                                                                                                                
MR. MACLEOD explained that the FTC remains a very "tight-lipped"                                                                
operation. It is required to operate under very strict                                                                          
confidentiality rules set out in Hart-Scott-Rodino.  In general, no                                                             
one knows what the FTC's decision will be until it is made.  One                                                                
can predict what the FTC will be concerned about, and if the FTC's                                                              
history is any guide, DR. SCHEFFMAN's observation is correct that                                                               
the FTC is very concerned about the pipeline overlap created by                                                                 
this transaction.                                                                                                               
                                                                                                                                
REPRESENTATIVE GREEN asked if the consultants thought that                                                                      
divestiture of all or a portion of ARCO's interest in the TAPS line                                                             
would  create a problem in the market.  He questioned whether a                                                                 
buyer would want to get involved with something that is amortized                                                               
already and would provide a limited profit because it is facing a                                                               
huge dismemberment in the future.  He questioned if that is the                                                                 
only piece the buyer would get, whether anyone would be willing to                                                              
buy it.                                                                                                                         
                                                                                                                                
MR. MACLEOD stated that question raises a very important point                                                                  
about the sale of assets and what the interest, or lack of, in any                                                              
purchases of those assets says about the viability of the industry                                                              
in a post-merger world.  One reason why vertical integration is so                                                              
critical in Alaska is precisely the reason just described by                                                                    
Representative Green.  That is, if one piece of the chain is sold,                                                              
and what comes in or out of it is not sold, that piece of the chain                                                             
may be almost useless.  At the same time, the fact that there might                                                             
be a company that is interested in this or that particular asset                                                                
provides no assurance to Alaska, or to the customers of the                                                                     
industry, that the remedy will cure competition.   If he thought                                                                
that the level of competition after the merger would go down, he                                                                
would be very interested in buying production assets.  The answer                                                               
of who is willing to buy and what amount they will pay says there                                                               
is a market for the assets, but it does not say that there is a                                                                 
company who will bring competition back to the market after ARCO                                                                
disappears.  It may well be that some assets are worth less when a                                                              
market is competitive than they would be if a company that is                                                                   
entertaining their purchase would be willing to pay if it thought                                                               
the market was not going to be competitive.  One reason DR.                                                                     
SCHEFFMAN repeated that it is difficult to analyze these businesses                                                             
is that only companies operating in a competitive market will be                                                                
able to determine the best, most efficient, most competitive                                                                    
combination of assets.  He will not know, probably until it is too                                                              
late, whether the purchasers bought the assets because they                                                                     
believed the market would be a very competitive one that they could                                                             
win, or a comfortable uncompetitive market in which the purchasers                                                              
could make an easy living for a few years.                                                                                      
                                                                                                                                
Number 318                                                                                                                      
                                                                                                                                
SENATOR PEARCE referred to a statement made by company officials                                                                
about their expectation of a $1 billion savings in efficiency                                                                   
resulting from the merger.  She asked whether, from an economic                                                                 
standpoint, the consultants see any efficiencies that will be                                                                   
achieved through this merger and acquisition that are not                                                                       
achievable without a merger.                                                                                                    
                                                                                                                                
DR. SCHEFFMAN said it is widely known that certain inefficiencies                                                               
in operations exist in some of the fields in Alaska.  In principle,                                                             
those particular things could be resolved by an agreement of the                                                                
parties to consolidate certain operations, although no effort has                                                               
been made so far even though some parties have believed for a long                                                              
time that it would be in their interest to do so.  Some of the main                                                             
efficiencies being proposed are ones that could be achieved and the                                                             
parties would have an interest in doing so.  BP, from its own point                                                             
of view, could become more efficient by reducing employment and                                                                 
overhead resources.  From the customer's standpoint, that is a good                                                             
idea.  He said he is reasonably confident that, absent the merger,                                                              
the companies will have to find a way to come to an agreement.                                                                  
                                                                                                                                
MR. MACLEOD pointed out that if there is an efficiency claim for a                                                              
merger, that efficiency will not justify the merger unless the                                                                  
parties can show that the efficiency would not have been achievable                                                             
unless the parties had merged.  A great deal of activity on the                                                                 
North Slope and throughout the production and transport of oil is                                                               
activity that is done in various forms of joint ventures.  If there                                                             
is a particular benefit being claimed for the merger, for example                                                               
a more efficient operation of TAPS, the parties would have to show                                                              
it could not be done without the merger.  He has seen no evidence                                                               
that a number of the efficiencies claimed for the transaction could                                                             
not be achieved if the companies remain separate; and it remains                                                                
the burden of the merging parties to explain why a merger is                                                                    
necessary to accomplish each efficiency.                                                                                        
                                                                                                                                
SENATOR PEARCE asked if there is a test set in antitrust law.                                                                   
                                                                                                                                
Number 309                                                                                                                      
                                                                                                                                
MR. MACLEOD said that is correct, and that if two companies have an                                                             
idea, for example they want to try to demonstrate the viability of                                                              
a new gas technology, and they want to pool their resources to do                                                               
it, they can  do that and remain competitors in all other respects.                                                             
If the companies want to change some aspect of the operating                                                                    
agreement in a facility, they can probably do a great deal without                                                              
merging all operations and moving all other competition that                                                                    
otherwise benefits the customers in the market.  The companies need                                                             
to explain, to defend the merger, that the efficiency could not be                                                              
accomplished unless all resources of both companies are combined.                                                               
He repeated that he has not seen such evidence.                                                                                 
                                                                                                                                
SENATOR PEARCE asked whether a strong case could be made that                                                                   
setting up two smaller companies in Alaska, as set out in the                                                                   
Charter, would make Alaska more attractive in a global marketplace                                                              
and bring more industry to Alaska.   She also asked whether one                                                                 
could argue forcefully that those companies that do want to come in                                                             
would do more exploration instead of coming to make money for a few                                                             
years.                                                                                                                          
                                                                                                                                
DR. SCHEFFMAN said the argument that setting up two companies will                                                              
help Alaska in the global marketplace, according to the Attorney                                                                
General's letter, is that the Charter agreement will result in two                                                              
companies where there was only ARCO before.  The problem is that                                                                
the two companies combined will be much smaller than ARCO.  As an                                                               
economist, he has seen in the history of Alaska a pattern in which                                                              
there was a basis for two substantial vertical integrated parties                                                               
to be very successful.  He pointed out that history is devoid of                                                                
any supporting evidence that smaller players could have fulfilled                                                               
the role.  Smaller companies would have a competitive effect on the                                                             
market but the lesson in Alaska is that given the size and                                                                      
riskiness of the prospect, there is room for two big, resourceful                                                               
and aggressive players.                                                                                                         
                                                                                                                                
                                                                                                                                
MR. MACLEOD noted he has seen consolidation and deconsolidation in                                                              
a number of industries over the past couple of decades in the                                                                   
United States.  Markets can quickly recognize when firms have                                                                   
become too large and when conglomerates have become too                                                                         
complicated.  In those situations, the markets spin off those                                                                   
assets that can operate better in a smaller fashion or the firm                                                                 
starts to decline because it is not as effective.  He saw no                                                                    
indication before the Charter that anyone thought ARCO would be a                                                               
stronger competitor if it were cut in two with one part sold to BP                                                              
Amoco.  What is it about two smaller companies that will make them                                                              
more effective than ARCO has been up until now as a competitor in                                                               
Alaska?  The answer is not at all obvious from the terms of the                                                                 
Charter, nor is it obvious from the Attorney General's explanation                                                              
of the Charter.  Of most concern is the vagueness of the Charter.                                                               
Alaska has no assurance that when the two companies finally emerge,                                                             
they will be the capable and competitive companies that the                                                                     
Attorney General says they should be.  The Charter gives the State                                                              
no right to object to the transaction simply because the State does                                                             
not believe the competitors are good enough.  He reads the Charter                                                              
to say if the companies meet the criteria, the BP-ARCO entity that                                                              
sold the assets will have fulfilled its obligations under the                                                                   
Charter.                                                                                                                        
                                                                                                                                
Number 139                                                                                                                      
                                                                                                                                
DR. SCHEFFMAN said he does not want to give the mis-impression that                                                             
there are no important smaller players in Alaska, of which there                                                                
are many.  The reality is, however, that throughout the history of                                                              
the industry, aggressive smaller players virtually always end up                                                                
partnering with ARCO or BP Amoco.  One result of the proposed                                                                   
merger is that the smaller companies will have only one company to                                                              
play with.                                                                                                                      
                                                                                                                                
CHAIRMAN HALFORD asked how the Charter relates to an FTC consent                                                                
decree.  The Attorney General said any provisions the FTC comes up                                                              
with would be included in the Charter, however the format of the                                                                
two is totally different.  He asked what the Charter actually                                                                   
commits the State and the industry to and how it would work with a                                                              
package devised by the FTC that includes the divestitures in the                                                                
Charter and other conditions traditionally required by the FTC.                                                                 
                                                                                                                                
MR. MACLEOD replied the Charter takes a form that does not give the                                                             
State of Alaska the kinds of advantages that the FTC and the                                                                    
Antitrust Division will always take for themselves when they are                                                                
settling a merger.  The Charter is simply a contract.  If the State                                                             
wants to enforce that contract it has to go into a court and bring                                                              
a simple contract action.  The State would bear the burden of proof                                                             
of showing why the contract terms were not complied with.  When the                                                             
federal government settles with companies over a merger, it comes                                                               
in the form of a consent decree.  It comes after a complaint is                                                                 
filed that outlines the competitive effects that the government                                                                 
alleges were at stake in the merger and it comes with a very clear                                                              
order as to what the companies must do to remedy that problem.                                                                  
That order, in the case of divestitures, virtually always has one                                                               
of two conditions.  The first condition is that either the asset                                                                
divestiture and the party buying it has already been identified,                                                                
or, the second condition is that the agency already has advance                                                                 
approval rights as to who the party is and of the divestiture                                                                   
package so that the divestiture will not occur before the agency                                                                
has given its approval.  Neither condition is set out in the                                                                    
Charter.                                                                                                                        
                                                                                                                                
The consequence of the Charter being a contract rather than a                                                                   
consent decree is that when the agency finds that a consent decree                                                              
has not been followed, the remedy for the agency is to go into                                                                  
court and seek an order to show cause in which the companies must                                                               
come forward and explain why they are not in violation of the                                                                   
order.  It puts the burden on the companies to show they have done                                                              
the right thing.  Relying on the Charter, rather than a consent                                                                 
decree, will create some very significant procedural disadvantages                                                              
for Alaska.  The reason the consultants do not like the divestiture                                                             
is because the Charter does not have a complaint section that                                                                   
allows the State to make that kind of argument.                                                                                 
                                                                                                                                
CHAIRMAN HALFORD asked if the State will pick up a consent decree                                                               
in the same way it would if the FTC negotiated one.                                                                             
                                                                                                                                
Number 110                                                                                                                      
                                                                                                                                
MR. MACLEOD replied as he reads the terms of the Charter, it says                                                               
that any order by the FTC that governs the transaction will be                                                                  
incorporated by reference in the terms of the Charter.  That                                                                    
provision will not convert the Charter from a contract to a consent                                                             
decree.  What impact that provision will have on the State on the                                                               
arguments it could have in court would not change the burden of                                                                 
proof or basic form of action the State would have to follow in                                                                 
order to gain relief under the Charter.                                                                                         
                                                                                                                                
DR. SCHEFFMAN added that the FTC, if it had a consent that involved                                                             
what is involved in the Charter, it would thoroughly investigate                                                                
the buyers, it would have discovery of documents, depositions or                                                                
interviews with the executives.  The FTC would try to nail down                                                                 
what their intentions are in respect to exploration development and                                                             
the status of their budgets for that exploration development.                                                                   
                                                                                                                                
TAPE 00-03, SIDE A                                                                                                              
Number 001                                                                                                                      
                                                                                                                                
REPRESENTATIVE PORTER commented that the Charter is the                                                                         
Administration's decision to address the antitrust laws with a                                                                  
certain amount of divestiture.  The question was whether the                                                                    
divestiture would achieve  the goals of competition?  The                                                                       
conclusion was that  it would not.   It would not be  as effective                                                              
as the status quo with ARCO in place, or if  ARCO were rejuvenated                                                              
or acquired by another company.  The State would be better off with                                                             
the Charter.                                                                                                                    
                                                                                                                                
REPRESENTATIVE PORTER asked if it would not be a fair statement to                                                              
say that the Charter agreement brings the deal into harmony with                                                                
State antitrust laws.                                                                                                           
                                                                                                                                
Number 78                                                                                                                       
                                                                                                                                
MR. BONESS responded that the Attorney General enforces the State                                                               
anti trust laws and if the Charter is implemented, the answer is                                                                
no.                                                                                                                             
                                                                                                                                
SENATOR HALFORD wanted to know  how long it would take to implement                                                             
a process if the FTC negotiated an agreement and tied their                                                                     
provisions back to the divestitures and Charter, so  it  would be                                                               
known who was involved.                                                                                                         
                                                                                                                                
MR. MACLEOD  responded that the oil companies could probably answer                                                             
that question better, but he would respond to the timing concerning                                                             
the FTC and the Charter.  The time involved, in the review of this                                                              
case, has been mutually agreed upon by the State, the Commission                                                                
and the oil companies .  Any delay that has taken place over the                                                                
last few months has been a delay  the companies thought  served                                                                 
their purpose better than forcing a decision earlier by the                                                                     
regulators.  There is a great deal of work that has to be done no                                                               
matter what the FTC decides, even if they decide to do nothing                                                                  
there are months and months of work to be done.                                                                                 
                                                                                                                                
DR. SCHEFFMAN also responded  that it is known that this type of                                                                
situation takes a long time and it is partly because it has to.                                                                 
This is factored in during the planning stages.                                                                                 
                                                                                                                                
Number 135                                                                                                                      
                                                                                                                                
REPRESENTATIVE KERTTULA wanted to know if the analysis would change                                                             
if California were dropped from the picture.                                                                                    
                                                                                                                                
DR. SCHEFFMAN  responded that that conclusion was completely                                                                    
independent of what was happening in California.                                                                                
                                                                                                                                
REPRESENTATIVE KERTTULA also asked what would happen next with the                                                              
FTC.                                                                                                                            
                                                                                                                                
DR. SCHEFFMAN responded that the Commission would not act unless                                                                
the oil companies asked for a decision.  At this point, it is the                                                               
oil companies decision as to whether they want to force a decision                                                              
or whether they want to give the Commission more time to see if                                                                 
there could be a resolution.                                                                                                    
                                                                                                                                
Number 186                                                                                                                      
                                                                                                                                
MR. MACLEOD added that the FTC has 20 days to challenge the merger.                                                             
If the Commission challenges the merger it will  do so immediately                                                              
upon the expiration of the 20 days,  if they  want to prevent the                                                               
merger from closing.  The Commission would have to  make a decision                                                             
by the end of this month as to whether the transaction would go                                                                 
forward.                                                                                                                        
                                                                                                                                
REPRESENTATIVE GREEN asked whether the FTC was leaning in a certain                                                             
direction as to their decision.                                                                                                 
                                                                                                                                
MR. MACLEOD responded that the FTC never reveals that information                                                               
but if you look at the history of FTC merger challenges, it would                                                               
address all aspects of a transaction and would not sue on only one                                                              
aspect of the merger.                                                                                                           
                                                                                                                                
REPRESENTATIVE GREEN was concerned about how long it would take to                                                              
resolve the merger challenge.                                                                                                   
                                                                                                                                
MR. MACLEOD answered that these things are usually resolved within                                                              
several months and not drag on for a number of years.                                                                           
                                                                                                                                
Number 250                                                                                                                      
                                                                                                                                
SENATOR PEARCE asked who has the burden of proof  when proving                                                                  
there is no reduction of competition.                                                                                           
                                                                                                                                
MR. MACLEOD  responded that the burden of proof is on the "agency"                                                              
in the initial challenge.  Basic guidelines have been set up for                                                                
this type of judgement.  The court would first look at what the                                                                 
change in competition is.  They then look at how the competition                                                                
would work and if it would be effective.  "The burden is                                                                        
traditionally handled by the FTC."                                                                                              
                                                                                                                                
SENATOR PEARCE asked Mr. MacLeod whether or not there was an                                                                    
Alaskan fix to solving  "burden of proof."  MR. MACLEOD answered                                                                
that this is probably the most difficult problem of merger analysis                                                             
and review.  Alaska has to rely on the parties involved to                                                                      
demonstrate that the remedy  proposed will satisfy all problems.                                                                
It is beyond the ability of government officials to construct a                                                                 
gigantic corporation.  When the Commission is reviewing a merger                                                                
and a problem is identified, the Commission asks the companies how                                                              
their fix would solve the problem and  how it would be as good as                                                               
the status quo before the merger.                                                                                               
                                                                                                                                
REPRESENTATIVE OGAN referred to the Department of Revenue's paper                                                               
by Mr. Dan Dickinson, on royalties, sec. C, page 12.  It indicates                                                              
that because of BP's higher transportation rates, royalties to the                                                              
State would be reduced in the post merger period.  Representative                                                               
Ogan calculated that the state would lose $1.14 per barrel  on ARCO                                                             
oil that BP pumps.  At today's rates, this adds up to a significant                                                             
amount of money.  He asked for the consultants response to this                                                                 
section in the report.                                                                                                          
                                                                                                                                
MR. BONESS responded that he did not have access to the underlying                                                              
numbers for an evaluation.  The report seems to be saying that                                                                  
because there are "reopeners" in both agreements and because                                                                    
parties have indicated a desire to reopen the negotiations,  the                                                                
result would be that the two rates would converge and both parties                                                              
would charge the same price.  MR. BONESS thought there was no                                                                   
reason for the companies to converge, if the State were to                                                                      
negotiate aggressively--so it would have the advantage.  There must                                                             
be  an assumption that the convergence would be at the middle point                                                             
because if the convergence were at a savings level, there would                                                                 
still be an opportunity for the state to gain or lose revenue                                                                   
depending on the negotiations.   He felt the paragraph, referred to                                                             
by Representative Ogan, left a lot of questions unanswered.                                                                     
                                                                                                                                
REPRESENTATIVE OGAN asked if  BP Amoco were to get ARCO oil, could                                                              
BP divest that oil at BP's rate to another company or would the                                                                 
other company have to pay the higher ARCO rate.                                                                                 
                                                                                                                                
MR.  BONESS  felt that if BP were to acquire ARCO it would have the                                                             
option to use the BP rate with respect to the royalty.  A different                                                             
acquiring company would have to assume the ARCO rate.                                                                           
                                                                                                                                
Number 361                                                                                                                      
                                                                                                                                
SENATOR TAYLOR asked where the legislature goes from here and would                                                             
they have the ability to play a role in the merger.                                                                             
                                                                                                                                
MR. MACLEOD responded that the FTC will be following the hearing                                                                
closely and that the Commission will be interested in what the                                                                  
committee decides to do and in any action taken by the legislature.                                                             
It is difficult to say what impact the committee's deliberations                                                                
will have on the FTC.  The committee dialogue helps the FTC                                                                     
understand the concerns of the legislature but it is up to the                                                                  
committee and the legislature to decide if they want to communicate                                                             
further with the FTC.                                                                                                           
                                                                                                                                
REPRESENTATIVE TAYLOR asked if  the legislature chose to move                                                                   
forward in the process would  there be an "intervenor" position                                                                 
with the FTC.                                                                                                                   
                                                                                                                                
MR. MACLEOD responded that a judge would probably decide if formal                                                              
intervention were necessary.  It is relatively common for a court                                                               
to allow someone to file views as "friend of  a court."                                                                         
                                                                                                                                
SENATOR WILKEN asked to what extent it is possible to determine how                                                             
the merger would effect state revenues.                                                                                         
                                                                                                                                
DR. SCHEFFMAN responded that those calculations have not been done.                                                             
                                                                                                                                
                                                                                                                                
SENATOR HALFORD responded to Senator Wilken by saying that the                                                                  
administration has sent something akin to a fiscal note, but it is                                                              
not a numerical analysis -- "the variables engulf the constants."                                                               
                                                                                                                                
MR. MACLEOD elaborated on DR. SCHEFFMAN's answer by saying:                                                                     
                                                                                                                                
     The assumption that has informed  the report we are                                                                        
     discussing, the "Dickinson Report", for lack of a better                                                                   
     description, is that the merger, either as originally                                                                      
     proposed or as modified by the Charter, will not affect                                                                    
     the anticipated production  volume of currently known                                                                      
     resources,  and that following a convention the                                                                            
     department adopted more than thirty years ago it has not                                                                   
     included any revenues from future oil and gas discoveries                                                                  
     in it's forecast.  Those are precisely the questions that                                                                  
     are at stake in this merger today.  We believe that an                                                                     
     important by-product of the competition between ARCO and                                                                   
     BP Amoco is vigorous research, exploration and                                                                             
     development that can change the volume of oil that is                                                                      
     brought to market, and therefore, the revenue to the                                                                       
     State of Alaska.                                                                                                           
                                                                                                                                
REPRESENTATIVE KERTTULA asked for Mr. Boness' comments on this                                                                  
statement.                                                                                                                      
                                                                                                                                
MR. BONESS stated that fundamentally the question is, is the State                                                              
going to be better off with the merger as amended by the Charter,                                                               
than if ARCO continued to exist on its own or as an acquisition                                                                 
target in the future saying:                                                                                                    
     This panel believes that, long run, the State would be                                                                     
     better off if ARCO continued to exist and compete with                                                                     
     BP.  And the State would be better off for a large number                                                                  
     of reasons because of  all the technological sorts of                                                                      
     developments, differences in exploration philosophies,                                                                     
     the differences in the way the companies deal with Alaska                                                                  
     as part of their  total portfolio.  And to the extent                                                                      
     that one wants to focus on revenue, the assumption must                                                                    
     be that we will see greater exploration and development                                                                    
     than we would see under the merger scenario with the                                                                       
     Charter.  I firmly believe that is the case when one                                                                       
     looks at how the Charter supposedly will be implemented                                                                    
     and what the options are, but I think that the question                                                                    
     that you folks may want to propose to the Administration                                                                   
     is, do they agree with that view or do they believe that                                                                   
     somehow or other the companies that will come in and                                                                       
     acquire access under the Charter will, in the long run,                                                                    
     generate a better piece of competition in buy-back.                                                                        
     There are things like exploration philosophy and                                                                           
     technology and development and that sort of thing but,                                                                     
     bottom line, the question is do they believe we are going                                                                  
     to have more oil and gas production than we would absent                                                                   
     the merger, because the two in the revenue  analysis are                                                                   
     tied  intimately together.  They say that basically the                                                                    
     issue is do we have more oil and therefore more revenues.                                                                  
     They are unable to say even with respect to the cost                                                                       
     savings which the report refers to as the billion dollar                                                                   
     cost savings--will, under their analysis, result in                                                                        
     greater income to the company and therefore, in a                                                                          
     simplistic fashion, one would say because the company is                                                                   
     going to have more income the State of Alaska is going to                                                                  
     get oil and gas taxes but because of the way the  tax                                                                      
     system works here, the modified unitary approach--it is                                                                    
     not possible, and the report says as much,  that even                                                                      
     though the company is going to save a billion dollars                                                                      
     they don't know whether state income taxes are going to                                                                    
     go up or down.  And so, when one looks at it from a                                                                        
     revenue point of view, which is not an anti-trust point                                                                    
     of view, by-the-way, but when one looks at it from a                                                                       
     revenue point of view, one concludes, based on this                                                                        
     analysis, and it is not necessarily an incorrect analysis                                                                  
     or anything, we will not have any greater severance tax,                                                                   
     we will not have any greater royalties, we won't have any                                                                  
     differences in the property tax because the report says                                                                    
     it is not who owns them but just the value of the assets                                                                   
     and the companies will have a savings of a billion                                                                         
     dollars and we don't know if that will result in an                                                                        
     increase or decrease in income tax.  That's the revenue                                                                    
     analysis.                                                                                                                  
                                                                                                                                
SENATOR HALFORD adjourned this portion of the meeting and announced                                                             
the committee will come back tomorrow, January 20, at 10:30 a.m.                                                                
He asked the consultants to stay on call because they may be needed                                                             
to answer questions at the next meeting.  The committee adjourned                                                               
at 3:50  p.m.                                                                                                                   
                                                                                                                                
                                                                                                                                

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