Legislature(1999 - 2000)
01/18/2000 01:12 PM Senate MER
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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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