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.