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Lax Enforcement of Antitrust Laws Led to Highly Consolidated Industry, Witnesses Say

Lax enforcement of antitrust laws by federal regulators cleared the way for the mega-mergers of oil and natural gas companies in the late 1990s and early 2000 that in part may have contributed to the run-up in energy prices over the past couple of years, state attorney general officials and antitrust lawyers told the Senate Judiciary Committee last Tuesday.

Testifying during a nearly day-long hearing, witnesses also pinned the higher prices on the alleged efforts of ExxonMobil and BP to block the construction of a long-line gas pipeline system from Alaska's North Slope to the Lower 48 states, while others claimed that lack of transparency in the commodity markets opened the door for manipulation of prices.

In many lawsuits, the federal government has been on the side of the defendants -- the energy companies -- rather than representing the consuming public, said Joseph M. Alioto, an antitrust attorney from San Francisco, during the hearing exploring the connection between the consolidation in the oil and gas industry and the run-up in energy prices.

"I think that it is extremely important that the private right of action be reinforced by the Congress -- that it be made clear that the private parties can bring [action] under the anti-merger statute," he said. "I think they [Department of Justice] have abdicated their responsibility to the people with regard to the antitrust laws."

Severin Borenstein, a professor of business administration and public policy at the University of California in Berkeley, CA, said there was a definite need for a change in the way the federal government enforces the antitrust laws. There needs to be a "real shift in the burden of proof" that merging companies must meet in future merger deals, he noted.

The Department of Justice and Federal Trade Commission regulators "sound like lap dogs in a room [full] of energy pit bulls," said Sen. Richard Durbin (D-IL). The consolidation in the energy industry has "largely gone unchecked" by the federal government, and has resulted in a "huge amount of market power" for some companies, noted Sen. Dianne Feinstein (D-CA).

ExxonMobil Chairman and CEO Rex Tillerson disputed claims that there was a direct connection between the wave of mergers and acquisitions and the rise in oil and gas prices.

Committee Chairman Arlen Specter (R-PA) reported that 2,600 mergers in the oil and gas industry were approved in the past decade. The largest occurred in 1999, when Exxon acquired Mobil Oil. Last year, the combined ExxonMobil earned $36 billion, the largest profit in U.S. corporate history.

Appearing before the committee, the CEOs of ExxonMobil, ConocoPhllips, Chevron, Shell Oil, BP America and Valero Energy defended their companies size. "For an American company to succeed in this industry, it needs enormous scale," said Tillerson. "I think it's important for us to grow on a global basis," said BP America CEO Ross Pillari, who added that his company didn't have any mergers planned at this time. But he said he wouldn't rule it out for the future.

Specter earlier this month released a "discussion draft" of proposed legislation that would prohibit the acquisition of oil and gas companies "if the effect of such acquisition may be to appreciably diminish competition," and would expose energy companies to prosecution under the Clayton Act if they withhold oil, natural gas or product supplies to drive up prices or create shortages in the market.

The antitrust lawyers and attorney general officials on the panel said they supported Specter's proposed measure, but major oil and gas producers generally did not think there was a need for the bill. "I think [that] the current antitrust laws are sufficient," responded ExxonMobil's Tillerson.

Attorney David Boies, who represented former Vice President Al Gore in his challenge of the 2000 presidential election results and is now representing the Alaska Gas Port Authority in a lawsuit to build the Alaska gas pipeline, contends that Alaska's major gas producers -- BP and ExxonMobil -- have blocked competing company proposals to construct the pipeline in order to maintain control of North Slope reserves and prevent the export of natural gas to the United States.

He noted that a number of companies -- Yukon Pacific, TransCanada, MidAmerican Energy and Alaska Gas Port Authority (his client) have all made proposals over the past decade to bring the Alaska gas to market. "In a competitive market, that's what would have happened. But, in fact, every single one of those proposals was refused, and the reason [they were] refused was because that allowed the oil companies to keep control," Boies said.

"Where you have a market that is controlled not by competitive free-market forces, but by the power of one or two...companies, what happens is that free-market forces break down."

ExxonMobil's Tillerson said the competing proposals to build the Alaska gas pipe were rejected because they had a "number of flaws in them."

Boies estimated that Alaska has 35 Tcf of proven gas reserves, and 143 Tcf of additional potential resources. "If you simply transported 4 to 6 Bcf/d to the United States, it would have a tremendous effect on increasing supply and reducing prices, and that could go on for 40 to 60 years." He said Alaska gas could reduce domestic prices by as much as 20-25%.

Tillerson called it "regrettable" that Boies was trying to litigate the lawsuit in front of the committee. BP America CEO Ross Pillari echoed that sentiment, and assured the committee that the Alaska producers plan to build the $20 billion pipeline."That is the intent, sir, yes" to build the pipeline, assuming that legislation currently before the Alaska Legislature is approved, he said.

"I think a lot of people have been concerned that there's never been any natural gas come out of the North Slope," remarked Specter.

Wisconsin Attorney General Peg Lautenschlager said an investigation into gas prices by her state and others revealed that "while tight supply and demand does in many ways [contribute to] the gradual upward increases, it doesn't explain the volatility of the market." She noted "we found this incredible correlation between frequency of trading in the commodity market and the spikes in price."

Lautenschlager also found the natural gas market to be highly concentrated, with BP controlling 20% of the U.S. market, and the next three largest energy companies having market shares of 10% each, thus collectively controlling 50% of the market. This growing consolidation opens wide the potential for market manipulation, she said.

Sen. Tom Coburn (R-OK) shared her concern, saying he believed manipulation of the commodity markets by speculators was to blame for the recent run-up in oil and gas prices. He suggested that Congress enact a rule that would require speculators to take delivery of natural gas. They'd "choke on it," Coburn remarked.

"I don't think that speculators can [maintain] a long-term spike in the market," said the University of California's Borenstein. Moreover, "I'm not sure you want to force hedge funds to take delivery." Another option would be to require them to unwind in a reasonable time, he noted.

When reauthorization of the Commodity Futures Authorization Act comes before the Senate this year, Sen. Feinstein said she again plans to offer an amendment to regulate trading in the over-the-counter markets."My concern is what we're now seeing is the rebirth of fraud and manipulation, but in the natural gas market." Lautenschlager said she would support Feinstein's proposal, noting that "our inability to access information about those trades [is] frustrating to us." She also contends the lack of transparency in the commodity markets has a direct impact on published price indexes.

Sen. Joseph Biden (D-DE) pressed the witnesses about whether they saw any need for the $2.6 billion in incentives over 10 years that Congress provided the oil and gas industry in the Energy Policy Act of 2005, which was signed into law last summer.

"I was certainly sorry to see those incentives in the energy bill," said Borenstein. It was like handing profits directly to the energy companies' shareholders, he noted. All of the oil and gas company CEOs also agreed that the tax incentives weren't needed. Biden said he would offer legislation to eliminate the tax incentives for oil and gas. "Let's just get rid of all these incentives."

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