SAN FRANCISCO (CN) – A federal judge warned oil giant Valero on Wednesday that if he decides not to block its purchase of a San Francisco Bay Area oil terminal, it must be prepared to give up the facility next year if he finds the deal will stifle competition and raise gas prices.
“If we let it close, and I decide you should lose in January, I don’t want Valero to argue we have an ‘undo the egg’ problem,” U.S. District Judge William Alsup told Valero attorneys in court. “You realize that divestiture could be a real possibility.”
California Attorney General Xavier Becerra sued Valero last month to block its purchase of a Martinez terminal owned by Plains All American Pipeline. Becerra says the deal would allow refineries to control Northern California’s three main oil terminals, enabling them to manipulate supply and drive up gas prices.
Alsup denied a motion for a temporary restraining order to block the deal on July 10.
During a hearing Wednesday, Valero attorney Stephen Weissman urged Alsup to also deny the state’s motion for a preliminary injunction to stop the sale. He said the state failed to offer concrete evidence that the deal would cause market harm or show how other fuel transportation options like trucking impact the market.
“Plaintiff has the burden of showing what’s in the market, and what’s out of it,” Weissman said.
In 2005, California’s former attorney general Bill Lockyer forced Valero to sell off terminals in Richmond and Martinez that it acquired in a $2.8 billion purchase of Kaneb Services and Pipe Line Partners. The state and Federal Trade Commission had objected to that deal before Valero made those concessions.
Now, Valero is looking to re-acquire the terminals, and it says the FTC conducted “an extensive investigation” into the proposed deal and found it “merited no regulatory action.” Valero says it plans to “meaningfully expand capacity” at both terminals, “which will benefit customers as well as California consumers,” according to a statement it issued in July.
The state argues the deal will radically change the market so that only three entities – Valero, Shell and Andeavor, formerly Tesoro – control the delivery of excess fuel in Northern California, compared to the eight companies that can transport extra fuel on those pipelines now.
“If there are very few unconstrained pipelines in the hands of refineries, then there is the opportunity to bring less product through the [Kinder Morgan pipeline system],” said Charles Kagay, a private attorney hired to represent the state of California.
Weissman countered that the state concocted a market for “unconstrained capacity” pipelines to make it appear as though the deal would limit fuel transportation competition in Northern California.
He added that as part of the deal, Valero will inherit contracts with two smaller distributors that have the right to use the terminal for shipping oil into the next decade. When those contracts expire, excess capacity on pipelines “ensures no one can exercise market power,” he argued.
But Kagay urged the judge not to take Valero at its word or view the company’s reluctance to limit supply while under scrutiny as evidence of how it will behave once it has unchecked power over the terminal.
“I think these defendants will be on their best behavior over the next few months and not restrict competition, but it will be hard once this deal is closed to get back the competitive behavior we had before,” Kagay said.
Alsup asked Valero attorneys if the company would agree not to replace managers at the terminal or enter into new contracts before the dispute is resolved in a trial set to start in January 2018. The judge said if the company submits to those conditions, he would be more likely to deny the state’s motion for an injunction to block the sale.
Weissman said Valero would submit a document vowing to abide by those conditions on Thursday, and Alsup gave the state until 5 p.m. Friday to respond to Valero’s proposal.
The judge said he would like to visit terminals in Martinez and other Bay Area cities to better understand how the system works. He also asked for more details on the distribution of fuel by trucks, and historic competition data on the use of Bay Area pipelines and terminals going back to 2005.
“No matter which way this comes out, we’re going to have a trial,” Alsup said before ending the hearing and taking the arguments under advisement.
Valero, based in San Antonio, Texas, is the largest independent oil refiner in the United States with nearly 10,000 employees and $75.6 billion in annual revenue as of May 2017, according to Forbes.
Weissman is with Baker Botts in Washington. Kagay is with Spiegel Liao & Kagay in San Francisco.