Antitrust Lawyer Blog Commentary on Current Developments

FTC Challenges Deal between Enterprise Products Partners and TEPPCO

The Federal Trade Commission (“FTC”) announced a law enforcement action on August 18 challenging a 2005 acquisition that combined the natural gas liquids (“NGL”) storage businesses of Enterprise Product Partners, L.P. and TEPPCO Partners, L.P. under common ownership. The FTC's complaint alleged that the transaction likely would result in higher prices and service degradations by reducing the number of commercial salt dome NGL storage providers in Mont Belvieu, Texas, from four to three.
In settling the Commission's charges, TEPPCO is required to sell its interest in an NGL storage facility and associated assets to a Commission-approved buyer no later than December 31, 2006. Both of the NGL storage facilities involved in the transaction, which are operated by TEPPCO Partners, L.P. and Enterprise Products Partners, L.P., ultimately are owned and controlled by Dan L. Duncan.

On February 24, 2005, EPCO, Inc., through a holding company, acquired: (1) TEPPCO's general partner, Texas Eastern Products Pipeline Company, LLC, and, (2) 2.5 million limited partnership units of TEPPCO Partners, L.P. for $1.1 billion and $100 million, respectively, from Duke Energy Field Services, LLC. Enterprise, a wholly owned subsidiary of EPCO, and TEPPCO operate the two leading providers of NGL salt dome storage out of only four providers in the Mont Belvieu market. TEPPCO operates the Mont Belvieu Storage Partners NGL storage facility, and Enterprise operates the Enterprise NGL storage facility. Duncan owns and controls both TEPPCO and Enterprise, and therefore controls a majority of the NGL storage capacity in Mont Belvieu.

NGLs are a group of light hydrocarbons – including ethane, propane, normal butane, isobutane, and natural gasoline – that are used, among other things, as feedstocks in the production of ethylene and propylene, as fuel for heating or industrial processes, and in blending components for gasoline. They primarily are stored in large underground wells formed out of geological salt domes under the Earth's surface until they are delivered to end-users, usually via pipelines. Mont Belvieu, Texas, contains the largest NGL storage system in the world, including pipeline connections that allow NGL marketers to reach the broadest array of end users. No viable competitive alternatives for NGL salt dome storage in Mont Belvieu exist.

According to the FTC's complaint, the acquisition violated Section 7 of the Clayton Act and Section 5 of the FTC Act, as amended, by reducing competition in the market for salt dome storage for NGLs in Mont Belvieu. The market for salt dome storage for NGLs in Mont Belvieu is highly concentrated, with Enterprise and TEPPCO being the two largest suppliers based on storage volumes. Combined, the two companies account for approximately 70 percent of all commercially available salt dome storage volume in Mont Belvieu, with Targa Resources, Inc. and Valero Energy Corporation owning the remaining volume.

Before the acquisition, Enterprise and TEPPCO competed directly for NGL salt dome storage volumes in Mont Belvieu based on price and service levels. Both companies are connected to the Dixie Pipeline and competed for customers who wanted to ship products – primarily propane – into the southeastern United States. In addition, along with Targa Resources, Enterprise and TEPPCO competed for storage customers' marginal volumes, as well as for their trading volumes prior to the acquisition, with many customers ranking Enterprise and TEPPCO as their first and second choices for NGL storage.

The acquisition significantly increased NGL salt dome storage concentration in Mont Belvieu, leaving Duncan with ownership of a dominant share of storage volume and capacity. A combined Enterprise/TEPPCO enhances its ability unilaterally to exercise market power, as the companies are the market leaders for NGL salt dome storage, and the remaining suppliers cannot replace the competition lost through the acquisition. The result would be the elimination of competition between two leading NGL salt dome storage providers, likely leading to higher prices and reduced service for storage customers. Finally, the FTC contends that entry into the Mont Belvieu NGL salt dome storage facility market is not likely to be timely or sufficient to offset the alleged anticompetitive effects of the transaction.

The FTC's consent order is designed to remedy the competitive harm resulting from the 2005 acquisition. It requires TEPPCO to divest its interest in the Mont Belvieu Storage Partners NGL salt dome facility, as well as certain related pipeline, land, and other assets. Specifically, the order directs Duncan, who controls both TEPPCO and Enterprise, to sell these assets to a Commission-approved buyer no later than December 31, 2006, in manner approved by the FTC and subject to final FTC approval. If Duncan is unable to divest the storage and other assets by that time, the Commission would be able to appoint a divestiture trustee to oversee their sale to an approved buyer.

Further, the order states that Duncan must provide the FTC with prior notice before acquiring, operating, or managing any NGL storage facility in Mont Belvieu in the next 10 years, and requires him to send the FTC copies of all new NGL storage leases with third-party NGL storage facilities in Mont Belvieu within 15 days of when they are signed or become effective. Both provisions are designed to ensure that certain subsequent actions by Duncan do not adversely impact competition in the market covered by the order. To ensure that the acquirer receives all resources necessary to operate the divested assets, the order requires Duncan to provide the buyer with the opportunity to interview and hire employees who spend more than 10 percent of their time working on the divested assets. It also prevents Duncan from offering these employees incentives to decline jobs with the acquirer. Duncan also must provide the acquirer with all licensed intangible property necessary to operate the divested assets in a competitive manner.

Authored by

Camelia C. Mazard
202-589-1837
cmazard@dbmlawgroup.com