August 29, 2017

It's a Sign of the Times: Challenges to Big Oil Transactions Will Likely Continue in California

Holland & Knight Energy and Natural Resources Blog
Jessica M. Brown

Valero Energy Corporation will likely face an uphill battle ahead in California over its plans to purchase storage terminals in Martinez and Richmond, California from Plains All American Pipeline. The California Attorney General’s (AG) opposition to the transaction following the Federal Trade Commission’s (FTC) approval of the sale is likely the beginning of a series of challenges. Earlier this year, the State AG’s Office filed both temporary and preliminary injunctions in federal court in San Francisco seeking to block the proposed merger between Valero and Plains All American Pipeline as a violation of Section 7 of the Clayton Act, 15 U.S.C. §18, on the basis that it must “protect the public from the anticompetitive effects of the transaction that lie at the heart of the case.” 3:17-cv-03786, Dkt. No. 77 at 3.

U.S. District Judge William Alsup denied the AG’s application for a temporary restraining order on July 12, 2017 without prejudice to the AG moving for a preliminary injunction at a later date.  Dkt. No. 13 at 1. The AG so moved on July 25, 2017, and by order under seal, Judge Alsup denied the motion on Aug. 23, 2017, stating that the court was “strongly inclined to unseal the order and post it in its entirety, unredacted.” Dkt. Nos. 79 & 80.  Judge Alsup adhered to the Ninth Circuit Court’s “compelling reasons” standard in favor of public accessibility to judicial documents, so we expect the Court will likely issue an unsealed order in the near future. See, e.g., Apple, Inc. v. Samsung Elecs. Co., No. 11-CV-01846-LHK, 2012 WL 4068633, at *1 (N.D. Cal. Sept. 14, 2012). Trial in the matter will begin Jan. 8, 2018.

The California AG’s opposition to the deal in not surprising from a political perspective. It is no secret that the State has set aggressive goals to lower greenhouse gas emissions and transition away from fossil fuel-based resources to that end. However, California is not alone in that trend. Appointments and personnel changes at the U.S. Department of Justice’s Antitrust Unit and the FTC have state AG’s offices like California shifting to heavier enforcement, should federal priorities change and enforcement wane on that front. At the ABA Antitrust meeting in spring of this year, top lawyers from the New York and Tennessee AG offices announced they were ready to fill the gap should the federal government relax its enforcement efforts.

The CA AG’s involvement also reveals its legislative focus on Gov. Jerry Brown's 2030 Climate Commitment pursuant to CA’s landmark California Global Warming Solutions Act of 2006 (AB 32), which required the state to reduce its GHG emissions to 1990 levels by 2020. One of the goals of the Commitment requires CA to cut its petroleum use in half by 2030. Market support for zero emission vehicles and renewable fuel production through carbon pricing and other incentives may run counter to the optics of Valero’s plan to meaningfully expand capacity at both the Martinez and Richmond Terminals.

Accordingly, even if Valero receives a favorable decision in the U.S. District Court, it will likely continue to face challenges from California under state law. While it’s possible the Court could deny or grant the State AG’s opposition, the Court could always order Valero to divest the assets under a separate entity to address concerns about market power. Either way, oil refiners doing business in California and similar states may consider addressing market power concerns in a similar way to anticipate future challenges like this in the near future.

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