UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

In the Matter of Magellan Midstream Partners, L.P.

and Shell Oil Company

FTC File No. 041-0164

COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

Proposed Order announced September 28, 2004

Comments filed November 1, 2004

Citizens for Voluntary Trade files the following comments in

response to the Federal Trade Commission's proposed decision and
order in the above-captioned matter.
Introduction
On June 23, 2004, Shell Oil Company (Shell) agreed to sell a
package of refined petroleum pipeline and terminal assets to
Magellan Midstream Partners, L.P. (Magellan). Magellan is a
publicly traded limited partnership that provides “midstream” energy
services, including the storage and transportation of light petroleum
products. The partnership's estimated 2003 revenue was $485.16
million.
Among the assets in Shell's package to Magellan was a refined lite
petroleum terminal in Oklahoma City, Oklahoma. The Federal Trade
Commission issued an administrative complaint against Magellan
and Shell, claiming Magellan's acquisition of the Oklahoma City
terminal violated Section 5 of the Federal Trade Commission Act, 15
U.S.C. § 45, and Section 7 of the Clayton Act, 15 U.S.C. § 18.
Magellan and Shell agreed to a proposed order whereby Magellan
must divest the former Shell Oklahoma City terminal, at no
minimum price, to a buyer approved by FTC.
 In the Matter of Magellan Midstream Partners, L.P.
and Shell Oil Company
COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

Comments
This is the second FTC prosecution in the past month of a
refined petroleum terminal sale by Shell to a midstream
partnership. Just last week, CVT filed comments on FTC's
proposed order against Shell and Buckeye Partners, L.P.1, over an
abandoned sale of a terminal in Niles, Michigan. FTC is clearly
micromanaging the midstream industry through antitrust
regulation, although the Commission can demonstrate no
economic benefits to this approach. There is no evidence in the
record, either in this case or in the Buckeye prosecution, that
violent intervention by FTC yields superior economic outcomes to
those created by the free market.
FTC's “competitive” concerns about the sale of the Oklahoma
City terminal relies almost exclusively on the Commission's use of
the Herfindahl index.2 The index purports to measure market
concentration by adding the squares of the market shares of the
existing competitors. For example, if a market has four
competitors with market shares of 30%, 30%, 20%, and 20%, then
the Herfindahl index number will be 900+900+400+400 or 2,600.
FTC would define this theoretical market as “highly
concentrated,” because the index exceeds 1,800. If two of the four
competitors—say the two firms with 30% shares—were to merge,
FTC would probably object because this would increase the index
number from 1,800 to 4,400. Any post-merger increase in the
index of more than 100 in a “highly concentrated” market is
deemed suspect because the merger is considered “likely to create
or enhance market power or facilitate its exercise.”3
In this case, FTC claims Magellan's acquisition of Shell's
Oklahoma City terminal would increase the Herfindahl index
number from 3,100 to 4,300, an 1,200-point increase in a “highly

1 FTC File No. 041-0162.

2 Also called the Herfindahl-Hirschman index.
3 U.S. Department of Justice and Federal Trade Commission, Horizontal Merger
Guidelines at 1.5. (Available at
www.usdoj.gov/atr/public/guidelines/horiz_book/15.html).

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 In the Matter of Magellan Midstream Partners, L.P.
and Shell Oil Company
COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

concentrated” market. Because FTC doesn't provide any

information about how the Herfindahl index was calculated here
—i.e. the total number of competitors and their exact market
shares—it is impossible to verify the pre- and post-merger
numbers given.
Assuming, arguendo, that the Herfindahl index numbers given
in the complaint are valid, this alone does not constitute proof of
any “market power” or justify FTC's intervention. The Herfindahl
index is nothing more than a predictor of whether FTC (or the
Department of Justice) will pursue legal action. As economics
professor Dominick Armentano explained, there is no objective
economic merit in the Herfindahl index:
Although the general public has the impression that
there must be some good reason for the antitrust
authorities' choice of particular limits in the
Herfindahl Index of market concentration, those
limits are completely arbitrary. No one—and
certainly not the antitrust authorities—can ever
know whether a merger of firms that creates, say, a
36-percent market share, or one that raises the
Herfindahl Index by 150 points, can create sufficient
economic power to reduce market output and raise
market price. No one knows, or can know, whether
monopoly power begins at a 36 percent market share
or a 36.74-percent market share. Neither economic
theory nor empirical evidence can justify any merger
guideline or prohibition.4
FTC—an agent of the United States Government—is seeking
to restrict or prohibit the right of private businesses to enter into
an enforceable contract. If Shell decides to sell its property to
Magellan, that is their business, not the publics. Property rights
have no meaning if they are subject to arbitrary and capricious

4 Dominick T. Armentano, Antitrust: The Case for Repeal, pp. 85-86 (2nd ed., Ludwig
Von Mises Institute 1999).

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 In the Matter of Magellan Midstream Partners, L.P.
and Shell Oil Company
COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

violation by the state. FTC cannot, consistent with the

Constitution and free-market economic principles, condition an
exchange of private property on whether a buyer or seller owns
“too much” property according to an arbitrary formula. If that
were the case, then no property is safe from government seizure
on the grounds that ownership is “highly concentrated.” The
federal government could conceivably seize private homes by
claiming the homeowners own “too much” property according to
some index that purports to measure market concentration of real
estate.
Indeed, FTC's exclusive reliance on the Herfindahl index to
establish market power here raises a curious question. If the pre-
merger index number is 3,100—a full 1,300 points over the
threshold for declaring a market “highly concentrated”--then why
can't FTC, consistent with its own mandate, force Magellan or
Shell to divest their existing properties in the Oklahoma City
area? In other words, what is to stop FTC from breaking up
companies, without the pretext of merger review, to ensure the
Herfindahl index stays below 1,800 at all times? The practical
answer is that were FTC to simply seize private property and
redistribute it according to its own whims, the agency (and
antitrust policy generally) would risk losing congressional and
popular support. Without the facade of merger review, FTC's
actions would be portrayed for what they are—central economic
planning and the forced redistribution of property.
The other prong of FTC's argument in favor of violent
intervention here is the alleged “barriers to entry” that would
prohibit a new firm from entering the Oklahoma City market to
compete with Magellan. FTC claims, “[e]ntry into the market . . .
is difficult and would not be timely, likely or sufficient,” because,
among other factors, there are “regulatory and supply
constraints” that would impede construction of terminaling
assets.

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 In the Matter of Magellan Midstream Partners, L.P.
and Shell Oil Company
COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

None of these alleged “barriers” have anything to do with

Magellan and Shell's transaction. They did not create the supply
constraints or impose the regulations. Thus, it is unfair to
condition their exercise of property rights on factors beyond their
control. Supply constraints are inherent in any market; scarcity,
after all, is what necessitates economic systems in the first place.
And blaming private firms for the government's regulatory
barriers is the type of accusation more appropriate to a budding
totalitarian state (which always require scapegoats) than it is to a
republic founded on the principles of individual rights.
As with the Herfindahl index, FTC's alleged entry barriers
assume the agency possesses perfect knowledge and can predict,
with reasonable certainty, economic outcomes. But in a free
market, the lack of perfect knowledge is accepted, and economic
outcomes are determined through the continuous interaction of
buyers and sellers. Outcomes are not predetermined, as FTC
models attempt to do. For example, FTC claims no firm will enter
the market in a “timely, likely or sufficient” manner to counteract
Magellan's market power in Oklahoma City. But what would
FTC consider “timely”? The term is indefinite. How fast must a
potential competitor enter the market to satisfy FTC's whims?
One month? One year?
FTC's very market definition exposes the limits of central
economic planning. Paragraph 10 of the complaint states that
buyers of light petroleum products in Oklahoma City “have no
effective alternative” to local terminals. This may be true today,
but it need not be true in perpetuity. At one time, the idea of
transporting goods of any type from, say, New York to Georgia
would have been cost-prohibitive for many buyers and sellers.
But technology and markets evolved to overcome those
limitations. Yet a theoretical regulator in 1801 trying to
arbitrarily define markets could not have foreseen the
transportation innovations of the next 50 years or been able to
calculate their impact on the market.

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 In the Matter of Magellan Midstream Partners, L.P.
and Shell Oil Company
COMMENTS OF CITIZENS FOR VOLUNTARY TRADE

FTC seeks instant gratification with respect to economic

competition. Any quantity of competition “lost” today must be
replaced immediately, lest the market change too much before the
status quo can be restored. There is no attempt to understand
how the competition developed in the first place or how violent
intervention will distort future economic outcomes. This
approach to regulation violates free market principles and
demonstrates the breadth of FTC's contempt for private property
and wealth creation. No amount of hysterics over alleged entry
barriers or fancy-sounding statistical indexes alters this basic
truth.

Conclusion
For the reasons discussed above, FTC should withdraw the
proposed order from consideration and dismiss the complaint
against Magellan and Shell.

Respectfully Submitted,
CITIZENS FOR VOLUNTARY TRADE
Post Office Box 66
Arlington, VA 22210
Tel/Fax: (703) 740-8309
Dated: November 1, 2004

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