New FTC chair Khan not afraid to play hardball with oil, gas industry: Baker Botts

US Federal Trade Commission Chair Lina Khan is not pulling any punches with the oil and natural gas sector as she sets out to enforce antitrust law as the youngest person ever to helm the agency, global law firm Baker Botts says.

A 32-year-old former law professor, Khan has made a name for herself as a progressive voice with a get-tough approach to Big Tech's unchecked market power. When asked by the White House to lead the effort to monitor the US gasoline market and "address any illegal conduct that might be contributing to price increases for consumers at the pump," she showed no qualms with extending her aggressive antitrust enforcement philosophy to the oil and gas industry.

Khan "has the energy industry squarely within her sights," a Baker Botts Sept. 1 note to clients asserts. Her "response went far beyond [National Economic Council Director Brian] Deese's straightforward request, outlining a three-part enforcement plan, tightly focused on the energy industry."

This additional scrutiny on the sector comes as rising gasoline prices over the summer prompted the White House to wade into oil market dynamics. But further calls for investigations into what is causing divergences between oil prices and the cost of gasoline at the pump are expected if gasoline prices rise in the wake of Hurricane Ida, which slammed into Louisiana Aug. 29 with 150 mph winds and on Sept. 1 brought torrential rain, high winds and flash flooding to the Mid-Atlantic states.

The US Energy Information Administration has reported pre-Labor Day gasoline prices at their highest levels since 2014. US retail gasoline prices on Aug. 30, the Monday before Labor Day weekend, averaged $3.14/gal, a 92 cents/gal, or 41%, rise over the same time in 2020 and a 57 cents/gal, or 22%, increase over the pre-pandemic period in 2019.

Pricing investigations

Whether triggered by Hurricane Ida or other means, "any FTC gas pricing investigation would bring significant discovery burdens for industry participants," Baker Botts said in its note to clients.

The investigation that followed Hurricane Katrina in August 2005 identified more than 105 retailers accused of price gouging, but ultimately uncovered very little evidence of wrongdoing, the law firm said. Instances of higher average gasoline prices were attributed to "other factors, such as regional or local market trends," according to the FTC's post-Katrina May 2006 report.

"This prior failure to find illegal conduct is unlikely to dissuade the current slate of enforcers from pursuing a similar investigation," Baker Botts said. "Aggressive antitrust enforcement has rapidly become a central cause of the current administration. Biden's antitrust appointees, including Khan, are clearly intent on implementing an elevated level of antitrust scrutiny."

The firm advised industry participants to be prepared for pricing investigations if gasoline prices go up meaningful, with "thorough documentation of the business justifications for any price increases."

Baker Botts also recommended that "parties to proposed transactions, particularly those involving retail fuel outlets, should be prepared to encounter an agency anxious to find issues premised on theories that fall outside of modern antitrust precedent."

Three-step approach

Khan's Aug. 25 letter to Deese expressed concern that existing policies governing oil and gas industry mergers had "enabled significant consolidation, particularly when it comes to retail fuel outlets."

Mandating fuel station divestitures in overlapping markets to remedy anticompetitive deals may have inadvertently "increased consolidation at the national level, creating conditions ripe for price coordination and other collusive practices," she said.

Khan committed to a three-step approach to crackdown on unlawful conduct and potential gaps in FTC oversight.

"First, I will ask that we identify additional legal theories to challenge retail fuel station mergers where dominant players are buying up family-run businesses," she said in the letter. "Second, I will be taking steps to deter unlawful mergers in the oil and gas industry" as the repeated proposal of illegal mergers by retail fuel station chains suggest "the agency's approach has not deterred firms from proposing anticompetitive transactions in the first place. ... Third, I will be asking our staff to investigate abuses in the franchise market."

Khan said she was especially interested in digging into ways large national chains may be able to "'restore' higher prices through collusive practices," and planned to have FTC staff investigate any signs of such conduct.

Further, she said, "We will need to determine whether the power imbalance favoring large national chains allows them to force their franchisees to sell gasoline at higher prices, benefitting the chain at the expense of the franchisee's convenience store operations."

Greater scrutiny into mergers, "possibly untethered to traditional concerns about customer impacts, could mean longer and less predictable reviews for deals involving the sale of independent gas stations," Baker Botts said. "All of this adds up to a notably focused promise to create new hurdles for proposed transactions in the energy industry and to find new reasons to investigate a variety of conduct."