Associated Octel Company L., et al. and Ethyl Corp; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 971-0004]

Associated Octel Company L., et al. and Ethyl Corp; Analysis To

Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreements

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SUMMARY: The two consent agreements in these matters settle alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaints that accompany the consent agreements and the terms of the

consent orders--embodied in the consent agreements--that would settle

these allegations.

DATES: Comments must be received on or before June 5, 1998.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 6th St. and Pa. Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Michael Antalics or Geoffrey Green FTC/S-2627, Washington, DC 20580.

(202) 326-2821 or 326-2641.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the

Commission's rules of practice (16 CFR 2.34), notice is hereby given

that the above-captioned consent agreements containing consent orders

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, have been placed on the public

record for a period of sixty (60) days. The following Analysis to Aid

Public Comment describes the terms of the consent agreements, and the

allegations in the complaints. An electronic copy of the full text of

the consent agreement packages can be obtained from the FTC Home Page

(for March 31, 1998), on the World Wide Web, at ``http://www/ftc/gov/

os/actions97.htm.'' A paper copy can be obtained from the FTC Public

Reference Room, room H-130, Sixth Street and Pennsylvania Avenue, NW.,

Washington, DC 20580, either in person or by calling (202) 326-3627.

Public comment is invited. Such comments or views will be considered by

the Commission and will be available for inspection and copying at its

principal office in accordance with Sec. 4.9(b)(6)(ii) of the

Commission's rules of practice (16 CFR 4.9(b)(6)(ii).

Analysis of Proposed Consent Orders to Aid Public Comment

The Federal Trade Commission has accepted agreements to proposed

consent orders from The Associated Octel Company Ltd. (``Octel'') and

its parent corporation, Great Lakes Chemical Corporation (``Great

Lakes''), and from Ethyl Corporation (``Ethyl''). Octel has its

principal place of business in Ellsemere Port, England. Great Lakes has

its principal place of business in West Lafayette, Indiana. Ethyl has

its principal place of business in Richmond, Virginia.

The proposed consent orders have been placed on the public record

for sixty (60) days for reception of comments by interested persons.

Comments received during this period will become part of the public

record.

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After sixty (60) days, the Commission will again review the agreements

and the comments received, and decide whether it should withdraw from

the agreements or make final the agreements' proposed orders.

The complaint alleges that Octel, Great Lakes, and Ethyl

(collectively referred to as ``respondents'') have engaged in acts and

practices that have unreasonably restrained competition in the

manufacture and sale of lead antiknock compounds in violation of

Section 5 of the Federal Trade Commission Act. Lead antiknock compounds

are gasoline additives that contain tetraethyl or tetramethyl lead, and

that increase the octane rating of gasoline.

The complaint alleges that until 1994, Octel and Ethyl were the two

largest manufacturers of lead antiknock compounds in the world. Between

October 1993 and March 1994, respondents entered into a series of

contracts, agreements, and understandings--written and unwritten--

regarding the manufacturer, distribution, and sale of lead antiknock

compounds. According to the complaint, among the important undertakings

are the following:

(a) Ethyl agreed to cease manufacturing lead antiknock compounds.

(b) Octel agreed to supply to Ethyl each year, for re-sale, a

limited volume of lead antiknock compounds at a discount price.

(c) Octel and Ethyl agreed that the maximum volume of lead

antiknock compounds supplied to Ethyl each year would be a fixed

portion of Octel's annual capacity to manufacture compounds, but left

Octel free to reduce that capacity unilaterally.

(d) Octel and Ethyl agreed that the price of lead antiknock

compounds purchased by Ethyl for re-sale to customers in the United

States and certain other countries would be adjusted each year,

depending upon the change in the average sale price charged by Octel to

retail customers located in the United States and certain other

countries, thus giving Octel the means to influence Ethyl's costs (and

therefore its price) by raising its own price.

(e) Octel agreed to notify Ethyl each year of the change in the

average sale price charged by Octel to retail customers located in the

United States and certain other countries.

(f) Octel agreed to cease the bulk shipping of lead antiknock

compounds, and to transfer to Ethyl certain ocean going vessels

dedicated to transporting lead antiknock compounds.

(g) Ethyl agreed to provide to Octel all bulk shipping services

required by Octel for the distribution of lead antiknock compounds.

The complaint further alleges that in March 1994, Ethyl closed its

manufacturing operation in Sarnia, Canada--the company's only facility

for the production of lead antiknock compounds.

Finally, the complaint alleges that the effect of respondents'

concerted decision to close the Sarnia manufacturing facility, together

with certain terms of respondents' supply agreement, is to increase the

likelihood of coordinated interaction among sellers of lead antiknock

compounds, to increase prices, and to injure consumers.

The quantity and price terms of the supply agreement are of serious

concern to the Commission. As Ethyl has closed its facility for

manufacturing lead antiknock compounds, the company's potential sales

volume is artificially capped by the supply agreement, and is subject

to manipulation by Octel. Given this arrangement, Ethyl's ability to

expand its output is diminished. And if Ethyl cannot expand its output,

then it has no incentive to reduce its prices.

The wholesale price term adopted by the parties (tying the Octel-

to-Ethyl transfer price to changes in Octel's retail price) enhances

Octel's incentive to increase its own retail prices. The reason is the

Ethyl increases its payments to Octel as and to the extent that Octel

increases its prices to refiners.\1\

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\1\ In American Cyanamid, Docket No. C-3739 (May 12, 1997), the

Commission determined that an incentive payment tied to higher

retail prices was anticompetitive where the parties were in a purely

vertical relationship: American Cyanamid made rebate payments to

dealers that charged higher prices. An incentive payment between

horizontal competitors, as here, is even more dangerous to

competition.

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Finally, in order to implement the price term, Octel discloses to

Ethyl any changes in its average retail price. This disclosure of

information may reduce uncertainty in an oligopolistic market and thus

facilitate coordinated interaction.

Octel, Great Lakes, and Ethyl have signed consent agreements

containing the proposed consent orders. The proposed consent orders

require respondents to modify the contract under which Octel supplies

lead antiknock compounds to Ethyl.\2\ Octel would be obligated to

provide Ethyl with whatever volumes Ethyl requires for resale to U.S.

customers. The elimination of the artificial cap on Ethyl's output

should enhance Ethyl's incentives to price aggressively.\3\

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\2\ The Commission has determined that it is not practicable to

order Ethyl to re-open its Sarnia facility.

\3\ This order provision would not diminish the volume of lead

antiknock compounds available to Ethyl from Octel for resale outside

of the United States.

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The proposed consent orders also require respondents to modify the

price term of the supply agreement so that (i) the price of product

available to Ethyl for resale in the United States is not tied to

changes in Octel's retail price, and (ii) the price of product

available to Ethyl for resale outside of the United States is not tied

to changes in Octel's retail price in the United States. The transfer

price is thus de-coupled from Octel's retail price, thereby eliminating

the anticompetitive incentives discussed above.

Octel and Ethyl will negotiate a new transfer price for lead

antiknock additives. If the transfer price is too high (relative to the

price at which Ethyl could self-manufacture product), then prices to

consumers may likewise be supra-competitive. The proposed remedy relies

upon Ethyl's incentive to negotiate the lowest possible price.\4\

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\4\ Ethyl's incentive to seek a low transfer price would be

compromised if the company could recoup high payments by receiving a

side payment from Octel, perhaps by means of a separate transaction.

In theory, the bulk transportation agreement between Octel and Ethyl

offers an opportunity for such recoupment. However, as long as the

fee that Octel will pay Ethyl for transportation services is

regulated by the parties' contract dated March 25, 1994, there is no

danger of side payments through this mechanism.

The alternative to permitting the parties to negotiate a new

transfer price is to have the Commission set the transfer price.

Generally, the Commission does not regulate prices.

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The proposed consent orders provide that the new transfer price

adopted by the parties may not be structured such that the unit price

increases if Ethyl purchases greater volumes of lead antiknock

additives from Octel. The prohibited pricing mechanism, a ``volume

penalty,'' would deter output expansion by Ethyl and thus restrain

competition. Indeed, a volume penalty could have the same effect upon

Ethyl as an artificial cap on the quantity of product available to

Ethyl.\5\

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\5\ As noted above, the proposed consent orders would require

respondents to eliminate the artificial cap that is included in the

original Octel-Ethyl supply agreement.

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The proposed consent orders also would prohibit Octel and Ethyl

from disclosing to one another information regarding historical,

current, or future prices for lead antiknock compounds sold to

customers located in the United States.

In addition, the proposed consent orders would require respondents

to provide the Commission with notice in

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advance of acquiring the assets or securities of any firm engaged in

the distribution of lead antiknock compounds in the United States, or

the manufacture of lead antiknock compounds anywhere in the world. The

prior notice obligation would also apply to the sale of lead antiknock

compounds to a competing manufacturer, as such a transaction may be

used to induce the rival to exit from manufacturing.

The purpose of this analysis is to facilitate public comment on the

proposed orders, and it is not intended to constitute an official

interpretation of the agreements and proposed orders or to modify in

any way their terms.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 98-8920 Filed 4-3-98; 8:45 am]

BILLING CODE 6750-01-M