The Federal Trade Commission today filed its complaint seeking a preliminary injunction to block Arch Coal, Inc.'s (Arch) proposed $364 million acquisition of all assets of Triton Coal Company, L.L.C. (Triton), from New Vulcan Holdings, L.L.C. (New Vulcan). Pursuant to the acquisition, Arch will acquire Triton's North Rochelle and Buckskin mines. The complaint was filed in the U.S. District Court for the District of Columbia, and has been assigned to Judge John D. Bates.
In moving to challenge the acquisition, the Commission has determined that "such an injunction is in the public interest, and that it has reason to believe that . . . the acquisition may substantially lessen competition and/or tend to create a monopoly in coal mined from the Southern Powder River Basin (SPRB) and in 8800 British Thermal Unit (Btu) SPRB coal." The Commission considered Arch's proposed transfer of Triton's Buckskin mine assets to Peter Kiewit Sons', Inc. (Kiewit) insufficient to "materially change the acquisition or its likely effect on competition."
Southern Powder River Basin Coal
The Commission's complaint noted that "the SPRB is a source of low sulfur coal . . . and [SPRB coal] is one of the few coals that comply with the current sulfur emission limits imposed on coal-fired generators by the 1990 Clean Air Act. SPRB coal is also low in ash and sodium content. These properties, combined with exceptionally low mining costs, give SPRB coal a strong economic advantage in supplying many electric generators compared to coal produced in other regions of the United States." Further, "SPRB coal suppliers and customers have established two distinct price points for SPRB coal based on the heat content of the coal - 8800 Btu and 8400 Btu."
The Commission's complaint explained that "the most highly valued SPRB coal is 8800 Btu coal, which is produced in the southern portion of the SPRB, known as 'Tier 1' or as the 'Wright Area.' This 8800 Btu coal commands a substantial price premium over 8400 Btu coal, which comes from mines in Tiers 2 and 3, the adjacent areas to the north in the SPRB. The price premium for 8800 Btu SPRB coal reflects its lower sulfur content, higher energy content, and easy access to competing rail transport service."
The complaint noted that "the four leading producers in the SPRB - Arch, Peabody, Kennecott, and Triton - all operate mines in the Tier 1 Region. Arch's Black Thunder mine and Triton's North Rochelle mine are located in the Tier 1 region and produce 8800 Btu coal. Each of these producers also conducts one or more coal mining operations in Tiers 2 and 3 of the SPRB. Arch's Coal Creek mine, which Arch has kept idle since 2000, is located in the Tier 2 region. Triton's Buckskin mine is located in the Tier 3 region. Another SPRB producer, R.A.G., is a significant producer of 8400 Btu SPRB coal, but produces coal only in Tiers 2 and 3."
The Commission's Complaint
The Commission's complaint alleged that the acquisition would:
- Combine two of the four leading producers of SPRB coal - substantially increasing concentration in the SPRB market and resulting in a highly concentrated SPRB market - eliminating the existing substantial competition between Arch and Triton, and substantially reducing competition in the SPRB market;
- Combine the two firms that hold the principal sources of excess capacity in the SPRB, and bring under Arch's control the principal source of excess capacity for production of 8800 Btu SPRB coal;
- Combine two among only four producers in Tier 1 of the SPRB - substantially increasing concentration in 8800 Btu SPRB coal and resulting in high concentration among 8800 coal producers - eliminating the existing substantial competition between Arch and Triton, and substantially reducing competition in 8800 Btu SPRB coal; and
- increase the likelihood of coordination in the market for SPRB coal - a market that is already susceptible to coordination.
The SPRB Coal Market is Susceptible to Coordination
The complaint alleges that "the SPRB coal market . . . possesses several structural features that make coordination more likely, including a small number of competitors, high barriers to entry, homogeneity of the relevant product, relatively inelastic demand, availability of substantial market and competitor information, and close geographic proximity of competitors."
"The major SPRB producers regularly signal their intent with respect to coal production," the complaint alleged, "and competitors keenly follow these signals and ascertain whether production announcements are actually implemented. This signaling includes open communications by coal companies and coal company executives at investor conferences and trade association meetings and through press releases and statements in the trade press." According to the FTC, Arch President and Chief Executive Officer Steven Leer, in speaking at the Western Coal Council's Spring Forum on May 23, 2000, "urged coal suppliers to 'produce less coal' in response to the problem of oversupply" and said that "coal companies will benefit from matching supply and demand." Leer "stressed that 'Arch has been conscientious' in reducing capacity, including idling Coal Creek (removing 10 million tons per year of output and idling 18 million tons per year of capacity) and limiting expansion at Black Thunder to about 60 million tons per year" (the original plan had called for about 80 million tons per year).
The FTC further noted that, Leer "defended his and his competitors' decisions to constrain supply - 'We've had offers to open up Coal Creek Mine for one year at extremely attractive pricing. And the answer is no. I think other producers are in the same boat.'" The complaint alleges that "Arch's message got through to Triton, and indeed was discussed within a few days internally among Triton's management."
According to the FTC, in an April 25, 2000, speech to the Western Coal Transportation Association, Irl Engelhardt, Chairman and CEO of Peabody Coal, discussed steps that his company had taken to reduce "oversupply," including:
- In early 1999, Peabody suspended the 10-million-ton-per-year Rawhide Mine, "one of the most productive mines in the United States;"
- Later in 1999, Peabody delayed a 30-million-ton-per-year capacity expansion at North Antelope/Rochelle "until margins will generate the proper returns;" and
- In April 2000, Peabody idled a truck/shovel fleet at Caballo, reducing output by eight million tons per year, "until market conditions improve."
The complaint alleges that "communications among the major SPRB producers are not limited to speeches, but include direct conversations concerning expansion plans and mine operations. Competitors also discuss with one another supply contracts with individual customers. In considering how to respond to a customer's expressed interest in purchasing coal, a major SPRB producer drew on its discussions with Arch personnel regarding the customer's future purchase commitments with Arch. Discussions between competitors also involve SPRB price projections and the SPRB supply and demand balance."
Triton's North Rochelle Mine Has Been the Principal Source of SPRB Output Expansion
The complaint noted the importance of Triton's actions as an independent competitor. "Shipments of SPRB coal increased by 70 million tons over the five-year period 1998 through 2003," with "Triton's North Rochelle mine . . . the largest source of increased supply . . . over the five-year period 1998 through 2003," accounting for "34.1% of the total increase." The complaint alleges that "Arch management recognized that an acquisition of Triton will provide an 'insurance policy' for Arch in the SPRB, by eliminating an 'undisciplined' producer and enabling Arch more effectively to control production to match demand."
FTC’s Earlier Vote to Authorize Enforcement Action for Failure to Comply with “Second Request”
On February 23, 2004, the Commission unanimously authorized the staff to pursue a temporary restraining order to enjoin the proposed acquisition because Arch failed to substantially comply with the FTC’s request for additional information under the 1976 Hart-Scott-Rodino Amendments to the Clayton Act. Ultimately, Arch submitted additional information, obviating the filing of a complaint based on Arch’s failure to comply with established procedures.
Copies of the Commission's complaint are available on the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580, Electronic Mail: email@example.com; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.
(FTC File No.: 031-0191)
(Civ. No. 1:04CV534 (JDB)
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