UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION

In the Matter of

PACIFICORP, a corporation, THE ENERGY GROUP PLC, a public limited liability company, PEABODY HOLDING COMPANY, INC., a corporation, and PEABODY WESTERN COAL COMPANY, a corporation.

Docket No. C-

COMPLAINT

Pursuant to the provisions of the Federal Trade Commission Act and the Clayton Act, and by virtue of the authority vested in it by said Acts, the Federal Trade Commission, having reason to believe that PacifiCorp proposes to acquire 100% of the voting securities of The Energy Group PLC in violation of Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45, and in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and it appearing to the Commission that a proceeding in respect thereof would be in the public interest, hereby issues its complaint stating its charges as follows:

I. RESPONDENTS

1. Respondent PacifiCorp is a corporation organized, existing and doing business under and by virtue of the laws of Oregon, with its office and principal place of business located at 700 N.E. Multnomah, Suite 1600, Portland, Oregon, 97232-4116. In 1996, PacifiCorp had total sales of $4.3 billion, including wholesale electric sales of $739 million and retail electric sales of $2.1 billion.

2. Respondent The Energy Group PLC is a public limited liability company organized, existing and doing business under and by virtue of the laws of England and Wales, with its office and principal place of business located at 117 Piccadilly, London, W1V 9FJ, England. For the fiscal year ending September 30, 1996, The Energy Group PLC had approximately $6 billion in total sales. The Energy Group controls respondent Peabody Holding Company, Inc.

3. Respondent Peabody Holding Company, Inc. is a corporation organized, existing and doing business under and by virtue of the laws of New York, with its office and principal place of business located at 701 Market Street, Suite 700, St. Louis, Missouri 63101-1826.

4. Respondent Peabody Western Coal Company is a corporation organized, existing and doing business under and by virtue of the laws of Delaware, with its office and principal place of business located at 1300 S. Yale, Flagstaff, Arizona 86001.

II. JURISDICTION

5. At all times relevant herein, the Respondents have been, and are now, corporations as "corporation" is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. 44; and at all times relevant herein, the respondents have been, and are now, engaged in commerce as “commerce” is defined in Section 4 of the Federal Trade Commission Act, 15 U.S.C. 44, and Section 1 of the Clayton Act, 15 U.S.C. 12.

III. THE PROPOSED ACQUISITION

6. Pursuant to a tender offer made on February 3, 1998, PacifiCorp plans to acquire all of the outstanding voting securities of The Energy Group PLC for approximately $10.7 billion, including assumption of approximately $4.1 billion in debt and lease obligations.

IV. THE RELEVANT MARKETS

Relevant Product Markets

7. The mining, production, and sale of coal is one relevant line of commerce within which to analyze the competitive effects of the proposed acquisition. Coal is the only economic fuel source for coal-fired power plants. Coal-fired power plants are expressly designed to use coal as a fuel source. Coal-fired power plants would not convert to the use of other fuel sources, such as natural gas, in response to a small but significant, nontransitory increase in the price of coal, because of large sunk capital costs, uncertainty concerning future relative prices of coal and natural gas, and lost operating time required to complete such a conversion.

8. Navajo and Mohave are two large coal-fired power plants located respectively near Page, Arizona, and Laughlin, Nevada.

9. Navajo and Mohave are supplied with coal from two mines owned by Peabody Western Coal Company, the Kayenta and Black Mesa mines. The Kayenta and Black Mesa mines are located on the Navajo Indian Reservation in Arizona. The Kayenta and Black Mesa mines are adjacent mines which share some operating facilities.

10. Freight charges are a large component of the delivered cost of coal to coal-fired power plants. Coal is typically carried by rail from the mine to the power plant. Coal is transported by dedicated rail line from the Kayenta mine to Navajo and by dedicated slurry pipeline from the Black Mesa mine to Mohave. Because of their location relative to alternative economic transportation and other coal mines, Mohave and Navajo are “captive” to the coal mines that supply them and would not be able economically to source coal from other mines should the price of coal from the captive mines increase. See infra 23.

11. Wholesale electricity sales also constitute a relevant line of commerce in which to analyze the competitive effects of the proposed acquisition. Wholesale electricity sales are made from generation facilities, including coal-fired power plants, to utilities that transmit and distribute power to end-use retail customers. The Federal Energy Regulatory Commission (“FERC”) permits wholesale electricity sales to be made at market rates if a generation facility can show that it does not possess market power in the region in which it operates. Wholesale electricity rates are consequently substantially unregulated.

12. Retail electricity sales are made from utilities to end-use customers. Retail electricity prices are currently regulated by state utility regulatory commissions. However, the regulatory structure of retail electricity is currently undergoing dramatic change. In the next few years, many states are likely to deregulate their retail sales and allow retail electricity prices to be determined by competitive conditions. Ultimately, the differences between wholesale and retail electricity rates, which are largely a product of their different regulatory environments, will disappear or will be significantly reduced. In deregulated electric markets, increases in wholesale rates will likely have strong and immediate effects on retail rates. California, among the first states to deregulate retail electricity sales, is expected to institute retail deregulation during 1998.

13. Because wholesale electricity cannot be economically stored in large quantities and demand for electricity fluctuates over the course of each day and from day to day over the course of each year, supply and demand must be continuously balanced. Consequently, separate markets for wholesale electricity sales exist at different times of the day and seasons of the year. For practical operating purposes, hourly wholesale electricity markets constitute a relevant line of commerce in which to analyze the competitive effects of the proposed acquisition.

14. Wholesale electricity prices are greatly affected by which types of plants are supplying electricity at a given point in time. In the electric industry, the various types of generating facilities have differing production costs. The general categories of production facilities are nuclear, hydroelectric, coal-fired, and gas-fired. The price at which a plant will bid wholesale electricity is likely to be strongly influenced by its short run variable cost, or the discrete cost associated with producing one more kilowatt-hour of electricity in a competitive market. Short run variable costs exclude fixed costs that do not vary with production levels at the plant.

15. In the electricity industry, variable costs are determined principally by a plant’s fuel costs. In general, nuclear plants have the lowest variable costs and are usually "dispatched," or sold to the market, first. Hydroelectric plants operating on a run-of-stream basis also have very low variable costs and are usually dispatched as long as they are operating on that basis. Consequently, electricity from nuclear and hydroelectric plants operating on a run-of-stream basis is typically dispatched first, and these plants are more likely to be run at full capacity than other types of plants.

16. Coal-fired plants have intermediate variable costs, and tend to be dispatched after nuclear and hydroelectric plants. Traditional gas-fired plants have the highest variable costs, and tend to be dispatched last. Many gas-fired plants are used only during periods of high or peak demand.

17. Because of their high cost, gas-fired plants generally are not utilized during periods of lower or off-peak demand. Consequently, for off-peak periods, coal-fired power plants frequently are the price-setting, marginal plants.

18. Under the electric industry reforms anticipated to begin shortly in California, both wholesale and retail electricity sales will be operated on a competitive basis. Under the California reforms, each generating plant will bid to supply power to the state's Power Exchange. The operator of the Power Exchange will then rank generators’ bids from lowest to highest prices, and choose the lowest-cost bids necessary to meet projected demand. All suppliers will receive the price of the last increment of supply necessary to fulfill demand, even if they bid a lower price. Consequently, in the system anticipated to be used in California, the marginal supplier will set the price for the entire system.

Relevant Geographic Markets

19. One relevant geographic market within which to analyze the proposed acquisition is the United States as a whole. In the United States there are nine independent reliability councils that coordinate interchange of electricity among power plants and transmission systems located within their boundaries. At various times, depending on transmission congestion, geographic areas consisting of a single reliability council, or combinations of adjoining reliability councils, or narrower areas therein, may constitute distinct geographic markets. The relevant geographic market of the United States as a whole is established through the trading activities of buyers and sellers in the wholesale electricity market.

20. Another relevant geographic market within which to analyze the proposed acquisition is the Western Systems Coordinating Council ("WSCC"). The WSCC coordinates interchange of electricity among power plants and transmission systems located within the eleven western states of Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming, and parts of southwestern Canada and northwestern Mexico. The WSCC is connected to the electricity grids of the rest of the United States, Canada, and Mexico by only a few, low capacity interconnections.

21. A geographic market smaller than the WSCC may be relevant during peak periods when transmission congestion occurs or in the event of transmission disruptions. Even during off-peak periods, transmission costs, including fees and line losses, mean that not all WSCC generators with similar variable costs of generation are equally well positioned to substitute for the power generated by the Navajo and Mohave generating stations.

V. MARKET STRUCTURE

22. Navajo has 2,250 megawatts of capacity and is the largest coal-fired power plant in the WSCC. Mohave has 1,580 megawatts of capacity and is one of the largest coal-fired power plants in the WSCC. Together, Navajo and Mohave represent about 11% of all of the coal-fired capacity located in the WSCC. Navajo and Mohave are now, or are likely to be in the future, the marginal, price-setting plants during significant periods of off-peak demand. When Navajo or Mohave are the marginal suppliers, relatively few generators in the WSCC have cost structures likely to allow them to constrain a 5% bid price increase at Navajo or Mohave.

23. Navajo and Mohave are absolutely dependent upon the Kayenta and Black Mesa coal mines for their fuel supply because of their extreme isolation relative to rail lines and other coal mines. There are no other economic sources of fuel, coal or otherwise, for these two power plants.

VI. ENTRY CONDITIONS

24. Construction of a new coal mine is a time-consuming process. Obtaining necessary federal and state environmental permits adds significant time to the process. Even assuming the existence of other coal reserves that could economically supply the Navajo and Mohave power plants, completing new mines to develop such reserves would take in excess of two years.

25. Construction of a new power plant is a time-consuming process with significant amounts of time required for the planning, permitting, and construction phases. A new coal-fired power plant would take about six years to complete. In addition to these time lags, there is considerable uncertainty that necessary siting, pollution, and transmission siting permits could be obtained in any time frame. Moreover, there is considerable uncertainty that such a plant would in fact have sufficiently low costs to constrain pricing of the Navajo and Mohave generating stations. Similar uncertainties in siting, transmission access, and timing affect other prospective generating facilities, including gas-fired plants, as well.

VII. COMPETITIVE EFFECTS

A. Raising Rivals’ Costs

26. PacifiCorp is the third largest generator of electricity in the WSCC. In 1996, PacifiCorp generated 53.8 million megawatt-hours of electricity.

27. A merged PacifiCorp/Peabody, because of its substantial electricity generation assets, will have different incentives in setting the price of coal to Navajo and Mohave than does an independent Peabody, which has no generation assets. An independent Peabody will act to maximize its profits by considering only the effects on its coal profits of its coal pricing to Navajo and Mohave. A merged PacifiCorp/Peabody, on the other hand, will also consider the effect on its wholesale electricity profits of its coal pricing to Navajo and Mohave. Consequently, a merged PacifiCorp/Peabody may act differently from an independent Peabody, with resulting harm to consumer welfare.

28. A merged PacifiCorp/Peabody would have incentives to increase coal costs to Navajo and Mohave, if by doing so it could increase the price of wholesale electricity in the WSCC and enjoy increased profitability on its substantial electricity sales. Navajo and Mohave determine prices in the WSCC during certain off-peak hours, when they are the price-setting, marginal plants. A merged PacifiCorp/Peabody would have increased incentives to increase the price of wholesale electricity in the WSCC during these off-peak hours by increasing coal costs for Navajo and Mohave. A merged PacifiCorp/Peabody would have the ability to increase the price Navajo and Mohave pay for their coal because the supply contracts use a modified cost- plus formula that can be manipulated by the merged entity.

29. Alternatively, a merged PacifiCorp/Peabody could fail to grant price concessions to Navajo and Mohave that an independent Peabody would grant, if granting such price concessions would decrease the price of wholesale electricity in the WSCC and decrease the profits PacifiCorp/Peabody enjoys on these wholesale electricity sales. An independent Peabody could find that its profit maximizing strategy would be to offer lower prices in order to increase coal sales to Navaho and Mohave. Under reasonable conditions, the merged PacifiCorp/Peabody could find these incentives offset by their interests in higher sales from their own plants and higher prices for their electricity sales in general. Navajo and Mohave determine prices in the WSCC during certain off-peak hours, when they are the price setting, marginal plants. Consequently, post-merger, there is an increased likelihood that the price of wholesale electricity in the WSCC would be higher than it would be if an independent Peabody were setting coal prices to Navajo and Mohave.

30. Consequently, the proposed acquisition may substantially lessen competition or tend to create a monopoly in the market for wholesale electricity in the WSCC, during certain off-peak hours.

B. Abuse of Proprietary Information

31. Power plant operators currently compete to supply electricity in informal wholesale markets characterized by bilateral contracts. In some states (e.g. California), power plant operators will soon compete in formal auctions to supply electricity. In all of these situations, power plant operators buy and sell both directly and through “power marketing” affiliates that have been expressly created to compete in the deregulating wholesale market for electric power.

32. Competition in the wholesale electricity market could be adversely affected by this acquisition because PacifiCorp may gain access, through Peabody’s coal contracts and coal supply relationships, to highly sensitive data on competitors’ costs and to real-time information relating to operating conditions of competing generators of electrical power.

33. A coal supplier is able to obtain competitively-sensitive information about the day-to-day operation of the power plant it supplies, including when the plant is experiencing downtime and when it is facing transmission bottlenecks. In addition, because coal costs comprise 90% of a coal-fired power plant’s variable cost of generating electricity, a coal supplier will know detailed information sufficient to predict the price the power plant will likely bid.

34. Peabody is a significant supplier of coal to coal-fired plants, supplying 27% of the coal that goes to such plants in the WSCC and 15% of the coal going to such plants in the United States. Many of Peabody’s coal supply contracts have no protection against the transfer of such competitively-sensitive information, since they were executed prior to regulatory reform and before purchasers under these contracts had reason to be concerned about the competitive sensitivity of the information that could be revealed to competitors through such contracts or through the day-to-day relationship between the coal supplier and customer. Consequently, by acquiring Peabody, PacifiCorp will gain an invaluable window on real-time information relating to operating conditions and production plans at many of the approximately 150 power plants supplied by Peabody. By enabling PacifiCorp to predict supply shifts and consequent price movements in the market, this information gives PacifiCorp a significant competitive advantage in the purchase and sale of wholesale electric power.

35. PacifiCorp will be able to trade on that information at the expense of other traders of wholesale electricity. Expected profits for both incumbents and prospective entrants will be lower if PacifiCorp possesses inside information regarding competitors’ costs, supply conditions, and future operating plans. Consequently, as a result of PacifiCorp’s perceived information advantage regarding electricity supply and costs, competitive entry in power marketing will be discouraged, and existing power marketing companies may defer greater investments in such enterprises and perhaps even exit, making the market for wholesale electricity operate less efficiently.

36. Thus, the proposed acquisition may substantially lessen competition or tend to create a monopoly in the market for wholesale electricity in the WSCC and in the United States as a whole.

VIII.VIOLATIONS CHARGED

37. The proposed acquisition by PacifiCorp of TEG would, if consummated, violate Section 7 of the Clayton Act, as amended, 15 U.S.C. 18, and Section 5 of the Federal Trade Commission Act, as amended, 15 U.S.C. 45.

WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this ____________ day of ________________, 1998, issues its complaint against said respondents.

By the Commission.

Seal Donald S. Clark
Secretary

Issued: