FTC Restructures Electric/Coal Combination To Ensure that Consumers Reap Low Prices from Electricity Deregulation

The Federal Trade Commission today announced that it will publish for public comment a proposed consent order with PacifiCorp that would settle FTC charges that the company's $10.7 billion acquisition of The Energy Group PLC (TEG) would potentially lead to increases in wholesale and retail electricity prices in the United States. As part of the proposed consent agreement, PacifiCorp would divest two coal mines owned by a TEG subsidiary, Peabody.

"As many states, including California, begin to deregulate the market for electricity, it's important that the FTC and energy regulators work together to ensure that a competitive market is maintained for wholesale and retail electricity," William J. Baer, Director of the FTC's Bureau of Competition, said.

PacifiCorp, headquartered in Portland, Oregon, provides retail electric utility service in seven western states, including Oregon, Washington, California, Utah, Idaho, Wyoming and Montana. Its retail electricity sales in 1996 totaled $2.1 billion. The company also makes wholesale electricity sales to other utilities in the western United States.

TEG is a diversified energy company headquartered in London, England. TEG owns Peabody, which produces roughly 15 percent of the coal mined in the United States. TEG also owns a power marketer, which trades electric power throughout the United States and owns both electric power plants and an electric power transmission system in England. TEG's total revenue for the fiscal year ending September 30, 1996, was roughly $6 billion dollars.

As part of the company's planned acquisition of TEG, PacifiCorp would gain the Peabody mines, including the Kayenta and Black Mesa mines located on the Navajo Indian Reservation in Arizona. The Kayenta and Black Mesa mines, owned and operated by a Peabody subsidiary, Peabody Western Coal Company, are the sole source of coal for the Navajo and Mohave power plants in Page, Arizona, and Laughlin, Nevada, respectively.

The FTC's complaint notes that the Mohave and Navajo plants are "captive" to the coal mines that supply them and would not be able to source coal economically from other mines should the price of coal from the captive mines increase.

According to the complaint, PacifiCorp is the third largest generator of electricity in the western United States, and in 1996 generated 53.8 million megawatt-hours of electricity. As such, PacifiCorp is a major "power marketer" in the newly deregulated markets for "wholesale" electricity (sales of electricity from generation facilities to utilities). The complaint states that a merged PacifiCorp/Peabody, because of its substantial electricity generation assets, would have both the incentive and the ability to raise the price of coal to its competitors, Navajo and Mohave, unlike an independent Peabody, which owned no generation assets.

The complaint further alleges that raising the price of coal to Navajo and Mohave is likely to raise wholesale electricity prices to consumers in the western United States during off-peak hours. Currently, Navajo and Mohave act as price setters for wholesale electricity in the western United States during certain off-peak hours. Coal costs are 90 percent of the electricity price that Navajo and Mohave charge. Consequently, by gaining total control over their fuel supply, PacifiCorp would be able to increase the fuel costs of these key suppliers of electricity and, thus, raise the price of wholesale electricity for off-peak hours to all consumers in the western United States.

The harm to consumers will be even greater, the FTC alleged, once "retail" electricity sales (sales to actual end users) are deregulated. For example, under California's current reform proposal, key electricity suppliers such as Navajo and Mohave will actually set the price for the entire market. To remedy these competitive concerns, the parties have agreed to divest the Black Mesa and Kayenta mines.

The complaint also addresses the FTC's concern that the acquisition would give PacifiCorp access to proprietary information not available to its competitors. For example, the agency noted that wholesale electricity markets throughout the United States 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 about competitors' costs and to information about the operating conditions of competing generators of electrical power. The FTC noted that Peabody supplies 27 percent of the coal that goes to such plants in the western United States and 15 percent of the coal going to such plants in the entire United States. By acquiring Peabody, PacifiCorp would gain real-time information about the operating conditions and production plans at many of the approximately 150 power plants supplied by Peabody, the FTC said. This information may unfairly affect PacifiCorp's competitors in the wholesale electricity market.

Under the terms of the proposed consent order, which will be open for public comment for 60 days, PacifiCorp would divest Peabody Western Coal Company, which owns the Kayenta and Black Mesa mines, to an acquirer or acquirers approved by the Commission. The order also includes a "firewall" that forbids Peabody from disclosing to PacifiCorp any non-public information regarding Peabody customers who object to such disclosure and either purchase coal from Peabody under contracts with a term of one-year or longer or purchased in excess of one million tons of coal from Peabody during the preceding year.

The Commission's vote to announce the consent order was 3-0, with Commissioner Mary L. Azcuenaga and Commissioner Mozelle W. Thompson not participating.

An announcement regarding the proposed consent agreement will be published in the Federal Register shortly. The agreement will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the FTC's complaint, the proposed consent order, and other documents are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-3128; TDD for the hearing impaired 1-866-653-4261. Consent agreements subject to public comment also are available by calling 202-326-3627. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. 971-0091)