By Robert B. Barnett Jr., J.D.
In the wake of the FTC filing its complaint, Arch and Peabody announce their intent to continue pursuit of "highly synergistic joint venture."
The FTC has filed an administrative complaint to stop on anticompetitive grounds a joint venture between the two largest coal producers in the Southern Powder River Basin (SPRB) in Wyoming, Arch Coal and Peabody Energy Corporation, who want to join forces to produce coal for entities in 16 states. The resulting market concentration in an already concentrated market would easily exceed the Herfindahl-Hirschman Index thresholds, which are used by the FTC and the Department of Justice to determine presumptively unlawful ventures. A hearing on the complaint has been scheduled before the FTC for August 11, 2020, according to the announcement (Peabody Energy Corporation and Arch Coal, Inc., Docket No 9391, FTC File No. 191 0154, February 25, 2019).
Background. Peabody Energy Corporation, based in St. Louis, is the largest coal producer in the U.S. and the largest producer in the SPRB. It operates three mines in the SPRB, one of which is the largest coal mine in the world. Arch Coal, Inc., also based in St. Louis, is the second largest coal producer in the U.S. and the second largest producer in the SPRB. It operates two mines in the SPRB. On June 18, 2019, they signed a joint venture, with Peabody taking a 66.5% stake in the venture and Arch taking a 33.5% stake in the venture, to combine forces from a total of seven mines (five in the SPRB and two in Colorado) to produce coal for entities in 16 central and midwestern states. The venture between the by-far two biggest SPRB coal producers would result in a market share of 60% of SPRB coal mined and more than 60% of SPRB coal reserves. The FTC filed its complaint to stop the venture, which it characterized as anti-competitive in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act.
FTC complaint. The complaint asserts that the relevant product market is the sale of SPRB coal, which is distinguished from coal mined elsewhere by its low cost of production (near the Earth’s surface), its cost-effective heat content, its low sulfur content, and its low sodium content. The FTC offers three possible relevant geographic markets, consisting of the SPRB, the United States, and the locations where SPRB coal is consumed. In one or more of those locations, the FTC contends, the joint venture would "substantially lessen competition for the sale of SPRB coal."
Beyond Peabody and Arch, the SPRB coal market is split among five producers, two of whom exist only to supply their own captive power plants. The other three are minor players in the market, with Peabody and Arch controlling five times the coal production of the third largest producer. The joint venture is presumptively unlawful, the FTC contended, because it far exceeded the Herfindahl-Hirschman index, which the FTC and Justice use to measure presumptions of illegality. A combination is unlawful if it exceeds the market-combination index by 2,500 and the transaction increases the index by more than 200 points. In this case, the FTC concluded that the joint venture exceeded the index by 4,500 and increased the Index by at least 2,000, providing the FTC will ample evidence of presumptive illegality.
Finally, the FTC alleged that the joint venture was unlikely to produce new entrants in the market because of substantial market entry barriers, including high costs, or expansion from existing firms because their reserves are costlier to extract than the coal mined by Peabody and Arch. The FTC vote to file the complaint was 4-1, with Commissioner Wilson dissenting.
Reaction by Arch and Peabody. Following today’s announcement by the FTC, Arch and Peabody reiterated their intent to continue to pursue creation of a joint venture to strengthen coal's competitiveness with other energy sources and create substantial value for multiple stakeholders. "Arch and Peabody intend to litigate the FTC's decision within the U.S. federal court system over the coming months. Both companies believe the FTC has incorrectly defined the market, and fails to reflect the true competitive nature of the current U.S. energy landscape," according to their statement.
"We view the need for this combination as self-evident," said John W. Eaves, Arch's chief executive officer. "The proposed joint venture promises to enhance the cost-competitiveness of our thermal operations, enable us to serve the evolving needs of domestic power generators well into the future, and protect the value of our thermal assets for our shareholders."
Peabody President and Chief Executive Officer Glenn Kellow added: "We have provided tremendous amounts of evidence to the FTC during an extensive review, fully demonstrating that coal, including Southern Powder River Basin coal, faces intense competition from natural gas and other alternate fuels. We believe that the commission has reached an incorrect decision that should be rapidly remedied within the court system to allow customers and others to benefit from the combination."
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