[Federal Register Volume 63, Number 37 (Wednesday, February 25, 1998)]
[Notices]
[Pages 9551-9555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4755]
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FEDERAL TRADE COMMISSION
[File No. 971-0091]
PacifiCorp, et al.; Analysis to Aid Public Comment
AGENCY: Federal Trade Commission.
ACTION: Proposed consent agreement.
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SUMMARY: The consent agreement in this matter settles 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
complaint that accompanies the consent agreement and the terms of the
consent order--embodied in the consent agreement--that would settle
these allegations.
DATES: Comments must be received on or before April 27, 1998.
ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,
Room 159, 6th St. and Pa. Ave., N.W., Washington, D.C. 20580.
FOR FURTHER INFORMATION CONTACT: Joseph Krauss, FTC/S-3627, Washington,
D.C. 20580. (202) 326-2713.
SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Section 2.34 of
the Commission's rules of Practice (16 CFR 2.34), notice is hereby
given that the above-captioned consent agreement containing a consent
order to cease and desist, having been filed with and accepted, subject
to final approval, by the Commission, has 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 agreement, and the
allegations in the complaint. An electronic copy of the full text of
the consent agreement package can be obtained from the FTC Home Page
(for February 18, 1998), on the World Wide Web, at ``http://
[[Page 9552]]
www.ftc.gov/os/actions/htm.'' A paper copy can be obtained from the
FTC Public Reference Room, Room H-130, Sixth Street and Pennsylvania
Avenue, N.W., Washington, D.C. 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 Section
4.9(b)(6)(ii) of the Commission's Rules of Practice (16 CFR
4.9(b)(6)(ii)).
Analysis of Proposed Consent Order to Aid Public Comment
I. Introduction
The Federal Trade Commission has accepted from PacifiCorp and The
Energy Group PLC (TEG), for public comment, an Agreement Containing
Consent Order (Proposed Consent Order). The Commission has also entered
into a Hold Separate Agreement that requires Proposed Respondents to
hold separate and maintain certain assets until they are divested. The
purpose of the Proposed Consent Order is to remedy the likely
anticompetitive effects of PacifiCorp's acquisition of TEG.
II. Description of the Parties and the Transaction
PacifiCorp, which is headquartered in Portland, Oregon, provides
retail electric utility service in seven western states: Oregon,
Washington, California, Utah, Idaho, Wyoming, and Montana. PacifiCorp's
1996 retail electricity sales totaled 2.1 billion dollars. PacifiCorp
also makes wholesale electricity sales to other utilities in the
western United States. PacifiCorp's 1996 wholesale electricity sales
totaled 739 million dollars. Finally, PacifiCorp also operates five
coal mines in the northwestern United States and owns a power marketer
that trades electric power throughout the United States.
TEG is a diversified energy company headquartered in London,
England. TEG owns Peabody Coal Company (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.
PacifiCorp seeks to acquire 100 percent of the voting securities of
TEG.
III. Industry Background
The generation and marketing of electricity is moving from a
regulated environment to a competitive environment.\1\ Currently,
utilities in most states own both generating facilities and
transmission facilities. State public utility commissions regulate
rates charged by these utilities. In this regulated environment,
utilities trade electricity to some extent in a wholesale market. To
meet its electricity needs, a utility can purchase electricity from
another utility or from an independent producer. The Federal Energy
Regulatory Commission (``FERC'') regulates interstate wholesale
electricity sales and transmission. FERC permits wholesale electricity
sales to be made at market rates if a power generator can show that it
does not possess market power in the region in which it operates.
Consequently, wholesale electricity rates are determined by the balance
of supply and demand.
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\1\ See Timothy Brennan, A shock to the System: Restructuring
America's Electricity Industry (1996); Joskow, Restructuring,
Competition and Regulatory Reform in the U.S. Electricity Sector,
11(3) Journal of Economic Perspectives 119-138 (1997); and Comment
of the Staff of the Bureau of Economics of the Federal Trade
Commission before the Federal Energy Regulatory Commission (August
7, 1995).
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Many states are in the process of deregulating their electric
utility industries. As this process progresses, the vertical
integration that has historically characterized the industry is likely
to diminish, and transmission and generation functions will be
separated. In the deregulatd environment, electricity transmission
would remain a regulated monopoly in which the operator of the
transmission system is prohibited by FERC Orders 888 and 889 from
discriminating against particular users. Electric power generator,
however, would become competitive, allowing customers to choose their
supplier of electricity. The end result of this deregulation process
will be a market in which retail rates are no longer regulated by state
utility commissions, but are determined by the balancing of supply and
demand in a competitive market. 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 the current wholesale electricity market, short periods of time
(e.g., hour or one-half hour periods) often represent distinct product
markets because electricity demand cannot easily be shifted from one
time period to another and because electricity cannot easily be stored
in large quantities. As retail electricity sales are deregulated,
retail rates will also likely be priced on an hour-by-hour basis.
Constraints on transmission capacity typically delimit geographic
markets as regional areas comprised of several states. One such
geographic market is the area included within 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.
While transmission constraints limit the geographic area within
which electricity is generated and consumed, trading among buyers and
sellers in the wholesale electricity market links electricity markets
into larger trading areas, one of the largest being the United States
as a whole.
Electricity demand in a particular region at a particular time is
met by utilizing or ``dispatching'' power plants in an order that is
likely to be based substantially on plants' variable cost of generating
electricity. Given current technology and fuel prices, nuclear power
plants have low variable costs and are dispatched 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.\2\ Coal-fired power plants have higher variable costs, and
natural gas plants generally have even higher variable costs.
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\2\ Although hydroelectric power plants have low variable costs,
river flow is often insufficient to dispatch these plants at full
capacity 24 hours a day. When river flow is low, some hydroelectric
capacity is held back during off-peak periods and dispatched at
periods of peak electricity demand.
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As a consequence of the dispatch order discredited above,
competition between a small number of plants can be critical in setting
price. In the WSCC, during periods of lower or off-peak demand, gas-
fired plants generally are not utilized because of their high variable
costs.\3\ Consequently, for off-peak periods in the WSCC, coal-fired
power plants frequently are the price-setting, marginal plants.
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\3\ Off-peak hours in the western U.S. are generally recognized
by the industry to consist of the eight hours between 11:00 PM and
7:00 AM Monday through Saturday, and all day Sunday. Peak hours are
recognized by the industry to consist of consist of the sixteen
hours between 7:00 AM and 11:00 PM Monday through Saturday.
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California is one of the first states that has started to
deregulate its retail electricity sales. California is currently in the
process of establishing a power exchange (``PX''), modeled on the
[[Page 9553]]
system used in the United Kingdom, which will run a centralized auction
for the purchase of electricity. Under the California reforms, each
generating plant will bid to supply power to the state's PX. The PX
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.
Entry into an electricity market can occur through the construction
of a new power plant or the construction of new transmission capacity,
which would enable distant electricity producers to compete more
effectively. However, the time required for obtaining regulatory
approval and for construction prevents either type of entry from
quickly correcting anticompetitive behavior.
IV. Threat to Competition
A. Raising Rivals' Costs
Navajo Generating Station (Navajo) is a 2,250-megawatt coal-fired
power plant located in the north-central section of Arizona. Navajo is
supplied exclusively from Peabody's Kayenta mine via an 80-mile
dedicated rail line. Mohave Generating Station (Mohave) is a 1,580-
megawatt coal-fired power plant located in southern Nevada. Mohave is
supplied exclusively from Peabody's Black Mesa Mine through a 275-mile
coal slurry pipeline. Long-term contracts govern the terms on which
Peabody supplies Navajo and Mohave.
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 large
power plants.
PacifiCorp owns roughly 9,000 megawatts capacity in the Western
Systems Coordinating Council (WSCC), an organization of electric
utilities and power marketers organized to improve the reliability of
power transmission and delivery in the western United States and parts
of southwestern Canada and northwestern Mexico. The WSCC represents a
geographic market since transmission constraints severely limit
imports. The WSCC represents a geographic market since transmission
constraints severely limit imports. Sub-regions within the WSCC may
also represent geographic markets, at certain times, given that the
transmission capacity connecting subregions is limited and may be
inadequate to balance supply and demand across the subregions.
A firm can sell its product at a higher price if its rivals charge
higher prices. Thus, a firm can profitably increase its own price if it
can take actions at low cost to itself that raise the costs, and
subsequently the price, of its rivals. By vertically integrating with
suppliers of a large share of some key input, a firm may be able to
increase its rivals' costs. Given this, PacifiCorp's acquisition of
Peabody, which is the exclusive supplier of coal to certain power
plants that compete with PacifiCorp's own power plants, raises
antitrust concern. Specifically, PacifiCorp would have an incentive to
increase fuel costs at Navajo and Mohave in order to drive up the
market price of electricity in the western United States. In the near
term, PacifiCorp would be able to realize this higher price on its net
wholesale electricity sales. In the long-term, assuming deregulation,
PacifiCorp might also be able to realize this higher price on some of
its retail electricity sales.
The extent of the anticompetitive harm caused by PacifiCorp's
acquisition of Peabody depends on two factors: First, how much
discretion does the mine owner have to affect the fuel costs at Navajo
and Mohave given the long-term contracts between Peabody and the plan
owners? Second, over what periods, if any, and to what extent will
changing the costs of Navajo and Mohave affect the market price of
electricity?
The long-term contracts that govern the supply of coal to Navajo
and Mohave have a modified cost-plus format that makes them vulnerable
to cost manipulation. A long history of cost disputes between the
parties underlines the supplier's discretion to determine cost levels
at the power plants. Consequently, post-merger, PacifiCorp could
increase Navajo and Mohave's costs. Alternatively, an independent,
profit-maximizing Peabody might find it in its interests to grant the
power plants a discount on coal pricing. A merged PacifiCorp/Peabody,
however, might decline to grant such discounts because increased output
at Navajo and Mohave might decrease wholesale electricity prices in the
WSCC and cause PacifiCorp/Peabody to earn less on its electricity
sales. In this context, failure to grant a price concession amounts to
a price increase.
Peabody documents reveal that price concessions in the near future
for both Navajo and Mohave are a real possibility. Peabody documents
show that the company has considered granting Navajo price discounts,
because the plant has been underutilized during off-peak hours in the
recent past. Moreover, Peabody documents also reveal that it expects
the coming deregulation of the electricity industry will intensify
competitive pressures on both coal-fired power plants and their coal
suppliers. Peabody documents also reveal that Mohave will face a costly
decision in the next several years on whether to install scrubbers to
comply with environmental regulations and will implicitly be looking to
its coal supplier for cost relief.
PacifiCorp's roughly 9,000 megawatts of generating capacity,
Navajo's 2,250 megawatts of generating capacity, and Mohave's 1,580
megawatts of generating capacity represent a comparatively small share
of the 138,000 megawatts of generating capacity in the WSCC. In a
market with numerous competitors such as electricity generation in the
WSCC, one might assume if coal costs at two plants such as Navajo and
Mohave were to increase and their generation consequently declined,
other plants would simply increase output and there would be no effect
on the market-clearing price. However, there is substantial evidence
that manipulating fuel cost at Navajo could have a significant effect
on the market price for wholesale electricity.\4\ A Peabody document
recognizes that if Navajo were to go to full capacity utilization
during off-peak hours, it would produce 1,200 megawatts of additional
power, depressing electricity prices. Also, computer modeling using
programs well-accepted in the industry shows that manipulating prices
at Navajo would have an effect on wholesale electricity prices in the
WSCC.
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\4\ At current electricity prices, Mohave operates at full
capacity. Hence Mohave is currently an infra-marginal producer and
unlikely to be a price setter. However, as California deregulates
its electricity market, prices are likely to fall and Mohave could
then be in a position to be a marginal, price-setting plant.
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How can participation of suppliers comprising only a small fraction
of capacity affect the market price for electric power? The answer lies
in the way in which power plants are dispatched. Power plants tend to
have very flat cost functions until they reach their capacity.
Thus, power plants tend to operate at maximum capacity if they can
economically do so at the prevailing price. Otherwise, they tend to be
idled.\5\
[[Page 9554]]
Consequently, most of the power plants generating electricity, at any
particular time period, have almost no ability to expand output and
offset anticompetitive behavior. Given these circumstances, the power
plants that could defeat anticompetitive behavior here would be those
power plants with excess capacity that could produce and deliver to the
areas served by Navajo and Mohave electricity at the same cost (or
slightly above) Navajo's or Mohave's. The evidence indicates that there
are no such power plants here.
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\5\ Because coal-fired plants require a start-up period of
several days, their output would be cut back to some minimal level
(e.g., 40 percent of capacity) when they are uneconomic for short
periods of time (e.g., nighttime).
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During periods of low electricity demand in the WSCC (e.g.,
nighttime hours during the spring), electricity demand is met using
some hydroelectric capacity, nuclear power plants, and some coal-fired
power plants. Gas-fired power plants tend to be idled during these
periods. Since coal-fired power plants are the last plants to be
dispatched during these time periods, the market price of electricity
during these periods is determined by the price at which the last-
dispatched coal-fired power plant supplies electricity. Since periods
of low electricity demand represent a substantial portion of the year
and since fuel costs at Navajo and Mohave affect market price during
these times, higher fuel prices at Navajo and Mohave can cause
significant harm to consumers. Indeed, to give a rough sense of how
this acquisition could increase concentration in markets for wholesale
electricity during off-peak hours, a hypothetical merger of
PacifiCorp's electric plants with Mohave and Navajo would make the
market for coal-fired electricity in the WSCC highly concentrated and
give PacifiCorp a 35% share, a level at which, under the Merger
Guidelines, could lead to unilateral anticompetitive effect.
Cost manipulation at Navajo and Mohave could affect electricity
prices in the WSCC not only during those off-peak hours when Navajo and
Mohave are the marginal, price-setting plants, but also during a
broader period of time. As noted above, power plants are dispatched in
large part based on their variable cost, which in turn is largely
determined by their fuel costs. This dispatch order can be thought of
as a supply curve for electricity. Given this supply curve, if the fuel
price at one power plant increases, then this power plant is removed
from its current position in the supply curve and placed in a position
further along the supply curve. This reorders the supply curve as
higher priced plants are dispatched earlier along the affected section
of the supply curve. This leads to higher prices every time electricity
demand in a particular period intersects the affected section of the
supply curve. Higher fuel prices at Navajo and Mohave could have a
significant effect on price along a significant portion of the supply
curve. If either plant were forced to close down, its removal would
affect prices at all points above the plant on the supply curve.
B. Abuse of Proprietary Information
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.
Competition in the wholesale electricity market could be adversely
affected by this acquisition throughout the United Stats 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.
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 cost information sufficient to
predict the price the power plant will likely bid.
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
power marketing.
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.
V. The Proposed Complaint and Consent Order
The Federal Trade Commission has accepted for public comment an
Agreement Containing Consent Order with PacifiCorp and TEG in
settlement of the charges in the proposed complaint. The proposed
complaint alleges that PacifiCorp's acquisition of TEG violates Section
5 of the Federal Trade Commission Act, 15 U.S.C. 45, and Section 7 of
the Clayton Act, as amended, 15 U.S.C. 18. The proposed complaint
alleges that the Acquisition will lessen competition in the supply of
electricity in the WSCC and in various geographic markets in the United
States as a whole.
To remedy the alleged harm to competition from raising rivals
costs, the proposed Consent Order would require PacifiCorp to divest
Peabody Western Coal Company (PWCC), the Peabody subsidiary that owns
the Black Mesa and Kayenta mines, to an acquirer approved by the
Commission. The required divestiture solves the competitive concerns
raised in this acquisition in the WSCC by assuring the PacifiCorp would
not have an anticompetitive incentive to raise fuel prices at Navajo
and Mohave in order to raise the price of electricity in the WSCC.\6\
The divestiture remedy is
[[Page 9555]]
consistent with longstanding Commission policy which favors the
structural approach to remedies, rather than the behavioral approach
which seeks to govern conduct through the use of rules.\7\
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\6\ Disvestiture is unnecessary elsewhere because there is no
evidence that other captive coal-fired power plants are marginal
price-setters in their geographic market as Navajo and Mohave are.
\7\ See William J. Baer, FTC Perspectives on Competition Policy
and enforcement Initiatives in Electric Power, before the Conference
on the New Rules of the Game for Electric Power: Antitrust &
Anticompetitive Behavior (Washington D.C., Dec. 4, 1997) at 12-13
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The fuel supply contracts between PWCC and Navajo and Mohave give
the Navajo owners a right of first refusal to buy the Kayenta mine and
Mohave owners a right of first refusal to buy the Black Mesa mine.
Because these rights of first refusal could delay the divestiture
process, the proposed Consent Order affords PacifiCorp a period of nine
months following the Acquisition to complete the required divesture,
and under certain circumstances, extends the time for divestiture to as
late as March 1, 2000. Under the circumstances of this case, the
Commission believes that the unusually long time afforded Respondents
to complete the divestiture and possible extension of that time under
the terms of the proposed Consent Order are likely to lead to
substantial economic harm. PacifiCorp's incentive to increase the fuel
price at Navajo and Mohave depends on PacifiCorp's sales of electricity
at the market price. In the near-term, most of PacifiCorps electricity
sales are at regulated rates or a prices specified by long-term
contracts. Thus, in the near-term, PacifiCorp will not have a strong
incentive the increase fuel prices at Navajo and Mohave because
PacifiCorp has limited net sales of electricty at the market price.
However, as PacifiCorp's wholesale contracts are renegotiated and as
PacifiCorp's retail sales are deregulated, PacifiCorp gains an ever
greater incentive to increase electricity prices by raising the fuel
price at Navajo and Mohave.
To remedy the alleged threat to competition from abuse of
confidential customer information, the proposed consent order forbids
Peabody from transferring PacifiCorp non-public information regarding
Peabody customers who object to such disclosure and who either purchase
coal from Peabody under contracts with a term of one-year or longer or
who purchased in excess of one million tons of coal from Peabody during
the preceding year. By preventing the transfer of this information, the
Proposed Consent Order prevents PacifiCorp from trading on proprietary
information in a way that is likely to retard development of a fully
competitive market in the wholesaling of electric power.
VI. Opportunity for Public Comment
The proposed Consent Order has been placed on the public record for
sixty (60) days for receipt of comments by interested person. Comments
received during this period will become part of the public record.
After sixty days, the Commission will again review the proposed Consent
Order and the comments received and will decide whether it should
withdraw from the Agreement Containing Consent Order, make final the
Consent Order, or take such other action as the Commission may
determine to be in the public interest.
The Commission anticipated that the proposed Consent Order will
cure the anticompetitive effects of the Acquisition as alleged in the
proposed complaint. The purpose of this analysis is to invite public
comment on the proposed Consent Order, including the proposed
divestitures, to aid the Commission in its determination of whether to
make final the proposed Consent Order. This analysis is not intend to
constitute an official interpretation of the proposed Consent Order,
nor is it intended to modify the term of the proposed Consent Order in
any way.
Donald S. Clark,
Secretary.
[FR Doc. 98-4755 Filed 2-24-98; 8:45 am]
BILLING CODE 6750-01-M
