States Back Off Collusion Claim

Star-Tribune energy reporter

Apr 7, 2004 -- GILLETTE -- Four major coal producers in the Powder River Basin have been accused of illegally coordinating production to push up prices. But so far, no one is seeking any action to reprimand the companies, collect damages or remedy the allegedly congested market for southern Powder River Basin coal.

The U.S. Federal Trade Commission and a coalition of six Midwestern states filed separate lawsuits in federal court last week, each seeking an injunction to block Arch Coal Inc.'s acquisition of Triton Coal Co. Both are competitors in the basin.

Both lawsuits allege that Arch, Triton, Peabody Energy and Kennecott Energy have participated in collusion efforts to control production. Both suits also claim that collusion would be even more likely if Arch were allowed to buy Triton and its two mines in the basin -- a presumption Arch strongly disputes.

But despite alleging collusion among the companies in court documents, the states are apparently backing off of the issue of past illegal behavior.

"We are concerned there could be collusion if things go through. But, no. Our focus is not on allegations of collusion in the past," said Scott Holste, press secretary for the Missouri Attorney General's Office.

The FTC isn't elaborating on its case against Arch, Triton and Triton's parent company, Vulcan Coal Holdings LLC. However, its complaint is similarly limited to blocking the acquisition.

According to court documents in the State of Missouri et al v. Arch Coal Inc. et al, "Behavior by the major SPRB (southern Powder River Basin) producers facilitates coordination."

The states further allege an incident in which Arch President and CEO Steven Leer had said privately that his company was leading the charge in limiting production to achieve better prices, and that Arch would punish its competitors in the basin if they didn't follow suit.

"However, Mr. Leer warned that if prices did not improve soon, Arch would ramp up the mines to full production," according to court documents. "Such a ramp up would send Arch's competitors a strong signal that Arch was prepared to punish other producers if they failed to support Arch's output curtailment initiative."

The language is identical to language in the FTC's complaint.

It is the first time producers in the basin have been accused of collusion. Robert Michaels, a professor of economics at California State University at Fullerton and a consultant to the power industry, said that although the FTC has made the same allegations, it is likely only an argument for blocking the acquisition and not the basis for any other action.

"If they've never been hauled in on this, what (the FTC is) doing is saying there is a strong suspicion this will raise the risk of successful price-fixing," Michaels said.

Dick Price is the managing director of Westminster Securities Corp., a New York-based investment services firm. Price said he believes there is no need for southern Powder River Basin producers to conspire over production plans since that type of information is readily available in public and corporate filings. He said it is common, and legal, for companies to individually consider market supplies in determining production plans.

"The information is so sufficiently transparent that these people don't need to talk about price," Price said.

Arch officials have maintained that it only wants Triton's North Rochelle mine, which shares a 5.5 mile border with Arch's Black Thunder mine. Arch signed an agreement earlier this year to re-sell Triton's Buckskin mine to Peter Kiewit Sons', Inc.

In a statement issued Friday, Arch spokesman Deck Slone said, "We believe that combining the Black Thunder and North Rochelle mines -- mines that share 5.5 miles of property lines -- would create very significant opportunities for cost savings. By integrating these two operations, we would expect to greatly reduce overhead, improve economies of scale and increase the efficiency of both operations."

Price said Arch's claim has merit. Kennecott and Peabody's southern and middle-tiered mines in the basin produce approximately 100 million tons annually, whereas Arch produces about 62 million tons and Triton produces 24 million tons in the southern tier.

"What it does is it levels the playing field at the top, which should make those three more competitive," Price said. "While it takes out Vulcan (Triton Coal Co.), it strengthens Kiewit which should allow them compete more effectively," in the northern portion of the basin.

Slone reiterated Arch's objection to the allegations of leading a collusion effort in the basin.

"While Arch has endeavored to supply the investment community and its customer base with a reasonable and appropriate degree of information about the company's future plans, we have never attempted to influence the actions of our competitors in any way," Slone said.