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The Federal Trade Commission’s challenge to the $364 million merger of Arch Coal Inc. and Triton Coal Co. opened Monday with U.S. District Judge John D. Bates questioning key aspects of the government’s case. That could prove troubling for the agency, which considers the litigation to have significance far beyond the coal industry. FTC Chairman Timothy J. Muris has said the challenge offers a chance to revive an important antitrust theory, called “coordinated interaction,” under which a merger may be illegal if it allows the remaining companies in a given industry to collude on pricing. A government victory in the case could give antitrust enforcers another potent weapon to challenge deals even when multiple competitors remain following a merger. St. Louis-based Arch agreed in May 2003 to acquire Gillette, Wyo.-based Triton. The FTC challenged the merger in March. Bates suggested during the FTC’s opening statement that power company executives who buy coal from Arch and Triton may be biased in favor of below-market prices for coal. He also questioned why he should believe their predictions any more than the predictions of the expert witnesses. But FTC lawyer Rhett Krulla said the judge should give significant weight to the customer testimony because they negotiate coal contracts every day and understand how to get the best value for their utility. “Customers don’t have an axe to grind here,” he said. “If they have a bias, it is in favor of competition.” But Bates seemed concerned that the power company executives will have little evidence to support the charge that the merger would result in higher prices. This worry may be heightened because Arch argues the deal will benefit customers with lower prices. The judge also questioned whether he should consider that the Triton New Rochelle mine has only seven years of reserves remaining. He asked whether there was a point at which the reserve could get so low that the FTC’s challenge would not be warranted. “Where would the break point be?” the judge asked. Krulla began the opening statement, which lasted twice the allotted 30 minutes, by saying the deal would leave four mining companies in Wyoming’s Southern Powder River Basin, only three of which produce the highly sought 8,800 BTU coal. This consolidation would occur in a market where price leadership already is occurring, Krulla said. Arch has used the bully pulpit to broadcast its desire to see production reduced in the basin, he said. This strategy began in 2000 and explains why prices have stabilized at higher than normal levels, he said. Responding to a question from Bates, Krulla said it is not necessary for the FTC to prove that the other producers have cut production in line with Arch to show the merger would lead to coordinated pricing. “Coordinated interaction does not require that everyone move in lockstep,” he said. “Rather, they all move in the same direction.” Triton is an especially important coal industry player because it has doubled its production at the same time that Arch and the others were seeking to restrain production to drive up prices, Krulla said. Arch and Triton dismissed the FTC’s claims as baseless. Brad Reynolds, a partner at Howrey, Simon, Arnold & White who represents Arch, said the company has a contract to immediately divest one of Triton’s two mines to Kiewit Mining Acquisition Co. That means there would be no loss in the number of competitors in the Southern Powder River Basin, Reynolds said. At the same time, consumers would benefit because it would cost less for Arch to operate Triton’s New Rochelle mine because it is an adjacent facility. “The FTC is taking you into unchartered waters,” Reynolds said. Richard Parker, a partner at O’Melveny & Myers who represents Triton, said the company needs to exit the market because it cannot competitively produce coal. Because Triton’s prices are necessarily high, it only wins bids when other industry producers lack the supply to service a utility, he said. Copyright �2004 TDD, LLC. All rights reserved.

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