By Scott Carpenter

August 20, 2020 - In a region of northeastern Wyoming and southern Montana, seams of rich coal line the walls of open-air mines like layers of a marble cake, and supersized yellow trucks ferry around huge piles of coal as though on giant platters. This 37,500-square-mile region known as the Powder River Basin is home to some of the largest coal mines in the world, and it supplies around 40% of the country’s 700 million tons annually.

It is also home to one of the energy world's highest-stakes legal battles. Peabody Energy and Arch Resources — the nation's two largest coal mining companies — want to combine their operations here in a bid to cut costs and harness economies of scale. Together, Peabody and Arch control around 60% of all the coal mined inside the basin. If created, their joint venture would tower over the handful of other coal producers here, so dominating the basin's overall production that the Federal Trade Commission alleges it would violate federal competition laws. Yet it might also just be the only option left to save the two behemoth coal companies from bankruptcy.

This is what the end of America's coal mining industry looks like: so unneeded that its two biggest companies now say they can't compete without attempting a potentially illegal consolidation. According to Joshua Macey, a professor at the University of Chicago Law School who studies the industry, “That’s a pretty dramatic statement from an industry that has insisted its product cannot be replaced."

Convulsed by Bankruptcy

Only a decade ago, the argument now being made by Peabody and Arch might have seemed absurd. In 2011 coal supplied 47% of America's electricity and the competition was deep in the rear-view mirror. Nuclear energy's popularity was tanking in the wake of the Fukushima Daiichi disaster; cost-competitive wind and solar energy were still a fever dream; and the fracking revolution that would unleash waves of cheap of natural gas was mired in controversy before it had even begun. Peabody Energy, the world's largest private mining company, had a market capitalization of $18 billion.

The outlook is very different today. Peabody has a market capitalization of $268 million, 1/69th of its 2011 value. Coal is America's most expensive mainstream energy source and is shunned by investors around the world. Last year coal supplied only one-quarter of America's electricity and that share is rapidly falling, accelerated by the COVID-19 economic crisis and pandemic.

The result has been bankruptcy after bankruptcy. As much as 60% of all coal mined in the U.S. now comes from companies that went through bankruptcy in the last 5 years, according to research by Macey. The resulting absence of health care and pension plans for workers orphaned by failed coal firms has become a national crisis. (As of July 179,000 people were still working in the U.S. mining sector, making an average of $31 an hour, according to the Bureau of Labor Statistics.)

Walking away from the coal mining industry is not a simple matter of liquidating assets and turning off the lights. Coal mines and their surroundings need to be thoroughly cleaned up at the end of their useful lives — a process known as reclamation — lest they leak pollutants. Reclamation can cost billions and is an obligation often attached to any sale of assets. No investor is enthusiastic about picking up the tab.

So instead of selling the industry off for parts, mining companies have instead plunged over a series of cliffs. "People talk about a downward glide-path for the end of coal, [but] I don't think that's the way it plays out in reality," said Mark Haggerty of Headwaters Economics, a Bozeman, Montana-based non-profit that studies community development and land management. "More likely, markets or policy will cross thresholds where things begin to happen very quickly. We may be in that now, or it could still be off in the future. But it's likely not far.”

In the Powder River Basin, nearly all of the top miners have gone through bankruptcy. Peabody and Arch Resources themselves each went bust in 2016, inflicting financial misery on workers and their families. But the ugliest episode yet came in July 2019 when Blackjewel filed for Chapter 11 in July 2019 and failed to secure interim financing to keep even basic operations up and running. It sent home 700 of its miners in the basin home without pay or notice; reports of bounced checks and vanishing bank deposits soon began cropping up. Former CEO Jeffrey Hoops would later be investigated for fraud and Blackjewel itself hit with a class-action lawsuit. (Hoops denies the allegations.)

The saga is not over yet. The two mines Blackjewel owned are now back in operation, but a legal tussle has ensued over the underlying federal permits. Nobody wants to claim them, partly because huge mine-cleaning costs and fines come attached to them.

Joint Venture or Bust

It was the specter of another collapse that drove Peabody and Arch Resources to formally propose their joint venture last year. The plan calls for merging operations at Peabody’s North Antelope Rochelle Mine — the world's largest coal mine — and Arch’s Black Thunder Mine — the second-largest in the U.S. — plus several smaller mines, including a handful in Colorado. The companies say they could shave off $120 million in costs annually by combining. Only then would they be able to compete effectively against natural gas and renewable energy, they have argued repeatedly in court filings. “Coal, and SPRB coal in particular, is losing [to the] competition at an unprecedented pace,” wrote Peabody in a court filing on March 11th, referring to coal from the Southern Powder River Basin (SPRB).

In an amicus brief supporting the joint venture, the state of Wyoming put a finer point on it: "The industry must contract and consolidate to survive. That can be done in a thoughtful way that minimizes harm or it can happen haphazardly through bankruptcies and sudden mine closures."

Wyomingites overwhelmingly favor the joint venture, even if it would result in some layoffs as part of cost-cutting. The industry's collapse was already well under way before many came to grips with it, and many are still intent on saving the industry by adopting new "clean coal" technology, although it remains uneconomical at scale and is viewed as a long-shot by most observers. "There has been a real push to find ways to convert coal into carbon products and heavily invest in carbon capture and storage,” said Camille Erickson, a reporter for the Casper Star-Tribune who closely follows the state’s energy sector. "But these options likely won’t be able to fully resuscitate the industry, and I fear these towns are going to be left behind with few options."

If Wyoming strongly favors the Peabody-Arch tie-up, the proposal has at least one serious opponent: the Federal Trade Commission (FTC).

In February, the FTC, which is responsible for ensuring the competitiveness of the country's markets, asked the courts to block the joint venture, pointing out that Peabody and Arch would control enough of the basin’s output (nearly two-thirds) that it would be able to raise prices without fear that customers — the coal power stations and utilities across the country — would switch to other, cheaper suppliers; there simply wouldn’t be enough alternatives left by that point. “The Joint Venture would significantly increase concentration in an already concentrated market,” the FTC said.

Peabody and Arch have pledged not to raise prices. In a presentation delivered to the FTC, in fact, they vowed that the joint venture would lower prices. But experts are skeptical.

The two companies have to say they will lower prices “because otherwise they are admitting to acting anti-competitively,” said Macey, the University of Chicago professor. “Unless they could take market share from gas, which is extremely unlikely because it would involve a huge level of cost savings, the simplest explanation is that Arch and Peabody want market power and plan to raise prices and withhold supply when market conditions are unfavorable.”
Story on Gillette, WY - Gillette, WY

A truck carries coal out of the Eagle Butte mine in the Powder River Basin. The Washington Post via Getty Images

Mark Squillace, a professor at the University of Colorado Law School, made a similar point. “If the [joint venture] succeeds we should all be concerned that Peabody and Arch, which control almost two-thirds of production [in the basin], could use their dominant position to squeeze out the remaining operators to their obvious benefit.”

But others say that the Powder River Basin is overcrowded and long overdue for consolidation. Of course coal is struggling to compete with natural gas as power stations' fuel of choice in the energy market, their argument goes: ferocious competition inside the Powder River Basin is cannibalizing the supply of coal before the precious rocks even leave Wyoming.

“The Powder River Basin has too many mines chasing too few customers, resulting in cutthroat competition,” said Robert Godby, a professor at the University of Wyoming who has long followed the industry. “Companies are having a hard time accessing credit markets because everybody can see this isn’t sustainable.” At some point, the only alternative left is bankruptcy, which is “incredibly disruptive not only to the mines and industry in the basin, but to the local economy as well.”

William Barr Eyes a Possible Intervention

The Powder River Basin has been producing more coal than Appalachia since the early 2000s, yet East coast states like Kentucky and West Virginia still command most of the attention from the national media and government. That has left many locals feeling that the basin is ripe for more publicity — or perhaps even a high-profile intervention by President Donald Trump to shore up the vote in coal country. "This is one those issues where I could imagine the Trump campaign saying, 'Well, here's an interesting one for us', " said Samuel Panarella, a professor at the University of Montana's law school.

Late last week, not the Trump campaign but the federal government stopped by.

U.S. Attorney General William Barr, while visiting Wyoming, told the Casper Star-Tribune that he thought the FTC may be applying too strict a view of market concentration. “If you don’t take into account the extent to which it will help Wyoming compete in other markets — the coal market, for example, or the electric power market — then you’re not looking at the whole realm of consumer benefit. Ultimately, you want to benefit consumers to the optimal extent, and it sounds to me like the whole picture wasn’t looked at here. So I’m going to go back and look at it myself. Or at least, I’ll talk to the FTC about it."

It may be too late. Lawyers for both sides delivered their final arguments in the U.S. District Court of the Eastern District of Missouri — both Arch and Peabody are headquartered in St. Louis, Missouri — two weeks ago. A decision is expected by the end of September, Peabody said in its quarterly earnings call this month.

Macey, the University of Chicago law professor, believes that the case is straightforward. The joint venture would clearly enjoy far more market power than the government typically allows, and it would likely use that power in the long run to increase prices. That means power plants would have to pay more to buy its coal and in turn charge households and businesses higher electricity prices to offset their increased costs. The government enforces competition laws to stave off precisely this kind of consumer harm, according to this view.

On the other side, Godby and others argue that the FTC fails to recognize that Powder River Basin coal competes in markets far bigger than the basin itself. If the market for coal is defined solely as the basin itself, then the joint venture's 60% control of production would indeed seem egregious. But that view is too rigid and ignores the fact that coal competes with natural gas as an input fuel at power stations across the country, this argument holds.

The judge in the case — Sarah Pitlyk, a Yale-educated member of the Federalist Society who was appointed by President Trump and confirmed in a near-party-line vote in December 2019 — seemed at least open to the idea that Arch and Peabody’s proposed joint venture should be analyzed in the wider context of possible bankruptcy amid fierce competition with natural gas and renewables, according to a report by Bloomberg Law. “There is evidence that one of these firms might not be able function as well in the future,” Pitlyk said during closing arguments on August 10th. (The case is Federal Trade Comm’n v. Peabody Energy Corp.)

The outcome of the case could ultimately determine on whom the costs of coal’s precipitous decline will fall.

If the two coal companies win, and if they do at some point raise prices, then households and businesses will bear the costs in terms of higher electricity bills. But if the FTC wins, then Peabody and Arch might face increased odds of another bankruptcy, meaning local workers and their families will bear the costs.

Disagreement on What to Do Next

Does the end of coal mining have to be ugly?

Haggerty, the Headwaters Economics researcher, doesn't think so. He says states like Wyoming need to do everything in their power to build a revenue base outside of the coal, oil and gas industry. That could include treating coal revenue as separate from the general tax structure; changing state property tax incentives on renewable energy generation and transmission; and removing limits on local governments' fiscal autonomy.

Some communities have been more proactive than others at easing dependency on the fossil fuel economy. The city of Sheridan, Wyoming, raised taxes and fees and the local economic development authority built the Sheridan High Tech Park, now home to light manufacturing businesses such as Weatherby, a firearms company, and VacuTech, a vacuum systems company, according to a 2019 report by the Resources Legacy Fund, a non-profit.

Wyoming would doubtless have liked some more time to help other towns and cities in the Powder River Basin prepare for the mining industry's decline. For now, it has pinned its hopes on the joint venture.