[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

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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\

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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

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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