working paper
department
of economics
THE PERFORMANCE OF LONG TERM CONTRACTS:
FURTHER EVIDENCE FROM COAL MARKETS
Paul
No.
517
L.
Joskow
February 1989
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139
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THE PERFORMANCE OF LONG TERM CONTRACTS:
FURTHER EVIDENCE FROM COAL MARKETS
Paul
No.
517
L.
Joskow
February 1989
?i.l.T.
[JBnARlES
Rgceve
(adjust)
February, 1989
The Performance
of Long
Term
From
Contracts: Further Evidence
Coal Markets
By
^^
'
i
'
'
Paul L. Joskow^
Summary
Introduction and
between
electric
importance
of
Opportunities
of
desirable
it
(Joskow,
1987)
vertically
integrate
into
the
for
of
structure
vertical
relationships
costs
for
utilities
or,
in
the
and
case
an
of
relationships
relationship
These
1985).
to
(Williamson
(1985),
by
and
enter
the
sellers.
investments
into
generating
long
term
plants,
to
provided additional
specificity
asset
Crawford and
Klein,
found
I
affected
specific
results
between
relationship
1988a).
buyers
many mine-mouth
of
important
by
suppliers
coal
their
supply (Joskow,
coal
made
making
by
1987,
1985,
relationships
vertical
significantly
is
investments
specific
of
nature
the
suppliers (Joskow,
vertical
expected
existance
the
examined
I
coal
their
these
minimize
contracts
support
and
relationship
to
makes
often
utilities
structure
the
that
papers
recent
three
In
and
Alchian
(1978), Hart (1988), Joskow (1988b)).
A
the
major challenge
specification
of
price
opportunistic
behavior
conditions
the
and
Hart
1960's
and
as
and
and
and
1970's
typically
structuring
quantity
provide
contractual
Moore(1988)).
in
adjustment
for
relationship
Long term
handled
the
long
term coal supply contracts involves
provisions
flexibility
plays
coal
price
itself
supply
to
out
that
adapt
over
contracts
determination
both
to
time
guard
changing
market
(Joskow
(1988a)
negotiated
problem
against
by
in
the
late
specifying
a
^Professor of Economics, MIT. Financial support from the MIT Center For
Energy Policy Research, the Olin Foundation, and the MIT Energy Economics Research
fund is gratefully acknowledged.
I
want to thank Jean Tirole, Oliver Hart, and
Gregory Werden for helpful comments.
This paper was written while the author was
an Olin Visiting Scholar at Harvard Law School.
2
base
and
price
formulas provide
of the
input
of
over
time.'
the
seller
specified
a
the
contracts,
well
adapted
with
of
producing
opportunities
deal
supply
the
adjusting
coal
changes
or
tends
Given
parties
the
or
breach
and helps
to
less
reflect
to
than
the
demand
long run
side
total
shocks
cost
that
prices
decreased
the
their
contracts
the
character
of
were reasonably
chosen
in
make
that
pay"
changes
reflect
minimize contractual
to
the
at
but
or
"take
formulas
increased
may have
seller
rents)
quantities
take
quantities,
market
values
run
long
total
breakdowns arising from
agreements
long
these
However, these adjustment provisions appear
be
to
changed
order
to
term contraccts
less
the
in
adapted
well
market
of
value
(excluding changes in scarcity rents) of
it.
These
responding
to
price
tracked
changing
break
adjustment
changing
upward
not
to
contract
to
total
economic
of
to
run
long
option to increase or decrease the
adjustment
that
weighted average
related
schedule
These
time.
the
in
obligated
is
the
prices
and
fixed
the
them.
price
contract
This
buyer
around
changes
costs
a
buyer
the
to
the
that
side
coal.
prices
more or
producing
did
character
more profitably with third
"self-enforcing."
to
band
small
a
adjusting
to
user
in
The buyer often has
argued
I
and
supply
to
over
price
base
affect
to
specify
typically
also
"take-or-pay"
clear
associated
contracts
the
using a pre-specified
prices
changes
(excluding
coal
within
base
to
change
to
were expected
that
contract.
taken
these
cost
indices
obligated
is
quantities
have
price
The
in
adjustments
for
producing
costs
formula
adjustment
an
rigidity
appear
to
market conditions in the
was
market
down
formulas
observed
conditions
despite
fairly
(Joskow
fairly
1970s
1988a,
closely.
substantial
have
been
reasonably
and early
pp.
78-81)),
Contractual
upheavals
in
1980s.
coal
'They also provided for adjustments for other exogenous
mining regulations, that could increase the cost of producing coal.
on
successful
While some
average,
relationships
markets.
factors,
in
prices
generally
However,
such
as
I
new
3
(Joskow,
suggested
of
behavior of contract
the
rigidity
work
earlier
prices
associated
rising
nominal
During
with
coal
time
this
have
reflected
were
thus
long
term
domestic
1980's
side
rather
long
term
periods
contracts
and
prices
well
matched
coal
declined
side
cost
contracts
that
I
1979,
or
1960's
and
and
1981)
and
with
the
price
discuss
price
in
This
was
adjustment
1985 are
now
market's
more
adjustment
completed.
Contract
First,
(Joskow
contracts
1986
extent,
how
contracts
my
demand
primarily
contained
however.
in
mid-
the
in
been designed
in
the
reflect
to
Data for the
earlier
price
transactions
dynamics
contained
below,
to
data
work on
1984
for
price
and
available, however.
This paper extends
coal
specific
formulas
time.
appear
Market
provisions
were not available when
over
values
reflected
have
to
transactions
prices
coal.
detail
decline
examined do not appear
decline
coal
adjustment
my
in
were characterized by
market
changes in market values associated with demand side shocks,
period of the coal
had
that
me
to
and
1979
real
producing
of
The
particular
in
rigidities
were available
stable
costs
I
upward price
expanding
sharply.
shocks.
1980,
rising
were
as
and
would provide an opportunity
that
early
the
in
However,
prices
for
markets
coal
contracts.
than
the
in
until that point.
the
generally
changes
run
reasonably
coal
between
executed
these
long
had done up
I
to
place
behavior
contracts;
"old"
period
later
opposed
as
these
in
took
that
adjustment
price
into
and transactions price data
contracts
(contracts
this
markets
coal
in
insights
promises
during
prices
been the focus of the work that
The
further
contractual
examine downward price
changes
that
81)
provide
breaches
for
incentives
to
would
mid-1980's
the
page
1988a,
and
did
1987
actual
(contracts
1988a)
as
to
well).
transactions
negotiated
my
previous
cover
I
the
am
prices
before
work on
years
interested
for
1980)
coal
adjust
1984
and
two
in
sold
to
adjustment in long term
price
1985
(and
related
pursuant
changing
sets
to
to
of
"old"
market
a
lesser
questions.
long
term
conditions
4
when
1983
after
Were old contract
prices
and
renegotiation
were
of
value
declined
coal
significantly?
new market
or did they adapt quickly to the
the
of
roles
determining
in
litigation
market
real
downward
rigid
what
Second,
conditions?
and
nominal
the
adjustment
formal
the
transactions
provisions,
and
quantities
prices,
the
durability of existing contractual relationships?
To
transactions
most
the
to
the
price
I
during the
for
include
in
adjustment
with
the
market
in
are
simple.
extended
transactions
1984 and
for
prices
these
the
prices
are
wage and price indices
written
Next,
I
and
1984
conditions
in
are
for
and
pre- 1980
with the "old"
information
between
to
me
typically
term
U.S.
coal
moved
incorporated
coal
for
1981
a rough
contract prices
observed
all
coal
1984
"old"
compared
long
prices
prices
transactions
coal
pre- 1980
into
transactions
in
that
if
of
This allows
changed
first
and
price
1985.
contracts
"old"
these
started
I
term
long
work,
for
behavior
the
"old"
previous
available
quite
is
transactions
changes
1985 period.
my
the
would have been expected
provisions
to
utilities
in
that
"average"
prevailing
presented
examine
I
under
in
data
work and
with
1981
which
transactions
compare
then
covered
year
associated
prices
made
sales
analysis
previous
changes
investor-owned
with
last
These movements
contracts
reflect
to
how
the
contracts.
term
the
of the price changes
with
along
with
questions
of
set
first
years
my
in
1984/1985.
estimate
by
recent
contracts
determine
and
in
used
these
for
1981,
The empirical
contracts.
contracts
the
associated
prices
between
contracts
1985,
answer
contracts
these
long
production
collected data for "new" coal contracts signed
1985
1984
(the
and
"new"
1985.
contracts).
These contracts
Transactions
prices
for
coal
comparable attributes associated with the "old" contracts are then compared with
transactions
significant
prices
associated
downward
These
with
the
"new"
contracts
determine
to
whether
there
is
price rigidity.
simple
empirical
analyses
indicate
that
the
transactions
prices
5
associated
of
period
between
the
coal
market
"old"
and
transactions
decline
"new"
poorly.
coal
all
sales
are
observe
there
is,
during
published
market
in
I
That
contracts
typical
that
for
prices
quite
term
changes
track
contracts.
long
clear
fairly
also
contracts
"old"
with
associated
rigidity
is
with
price
coal
imperfect
prevailing
market conditions because of downward price
contracts
which
on
rely
conventional
base
of
price
price
It
average
changes
run
in
with older
associated
escalation
plus
on
based
short
rigidities
prices
in
market decline.
of
indices
indicators
this
downward
substantial
period
this
differences
large
is
during
conditions
provisions
to
determine transactions prices.
The
"new"
to
new market
the
1984
1985
or
there
existing
signed
leads
would
they
about
questions
to
conditions.
transactions
much more
obtain
favorable
contracts
with
contracts
could
be
of
impose
switching
sustain
a
a
price
to
on
costs
be
by two
constrained
pay substantial
binding
legally
to
contract,
buyer
the
higher than would
damages
give
the
have been achievable
if
renegotiate
to
have
they
First,
some
specific
the
in
capital
bargaining
entire
the
even
Second,
seller.
seller
were
they
than
in
do not accept delivery,
relationship
in
sellers
supplies
coal
ability
factors.
they
If
the
to
investments
and
terms
price
However, there
performance provisions.
detailed
liable
absence
likely
is
for
and
"old"
and
buyers
of
reactions
buyers could contract de novo
If
with
associated
prices
the
by performing on their old contracts.
receiving
they
naturally
contracts
between
disparity
large
may
power
relationship
to
were
negotiated de novo in 1984 or 1985.
The
final
section
of
the
contract
terminations,
breaches
and
evidence
regarding
incidence
and
outs,
and
rigid
quantity
litigation
the
resulting
provisions
in
from
long
paper
discusses
voluntary
nature
breach
of
of
renegotiation
contract
contract
term contracts
opportunities
there
and incentives for
and
renegotiation,
after
1983.
appear to
some
presents
contract
Given the
be a limited
buyfairly
number
6
of
where voluntary mutually
circumstances
However,
agreements
if
enforced.
If
questions
about
these
economic
were
and
a
lead
to
of
long
term
ability
and
price
imperfections
reflect
are
leading
relatively
primarily
the
reported
are
adjustments
in
ex
for
and
and
"old"
of
ante
that
relatively
few
do
not
and
contractual
contract
contractual
in
lead
the
"new"
prices,
relationships
renegotiation
themselves
contracts
the
in
breakdowns
enforcing
Instead,
litigation.
provisions
contractual
from
distribution
voluntary
truly
monitoring
between
of
fraction
large
writing,
and
termination
provided
flexibilitity
beneficial
a
that
differences
large
the
serious
sellers
contractual
significant
few instances of complete breakdowns
premature
to
with
over
be easily
raise
and
buyers
their
be a significant increase in renegotiation,
to
renegotiations
associated
Despite
provisions.
seems
It
haggling
post
cannot
would
it
likely.
is
breach
to
contracts
protect
to
mid-1980's,
the
in
problem.
downward
significant
activity
litigation
buyers
for
breakdowns,
contracts
ex
inefficient
renegotiation
post
formal
in
contractual
incentives
While there does appear
major
incentives
substantial
and conditions specified
behavior
rents.
not
there
the
be
to
terms
the
opportunistic
buy-out
appear
there
ex
satisfactory
to
or
reflects
mutually
output
increased
and
contract prices closer to market values.
Background
As
contracts
coal
I
discussed
(Joskow
my
in
1988a),
during
demand and supply
U.S.
Table
increased
2,
40% between
2).
1965
The average
and
1973,
real
nearly
six
price
to
price
1965
to
adjustment in long term
1981
between
price
1965
to
1981
of coal in the U.S.
doubled
the
domestic
coal
and cost increasing shocks on both
The average nominal
sides of the market.
by a factor of about
column
period
the
market expanded steadily and was subject
the
work on
previous
between
1973
and
price of coal in the
(See
Joskow
increased
1975,
1988a,
by roughly
following
the
7
dislocation
1979, and
until
2,
energy markets following the
in
Column
declined by about
significant
"softening"
conditions
prevailed
of
large
market.
peak
coal
in
coal
until
at
markets
almost
all
of
this
1981
(See
Joskow 1988a, Table
in
1983
Capacity
utilization
in
the
boilers
the
1983-85
appear
1982
by
in
These
the
trade
press
roughly
1983.
Depressed
in
discussions
a decline
electric
increase
was
in
the
in
and Midwest was stagnant between
production
after
beginning
supplies and
in
over
conditions
1987.'
least
new long term
East
the
decline
levels
market
but
1986,
production
a
1979 and
refer
to
prices
in
a
have
utilities^;
coal
industry
The major
been
(2)
a
market
decline
in
7% between
Coal
region.^
1986.
There was
which accompanied the onset of the depressed
period.^
to
Western
1980 and
indicate
both spot and
Aggregate U.S. Coal production increased by only about
markets.
and
1980
market
coal
in
contracting for
contract
6% between
embargo, was roughly constant
oil
3).
Discussions
utility
Arab
oil
(1)
falling
a
oil
was
significantly
factors
dramatic
affecting
reduction
and natural gas
below
the
in
prices,
previous
domestic coal
orders
new
for
especially
after
Basin Spot Prices Go Nowhere; Contracts
Will Allow Major Spot
Coal Week
May 25, 1987, p.3; "Long Term Coal Contracts Will Return, But
They Will Provide New Contract Flexibility, Coal Week August 12, 1985, p. 7; "Detroit
Edison Evaluates Bids," Coal Week April 8, 1985, p. 4; "Long Term Strategy Pays Off
For Companies Bucking Current Slide," Coal Week November 28, 1983, p. 7; "Slow
Times Out West." Coal Week August 15, 1983; "Dismal Market Is Utilities' Trump Card
in Contract Talks." Coal Week
February 7, 1983, p. 2; "Cost and Quality of Fuels For
the Electric Utility Industry 1986, Energy Information Administration, U.S. Department
of Energy, p. 4.
' "Illinois
Buys,"
.
.
.
.
.
.
^
Coal Production 1986 . Energy
Energy, (DOE/EIA-01 18(86), page 14.
^
Information
Administration,
U.S.
Department
of
Economic Report of the President February 1988, page 505.
.
1970 and 1983 on the order of twenty to thirty new base-load coal
entered service in each year.
In 1983 only thirteen new units entered service.
In 1988 only two units are scheduled to enter service and an average of three units
per year are expected through 1992.
Given the lead times for new generating units,
this is consistent with a dramatic reduction in orders for new coal units in the early
Since contracts for coal for new generating units are generally made several
1980s.
^Between
units
8
affecting
1984,
fuel
utility
decisions
utilization
around
country^;
the
(3)
the
completion of additional coal mining capacity in the West developed in anticipation of
more
rapidly
demand
expanding
and;
growing
(4)
from
competition
foreign
coal
suppliers.*
The
broadly
coal
Table
prices
mine)
in
and
nominal
nominal
in
Figure #1
1987.
in
in
and
coal
U.S.
constant
the
the
in
trade
during
prices
1982
dollars
•
press
the
are
1983-87
1979
and then began
until
for
time
several
periods
of average U.S. coal prices
levels
between
dollars
was roughly constant
1975,
average
displays
constant
nominal price of coal peaked
peaked
of
found
market
computations of the average rate of change in average U.S.
mine
the
at
changing
the
behavior
the
provides
1
1975 and
between
the
with
consistent
period.
of
descriptions
to
and
fall.
The average
1987.^
The
(at
price
real
of coal
1979 and has declined since then. The rate
of decline in real coal prices accelerated after 1982.
Unfortunately,
aggregate
published,
together
along
with spot market
Table
#1
thus
reflect
all
coal
transactions
price
coal
for
The average
coal
transactions
made
all
contracts,
price
in
data
figures
each
year
are
that
regardless
used
—
in
those
of
Figure
generally
vintage,
#1
associated
and
with
commercial operation, this is also consistent with a reduction in longto supply new units. See "Two Utility Coal Plants to Enter Service
Lowest Total Ever," Electric Utility Week July 25, 1988, page 4.
years
prior
term
contracting
in '88;
sales.
mouth
mine
the
to
.
oil prices peaked in 1981 and then began to fall. Nominal and
peaked in 1984 and then began to fall. The big break in prices
for both oil and gas began in 1985. U.S. Department of Energy, Energy Information
Agency, Annual Energy Review 1987 page 25. See "Troubles in Wyoming Tell Tale of
the West," Coal Week
November 3, 1986; "Oil and Gas Back Out Coal at Arizona
Utility," Coal Week November 10, 1986.
^Nominal and
real
natural
gas
real
prices
.
.
.
*
"Market Watch," Coal Week July 27, 1987, p.4
In Gulf Region," Coal Weeks
September 24,
Contracts Will Return," Coal Week August 12, 1985, p. 7.
.
Market
.
;
"Logistics
1983,
p.l;
Transforming Coal
"Long Term Coal
.
®The
GNP
deflator was used to deflate the nominal prices using 1981=100.
TABLE
1
Changes In Average U.S. Coal Prices At The Mine
(Average Annual % change)
Period
Nominal
1
Constant $1981
1975-79
6.30%
-1.20%
1979-82
5.30%
-2.20%
1982-87
-2.80%
-5.70%
Source: Statistical Abstract of the United States
,
various years.
1
1
1
'
1
o
co
en
rr
n
I—
z.
<
1
<
o
-)
C)
c
9
^ in
"e
\—
00
2
O
o
m
<
UJ
+
\.
^-)
o
M
"^
1/1
c
fl)
u
*—
1,1
o
<
rr
1
<
1
>
<
-z.
o
D
o
in
CN
o
CM
in
in
o
33iyd
o
o
in
en
o
in
00
o
00
9
old
new
contracts,
however,
believe
to
and
contracts,
disaggregated
the
that
market
spot
There
transactions.
transactions
prices
for
no
is
"old"
reason,
and
"new"
contracts are equal to one another.
The
sample)
original
plus
formula
an
using
at
adjustment
price
The
prior
1980
to
features
that
price
base
typical
was
contract
the
executed
contracts
(BPE).
were
contracts
price
inflations,
on
binding
the
the
If
etc.
and
parties
written
actual
continued
1984-85, the associated prices would not
downturn
in
the
is
with
associated
price
base
a
market
adjusted
then
wages,
for
provisions
operate
to
in
the
is
my
in
prevailing
reflects
without renegotiation
reflect
on
rely
The base
negotiated.
those
(i.e.
composed of a weighted average of input price variables
index
and supplies, general
material
"old"
time
the
coal
have
generally
escalation
conditions
term
long
as
be expected
of these
written,
fully
to
market for new coal supply contracts, since the downturn
downward
and
capacity
excess
significant
adjustments
the
in
expected future demand for domestic coal, rather than with declining input prices.
Absent
renegotiation,
should probably have continued
than
rather
these
turning
contracts
to
include
a
coal
sold
the
of components
variety
1985.
During
materials,
roughly
supplies,
50%
15% between
by
the
of
same
and
total
1981
period
and 1985.
since
mining
producer
price
index
of
this
time
for
the
increased
would
Let's
producer
by
imply an
Most of
compensation
of
the
this
"old"
contracts
only
price
producer price
index
for
Assuming
in
index
calculations.
25% between
4%.
increase
found
escalators
1981
and
intermediate
wages
are
nominal prices of about
in
nominal price increase should have occurred
increased
intermediate
the
do some rough
miners increased by about
components
costs
1984
for
to
The primary
market.
and a mining wage index (Joskow 1988a, pp. 55-60).
The average annual compensation
pursuant
nominal terms during the mid-1980s period,
in
rise
down along with
typically
for
prices
by
materials,
less
than
supplies
4%
and
in
1985,
components
and
the
declined
10
slightly
between
contract
prices
short,
primary
determinant
1984-85
period,
and
1984
if
of
This
1985.
between
In
contracts.^''
and
1984
the
escalation
transactions
we should expect
prices
in
the
with
associated
these
are
the
during
the
despite
the
contracts
prices
rising
in
existing
in
contracts
"old"
contract
"old"
1-2% increase
a
provision
escalation
to
provisions
observe
to
market value of coal was
fact that the average
due
1985
roughly
with
consistent
is
falling.
Price Adjustment in "Old" Contracts
As
report
transactions
these
result,
with
magnitude
of
for
series
contracts
price
of actual
long
"old"
with
patterns
provisions
compare
average
^°
do not make
term contracts used
price
contained
the
pattern
nominal
price
paths
of
"old"
series
for
In
in
coal
my
for
were
contract
all
coal
term
my
section
this
between
be
prices
of
1981
work.
expected
determining
with
transactions
the
price
paper
the
and
I
1985
first
if
However,
by
some
I
examine the
pursuant
compare these
typical
transactions
discussed
the
sold
the
changes
rigidities
can shed
I
in
above.
a
about
inferences
work,
As
time.
contracts.
previous
do not
series
in
potential
make
to
long
in
points
identify
to
price
coal
different
or
previous
would
that
contracts
these
in
used
set
prices
possible
with
associated
available
at
vintages
characteristics.
transactions
the
it
different
of
publicly
negotiated
contracts
rigidity
on these adjustment
pattern
discussed,
and augmenting the data
extending
the
already
prices
price
associated
light
have
I
prices.
the
In
to
price
escalation
I
also
published
the
next
These calculations are obviously very rough and are presented here to help to
the comparisons in behavior between "old" and "new" contracts discussed
below.
Actually escalation formulas are more complex.
Furthermore, productivity
improvements
the
could
reflected
in
through
be
aggregate
contract
prices
determination of the wage component of the escalation provision.
most
This would be
likely in contracts that treated wage changes on a cost plus basis rather than using a
simple wage index.
Productivity increases or decreases might also be passed along to
with
buyers
through
adjustment
provisions
of
complying
reflecting
the
costs
government regulations.
evaluate
11
of
section
paper
the
1984 and
with
contracts
"old"
compare
I
1984
1985
and
1985
transactions
transactions
a sample
for
prices
with
associated
prices
the
of "new" contracts
signed in 1984 and 1985.
My
of
use
previous work on long term coal contracts (Joskow
sample
a
available
for
subsequent
contracts
for
the
markets.
these
that
years
and
1984
issue
contracts
my
in
was able
I
was
information
was
withheld
also
able
^^This
later;
i.e.
proceeded
the
collecting
market decline,
decline
transactions
to
find 95
"old"
contracts
reported
73
for
reporting
for
updated
I
price
these
coal
in
data
the
for
to
information
them for the
almost
of
utility
all
of
in
these
for
the
the
"old"
contracts
are
that
used to estimate the transactions price
paper and that had expiration dates in
reported
account
to
transactions
by
of
some useful information on the
provides
1988
under
sales
the
also
most recent years for which such data are now available. ^^
the
2
were
Data
with
preceding
The most
1970's.
1979.
in
associated
period
a
and
1960's
signed
prices
1981,
period
the
There were 120
here.
equations
and
1980
the
examine the behavior of ex post transactions prices pursuant
during
1985,
was
transactions
on these contracts by
had
Table
at
post
1979,
to
contracts
"old"
I
order
In
ex
during
base
data
that
in
years
signed
contracts
coal
included
contract
recent
of
1988a) makes
1987,
1987
1984 or
Of
later.
Guide To Coal Contracts
Mine-mouth
contracts.
22
the
other
25
contracts
of
that
these
price
these
Price
.
information
contracts.^'
were not reported
was
I
at
all
was accomplished by identifying those contracts used to estimate the
price equations in my 1988 paper and that had expiration dates in 1984 or
then
I
those contracts that were not scheduled to expire before 1984.
to match these contracts with information provided in the 1987 edition of
Guide To Coal Contracts
The 1987 edition of the Guide provides information
If a
reported by utilities for coal contracts in force during the 1984-85 period.
contract appeared in the Guide 1 then collected transactions price data (at the mine
as before) for 1984 and 1985 as reported there.
If a contract was not reported in the
1987 edition of the Guide I tried to determine why it was missing.
the
.
.
^'utilities
information
if
are
now
they choose
to.
apparently
permitted
to
withhold
mine
mouth
price
(contracts .pot)
TABLE 2
OLD CONTRACTS WITH ORIGINAL EXPIRATION
DATES IN 1984 OR LATER
1.
2.
Total Contracts With Expiration Dates
of 1984 or Later:
Contracts Reported in 1987 Guide
to Coal Contracts
:
a.
b.
3.
120
95
price information reported:
price information withheld:
Contracts Not Reported in 1987
Guide To Coal Contracts
:
expired on schedule in 1984,
no report filed:
b. terminated/consolidated prior to 1984:
c. in force in 1983 but not
reported in 1987 Guide
73
22
25
a.
:
5
13
7
12
Guide
1987
the
in
simply
did
reporting
Five of these contracts expired sometime in
.
information
report
not
Another
period.
contracts
for
13
contracts
were
7
contracts
that
were not
that
terminated,
in
1984 and the buyers
force
for
the
entire
of significantly
consolidated,
revised prior to 1984.^'
This
"involuntary
potential
trade
press
Three
of
and SEC
filings
was
renegotiated
with which
it
new
a
off,
with
along
several
simply
contract
did
appears
have
to
and
breach
By searching
1985.
these
to
and
wholly-owned coal subsidiary.
its
was
file
been
sixth
a
contract
A
written.^*
between
contracts
A
of
a
utility
contract appears
any
on
report
terminated
of
to
its
fifth
and a
still
coal
as
the
contracts.
Another
suits.
When
the
was
contract
supplier
coal
be in force, but
The
contracts.
although
prematurely,
1983
of
of
other
not
1984
end
the
at
subject
contract
had several contracts.
buyer
utility
seventh
sold
utility
force
in
down what happened
track
to
the
were
during
candidates
tried
I
were
contracts
the
subsidiary
to
termination"
had been between a
contract
the
only
left
I
was
unable
determine the circumstances of the termination.^^
is
clear
were
in
It
contracts
through
that
at
least
that,
at
when
force
the
the
very
coal
the
least,
market's
vast
decline
majority
began
two years of depressed market conditions despite the
in
of
the
1983
fact
"old"
endured
that,
as
we
determined by checking the 1985 edition of the Guide (covering
in 1982 and 1983).
These 13 contracts either were not reported in
the 1985 edition either, and were almost certainly terminated prior to 1983, or the
1985 edition indicated that they had been consolidated with other contracts or a new
termination date (1983) negotiated.
For example, three of Duke Power's contracts
appear to have been renegotiated in the context of the divestiture of its coal mining
properties in 1982 and 1983.
*'This
contracts
in
^''This
^^I
new
could
contract appeared in the 1987
no
find
However,
sources.
reported
Steam
was
force
previously
Electric
Montana
as
information
contract involved was
involving the supply of
the
Plant
coal in 1985.
specific
Guide
Factors
Thus,
I
.
on
contract from these
the buyer had
Montana.
By consulting
seventh
only one
the
the
that
coal from
was able to determine that the utility burned
assume that the contract was terminated prematurely.
.
I
no
13
the
presently,
see
shall
have
and
A
1985.
between
pursuant
negotiated
prices
"new"
to
with
associated
prices
transactions
contracts
in
complete breakdown in contractual relationships does not appear to
my
sample
renegotiations,
price
significant
transactions
Within
occured.
emerged
gap
large
and
contracts
"old"
1984
a
of
contracts
"old"
termination
contract
there
and
litigation.
data
that
few
a
are
The
of
cases
implications
of this evidence will be explored further below.
The
"old"
contracts
with
these
found
made
coal
re-estimated
1988a,
estimated
price
contracts
of
supply
those
reported
in
explained
coal
I
yield
that
regions.
The
variation
dummy
and
separate
very
(Tables 3 and
variables,
vintage,
contract
values
close
5).
for
to
As a
the
1984
vintage
result,
coal
previously
I
First,
1
paper
earlier
with
prices
for
of
the
each
1988a)
in
the
are
of
the
regional
and the transaction date,
prices
The hedonic
prices
and
organized
1974-79
I
will
by
contracts
price equation estimates
for
the
"old"
contracts
by constructing simple contingency
for simplicity,
to
and
most
since
variations
contracts
transactions
1985
(Joskow,
transactions
pre- 1974
5).
and
Second,
variables,
mean
of
grouping
obtained
that
the
equations are similar
price
with
associated
is
1985
for
an
associated
data
price
paper.
this
to
contract
and
values
attributes
transactions
table
—
in
1984
for
of the transactions
contingency
a
date
reported
values
coal
prices
the
1985 transactions price data and used the
groups (See Table 3 and Table
predicted
are
with
for
collected
two different ways.
is
equations
price
Al)
(Table
transactions
in
constructed
and
execution
this
predicted
1979-81
the
did
I
1984 and
estimates
Appendix
the
year
region,
into
vintages
were
controlling
1984/85,
contract
prices.
generate
different
supply area
simply
to
and
1981
transactions
equations
price
examine how transactions prices associated
to
location,
Table 6) with the
with
me
between
transactions
hedonic
obtained
I
transactions
for
supply
quality,
the
(Joskow,
three
changed
explained
best
1985
possible
it
contracts
—
attributes
and
1984
tables
refer to the contingency tables in
14
the discussion that follows.
Table
1984 and
on
BTU
average
It
old
clear
is
contracts
West there
and
1981
and
content
for
is
an
average
from Table
increased
nominal price increase
the
values
the
down by
is
of about
prices
1981,
Information
region.
each
for
and
1981
15%. In the Midwest there
about
Transactions
1984.
coal supply
for
prices
region
are
also
nominal price of coal sold pursuant
between
substantially
increase
the
transactions
content
sulfur
that
3,
mean
the
1985 for the "old" contracts broken
presented.
these
contains
3
East,
the
about a 10% increase.
In
1985.
is
the
to
In
20%.
Most of the increase occurred between
under
the
old
1-2%
by
increased
contracts
between 1984 and 1985.
The
changes
what
with
consistent
in
would
nominal
in
values of the primary adjustment
these
if
observed
adjustment
formulas
contracts.
As
in
the
contracts
1981
and
determined
contracts
followed
prices
above,
discussed
I
old
the
A
increased over this period.
indices
specified
for
transactions
magnitude of the expected price change between
of the
the
expected
be
adjustment provisions specified
prices
BPE
the
nominal
the
rough estimate
assuming that
1984,
the
transactions
prices,
would be on the order of 15%, with an 1984-85 increase of no more than 1-2%.
observed
changes
in
actual
transactions
prices
with
associated
the
is
"old"
The
contracts
are
contract
plus
certainly in the ballpark of these rough estimates.
The average nominal
spot
#1).
transactions)
rose
The average
pattern
of
prices
through
price
in
is
"the
from the pattern observed for the
^^Actually
cents/mmbtu
it
is
in 1981).
slightly
gH U.S. coal transactions
1982 and then
U.S. coal price
observed
for
lower
fell
in
1983,
1984 and
about the same in 1985 as
market"
"old"
in
as
a
whole
contracts.
1985
(114.8
It
after
is
(all
quite
it
1985 (see Figure
was
1982
is
clear
cents/mmbtu
in
in
1981.^^
quite
that
1985
The
different
transactions
vs.
117.2
15
prices
with
associated
transaction
adjustment
downward
market
the
in
continued
but
would
provisions
down with
term contracts did not turn
long
"old"
This
suggest.
adherence
as
rise
to
implies
the
to
there
that
formal
price
least
some
at
is
"average"
the
price rigidity associated with these older contracts.
Comparisons of Transactions Price For "Old" and "New" Contracts
movement
The
consistent
for
with the continued reliance on the price adjustment mechanisms specified
in
Similarly,
significant
the
sold
coal
all
other
the
difference
for
coal
the
in
price
between
produced
in
and
the
transactions
the
could
U.S.
with
for
be
"old"
explained
and physical attributes of the coal sold pursuant
aggregate
for
are
not
the
patterns
price
of
represented
for
the
"old"
of
average.
17,
prior
and
"old"
transactions
and
contracts
1984
my
in
rigidity
to
and/or
transactions,
transactions
all
price
negotiated
in
U.S.
prices
almost
reported
for
that
1980
contract
for
if
aggregate
represent
"old"
a
by differences
my
at
in
other
simple
prices at the
arithmetic
it
is
with
fraction
the
average
underestimates
of
transactions
therefore
price
of
coal
are
total
likely
that
if
transactions
the
magnitude
with
associated
we
coal
production
total
could
mine for spot market transactions are not publicly available
my
Contracts
similar.
U.S.
which
comparing
Furthermore,
1985 and the associated transactions prices are included in the
By
things,
geographical
the
in
there
average
the
spot market prices
all.^^
composition
significant
However,
is
sample of "old" contracts and
contracts
coal
price
there
that
Among
and
contracts
significantly
the
U.S.
base
suggests
far.
prices
transactions
contracts.
so
movements
data
certainly
above
to
to
transactions
average
the
these
"old"
in
1984/85
reported
results
prices
in
and
1981
to
changes
the
changes
associated
rigidity
for
of
the
between
U.S.
explanations
possible
comparison
a
contracts
"old"
downward
are
that
the
is
with
associated
pursuant
prices
contracts
contracts.
these
transactions
in
at all.
U.S.
observe
(xy- contracts .old)
TABLE
3
SAMPLE VALUES OLD (Pre -1980) CONTRACTS
1981
1984
1985
EAST
MEAN PRICE (cents/mmbtu)
MEAN BTU CONTENT (BTU/pound)
MEAN SULFUR CONTENT (%)
Observations
150.91
12,258.00
1.59
81
174.89
12,061.00
1.41
23
176.92
.12.027.10
1.44
22
MIDWEST
MEAN PRICE (cents/mnibtu)
MEAN BTU CONTENT (BTU/pound)
MEAN SULFUR CONTENT (%)
Observations
122.80
11,018.00
3.13
46
133.44
11,098.00
3.14
28
139.20
11.098.00
3.14
28
WEST
MEAN PRICE (cents/mmbtu)
MEAN BTU CONTENT (BTU/pound)
MEAN SULFUR CONTENT (%)
Observations
80.41
508.00
0.79
46
98.00
9,639.00
0.88
22
99.88
9,593.00
0.88
20
16
transactions
difference
contracts
the
aggregate
between
the
prices
signed
movements with
term
long
new
contract
by
observed
would
for
by
contracts
"old"
comparing
that
larger
and
"new"
contract
"old"
during
this
period
of
identified
for
and
1984
with
Relying
one
least
1985
on
on
1987
the
duration
year's
and collected the same
The
transactions
prices
comparable
transactions
prices
contracts.
"old"
compared
then
are
the
at
rigidity
information
collected
I
1985.
of
contracts
all
been signed in
have
I
and
1984
in
utilities
time,
price
.
and extent of the dowhward
contracts
these
even
nature
I
.
an
find
from
separately
the
having
as
them
for
for
we observe
than
electric
Contracts
utilities
information
observed
1985
precisely
prices
by
signed
To Coal
reported
more
define
contracts
Guide
movements
years
we
averages,
U.S.
and
1984
in
the changes in aggregate average U.S. transactions prices
To
of
those
in
negotiated
contracts
or
contracts
"old"
new
for
prices
observed for the "old" contracts in 1984 and 1985.
Table
contracts
signed
for
It
the
is
price
new
clear
that
contract
coal.
There
sample
is
to
characteristics.^*
Mean
1985.
the
BTU
prices,
Examples are reported
almost
all
data
set
too
little
I
is
of
explained
associated
with
intra-regional
precise
will
the
simply
of
the
the
rely
in
the
have also estimated
I
earlier
work using the
data
Appendix (Tables A-2 and A-3).
variation
regional
variation
estimates
therefore
in
for
interest
content and sulfur content are
my
equations such as those estimated in
obtain
of
characteristics
1985 for each of the three coal regions.
contracts.
"new"
this
1984 and
in
on
information
provides
1984 and
reported for
transactions
4
in
transactions
differences
BTU
effects
in
the
prices
in
the
source
of
the
content and sulfur content in
of
both
regional
and
on the computations reported
physical
in
Table
4 for comparison purposes.
^*The
MIDWEST
BTU and sulfur variables are simply picking up the difference between
and the other regions.
the
(xy- contracts new)
.
TABLE 4
SAMPLE VALUES NEW (1984-85) CONTRACTS
198A
1985
135.05
12,735.30
129.97
12,695.10
1.45
EAST
MEAN PRICE (cents/mmbtu)
MEAN BTU CONTENT (BTU/pound)
MEAN SULFUR CONTENT (%)
Observations
1.37
34
51
MIDUEST
MEAN PRICE (cents/nunbtu)
MEAN BTU CONTENT (BTU/pound)
MEAN SULFUR CONTENT (%)
Observations
114.01
11.420.00
3.10
10
120.13
11.325.10
3.10
14
WEST
MEAN PRICE (cents/mmbtu)
MEAN BTU CONTENT (BTU/pound)
MEAN SULFUR CONTENT (%)
Observations
71.83
9.073.60
0.54
5
69.05
9,033.6
0.49
5
17
Let's
(Table
to
compared
4)
examine
first
those
to
non-price
the
for
contracts
the
have
contracts
only
higher
slightly
The same
1984-85
the
West,
contracts. ^^
and
"new"
the
however,
Overall,
the
coal
quality
lower
quality
regional
and
Midwest. In
than
coal
the
"old"
similar
comparisons
price
3)
the
content
the
in
East,
by region are quite
attributes
Simple
samples.
contract
"old"
somewhat
have
contracts
true
is
In the
BTU
(higher
coal
contracts
sample (Table
contract
"old"
quality
lower sulfur content) than the "old" contracts.
for
my
in
"new"
the
determine whether simple mean price comparisons are meaningful.
1984-85
the
of
characteristics
can
therefore be made.
Table
"new"
between
negotiated
higher
presents
and
before
negotiated
summarizes
and
contracts
prices
5
"old"
mean
first
"new"
quite
are
contracts
than
"new"
negotiated
contracts
and West, prices paid for coal pursuant
30% lower than
difference
the
paper
downward
^^Using
attributable
Joskow,
rigidity
the
with
1988,
The
lower
previous
work
in
BTU
pursuant
delivered
Table
with
contracts
"old"
transactions
in
contracts,
"old"
1983, exhibit
market declined.
15%
7).
the
of
It
—
but
as
different
clear
is
long
the
to
"old"
large
or
that
there
is
term coal contracts
Table 6,
1988a,
Joskow,
content of the Western coal
the
is
much
the
In
very
to
The
than
larger
East
25%
contracts.
estimated
vintages
and
"old"
"new" contracts are on the order of
contracts
associated
equations
the
to
coal
to
the
differences
substantial.
the
after
smaller- -roughly
is
associated
(See
price
for
prices
Midwest
the
in
differences
earlier
The
for
for
prices
long before the turn in the market beginning in roughly
prices
price
transactions
crises.'"
oil
information
price
transactions
separate
the
after
and
the
in
the
my
significant
negotiated
prior
estimated difference
less than 5 cents per
million BTU's.
'°In
between
the
I
transactions
found
prices
that
there
associated
was
a
with
significant
with post-embargo contracts.
higher than the former in 1981. Joskow, 1988a, Table 7.
transactions
prices
associated
difference by
contracts
pre-embargo
The
latter
were
1981
and
10-15%
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18
Not
1980.
to
are
these
contracts
in
observed
for
the
"old"
than
contracts
prices
even
are
The
are
greatest
for
base
prices,
real
identified
points
in
margin"
contracts
1988
paper.
series
that
mix
may
time
in
did
these
transactions
from
specific
suggest
price
with
Finally,
a
at
for
1981
"old"
transactions
the
that
prices
Table
in
results
lead
also
indicator
of what
in
1984
and
many
at
that
I
that
different
happening "on the
is
than
had
"old-old"
conclusion
Transactions
1985
initial
and
rigidities
the
to
negotiated
time.
higher
(the
price
contracts
in
had
contracts
upward
the
differences
price
provisions
escalation
point
more
the
column for 1981
pre-embargo
the
consistent
dropped significantly
had
extensive
not provide a very precise
market
the
more
observed
"new"
the
4).
also
5
for
the
the
in
1985
These contracts generally
contracts.
quite
is
my
in
price
result
Table
in
than
provisions
This
contracts!).
post- 1973
incorporated
reopener
tighter
coal
the
than
(Compare the prices
reported
figures
prices
lower
with the prices for 1984 and 1985 reported in Table
and
1984
in
transactions
the
they
but
years,
transactions
the
lower
substantially
contracts
3
only
is
prices
in
new
by the
suggested
aggregate U.S. coal price series.
Renegotiation. Breach and Litigation
The
evidence
term contract in force
1984 and
suggests
obligated
to
quantities
is
take,
buyer's
very limited.
1980
contract
have
obtained
the
the
who
sought
much more
absence
of
ability
Thus,
to
it
is
secure
favorable
enforceable
the
that
typical
pre- 1980
long
1985 had "formula" prices far above current market
Because these contracts generally specify
prices.
In
in
above
discussed
to
minimum
respond
fairly
coal
terms
to
supplies
than
contractual
high
that a
clear
de
quantities
that
prices
relative
the
buyer
is
by reducing
buyer stuck with such a pre-
novo
in
1984
under his existing
provisions
and
and
1985
would
pre- 1980
contract.
relationship
specific
19
investments,
to
buyer would
a
new market
the
reflect
have simply
renegotiated
terminated
or
conditions
price
the
and negotiated a new
contract
the
an existing contract
in
contract with an alternative supplier.
It
and
contract
buyer
(in
useful
is
voluntary
case)
this
including
conditions,
renegotiation
able
is
between involuntary renegotiation or breach of
distinguish
to
Involuntary
.
force
to
termination,
the
are
that
seller
agree
to
favorable
less
to
renegotiations
refusals
(e.g.
take
to
contractual
in
terms
are
to
be
litigation
or
likely
delivery),
Voluntary
relationships.
the
contractual
terms
and
of
renegotiation
than
would
contract
ex
seller
the
in
with
associated
threats
when
the
to
performance on the contractual terms and conditions specified
Involuntary
occurs
renegotiation
and
when
occurs
and conditions of the contract are mutually beneficial.
ante
.
breakdowns
contractual
litigation,
be
major
changes
changes
the
in
Voluntary renegotiations
are likely to take place without contractual breakdowns and litigation.
involuntary
If
could
very
be
behavior
or
ex
ante .'^
it
possible
of
and
are
guarding
for
enter
to
into
ex
against
make
to
contractual
Voluntary renegotiations are likely to be desirable, however,
for
the
parties
overcome contractual
to
that
rigidities
are
contracts
opportunistic
post
incentives
efficient
term
long
frequent,
would diminish
This
risk.
investments
specific
renegotiations
post
mechanisms
imperfect
reallocations
relationship
ex
efficient
relationships
they
if
inefficient
make
in
the
sense that they reduce the aggregate value of the contracts to the parties.
Whether
opportunism
uncertainty,
that
the
'^It
or
is
and
and
also
to
provide
to
buyers
terms
is
it
the
an
for
sellers
conditions
case
specific
protect
that
enter
that
of
allocation
into
they
rigid
investments
term
long
agree
to
contractual
ex
from ex
risks
ante
provisions
enhancing ex post renegotiations. See Tirole (1988), page 24.
regarding
contracts
are
with
future
the
either
could
hold-ups
post
or
price
expectation
self-enforcing
restrict
efficiency
20
1983) or can
(Williamson,
enforcing
cannot
or
be
be easily enforced by going to court.
by the courts some efficient transactions may
enforced
easily
may
be deterred and inefficient ex post haggling
my
In
contained
provisions
properties
run
long
market
increasing
the
incentives
seller's
the
had
contracts
prices
attractive
very
the
at
"old"
long
court
by
the
in
contract
"old"
reduced
contracts,
on
Reliance
changes
between
least,
term
self-enforcement
primarily
reflected
differences
1983,
breach.
to
argued that the price adjustment
I
significant
after
of
1988a),
market
The
values
occur.
coal
in
coal.
properties
self-enforcing
the
movements
supplying
current
term
long
in
as
of
cost
and
prices
long
as
work (Joskow,
previous
they are not self-
If
significantly
significanrly
enforcement
should
have become much more important after 1983.
Long term
contracts
can
and conditions of the contracts are
in
enforce
to
assessment
damages
of
general
by
since
party,
Contractual
to
because
long
clear
a
the
such
verify,
we
however,
with
courts
contracts
provisions
difficult
costs)
litigation
matter,
enforceable
the
and
do
the
breach
terms
the
parties
for
losses
to
potential
incomplete
performance
and/or
has
been
promises occurs.'^
As
term
be
party
the
long
real
without
or
specific
relied
cost
contingent
that
contracts
to
the
claims
to
damaged
contracts.
ambiguous, obligations and behavior may be
or
process
litigation
if
and behavior of the
of contractual
expect
not
generally
unclear
orders
economic
certainty
are
may be
if
by the courts
by a court, and the courts can be
through
reflecting
enforced
obligations
the
clear,
promises
contractual
damaged (including
a
readily
each state of nature are easily verifiable
upon
the
be
is
costly
and
However,
uncertain.
term coal contracts tend to be very detailed and generally provide very
provisions
for
prices,
majeure applies (Joskow
coal
1985,
^^Involuntary renegotiations
quality,
1988a),
may
it
and
may
the
not
also be mitigated
circumstances
under
which
force
be terribly difficult for a court
by reputational
constraints.
to
21
which
determine
breach
If
buyer does refuse
Such
verify.
who
types
threaten
to
of claims:
make
it
make
it
rates;"
1988a,
breach
impossible
recover
high
to
the
underlying
of
breakdowns,
suggest
relative
provides
promises
contractual
there
renegotiations
are
that
a
large
us
can
to
coal
with
be
allowing
had
seller
infeasible
it
ratepayers
to
earn
those
restrictions
electricity
in
"inequitably"
tied
high
imposed
costs
to
to
problems
or
costs
regulatory
that
from
especially
market
in
occur
will
of
leading
useful
enforced
their
and
the
evidence
nature
regarding
Whatever
and
The
1983.
after
litigation,
of
those
the
ease
1983
probability
the
are,
increased
termination
after
agreements.
contracts
have
to
occured
that
contractual
these
should
periods,
some
conditions
breach
to
characteristics
both
contractual
which
with
and ex ante commitments protected by contract.
contract
protections
the
(c)
following
the
also be subject to differing interpretations.
earlier
number of
contractual
the
breakdowns
contractual
and
obsolutely
If
"enforceability"
involuntary
incidence
buyers
of
provisions,
changes
the
coal;
are
prices
transportation
the
to
buyers
to 'find
make
to
difficult
and force majeure
clauses
contracts
their
consume
costs
adjustment
price
incentives
the
breach
unanticipated
that
(b)
for;
the
Clearly,
that
he will try to base
obligations
hardship
or
for
more cheaply elsewhere.
changing environmental regulations have made
by new government regulations, might
the
contractual
his
motivation
the
if
For example, we should expect
do
actually
impractical
to
that
(d)
Complex
increased
especially
obtain coal
to
inequity
gross
59-60).
pp.
or
that
(a)
economically
or
include
contracted
coal
profits.
perform on
to
provisions
Joskow,
(see
the
use
agreement,
the
on terms and conditions of the contract that are ambiguous or
refusal
clauses
breached
has
simply the opportunity the buyer has
is
the
his
party
are
terminations and a lot of litigation this would
very
imperfect.
Alternatively,
if
it
is
very
might even suggest that a state regulatory commission order it to
on a high priced contract in the hope of sustaining a force
majeure or gross inequity claim based on an unanticipated order by a government agency.
^'A
stop
utility
taking
delivery
22
observe
buyer's
the
that
clear
tendency
pervasive
a
1983.^*
prevailing
in
associated
increases
promises
for
prices
quantities
be
we
might
the
market
enforceable,
renegotiated
of
renegotiations
would
below),
(see
be
to
to
downward
Pervasive
in
unlikely
are
to
contract
suggest
also
simply
levels
without
prices,
contractual
that
promises are difficult to enforce.
There are
voluntary
renegotiations
reopener
scheduled
quantity
could
lead
contract
after
a
in
investments
prices
suggest
this
that
were
that
of
thought
we
the
parties
the
contracts.
in
by
both
are
higher
large
if
to
hold-ups
be
severe.
associated
to
the
value
of
buyers
see
remaining
taking
principle
in
prevailing
the
circumstances
the
reductions
of
presence
seller
than
and/or
price
the
the
lower
or
price
relationship
advantage
of
sunk
with
Furthermore,
between old formula prices and new contract prices
to
and
and
contracts
observe
While
have
contracts
renegotiate
to
buyer
the
either
coal
will
Some long term
observe
to
coal
in
from
resulting
Most importantly, a coal contract would not have provided
case.
reopener
scheduled
sunk
which we would expect
in
contracts.
allow
specified
dates
characteristics
1983
coal
that
investments
the
circumstances
term
long
renegotiated
to
renegotiation
for
at
specific
price,
markets
of
provisions
provisions
relationship
many
also
is
the
large
relationship
difference
probably quite
specific
investments.
reopener
provisions
Thus,
and
large
we
specific
in
compared
should
securing
prices
expect
large
price
reductions.
buyer
is
above
the
the
Another
case
highest
value
seller's
marginal
where
user
voluntary
of an
costs.
In
renegotiation
incumbent
such
seller's
situations
likely
is
coal
the
occurs
when
the
and contract prices are
seller
may be
willing
to
'*The presence of relationship specific investments makes determining what the
outcome of easy ex post renegotiation and bargaining will be, but given the relattively
short remaining terms on many of these contracts and the large differences between
"formula" prices and market values in 1983, we should at least see numerous instances
of downward price renegotiations toward market levels.
23
negotiate
or
maximum
may
prices
the
to
prices
and
buyer
to
of
cost
or
increased
the
are
obligated
increase
be
mutually
annual
quantities
willing
to
may be
negotiate
the
alternative
above
is
higher
suppliers,
lower
is
for
promise
a
term
the
price. '^
lower
a
contract
of
return
In
extending
or
high
coal
seller's
attractive.
taken,
The
the contract price
If
from
minimum
specify
take.
to
and
available
coal
could
quantities
seller
than
typically
contracts
production
increasing
seller
Such
of
the
renegotiations
clearly be efficiency enhancing.
Opportunities
the
buyers
the
For example, the quantity
quantities.
term
long
these
in
that
increased
for
buyers to take the minimums required.
buyer
contract,
would
contained
marginal
the
value
return
in
quantities
lead
seller's
the
price
provisions
"take"
and
by
lower
a
and
terms
specify
properties
must
it
contract
would
grounds
that
operating
reduce
some
production
is
come from.
seller
had
of
coal,
but
breached
his
costs.
In
from
coal
buyer
the
for
often
also
to
it
with
restrictive
provisions
in
more
the
is
likely
to
that
'^There
it
is
would
may be circumstances
not
contracts
the
the
only
mining
specific
specified
in
the
terminate
the
contract
on
the
a
consolidate
to
company
mining
production
would be willing
production
in
return
share
to
for
to
being
would otherwise keep him from
be especially prevalent when the coal
characterized by considerable excess capacity as
there
minimize
not
seller
efficient
contract
specify
to
when
arise
properties
economical
such a circumstance the
associated
Coal
However,
promises.
also
ability
seller's
customers.
its
Supplying
excuse
the
restrict
mine properties may find
Finally,
as far as
an
the
This kind of opportunity
so.
market
of
all
may
renegotiation
beneficial
contract
savings
the
of
relieved
doing
the
the
service
to
attributes
provide
multiple
of
coal
quality
the
of
conditions
providing
of
costs
mutually
for
in
it
was beginning
which
a
buyer
in 1983.
finds
of course no reason to expect that the renegotiated price
if expected damages from breach were not a consideration.
alternative
would
fall
24
supplies
coal
incumbent
out
the
are
that
contract
price
is
the
both
lower
than
may be producing from
seller
are
buyer
can
lower
than
cost
of
the
find
a
profits
must
be
of
deregulation
such opportunities
We
contract
prices
between
1981
with
extensive
that
the
vast
1985
is
provisions
for
new
majority
endured through
was
and
1984
the
alternative
post- 1983
from
that
the
The savings
for
and
may exceed
out
during
occurred
excess
Second,
costs
are
transport
due
to
capacity,
so
1980s
transportation
coal
the
incumbent.
the
the
the
if
incumbent,
buy
to
buyer
the
to
a
the
First,
transportation
by the
buyer
the
markets
rates
where
supplied
coal
period.*
termination.
located
is
which
in
1984
infrequent.
and
This
the
that
large
gap between "new" and
behavior
of
contract
"old"
"old"
prices
with the continued reliance of the parties on the
contained
in
of
prices
contracts
of
and
1985
a
is
consistent
renegotiation
available
pay
to
the
if
lower market price
a
at
have already seen that there
and
escalation
case
circumstances
high cost mine.
transportation
trucking
obligated
may have emerged.
in
price
and
rail
two
least
resulting
economical
it
coal
in
supplier
transport
to
make
changes
Significant
paid
the
during the
likely
supplier
satisfactory
could
savings
prices
incumbent
be
will
at
from contracting with an alternative supplier
lost
is
economical for the buyer simply to buy
is
relatively
a
he
incumbent supplier's price and the incumbent
the
There
costs.
what
than
This
buy-out would be
mutually satisfactory
is
incumbent.
with
incremental
supplier's
much lower
so
under the contract that
seller
supplier's
priced
the
suggests
in
that
Outright
that
by
The evidence
contracts.
these
negotiated
contracts
1985.
these
in
contracts
"old"
1984
were
and
1985.
in
force
still
We
at
large
the
lack
inconsistent
by
driven
termination of contracts
and
is
have
the
the
lower
also
seen
end of
1983
during this period
of
enforceability
of
contractual promises was not a pervasive problem during this period.
Given
the
imperfections
in
contracts,
the
uncertainty
and
costs
of
25
opportunities
litigation,
responses
when
them
to
quantity
(e.g.
could
that
it
would
disputes
and
new
but
litigation.
to
litigation that did take place
more
order
favorable
contract
1982
prices
and
sources.
that
amended
have
conditions
renegotiation
On
amended
renegotiated
even
renegotiated
or
hand
schedules or price adjustment
whether
determining
renegotiations
and
contract
sample.
did
report
that
not
did,
we
there
the
leading
any
and
By comparing
get
a
prices
were
not
the
during
and
price
report
between
transactions
prices
whether
tell
about
post-
the
what
us
in
contract
a
quantities,
reported
and
reported
it
been
has
delivery
is
worth
amendments
reported
for
the
and
"old"
with "old" contracts
transactions
typical
contract
terms
A
Nevertheless,
prices
a
if
adjustment provisions or
that
associated
the
when and
renegotiation.
have been made.
1985
renegotiate
to
information
litigation
adjustments
relationship
for
of
contractual
in
breakdowns
additional
to
of
minor
transactions
feeling
increase
1985,
evidence
by buyers
however,
not,
amendments or renegotiations with the
can
1984 and
and nature of renegotiation
indicates
may simply
only
provisions
is
1984
in
utilities
if
an
efforts
into
nature
the
major changes
other
that
The information came from two primary
does
It
or
gap
large
some
least
contractual
Guide To Coal Contracts
reflect
the
and
collected
I
disputes
renegotiated.
been
could
quantities.
or
insights
been focusing on.
1987
the
First,
been
have
I
at
incidence
the
contracts
contractual
the
taken
coal
varied over time.
it
further
existing
in
find
that
explore
to
not
contracts
clear
is
and how
obtain
to
renegotiations
period
It
would be useful
it
did
renegotiate
to
of
with alternative suppliers in
we
if
and
contract),
a
to
and
rigidities
quantities
the
in
price
incumbent supply contracts and the prices
with
contracts
however,
buyers
reductions
pursuant
associated
prices
by
leading
In
has
available
surprising,
efforts
pervasive,
is
be obtained from
be
increased
least
by
created
renegotiation
limited
at
flexibility
emerged between the
voluntary
for
prices
repjorted
for
that
contracts
renegotiation
is
26
associated with lower transactions prices.
Second,
trade
contract
to
understanding
better
changed
behavior
and
renegotiations
opportunity
more
over
litigation
only
not
time,
importantly
for
my
of
purposes,
and
trade
been
has
contract
a
if
The
how
with
renegotiated
renegotiation
on
the
"old"
or
and
of
the
provide
reports
press
the
renegotiation
outcomes
the
of
details
articles
obtain information to
to
prices,
litigation,
all
associated
lawsuits
is
over
renegotiations
identify
to
and
disputes,
reported.'^
activity
learn
to
of
prevalence
the
1982-1987
years
the
weekly coal market
leading
of the trade press
search
this
prevalence
the
for
of the
search
contractual
renegotiations,
The aim of
disputes.
these
NEXIS
—
Week
Coal
publication
press
referring
performed a
I
but,
litigated
litigation
an
cases
reported.
Table
edition
of
1985.
Of
1984
the
or
73
the
27
1985,
renegotiated
Eastern
Very
few
contracts
value
of
supplied
"old"
contracts
or
of
consistent
is
sunk
the
relationship
for
had
indicated
which
I
have
(37%) indicate that they
are
renegotiations
(10%
Contracts
contracts
contracts
contracts)
renegotiations
information
provides
Guide To Coal
the
"old"
6
associated
the
with
Midwest
(54%
of
in
old
Western
Contracts).
with
the
specific
1984
that
investments
"old"
1985
The
from the East and the Midwest (Joskow,
information
in
Most of
small,
1987).
(43% of the
East
the
Midwestern
for
the
as
is
it
more
to
I
Western
pattern
of
when
the
for
coal
likely
tends
However,
contracts).
"old"
inter-regional
renegotiation
is
in
1987
or
in
had been renegotiated.
and
reported
price
the
1984
renegotiated
transactions
the
were
view
been
produced
coal
which
contracts
be
could
find
no
"data" can be quite useful, but must be interpreted with some
reason to believe that trade press reports pick up all cases of
contract renegotiations or litigation.
Coal Week does appear to include virtually
anything contained in a press release sent to them by a utility or a coal supplier.
Publicly traded companies have an obligation to disclose developments that may have a
significant impact on earnings so, at the very least, the trade press reports should
pick up contract renegotiations and litigation involving substantial amounts of money.
^^This
care.
type
There
is
of
no
(reneg.gde)
TABLE 6
OLD CONTRACTS REPORTING 1984-85 RENEGOTIATIONS
IN GUIDE TO COAL CONTRACTS
1.
2.
Old Contracts Reporting 1984/85
Transactions Price Informations:
73
Old Reporting Contracts Indicating
1984-85 Renegotiation:
-27
a.
b.
c.
3.
EAST
MIDWEST
WEST
10 (of 23)
15 (of 28)
2 (of 22)
Nature of Renegotiations:
a.
b.
c.
d.
e.
Small Reduction in Contract Quantities: 5
Adjustments of Escalation Formulas
4
in Cost Plus Contracts:
Reopener Provisions Specified in
4
Contract:
3
Buyer Takes More Coal:
Unknown, but no obvious effects on
11
prices or quantities:
27
contracts
indicating
indicate. ^^
I
renegotiated
were
estimated in
to
try
examined
my
outliers
"old"
contracts
to
obtain
further
whether
and
prices
indicating
transactions
price
equations
these
been
contracts
analyzed),
information
relevant
and
contract
The information
and reported renegotiation
in
was able
I
Five
small
of
the
1985
and
to
obtain
for
contracts
often
take
provisions,
that
kinds
appear
utilities
provided
of
for
require
it
in
the
will
to
in
contract
a
utility
have
that
are
the
reported
as
of
the
27
in
in
contracts
"old"
but
Table
the
quantities,
period,
led
me
collected
more
1982 and
1983
had
and
the
already
any
other
trade
press.
indicating
that
6.
involved
no obvious change
nomination
amendments or
had
transactions
that
contracts,
appear to have
quantities ,
specify
so
been
I
activity
I
prices
Guides and
summarized
contracts
to
1985
these
1987
over some future
accept
contracts
renegotiations
also
is
"renegotiated"
downward adjustments
Coal
Some
27
the
for
quantities
they had been renegotiated in 1984 or 1985
and
1984
1981,
delivered
contained
that
the
that
between
relationship
information about the 27 contracts at issue.
(supplementing
not
had
they
that
information on price adjustment provisions, actual transactions prices in
for
did
that
this either.^*
statistical
1985
with
associated
contracts
contracts
the
significant
1984
in
and
renegotiated
1981
the
in
any
of
for
been
transactions
There was no evidence for
1988 paper.
lack
1984-85
the
had
they
that
also
The
prices
between
differences
significant
subject
relatively
in
to
prices.
minimum
generally at least a year.
of
renegotiations.
primary interest to us here.
lower
quantity
These
are
not
takes
the
Four contracts were
re-estimated the 1984 and 1985 transactions price equations for the "old"
sample reported in Table Al of the Appendix including a dummy variable
The
indicating whether a contract specified that it had been renegotiated or not.
coefficient was a small positive number that was not significantly different from zero.
'^I
contract
re-estimated the 1981 transactions price equation reported in Joskow, 1988,
with
a dummy variable indicating whether or not the buyer reported that the
6,
was
renegotiated
in 1984 or 1985.
Again,
the estimated coefficient was a
contract
'*I
table
small positive
number
that
was not significantly different from zero.
28
originally
from a
formula
plus
cost
The
contracts.
plus
cost
to
base
a
appear
renegotiations
plus
price
more
were
contracts
provisions
renegotiation
(20%
50%)
to
reductions
The
conditions.
specified
fourth
coal
from
between
were
the
the
significant
in
renegotiations
1985,
the
so
show up
it
eleven
led
or
that
the
conditions.
An
involved
contracts
for
effects
of any
these
broad
cases
large
market
has
that
of
the
quantities
of
three
additional
contract
There
contract.
For
renegotiations.^^
no
find
or
evidence
the
that
adjustment provisions.
was
contracts
or
contract
existing
to
Four
prevailing
an
these
renegotiations
four
additional
quantities
prices,
of
six
of
could
I
an
appeared
however.
additional
either
of
two
with
in
take
to
extension
the
associated
dates
cost
change
a
provisions
plus
a
agreeing
takes
changes
significant
to
likely
is
seller
"renegotiated"
renegotiation
in
involving
the
last
prices
half
of
would not
until 1986.
To
renegotiations
involve
the
buyer
1985,
with
consistent
is
This
of these
three
In
category
this
increased
reductions
price
remaining
However,
and
buyer
the
reopener
resulted,
the
The
seller.
price
prices
contract
involved
contracts
1984 and
contracts.
some room for renegotiation based on market
renegotiated
in
the
in
in
on
based
renegotiated
involved
formula.
escalation
have no significant effects on prices or quantities
have
to
in
summarize,
1984
significant
or
price
of
1985,
the
I
was
renegotiations;
27
"old"
able
four
to
contracts
identify
based
on
reporting
only
seven
reopener
amendments
that
appeared
provisions
of
or
to
some
at least one case, a separate contract for additional supplies had prices that
roughly 50% of those specified in the "old" companion contract.
The price
reduction in the original contract appears to have been on much smaller.
I also found
a story in Coal Week referring to this contract. See "Westmoreland Cuts Price, Gains
New 10- Year Pact," Coal Week July 16, 1984, p. 1. "Westmoreland coal has lowered
the price on coal delivered under a 15-year contract signed in 1978... at the same
time, picked up a 1 -million ton/year contract for a 10-year supply... [the utility] might
have been feeling pressure from state regulators. ..One Wall Street analyst says the
move by Westmoreland is not surprising, as the incremental volume increases from the
new. ..pact probably would make up for any loss under the price adjustment in the
1978 contract."
*®In
were
.
29
type
and
three
seven
these
1984
in
primarily
when
the
reductions
1985.
Thus,
contract
permits
or
quantity
increased
price
significant
cases,
occurred
with
associated
when
or
the
in
appears
In
have
to
five
appear
contracts
buyer and
the
buyer.
the
"old"
renegotiation
price
it
by
takes
have
to
taken
find
seller
of
place
mutually
it
attractive to increase the quantity of coal transacted.
me now
Let
renegotiated
of
all
reported
stories
in
about
stories
and
and
were
there
They
an
make
also
time
this
what
the
Week
in
quantities
through an increase in the
contract,
negotiation
*°In
several
particular
supplier.
of
cases
I
a
stories
new
there
only
seen
in
14
it
buyer
found four
I
and then
stories
generally
in
the
obtain
half
buyer
the
minimum
take,
replace
stories
count a contract once
of
in
the
of
pace
and
motivation
to
for
coal
take
in
the
contract
that
renegotiated
agreeing
price
accelerated
comparable
for
Trade
1987.
in
was the buyer's perception
About
multiple
1984 and six
in
stories
primary
consistent
is
There were no
stories
1985
contract
specific
7).^°
that
later
the
that
could
to
8
suggest
speed
clear
Table
about
stories
1982-87
period
(see
involved
contract
were
the
Week
about
stories
far
so
1983.
period
supplier.
alternative
Coal
during
gather
to
discussed
the
Week
activity
began
during
above
far
with
contracted
1986
major
we have
that
litigation
activity
were
Coal
renegotiation
1987.'^
renegotiation
prices
In
of
pattern
in
of the search of Coal
results
1982 and only one
in
1985.
renegotiation
1986
evidence
the
stories
press
appeared
that
the
to
The
contracts.
renegotiations
with
turn
if
it
contracts
additional
an extension of the term of the
an
about
expiring
a
contract,
particular
what follows even
utility
if
etc.,
in
and a
were
there
multiple stories.
'^
"Long
Term
Coal Week August
.
Contracts
12. 1985, p. 7.
Return, But They Will Provide New Flexibility,
"Market Watch," Coal Week . August 24, 1987, p. 4.
Will
(reneg. cw)
TABLE
7
COAL WEEK STORIES FOCUSING ON PRICE
RENEGOTIONS: 1982-1987
NUMBER OF STORIES
YEAR
1982
1983
1
1984
4
1985
6
1986
14
1987
8
NATURE OF PRICE RENEGOTIATIONS
1.
Buyer Takes Additional Quantities:
2.
Quantities Adjusted Down Due To
Reduced Power Demand Or Cancelled Plant:
4
Contractual Price Reopeners In Ongoing
Contracts:
7
4.
Buyout of Contract By Buyer:
3
5.
Not Specified/or Incomplete:
7
3.
15
NOTE: There Are more entries under "Nature of Renegotiations" because stories
sometimes covered more than one contract involving a specific buyer and
a specific seller.
30
return
lower
to
in
what
that
which
one
In
on
denied
was
prices
contracts.
based
The second most prevalent source of
lower prices.'^
for
however,
story,
such
provisions
buying
out
the
which a renegotiation was associated with a sharp reduction
and one case involving a cancelled
plant.
out
one
contracts
are
enough
costs
transportation
of
the
price
the
savings
In
buy
contract
costs
out
from
achieve
coal
turning
out
its
could
it
alternative
buying
of
cost
to
interesting.
the
an
incumbent
to
new
a
was so much
in
three
more
reduce
the
there
In
demand
buying
it
total
price
compensated
a
cases
in
another case
contract
were
in
savings
substantial
than
two
utilities
to
seller
cases
electricity
supplier.'*
Finally,
contract.'^
of
contract
the
contract,
able
than
less
supplier
alternative
was
utility
consequence
a
as
while
of the stories involving
the
case,
by turning
supplies
to
Two
particular
in
were
There
leading
supply
a
provisions,
contract.'^
buyer
the
specified
renegotiate
to
reopener
price
the
in
involved
renegotiations
contract
formal
existed
reopeners
price
buyer sought
the
were
claimed
it
formal
presence
the
renegotiation
few
that
for
the
cases
in
which the nature of the renegotiation was not specified or the outcome of announced
renegotiations was not reported.
Again,
the
contract
take
it
appears
specifically
additional
quantities
that
provides
of coal
for
renegotiations
renegotiation
from the
seller.
tend
take
to
place
either
because
because the buyer has agreed
or
There
is
little
evidence
that
to
these
one case the contract was for coal to be supplied to a plant that was not
The buyer indicated that absent renegotiation the plant would not be
economically feasible. "Renegotiation of Lignite Contract Puts Malakoff Project Back
on Track," Coal Week December 17, 1984, p. 1.
'^In
yet
built.
.
^
"Colorado Springs Reopens
Coal Week Mav 27. 1987. p. 6.
Contract;
Solicits
Bids
On
400,000
T/Y
Supply,"
.
''^
Coal Week November 24. 1986. p.l
.
Regulators Investigating Renegotiated Coal Pact For Utility," Coal
February 3, 1986, p. 2.
"The cost of the buy-out.. .will be offset by the lower
price of coal under the new contract."
'^"Wisconsin
Week
.
31
renegotiations
"voluntary"
fifteen
Except
for
motivated
coal
the
lawsuits
fact
perception
the
disputes
of
the
no
is
from
on
only
1982
and
stories
between
Western
the
been
motivated
reported
appear
by
to
region.
legitimate
have
been
under existing contracts were much higher
comparable coal
for
generally
there
prices
have
to
reported
suppliers
supplied
coal
contractual
that
coal
their
appear
that
the
by the
prevailing
prices
however,
issue,
of
and
involves
litigation
quality,
primarily
utilities
Week
Coal
litigation.
to
between
the
couple
a
over
disputes
when
of
turn
us
let
lawsuits
Most
1987.^^
than
of
sets
and/or
litigation
of their contracts cannot be readily enforced.
sellers that the provisions
Finally,
of
threats
reflect
new
in
provision
specific
In
contracts.
to
make
contracts
the
price
at
adjustments
differences between prevailing market prices and contract prices emerge.
As
should
not
ambiguities
contract
liable
For
suit.
provisions
their
in
damages,
for
these
in
that
in
contracts
based
on
commission
orders
not
expensive.'^
In
several
burning
few
is
example,
the
to
other
reduce
on
that
the
coal
suits
for
necessary
several
coal
take
order
in
it
provisions
restrictions
'^ In
above,
discussed
I
to
the
suits
find
to
expected
damages
appealed
transportation
for,
was contracted
claimed
convince a court
provisions
contracted
that
buyers
buyer
utilities
alleged
was
a
that
the
to
for
seller
it
contract
or
from a breach
of
in
the
the
problems,
and
that
state
majeure
force
environmental
public
utility
was
too
had calculated
the
because
it
stories covered suits by a single buyer and several
between Commonwealth Edison and subsidiaries of
and
Peter
Kiewit Son's which
eventually
involved
seven
suits
began in
1982
countersuits by 1987. "Commonwealth Edison Must Honor Kiewit Coal Contracts, Court
Says," Coal Week . April 22, 1985, p. I.
For the larger cases, there were typically
several stories picked up, reporting on the progress of the litigation.
suppliers.
a
One
cases,
set
of
trade
press
lawsuits
'^
"Decker Sues Commonwealth Edison; Producer, NIPSCO Discuss Contract," Coal
26,
1984, p. I; "Commonwealth Edison Must Honor Kiewit Coal
Contracts, Court Says," Coal Week
April 22, 1985, p. I; "Breach of Coal Contract
Alleged by Power River Producers," Coal Weeks August 6, 1984, p.l;
"Carbon County
Gets Temporary Edge in Contract Dispute With NIPSCO," Coal Weeks. June 3, 1985, p.
Week
.
November
.
.
.
7.
32
adjustment
price
breaching
or
hardship
claimed
agreement.'®
their
clauses
since
that
In
overcharging
buyers
the
one
In
buyer
the
appealed
very
for
gross
to
interesting
was a "requirements only contract"
contract
its
cases
several
contracts.'^
their
in
was
and
incorrectly
clauses
case
coal,
inequity
a
utility
had no minimum
it
take obligations.*"
Many
with
typically
If
found
only
case
one
reported
lawsuits
the
were
going
before
settled
to
trial,
buyer paying damages or providing some other consideration to the
the
the
seller.
of
proceeded
to
where
instance
conclusion of a
the
a
buyer
ultimately
trial,
buyer typically
the
This
prevailed.
involved
lost.
the
I
the
unusual requirements contract mentioned above.*^
The pace of
"excessive
contract
price"
have increased after the coal market turned down.
natural
markets
gas
leading
relationships
prices
new
and
after
1984,
an
to
contract
there
litigation
does appear to
However, unlike what happened
was not a widespread breakdown
avalanche
prices
motivated
of
diverged
lawsuits
despite
significantly.
the
While
fact
the
contractual
in
that
threat
in
old
contract
of
litigation
Utility Sues Supplier Over 15-year Coal Contract," Coal Week
May
"Decker Sues Over Contract For Texas Coal Supply," Coal Week March
4, 1985, p. 3; "Detroit Edison Sues Decker Coal Owners In Tax Computation Dispute,"
Coal Week April 7, 1986, p. 1; "U.S. Fuel Co. Sues Nevada Power in Coal Delivery
Contract Dispute," Coal Week April 21, 1986, p. 1.
^"Kentucky
30,
1983,
p.
.
1;
.
.
.
'%"Platt River, Nerco Talks Continuing," Coal Week . June 9, 1986, p. 6; "Early
Triton Injunction Refused; WFA Refutes Short-Payment Charges," Coal Week April 18,
1988, p. 1; "AMAX Coal Must Negotiate on Coal Price To Dairyland Power, Federal
.
Court Rules," Coal Week .
*°"NIPSCO
May
26, 1986, p.2.
Rules Contract Limited
Since
the contract price had
p.
gotten so high compared to the prices for coal that could be used in the utility's
other generating plants, it was uneconomical to run the generating unit for which the
coal contracted for was designated despite the fact that it was a new base load unit.
The buyer refused deliver on the grounds that his "requirements" were minimal at
such a high price, and prevailed in court.
Schahfer
Plant,"
*^ Ibid.
Joskow, 1985).
It
Beats
Coal
is
Westmoreland Over Colo.
August 10, 1987,
Week
unusual
.
because
it
has
no
Coal
Judge
3.
minimum take-or-pay
provisions
(see
33
may
be
primary
route
quite
clear.
of
contracts
if
been
not
of
threat
appears
term coal
long
parties
conditions
has
renegotiate
to
have relied on
buyers
that
of
conditions
the
strategy
a
terms and conditions.
attractive
of
of
part
an
not
and
promises,
contractual
forced
has
buyers
that
Since
important
litigation
contracts
that
are
of
can
beneficial for the buyer and the seller to
do
that
only
will
that
be
on
perform
they
altered
if
the
that
Overall,
renegotiations.
if
litigation
or
contracts
and
terms
explicit
surprising
old
in
"voluntary"
confident
be
and the obligations
enforce
not
is
it
a
more
renegotiate
to
explicit
to
reductions
more
provisions
contractual
appear
be
to
because the terms and
case
fairly
them,
price
motivated
sellers
typically
interpret
suppliers
the
is
appear
not
does
it
their
this
courts
the
to
source
force
to
believe
I
contract
a
it
it
their
mutually
is
so.
Conclusions
It
contain
is
provisions
for
Prices
these
provisions
prices
in
and
that
prices
old
parties
and
forced
litigation
conditions
lead
to
naturally
to
after
the
if
prior
adjust
market
the
"old"
typically
side shocks.
contracts
upon
relied
kept
When
buyers
to
the
continue
to
down
turned
were
lower
the
to
The
price
new
in
appear
take
not
prices
1984-85.
in
designed
not
did
1980
adjustment
adjust
to
beginning
in
Transactions prices pursuant to
increasing.
contracts
to
market turned down
the
were far above those observed
would have obtained
market
prices
negotiated
The formal terms of
1985.
negotiated
contracts
term contracts were rigid downward.
demand
the
term
contract
contracts
these
contracts
allowed
long
"old"
in
long
that
contracts
response to
in
1983,
these
that
"new"
available
in
clear
have
to
coal
negotiated
contracts
at
been
prices
in
binding
higher
1984
on the
than
they
they had been able to negotiate these contracts de novo in the
prevailing
in
significantly
1984
and
1985.
lower
coal
prices
Nor did
in
1984
voluntary
and
1985
negotiation
for
the
or
"old"
34
The
contracts.
did
lead
lower
to
reported
cases
several
but
prices,
in
these
way
one
in
take,
increase
significant
a
to
between old contract prices and new contract prices
differences
large
in
contract
trade
the
renegotiations
or
another,
renegotiation
press,
buyers
tended
to
additional
contract
"old"
Although,
however.
suggests
the
that
1985
transactions
their
contracts
promises
is
an
relationships.
contracts
sample
can
the
Few
prices
so
that
long
I
have
be
made by buyers and
trade
while
written
leading
contractual
and
to
the
sellers, or risk allocation
to
In
buyer agreeing
the
pursuant
or
to
be
the
in
are
regarding
reflected
ability
not
and
1984
to
of
of
it
specific
arrangements agreed to ex ante
1984 and
to
sustain
contractual
term contractual
"perfect,"
relationship
the
sellers
enforcement
1985,
renegotiation
in
endurance of long
protect
1985.
renegotiating
in
supplier
its
court
that
protections
enforced
of
result
reports
disposal,
me
to
successful
renegotiations
late
late
of the buyers with contracts in
press
too
my
at
suggests
important constraint
Thus,
of
pattern
such
may have picked up
pace
for
from
benefited
the
from
coal
reopener provisions provided for in the contract.
my
were
be
by
activity
.
appears
that
investments
:
(adjust.app)
APPENDIX
Definition of Variables Used In Transactions Price Equations
Dependent Variable:
Transactions price in cents per million BTU
Independent Variables
tl:
Dummy variable equals
1
for contracts signed before 1971
t2
Dummy variable equals
1
for contracts signed 1971-73
t3:
Dummy variable equals
1
for contracts signed 1974-1977
t4:
Dummy variable equals
1
for contracts signed 1978-79
MIDWEST:
Dummy variable equals
1
for coal supplied from midwestern mines
WEST:
Dummy variable equals
1
for coal supplied from western mines
BTU:
Heat content of coal expressed in BTU per pound
SULF:
Sulfur Content of coal expressed in
SULFl:
SULF * tl
SULF2:
SULF * t2
SULF3:
SULF * t3
SULF4:
SULF * t4
H:
Heckman correction for sample selection
PRICE79:
Dummy variable equals
1
for 1979 transactions
PRICE80:
Dummy variable equals
1
for 1980 transactions
PRICE81:
Dummy variable equals
1
for 1981 transactions
PRICE84:
Dummy variable equals
1
for 1984 transactions
PRICE85:
Dummy variable equals
1
for 1985 transactions
(Refer to Joskow (1988a), Table
3
%
of weight
and associated discussion)
(augment. reg)
APPENDIX
TABLE -Al
1984-1985 Transactions Price Equations
Pre -1980 Coal Contracts
DEPENDENT VARIABLE: TRANSACTIONS PRICE (cents/mmBtu)
Variables
pooled
OLS/H
1984
OLS/H
constant
30.33
(54.78)
27.43
(55.55)
-9.06
(58.42)
-10.21
(59.55)
69.02
(17.21)
67.98
(16.50)
tl
-81.03
(21.33)
-80.49
(21.70)
-52.04
(23.49)
-52.34
(23.61)
-31.82
(6.65)
-43.62
(6.49)
t2
-73.80
(21.67)
-74.01
(22.05)
-49.11
(24.16)
-49.74
(24.67)
-32.78
(6.57)
-39.0
(6.29)
t3
-40.49
(18.36)
-39.51
(18.61)
-14.08
(20.64)
-13.94
(20.97)
-4.76
(5.36)
-8.64
(6.29)
MIDWEST
-15.91
(10.55)
-11.95
(11.62)
-12.71
(10.94)
-10.77
(12.18)
0.40
(3.28)
3.53
(3.28)
-29.86
(12.71)
-25.19
(14.15)
-28.47
(13.73)
-26.22
(15.50)
-40.73
(4.21)
-39.47
(4.26)
WEST
BTU
SULFl
SULF2
1985
OLS
pooled
1984
OLS
1985
OLS/H
OLS
0.01588
(0.0039)
0.01561
0.01773
0.01763
(0.0040)
(0.0041)
(0.0042)
0.00823
(0.0013)
0.00878
(0.0012)
8.11
(4.75)
7.76
(4.82)
5.78
(4.96)
5.63
(5.06)
0.61
(1.61)
1.87
(1.54)
6.40
(6.71)
6.29
(6.83)
4.42
(7.08)
4.33
(7.23)
-0.38
(2.53)
-2.39
(2.40)
SULF3
-10.66
(6.06)
-10.64
(6.18)
-13.54
(6.28)
-13.60
(6.44)
-12.13
(1.70)
-12.26
(1.63)
SULFA
-12.54
(7.74)
-12.21
(7.92)
-2.78
(8.41)
-2.79
(8.59)
-10.84
(2.27)
-12.58
(2.16)
•
38.7
(55.55)
H
.
.
16.94
(61.38)
_
-30.13
(11.43)
(continued on next page)
I
TABLE Al- Continued
PRICE79
-27.08
2.67)
(
-24.89
(2.57)
-14.81
(2.62)
PRICEBO
-'.
-
-
-16.49
(2.74)
PR1CE84
-
-
-
15.25
(3.70)
16.50
18.93
20.24
(3'.75)
(3.57)
0.568
0.602
742
721
PRICE85
r2 (corrected)
NOBS
-
-
0.656
0.652
73
72
(Refer to Joskow (1988a)
,
Table
6
0.631
70
-
0.623
69
and the associated discussion)
(3.51)
(new. reg)
APPENDIX
TABLE-A2
1984 TRANSACTIONS PRICE EQUATIONS
NEW CONTRACT SAMPLE
DEPENDENT VARIABLE: 1984 Transactions Price (cents/mmbtu)
Variables
111
constant
(2)
ill
(
134.82
4.77)
(
-20.80
10.12)
14.94
(20.02)
13.38
(18.38)
(
-62.99
13.49)
-72.88
(24.57)
-77.016
(14.50)
MIDWEST
WEST
(
143.49
69.74)
(
157.93
11.34)
BTU
-
0.00114
(0.00542)
SULF
.
-16.74
(7.62)
-16.70
7.54)
(
0.346
0.360
r2 (corrected)
NOBS
0.305
50
49
-
49
(new85 reg)
.
APPENDIX
TABLE -A3
1985 TRANSACTIONS PRICE EQUATIONS
NEW CONTRACT SAMPLE
DEPENDENT VARIABLE: 1985 Transactions Price (cents/mmbtu)
_ai
Variables
constant
(
MIDWEST
129.72
3.15)
Hi.
(
199.07
55.01)
134.52
4.46)
9.60
6.85)
(10. OA)
(
(
-60.68
10.65)
-83.33
(24.57)
-63.93
7.91)
(
BTU
-8.93
-4.63
6.54)
-0.00492
(0.00416)
SULF
(
NOBS
(
(
-
WEST
R^(corrected)
(3)
0.306
71
-4.61
4.01)
0.309
70
-3.14
(
2.67)
0.32
70
(reneg.ref
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Hart, Oliver,
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.
Hart, Oliver and John Moore, "Incomplete Contracts and Renegotiation,"
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.
"Vertical Integration and Long-Term Contracts: The Case of
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Joskow, Paul L.
,
.
Joskow, Paul L.
"Contract Duration and Relationship Specific Investments:
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,
.
"Price Adjustment in Long-Term Contracts: The Case of Coal,"
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,
.
Joskow, Paul L.
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4(1), Spring 1988, 95-118, (1988b)
,
.
Klein, Benjamin,
Robert G. Crawford, and A. A. Alchian, "Vertical
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.
McGraw, Hill, Inc., Coal Week
.
1982-1987 issues.
Pasha Publications, Guide To Coal Contracts
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.
1983,
1981,
Tirole, Jean, The Theory of Industrial Organization
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.
1985 and 1987
Cambridge, MA, MIT Press,
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.
Williamson, Oliver, The Economic Institutions of Capitalism
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i
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U
Z.
O
.
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.
cee
MtT l-IBHWlf.^i
Jllllfll
005 510
dtt^
3 cioaO
Date Due
l^M^i
Lib-26-67
5^F?C0DB
'Oust
Page