Citizens of Wyoming are acutely aware of what is happening in the coal industry today, and there is understandably concern and alarm at the changes taking place. So the announcement that the Department of the Interior is conducting a comprehensive review of the federal coal leasing program has caused even more anxiety.
But the review is both warranted and well-timed. Audits of the federal coal program have found repeated and systematic breakdowns in the process that have created a leasing program that bears no resemblance to the one originally envisioned by Congress. For decades, the coal leasing program has been undervaluing federal coal, costing taxpayers billions of dollars.
The problems with today’s coal leasing program can be boiled down to lack of competition, problems with valuation, and lack of transparency.
In its 1976 reforms, Congress directed the Bureau of Land Management to establish a competitive leasing system where the agency would guide the planning and development of coal producing regions. In 1990, BLM began using the lease-by-application process as its primary leasing method, and since then about 90 percent of lease sales have been for maintenance tracts that received only one bidder, which was usually the company that submitted the lease application. In fact, the last new mine to break ground on a federal lease in the Powder River Basin in Wyoming was the North Rochelle mine almost 35 years ago.
Because there is no competition for federal coal leases, it is up to the BLM to estimate the fair market value of the coal. This already difficult task has been made even more difficult by the secrecy that surrounds the process. Developing fair valuations for tracts is both difficult and controversial. There are problems attempting to value coal by comparing competitively bid leases to lease tracts that lack competitive appeal because the tracts have been drawn to maximize profits of the bidder, not the taxpayer.
BLM could draw on outside expertise to estimate fair market value, but BLM does not typically make documents used to estimate fair market value publicly available, even though its guidance states that a public version of the appraisal document should be prepared. Nor are BLM state offices even documenting the rationale for their appraisal process. It is a black box.
The feds can learn something from states that also manage coal leasing. In Montana, for example, bids for state coal tracts are made public, and the state can then benefit from public input about its fair market value estimates and adjust estimates up or down if necessary.
All of this is important to federal taxpayers, especially those who live in states with significant coal production from federal lands. Revenues from federal coal leases are split equally between the federal government and the state in which the coal lease is located. Royalties from federal leases in Wyoming totaled a little more than $2.3 billion over the last five years. With nearly 8 billion tons of recoverable coal already leased on federal lands, Wyoming encompasses almost 90 percent of the coal available from federal lands. Improving the federal system will benefit Wyoming the most.
Thirty years ago, during the Reagan administration, Interior conducted its last major review of the federal coal program. Today’s coal industry is in a moment of transition, driven largely by shifting technology in the energy industry. But the coal industry will emerge from this process and continue, because the demand for domestic coal in energy generation will continue for decades to come. Ideally, both the coal industry and the federal coal program will emerge from the self-evaluations that are underway in a position to better meet the demands of energy markets and ensure a fair return for the resources federal taxpayers own.
— Ryan Alexander is president of Taxpayers for Common Sense. She has served as a litigating attorney, funder, small business owner, and nonprofit executive. Ryan co-founded Appalachian Mountain Advocates, which she continues to lead, and serves on the boards of directors of the Fund for Constitutional Government, Project on Government Oversight, and R Street Institute.
— Columns are the signed perspective of the author, and do not necessarily reflect the views of WyoFile’s staff, board of directors or its supporters. WyoFile welcomes guest columns and op-ed pieces from all points of view. If you’d like to write a guest column for WyoFile, please contact interim editor Matthew Copeland at matthew@wyofile.com.
Coal revenues have provided new schools and one of the best school systems in the nation. There is a lot more to this picture than the federal level of gain. On a local level, these revenues benefit thousands of children and families, and provide a stable economy for the entire state. Fair value is relative. Local benefit is a huge plus, and coal has allowed many states to provide affordable electricity for the industry that has helped them grow. Texas is the largest user of PRB coal and supports many industries with affordable energy.
R.T. makes a great point. It would also seem that with 2 major coal companies in bankruptcy, others having huge layoffs and losing money, and a declining market for coal, raising the royalty to get a “fair return” on coal is an irrational argument. If no one is mining coal, and it is kept in the ground, there is no return for the tax payers. Perhaps the motivation in raising coal royalties is spin to disguise the true motive for raising the true issue. I bet if one were to do a correlation between those who are seeking to raise the royalties on coal, and those who politically want to shut down coal altogether, one would find a perfect one-to-one correlation.
The BLM has been conducting reviews of federal coal values for decades. The BLM determines the minimum bonus bids for leases of federal coal, which usually amount to hundreds of millions of dollars per lease. Bidders must pay the bonus up front, often a huge economic burden undertaken with the risk that the company may not ever mine that coal, or may mine it many years in the future. I have heard the term “stranded capital” used to describe these bonus payments.
The bonus payments are split 50/50 with the state. Now that USDI has suspended leasing, none of these payments are available to help with Wyoming’s school construction and budget needs.
Economies of scale have stimulated the large Powder River Basin mines to consolidate. Each has one or more sets of crushers and silos and access to trains. Starting a new mine would require huge investments simply to compete with existing facilities; it’s not going to happen in the Powder River Basin.
The coal plays out to the east of the PRB mines, so the mining is universally moving west. If a coal tract owned by the federal government adjoins an existing mine to the west, it rarely would make sense for anyone other than the owner of that mine to bid on that tract. No amount of “federal review” will change that simple fact.
The taxpayers get a lot more money from royalties paid as coal is mined than if the coal is locked away forever with neither lease bonuses nor royalties being paid.
I do not represent any coal companies or own any coal company stock. I do live in Gillette, which is being devastated by the relentless cutbacks in coal mining brought on by two things: federal government policies and cheap natural gas.