A dragline removes overburden at Arch Coal's Black Thunder mine in Wyoming's Powder River Basin. The Center for American Progress claims that some PRB coal companies sell coal through a network of related buyers, shortchanging sales revenue to the public. (Dustin Bleizeffer/WyoFile — click to enlarge)
Originally published January 6, 2015, by Environment & Energy Daily. Contact E&E for permission to republish.

By Manuel Quiñones, E&E reporter

The Interior Department needs to do more to ensure taxpayers are getting their due from the leasing of federally owned coal reserves to mining companies, said a new analysis from the left-leaning Center for American Progress.

At issue is a proposed rule by Interior’s Office of Natural Resources Revenue, which the agency announced last month and published in this morning’s edition of the Federal Register.

Watchdogs say the rule would help close a loophole that they argue allows coal mining companies to reduce their royalty payments by selling or marketing the fuel through a network of affiliates (Greenwire, Dec. 19, 2014). The problem is particularly worrying, they say, because of the rise in exports.

Industry critics often point to a Reuters report that cited statistics arguing that taxpayers would have made $40 million extra in 2011 alone if federal regulators would have calculated royalties based on the export price to Asia rather than prices for domestic use.

“I said from the beginning that taxpayers must receive every penny they are owed when coal companies sell resources extracted from public lands,” said Sen. Ron Wyden (D-Ore.), who formerly led the Energy and Natural Resources Committee and pressed for the changes. “I applaud Interior Secretary Sally Jewell beginning to take common-sense steps to make sure that happens.”

The mining industry has strongly denied claims of wrongdoing. Companies have said environmental groups just want to reduce or eliminate coal use. And while exports have increased, only a small fraction of leased coal is sent overseas.

But CAP, in a document released this morning to coincide with the proposed rule’s publication, said mining companies would still be able to use hundreds of affiliates to avoid paying millions of dollars in royalties, plus receiving subsidies.

“Increasingly, the major coal companies are selling Powder River Basin coal not on an open market, but to an elaborate network of shell companies that they own and control,” said Matt Lee-Ashley, CAP public lands project director and report co-author.

The Powder River Basin, which is in Montana and Wyoming, is the nation’s top coal-producing region. The CAP report said companies doing business in Wyoming, the top producing state, used transactions with affiliates to sell or market more than 40 percent of the coal produced, up from 4 percent in 2004.

“This gaming of the system is costing federal and state governments millions of dollars in lost royalty payments and giving the Powder River Basin an unfair advantage over other U.S. coal producing regions,” Lee-Ashley said. “While Interior’s proposed rule is a good first step toward preventing the worst abuses, clearly more must be done to modernize the royalty system and rein in the largest subsidies it provides.”

CAP says Interior should calculate royalty payments based on the sale of coal to the end user rather than to the first so-called arm’s length transaction. The think tank is also calling for Interior to scrap royalty reductions for mines hit with tough market conditions and deductions for washing and transporting coal.

“Making such a change would not come without opposition from coal companies, which have built a complex system of corporate entities to game the current system and shortchange taxpayers,” the report said.

Indeed, the National Mining Association and pro-coal lawmakers on Capitol Hill have strongly questioned assertions by groups like CAP that taxpayers are missing out on royalty payments (E&E Daily, July 10, 2013). They say the federal government may even be getting more than fair market value because of sealed bids.

Even though reports by the Government Accountability Office and the Interior Department Office of Inspector General criticized parts of the coal leasing program, mine boosters say the problems outlined were nowhere near as deep as many critics allege (Greenwire, Feb. 4, 2014).

NMA and a host of industry representatives, including those from companies such as Cloud Peak Energy Inc., Alpha Natural Resources Inc. and Peabody Energy Corp., made their case during a November White House Office of Management and Budget meeting on the rulemaking.

They shared a presentation arguing that affiliates are often engaged in other aspects of coal marketing and transport, rather than mining. Costs associated with the process, companies said, therefore add up.

“Changes to the existing regulations are not justified as there have been no significant market changes in the last 25 years and markets are even more transparent,” said the presentation.

It also said it’s “[f]undamentally unfair and illogical to impose different valuation structure on affiliate of lessee and independent traders.”

CAP scholars, including Lee-Ashley, met with OMB in December and have called for a presidential commission to study the issue.

The Sierra Club, National Wildlife Federation and the Western Organization of Resource Councils also met with OMB on a different date in the same month.

Today’s Federal Register notice sets up a 60-day comment period on the proposal. In the meantime, the Bureau of Land Management released new manuals and handbooks meant to help offices determine fair market value for federal coal and take exports into account (Greenwire, Dec. 19, 2014).

Click here to read the rule.
Click here to read the CAP paper.
Click here for the NMA presentation.

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