2013-Federal Coal Leasing Fair Market Value and a Fair Return for the American Taxpayer

Federal Coal Leasing

Fair Market Value and a Fair Return for the

American Taxpayer

September 2013 Taxpayers for Common Sense, a non-partisan budget watchdog organization, prepared this report in collaboration with

Pamela Baldwin, federal lands consultant and former Congressional Research Service attorney.

Executive Summary

The predominant leasing process currently used by the Bureau of Land Management (BLM), the agency within the Department of the Interior (DOI) that manages the federal coal leasing program, does not obtain fair market value for taxpayers. It seldom generates competitive bids, and studies indicate that the resulting losses are substantial. Additional and potentially larger losses may be in store if certain current leasing practices continue and markets for exported federal coal expand.

Estimates of losses from BLM practices from 1983 to date run as high as almost $29 billion.1 The DOI Inspector General (IG) documents that “even a 1-cent-per-ton undervaluation in the FMV calculation could result in a $3 million revenue loss” in the average lease sale in the

Powder River Basin (PRB) of Montana and Wyoming.2 Still more revenues are lost as part of the royalty collection processes when the full value of exported coal is not considered, possibly as much as $40 to $100 million in recent years.3

Congress has repeatedly and expressly directed federal agencies to ensure a fair return to the government for the development of public assets, such as coal. Yet, DOI’s coal leasing program has been the subject of repeated cycles of audits, studies, moratoria, legislation, and new

regulations, all attempting to uncover and cure problems that cost the government and taxpayers money. New concerns over current and future revenue losses have resulted in another round of audits and studies of agency regulations and practices. So why are taxpayers still losing money on federal coal?

The evidence points to a leasing system put in place by BLM. Known as Lease by Application (LBA), a system has supplanted the competitive system envisioned by Congress. It improperly skews the valuation of lease tracts, garners significantly reduced bids, and shrouds crucial information in secrecy. Under this system, BLM allows coal companies to play a large role in delineating tracts for leasing, a process that has resulted in tracts that do not generate competitive bids. The problem has been most evident in the Powder River Basin of Wyoming, where over the past 23 years alone, BLM has leased 7.9 billion tons of coal.4

BLM has also failed to account for the growing foreign markets for federal coal, especially in Asia. BLM states that coal leases “meet the nation’s energy needs,”5 provide “a reliable, 1 Tom Sanzillo. “The Great Giveaway: An analysis of the costly failure of federal coal leasing in the Powder River Basin.” June 2012. Pg. 3. Cited as Sanzillo Report. Available at: https://http://wendang.chazidian.com/file/d/0B_qWeYLAqoq1V2YyX3hnR25lcXM/edit 2 Office of Inspector General. Report No. CR-EV-BLM-0001-2012. “Coal Management Program, U.S. Department of the Interior.” Department of the Interior. 11 June 2013. Pg. 7. Cited as June 2013 DOI IG report. Available at: http://www.doi.gov/oig/reports/upload/CR-EV-BLM-0001-2012Public.pdf 3 Patrick Rucker. “Asia coal export boom brings no bonus for U.S. taxpayers.” Reuters. 4 Dec. 2012. http://wendang.chazidian.com/article/2012/12/04/us-usa-coal-royalty-idUSBRE8B30IL20121204 4 Bureau of Land Management. “Successful Competitive Lease Sales Since 1990, Powder River Basin, Wyoming.” Department of the Interior. Accessed September 10, 2013. Available at: http://www.blm.gov/pgdata/etc/medialib/blm/wy/programs/energy/coal/comp_lease-1990.Par.55365.File.dat/SuccSales080813.pdf 5 Bureau of Land Management. “Final Environmental Statement for the Wright Area Coal Lease Applications.” Department of the Interior. Vol. 1, Ch. 1, Pg.17. Available at: http://www.blm.gov/pgdata/etc/medialib/blm/wy/information/NEPA/hpdo/Wright-Coal/feis.Par.33083.File.dat/01WrightCoalVol1.pdf.

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continuous supply of stable and affordable energy for consumers throughout the country,” and help “to reduce our nation’s dependence on foreign energy supplies.”6 Yet, the growth plans of coal companies like Peabody and Arch depend on the export of coal to Asia. According to Peabody Energy Chairman Gregory Boyce, Peabody is “opening the door to a new era of U.S. exports from the nation’s largest and most productive coal region to the world's best market for coal.”7 The U.S. Energy Information Administration reports 125 million tons of coal were exported during 2012, more than twice 2007 levels. Likewise, the price of exported coal has more than doubled from 2007 through 2011.8

In the last year, two new Congressionally-directed reviews have been requested. First, Senator Ed Markey (D-MA), former Ranking Member of the House Natural Resources Committee, has asked the Government Accountability Office (GAO) to review the federal coal leasing program, focusing on how fair market value (FMV) for federal coal is determined and the relationship of FMV processes to exports of federal coal.9 Second, the Senate Energy and Natural Resources Committee Chairman and Ranking Member, Senators Ron Wyden (D-OR) and Lisa Murkowski (R-AK) have asked DOI to investigate and ensure that adequate royalties are paid on federally-leased coal, especially in the context of sales for the export of coal.10

In response, the DOI is auditing coal sales from the Powder River Basin, and has asked the

Inspector General to investigate allegations regarding Powder River basin coal sales to affiliated export purchasers or broker. Separately, the IG investigated the coal leasing process, the coal lease inspection and enforcement program, and the venting of methane gas from coal mines.11 The report resulting from this latter IG investigation was released on June 11, 2013, and included a series of recommendations for changes to various aspects of the coal leasing program.12 The other reports are pending.

In the context of recent Congressional focus on federal coal leasing, this paper is meant to provide a basis for analyzing the current laws, regulations, and agency practices, as well as recommend areas for additional oversight and actions needed to ensure adequate compensation to federal taxpayers for extraction of coal on federal lands. The increased attention and scrutiny from the latest round of reviews must be used to catapult real reforms of the coal leasing program.

The following recommendations must be implemented to ensure that taxpayers receive fair value for the coal resources they own:

6 Bureau of Land Management. “RECORD OF DECISION: Environmental Impact Statement for the North Porcupine Coal Lease Application WYW173408.” Department of the Interior. 20 Oct. 2011. Pg. 10. Available at: http://www.blm.gov/pgdata/etc/medialib/blm/wy/information/NEPA/hpdo/Wright-Coal/n-porcupine.Par.91450.File.dat/ROD.pdf 7 Peabody Energy Corp. “Peabody Energy and SSA Marine Enter Into Long-Term Agreement for Powder River Basin Coal Exports.” 28 Feb. 2011. http://wendang.chazidian.com/content/120/Press-Releases 8 June 2013 DOI IG report, supra note 2, Pg. 7. 9 Letter from Rep. Edward Markey to Mr. Gene Dodaro, Comptroller General GAO, April 24, 2012. Available at:

http://democrats.naturalresources.house.gov/sites/democrats.naturalresources.house.gov/files/documents/2012-04-24_GAO_Coal_Exports.pdf. Rep. Markey and Sen. Max Baucus made a similar request in 1982. 10 Letter from Sen. Ron Wyden (Chairman) and Sen. Lisa Murkowski, January 3, 2013. Available for download at: http://www.wyden.senate.gov/news/press-releases/wyden-murkowski-seek-answers-on-coal-royalty-payments 11 Letter from Secretary of DOI Ken Salazar to Sen. Ron Wyden, February 7, 2013. Available for download at:

http://www.energy.senate.gov/public/index.cfm/democratic-news?ID=2ffebb2b-7d3e-4f27-90af-59b0690c071a 12 June 2013 DOI IG Report, supra note 2.

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1. Sustained congressional oversight is needed. Several inquiries have been recommended and are underway. Depending on the extent of these reports, additional information should be obtained on a variety of aspects of the federal coal leasing program, as described below.

2. Fair Market Value must be obtained for coal extracted on federal lands.

? No pending or new leases sales should be completed until ongoing investigations are finished and all recommendations are considered and implemented,

particularly those recommendations that affect fair market value appraisals.

? BLM’s methods for appraising fair market value must be reviewed and

evaluated. If the pending GAO report does not address the validity of BLM’s

methods, Congress should either obtain an additional GAO review or require

external audits of each FMV appraisal and minimum bid calculation prior to

future lease sales.

? Any adjustments made to the methods for calculating FMV (including the

pending IG recommendation that BLM consider export market potential) should

be accompanied by a plan to ensure that old comparable sales are not being used

to establish minimum bids, and that new methods are evaluated. For example, it

could be specified that a limited number of sales of a limited number of tons of

coal shall be held under the new procedures and then evaluated. If acceptable

returns are achieved, these sales could constitute a new set of “comparables” to

serve as the basis of sales going forward.

? BLM should make fair market value appraisals and appraisal methods public, opening them to public review and comment, similar to the State of Montana.

? Congress should obtain a GAO study of the relationship between a coal mine’s reserves and the amounts bid for new leases, and consider whether new leases

that are most likely to be of interest to companies with significant reserves

should be limited.

3. The lease by application system should be examined. The decertification of all Coal Production Regions and associated transition from competitive leasing procedures to the industry-led lease by application process raise serious concerns about whether that system is in taxpayers’ interest. Congress should obtain a GAO review of:

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? Whether current leasing levels, including pending lease by application sales, are in the national interest and contribute to obtaining fair market value for federal

coal, and whether pending LBAs should be completed.

? Whether tracts leased since 1990 would have been more likely to attract more or higher bids if they had been delineated differently, including whether sequential

single bid tracts could have been consolidated to constitute competitive tracts,

whether there might be improper, actionable decisions in the nomination and

approval sequences of limited interest tracts, and whether new guidelines are

needed to ensure delineation of genuinely competitive tracts.

? Whether another bidding system would increase competition or bid amounts. For example, if multiple leases are offered at once, but it is announced in advance

that only a certain percentage of tracts with the highest bids relative to the value

of the coal will be sold.

4. Use of lease modifications should be reviewed. Congress should obtain a GAO study of the use of lease modifications since the Energy Policy Act of 2005 expanded the acreage allowed to be included in modifications, including how many modifications have been applied for and granted, what acreage and amount of coal was applied for and granted, whether any of the modifications included coal that might have generated competitive interest, and any recommendations for changes.

5. Protections against speculative leasing should be enforced. Given the declines in U.S. coal demand and increasing leasing levels, Congress should obtain an GAO review of existing leases and lease terms to ensure that the Mineral Leasing Act’s diligent

development requirements are being enforced.

6. Create safeguards for royalty calculations

? Congress and DOI must ensure royalty payments are calculated on the full value for federal coal. Congress must ensure royalty payments are not based on a low

domestic price of the sale/transfer from one corporate subsidiary to another,

which then sells the coal abroad for a much higher price.

? A full audit and review of the royalty collection program for coal must be

completed. Key questions must be answered including: what percentage of coal

leases and leased acreage have been granted reduced royalties, what are those

rates and are the reductions appropriately justified, and what percentage of gross

proceeds of coal leases for royalty calculations are reduced for washing and

transportation expenses. Following the audit, DOI should take legal action as

appropriate to ensure that taxpayers receive a fair return.

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