“It is our sincere hope that the next Secretary of the Interior will follow through with a review of the federal coal program. It is a disservice to taxpayers, and to the states and towns that depend on revenue from coal mining, to ignore the well-documented problems with virtually every aspect of the process. Allowing the coal industry to control the leasing process and game the system has robbed taxpayers and harmed communities. If the next Administration or Congress want to bail out the coal industry, then they should do it in a transparent and accountable way, instead of undercutting an attempt to fix this broken system.”

                – Statement from Ryan Alexander, President of Taxpayers for Common Sense, January, 2017

Coal is an important energy fuel in America: more than 90 percent of coal mined in America is used to generate electricity.

Yet federal coal leasing has been the source of controversy for decades. Multiple reports from the Government Accountability Office and the Inspector General at the Department of Interior have criticized the federal coal program for failing to capture a fair return for taxpayers. In fiscal year 2012, coal tracts leased under the federal coal leasing program accounted for about 42 percent of the 1.05 billion tons of coal produced in the United States. Revenues from the collection of royalties represent one of the largest non-tax income sources for the federal government. Fair and accurate collection is necessary to ensure taxpayers are receiving what they are owed. Both BLM and the Office of Natural Resource Revenue (ONRR) are in the proccess of updating aspects of the federal coal leasing program.

TCS supports the use of gross proceeds from the first arm’s-length sale as an alternative to the existing benchmarks. The Mineral Leasing Act vests responsibility in DOI to charge royalties based on the actual value of publicly owned minerals. Under current rules, the value may be set in non-arm’s-length sales between two entities with interlocking ownership, allowing the entities to collude and set a low price to reduce royalties. The proposed rule would ensure that the value for royalty recovery in a non-arm’s-length transaction is established through the price set in sales between unrelated parties – the economic gold standard of “arm’s-length transactions” establishing value in the market. While efforts by DOI to estimate value have become more accurate over time, this proposal will look to actual transactions to set value, which is obviously the best reflection of value in the market.

TCS urges ONRR to consider how it can reform the federal coal system to increase revenues and ensure a fair return to taxpayers. Multiple reports from the Government Accountability Office (GAO-14-140) and the Inspector General at DOI (CR-EV-BLM-0001-2012) have criticized the federal coal program for failing to capture a fair return for taxpayers. One option that is within the scope of this rule is to reform the existing system for valuation of arm’s-length sales, in addition to the proposed reforms to non-arm’s-length sales.

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.  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.  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.

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?

Coal Bonding: Time to Revisit Self-Bonding Requirements