Statement by Ryan Alexander, president, Taxpayers for Common Sense in response to the release today of the Consolidated Federal Oil & Gas and Federal & Indian Coal Valuation Reform by the Office of Natural Resources Revenue (ONRR), within the Department of the Interior.

The Office of Natural Resource Revenue (ONRR), the agency charged with collecting royalties from oil, gas, and coal developed on federal lands, released its final rule today governing the valuation of these resources.  The updated rule is certainly an improvement but TCS is disappointed that well-documented problems with coal valuation were not eliminated.  Those issue have cost taxpayers millions of dollars in lost revenue.

Numerous studies, including a recent report by the Council of Economic Advisers, have demonstrated how coal companies manipulate the current system for valuing coal to reduce royalty payments.  Valuation of the minerals is a key component of the leasing process. It’s quite simple: If the value established for minerals is too low, royalty receipts will be too low.

The principal reform in this rule eliminates the use of “benchmark” prices for gas and coal, and requires that values be based on prices set in arm’s-length sales of the minerals.  Arm’s-length transactions are the gold standard for setting a market price, but they’ve often been ignored as sales between related corporations produce artificially low prices.  These regulations require that the value be set at the first arm’s-length sale between non-related parties.

However, recent studies examining the difference between initial sales and ultimate market prices for coal at the point of use suggest that even these reforms will not capture the true market value of federal coal for calculating royalty payments.  Sales of federal coal near the mine yield prices far lower than those paid to companies for coal exports or power plant sales. TCS has urged ONRR to investigate this discrepancy, and consider whether an alternate valuation method would capture royalties for taxpayers based more on actual values. TCS has also urged ONRR to consider eliminating the deductions for transportation and processing of coal. The reason: The deductions are not necessary to promote development on federal lands and coal companies artificially inflate them, reducing royalty payments.

Finally, as the Department of the Interior continues its comprehensive review of the federal coal program, the agency should consider making further changes to the valuation process, ensuring that taxpayers receive a fair return.