On August 20, 2021, the Department of the Interior’s Bureau of Land Management issued a notice of intent to conduct a review of the federal coal leasing program and solicit public comment. The effort will build on a review process started during the Obama Administration.

In January 2016, then-Dept. of Interior Sec. Sally Jewell paused the leasing of federal lands for coal production while undertaking a comprehensive review of the program. The review process completed its first step, releasing a scoping report in  January 2017. However, the process was then abandoned when. President Trump issued an executive order to “amend or withdraw” the coal leasing moratorium and end the review process.

From 2017 to 2020, an average of 42 percent of all U.S. coal came from on federal lands. The last comprehensive review of the federal coal program finished in the 1980s. There have been longstanding concerns about the federal coal program including its ability to attain fair market value for coal development, the reclamation liability from abandoned mining sites, and a leasing process that stymies competition, among others. The new review is a good chance to reexamine the leasing program and implement reforms to guarantee taxpayers a fair return from federal coal. Below is an overview of aspects of the federal coal program that need reform, many of which were identified by the Scoping Report produced by the BLM’s last review effort.

Fair Market Value Calculation

The Federal Coal Leasing Amendments Act of 1976 requires the Department of the Interior (DOI) to hold competitive leases for coal and that no bid may be accepted that does not represent fair market value. The BLM’s estimate of “value” or “fair market value” (FMV) serves as the basis for evaluating lease sale bids. If the sealed bid submitted by a private company undervalues the coal tract, then the bid will be rejected. Therefore, setting a price which reflects FMV is essential to providing taxpayers with a fair return. However, the data and methodology the BLM uses to make FMV estimates are not publicly available and company bids are sealed. The lack of transparency impedes accountability for the BLM’s FMV determinations that historically have reduced revenue for federal taxpayers.

The Leasing Process

DOI has been able to circumvent the competitive leasing mandate by introducing a Lease-By-Application (LBA) system. The LBA process begins with private companies submitting an application to the BLM indicating interest in a specific coal tract. The BLM then reviews the application and if land use and development criteria are met, the BLM prepares an Environmental Assessment (EA) or Environmental Impact Statement (EIS) for coal development on the federal lands in question and collects public comment. Once the EA or EIS process is concluded, the BLM publishes a notice in the federal register of its plan to conduct a lease sale for the tract. Before the sale, the BLM calculates an estimate of the fair market value of the lease, and the coal it contains. Private companies then submit sealed bids to the BLM for the lease. In almost all cases, there is only a single bidder – the company that nominated the parcel. The absence of competition means that taxpayers are losing out in sale revenues because the fair market value cannot be attained.

Royalty Rates and Royalty Rate Reduction

The BLM currently sets the royalty rate for surface mining at 12.5 percent and the rate for underground mining at 8 percent. However, the BLM has broad discretion to reduce these royalty rates and has frequently exercised its authority to do so in recent decades. Just since the start of 2017, the BLM has approved 59 separate royalty rate reduction requests, reducing revenue by tens of millions of dollars.

Royalty Valuation

Valuation of resources is a key component of the royalty collection system that decides the size of the pie from which taxpayers can get a slice. Companies often exploit the valuation system to reduce royalty rates and get bigger profits. The Office of Natural Resources Revenue (ONRR) uses arm’s-length sales, or sales made from the mine operator to an unaffiliated buyer, as indicators of the market value of federal coal. It’s much harder to determine the market value of coal when it’s sold between affiliated companies – a non-arm’s-length sale. Concerns have been raised that coal companies are manipulating the value of federal coal through non-arm’s-length sales to reduce the amount of royalties they pay to ONRR.

In 2016, ONRR introduced a rule that changed how coal sold in non-arm’s-length transactions would be valued for royalty purposes. The Trump Administration tried and failed to repeal the 2016 rule before publishing a rule in the final week of the Trump Administration that largely reverted the non-arm’s-length valuation system to its pre-2016 form. After the change in administration, ONRR delayed the effective date of that January 2021 rule and requested public comments. TCS submitted comments urging ONRR to rescind the Trump Administration’s rule and strengthen protections for taxpayers. In June, ONRR formally proposed to withdraw the 2021 valuation rule. The method for valuing coal from non-arm’s-length sales remains uncertain, however, following a recent court ruling. More work is needed to make sure that companies cannot reduce their royalties by exploiting the loophole of non-arm’s-length sales.

Bonding Requirements

To prevent taxpayers from paying for the cleanup (“reclamation”) of abandoned coal mines, coal companies need to prove they will be able to pay for site reclamation by providing some type of financial assurance, or “bond,” before they begin mining.  One of the accepted kinds of bonds is “self-bonds,” which are secured only by the finances of the coal operator that are deemed sufficiently healthy to cover the costs of reclamation later. However, the string of coal company bankruptcies In recent years like that of Peabody Energy revealed loopholes in self-bonding requirements. Specifically, large coal companies have used the financial statements of their subsidiaries to prove they have the assets available to cover reclamation costs while their own finances worsen. And when those companies have substantial debt or declare bankruptcy, the companies’ reclamation liabilities may be left to the federal government. Moreover, the same assets that are used to prove the health of a subsidiary for self-bonding purposes are often also used as debt collateral of its parent company, so creditors have claim to the assets while federal agencies do not. Current coal bonding requirements should be revised to ensure that companies cannot exploit these loopholes and to protect taxpayers from shouldering reclamation liabilities.

Conclusion

Systemic issues with coal leasing, royalty rates and valuation, and bonding requirements have prevented the federal coal program from getting a fair return for federal coal resources for decades. This review should seek to address each of these issues to ensure taxpayers are receiving their fair share from the federal coal leasing program.