New Legislation for Federal Coal Leases on the Horizon

By: Maggie Coulter

Forty percent of electricity used in the United States comes from coal-burning power plants. Coal used to fuel these power plants has traditionally come from two regions of the United States: the Appalachian Region of Tennessee, West Virginia and Pennsylvania, where coal is extracted from the mountainous landscape by the particularly destructive means of mountaintop removal mining (MTR); and the Powder River Basin, located primarily in Wyoming and Montana, where coal is mined from naturally exposed seams.

In the last fifty years, coal mining has made a dramatic shift from east to west in part because of the depletion of Appalachian coal reserves, and the higher quality of coal extracted from western mines (subbituminous coal, which predominates in the west, burns cleaner that the bituminous coal mined in the east). Currently, the Powder River Basin produces forty-three percent of coal in the United States – more coal than is extracted east of the Mississippi River combined – overtaking Appalachian coal production and making it the U.S.’s premier coal producing region. In the last two decades, coal production in the Powder River Basin has doubled.

The majority of the coal mines are located on federally owned public lands, and thus the extracting companies must obtain leases from the government. Typically, the Interior Department’s Bureau of Land Management (BLM) (the federal agency charged with overseeing the leasing program) calculates the overall amount of coal which should be leased in a region and identifies potential lease tracts to be sold competitively at auction. However, because of a technicality in the federal coal leasing program, federal officials decertified the Powder River Basin as a coal production region in 1990.   Consequently, the coal lease auction process does not apply. Instead, a mining company wishing to extract coal from federal public land in the Powder River Basin draws up their own proposal detailing an area to be leased which BLM auctions off – often to that same firm. The lack of competition in this modified auction process stems from the fact that there are only four major coal companies operating in the Powder River Basin (Peabody Energy, Alpha Natural Resources, Arch Coal and Cloud Peak Energy) and mining equipment is so large and expensive that companies typically propose parcels adjacent to their existing leased parcels, where it would be prohibitively expensive for a new company to come in and build.

As a result, the federal land leasing auction process is far from competitive. Though BLM sets a secret minimum bid price, the auction lacks the central tenet of competition: the bidding war between two or more interested parties. This phenomenon is especially important in the nation’s largest coal producing region, the Powder River Basin, where this non-competitive bidding practice has become the rule rather than the exception: “in the 26 coal leases the federal government has awarded in southeastern Montana and northeastern Wyoming since 1991, 22 have gone to a single bidder[; i]n the other four instances, there were only two bidders involved.”

In April of 2012 Sen. Edward “Ed” Markey (D-MA) made a formal request for review of the federal coal leasing program by the Government Accountability Office (“GAO”); an update to the report he requested in 1983 on the same subject. Specifically, Sen. Markey expressed concern that, though in compliance with federal law and regulations, the federal leasing process in the Powder River Basin allowed the lease of coal for less than fair market value at a huge cost to the government. An independent study, conducted by the Institute for Energy Economics and Financial Analysis, estimated that over the past thirty years the government has missed out on almost $30 billion in lost revenues by these federal coal lease “give-aways.”

Further reports by Thompson Reuters have uncovered that in the extremely lucrative and growing coal export industry, coal companies may be underreporting the value of coal and shortchanging the government in royalty payments. Outdated regulations allow companies to avoid this full payment of royalties further by using financial arrangements to sell coal to affiliated trading firms at low domestic prices. By valuing coal at low domestic prices rather than the much higher price fetched overseas, coal producers are able to legally dodge the larger royalty payout when mining federal land.

In June of 2013, Sen. Markey’s fear was confirmed by an Inspector General report that found that “[a]t the current rate of coal leasing . . . every penny-a-ton undervaluation cost taxpayers $3 million.” The Department of Interior itself is conducting an internal investigation into the federal coal leasing process, which began in February of 2013 and is still ongoing. Congress is also awaiting the requested GAO report on the federal coal leasing program.

In the meantime, Congress has remained active on this issue. In January of 2013, Senate Energy and Natural Resource Committee leaders incoming Chairman Ron Wyden (D-OR) and Ranking Member Lisa Murkowski (R-AK) echoed Sen. Markey’s sentiments and called for federal regulators to step in to ensure that royalty payments are properly calculated. Additionally, in July of 2013, the House Natural Resources Committee held an oversight hearing concerning the Western coal mining industry.

In the past, problems with the government’s coal program prompted temporary moratoria on leasing in the 1930s, under President Roosevelt, and more recently under President Carter in the 1970s and President Reagan in the 1980s. However, former deputy comptroller for the state of New York Tom Sanzillio of the Ohio-based Institute for Energy Economics and Financial Analysis, a group with environmental ties that produced the initial investigative report, expressed his opinion that a moratorium on leasing is unlikely to happen in 2013, because “politics surrounding coal are currently tilted in the industry’s favor.

The current practices of the coal industry, both regarding royalty payments and the valuation of federal coal leases, are not unlawful, but they do amount to de facto coal industry subsidies.  However, it is likely that with increased scrutiny by Congress and taxpayers, the antiquated federal lands leasing policies of the Mineral Leasing Act, last updated in 1960 and encompassing not only coal but also natural gas and oil leases, will be amended. Particularly in light of the U.S. financial crisis, the federal government and taxpayers cannot afford to throw away royalty payments for exported coal nor discrepancies in true valuations for coal leases because of outdated laws and regulations.

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