Climate

Coal Companies Are Selling Coal To Themselves To Get More Government Subsidies

CREDIT: AP Photo/Seth Perlman

In what is being described as a fundamental shift in how the coal industry does business, over 40 percent of all coal produced in Wyoming is now being first sold not to a power plant or a utility, but to a subsidiary of the same company that mined the coal — a 17-fold increase since 2004 for the U.S.’s largest coal-producing state.

According to a new report by the Center for American Progress, these inside deals between coal companies and their own subsidiaries (known as “captive transactions”) are aimed, in part, at intentionally dodging federal and state royalty payments and maximizing taxpayer-funded subsidies from the U.S. Department of the Interior.

The CAP review, released on Tuesday, found that five of the largest coal companies operating in the Powder River Basin in Wyoming and Montana have collectively created a network of 566 subsidiary companies through which they sell and market coal. Peabody Energy alone, which operates the country’s largest coal mine in Wyoming, boasts 242 domestic and foreign subsidiaries, with names like Coal Sales II, LLC.

Under current regulations, coal companies pay royalties on the first sale to another company after mining coal on federal land. The coal then can be bought and sold multiple times until it reaches a final destination and is sold to an end user, such as a power plant where it is burned for electricity. By building up hundreds of subsidiaries, coal companies have been able to sell to their own companies and partners, allegedly paying royalties based on an artificially low sale price. The CAP analysis presents evidence that captive transactions are common practice in the coal industry and regularly exploited to evade royalty payments and maximize subsidies.

“Increasingly, the major coal companies are selling Powder River Basin coal not on an open market, but to an elaborate network of shell companies that they own and control,” said Matt Lee-Ashley, a Senior Fellow and Director of the Public Lands Project at CAP in a press release. “This gaming of the system is costing federal and state governments millions of dollars in lost royalty payments and giving the Powder River Basin an unfair advantage over other U.S. coal producing regions.”

In recent years, members of Congress and the state of Wyoming, along with many others, have called on the Department of the Interior to reform how it assesses royalties for captive transactions. Taking initial steps to close this gaping loophole, the Department of the Interior released a proposed rule yesterday attempting to halt the practice of coal companies intentionally dodging royalty payments through captive transactions.

Senator Ron Wyden (D-OR) commended the proposed rule, telling E&E Publishing that, he “said from the beginning that taxpayers must receive every penny they are owed when coal companies sell resources extracted from public lands,” and that he “applaud[s] Interior Secretary Sally Jewell beginning to take common-sense steps to make sure that happens.”

However, under the proposed rule, coal companies will still pay royalties on a price that is below the true market value. Additionally, the massive subsidies given to the coal industry, through reductions in royalties due to financial hardships and deductions for transportation and washing, will remain in place. The CAP analysis calls for strengthening the rule to assess royalties based on the true market price of coal at the final point of sale to the end user, such as to a power plant or exporter, and reducing the other deductions and subsidies handed out to the coal industry.

Claire Moser is the Research and Advocacy Associate with the Public Lands Project at the Center for American Progress. You can follow her on Twitter at @Claire_Moser.