Obama Administration Takes Next Step On Raising Rock-Bottom Coal Royalty Rates

CREDIT: Shutterstock

The Obama administration is looking at raising the rock-bottom coal royalty rates companies pay to extract coal from public lands.

On Thursday, the Interior Department announced a schedule of five listening sessions it will host around the country focused on ensuring “that American taxpayers receive a fair return on the coal resources managed by the federal government on their behalf,” according to a press release. The sessions will be held in Colorado, New Mexico, Montana, Wyoming, and Washington, DC through July and August, and meetings in D.C. and Denver will be available to livestream on the Bureau of Land Management’s website.

“As I’ve said, it’s important to have an honest and open conversation about modernizing the federal government’s coal program,” Interior Secretary Sally Jewell said in the release. “I have heard many concerns about how the federal government leases coal, the amount of royalty charged and whether taxpayers are getting a fair return from public resources. These listening sessions are an opportunity to better understand how taxpayers, stakeholders and local communities perceive the federal government’s coal program today and how we can improve and strengthen it for future generations.”

The listening sessions, while focused on royalty rates, are the next step the administration will take to address concerns about coal mining on public lands, a senior administration official told ThinkProgress. The official said that this examination of raising royalty rates, combined with a parallel process focused on closing loopholes on artificially low coal sale prices as well as the upcoming release of the Stream Protection Rule, demonstrate the administration’s commitment. A stream protection rule would not affect revenue, but advocates, especially in Appalachia, have been pushing for a strong rule to limit the damage caused by mountaintop removal mining.

This follows up on the speech Interior Secretary Sally Jewell gave in March where she said the need to cut carbon pollution “should inform our decisions about where we develop, how we develop, and what we develop.” The Interior Department, through the BLM, manages the coal, oil, and gas located on 570 million acres of public lands, and about 40 percent of the coal produced in the United States is mined from public lands. Her comments about coal leasing made some environmentalists’ ears perk up. Specifically, she noted that “most Americans would be surprised to know that coal companies can make a winning bid for about a dollar a ton to mine taxpayer-owned coal,” and she called for “an honest and open conversation about modernizing the federal coal program.”

The federal coal program, which manages coal companies operating leases on 310 active coal leases covering about 475,000 acres in 10 states, charges a royalty rate of 12.5 percent on surface-mined coal and 8 percent on coal mined underground. This is the lowest rate they can legally charge, and it has never been successfully raised. For the federal treasury and for state budget managers, who roughly split the royalty revenue, this is even more of a problem because the effective royalty rate is actually much lower. An analysis performed by the research group Headwaters Economics found that through deductions and loopholes, companies mining coal on federal lands in fact pay an effective 4.9 percent royalty rate.

Nearly all coal mining on federal lands is surface coal mining.

The invitation letter to the listening sessions said that “concerns have been expressed that royalty rates are too low and that the program’s processes do not reflect current market conditions or appraisal best practices, and therefore put the government at risk of not obtaining for the taxpayer full value for the use of their federal coal resources.”

The letter asks the public if existing royalty rates are appropriate, and if “the size of the federal coal resource base and its domestic market share require us to think differently about how we establish an appropriate royalty rate.” Also on the agenda is the potential impact of raising rates, including jobs, export markets, the economic viability of mining operations, as well as federal and state revenue.

“Increasing royalty rates is not just about increasing revenues,” University of Colorado Law School professor Mark Squillace told ThinkProgress. “It is even more importantly about finding a way to ensure that coal covers more of its external costs to society. And when coal is forced to pay more of these costs, other energy sources look more attractive.”

“It is also conceivable that coal production will continue for the foreseeable future, especially in areas like the PRB where production costs are low,” he continued. “So, the federal government should demand a fair return for whatever future coal it sells.”

If, after the listening sessions, the process results in the decision to raise coal royalty rates, this would apply to future coal leases; the rates on existing leases are locked in by contract and by law. Future coal leases, judging by the interest generated in past years, would not be hot commodities. In 2013, an auction for a tract in Wyoming resulted in just one historically low bid, which was rejected because the BLM said it “did not meet fair market value.”

The royalty rates are not the only factor limiting potential revenue for taxpayers. The price at which the company sells the coal can also be made artificially low if they sell it to a subsidiary, who then can sell it for more, especially to the much stronger export market abroad. This is known as a captive transaction, and Interior proposed a rule addressing this loophole in January. It would attempt to halt the practice of coal companies intentionally dodging royalty payments through captive transactions.

“The action Interior has taken, through proposed rules of the Office of Natural Resource Revenues, is quite significant,” said Dan Bucks, who directed Montana’s Department of Revenue from 2005 to 2013. “They have made a good start in proposing improvements to the process for valuing coal.”

“Any increase in coal’s royalty rate should come after loopholes in the valuation system are closed,” he told ThinkProgress. “Failure to fully close loopholes in the valuation system while raising royalty rates will further incentivize the largest coal producers to exploit those loopholes and game the system to the detriment of companies that play by the rules.”

This proposed rule would still allow coal companies to pay royalties on a price that is below the true market value at the final point of sale, and as currently written would not reform deductions from royalty payments companies can receive for costs posed by washing and transporting their product.

A proposal from the Center for American Progress would require companies to pay royalties on the sale price at the final point of sale. This means that the actual, “arms-length” sale price would be used to calculate the royalty payment, not an artificially deflated price to a “not-arms-length” subsidiary. Because it would be a change to how royalties are calculated rather than a change to the royalty rate, this would also apply to existing leases, meaning it could be more effective than raising the rate for future leases.