The Trump administration’s decision not to close a loophole that allowed energy companies to sell coal, oil, and natural gas at significantly depressed prices will cost taxpayers $75 million per year, a fact the administration itself acknowledged in a Federal Register notice published Monday.
The Department of the Interior’s decision to repeal the Obama-era rule contradicts Secretary Ryan Zinke’s claims that he wants to maximize revenue from the private use of federal lands, according to Dan Bucks, the former Montana Director of Revenue and an expert on federal coal policy. Part of the revenues collected by the DOI from royalties and leases of federal lands goes to states and local communities through revenue sharing.
The DOI’s Office of Natural Resources Revenue (ONRR), in the Federal Register notice, severely underestimates how much money will continue to be lost if the valuation rule is not allowed to go back into effect, Bucks told ThinkProgress. “As bad as the $75 million loss is, it’s not a credible number,” he emphasized.
In Monday’s Federal Register notice, ONNR said the impact to the federal government, as well as states and local governments, will be a net decrease in royalties as a result of the changes. By allowing the loopholes to stay in place, the Trump administration will be harming U.S. taxpayers and local communities that receive revenue from minerals extraction that occurs on federal lands, Bucks said.
“They are hurting coal and oil and gas communities that need the revenue to diversify their communities and adjust to the changing energy realities,” Bucks said.
The ONRR rule was promulgated after a Reuters investigation found that coal companies operating on public lands were taking advantage of a loophole that allowed them to sell coal to their own subsidiaries at intentionally depressed prices, thereby avoiding royalty payments and cheating taxpayers out of hundreds of millions of dollars annually. In response, the Obama administration began a rule-making process to close the loophole.
The rule was finalized on July 1, 2016 and became effective on January 1, 2017. It made valuation changes to existing regulations governing royalty valuation and reporting practices for oil, gas, and coal.
The Trump administration stayed the rule in February, however, and signaled its intent to repeal it altogether. The Interior Department said its final rule published Monday repeals in the valuation rule in its entirety. Thirty days after the repeal announcement in the Federal Register, the ONRR will revert to its previous standards.
“The plan to repeal the ONRR rule… is an egregious handout to oil, gas, and coal companies, literally redirecting taxpayer resources into industry coffers,” Greg Zimmerman, deputy director of the Center for Western Priorities, a conservation and advocacy organization, wrote in a blog post on Friday.
The oil, gas, and coal valuation regulations that were put in place in the late 1980s had become outdated, the Obama DOI said last year. Obama’s new rule affirmed that valuation of these energy resources, for royalty purposes, is best determined at or near the lease and that gross proceeds from arm’s-length contracts are the best indication of market value. The rule simplified the method of valuating energy production by using gross proceeds from the first “arm’s-length-sale.” An arm’s length sale is defined as a sale that is not conducted with an entity affiliated with the seller.
Critics applauded closing what they saw as a loophole allowing companies, mainly coal mining firms, to sell their product to subsidiaries or affiliates at deflated prices.
A 2013 DOI inspector general report said taxpayers were losing tens of millions of dollars in revenue annually because the department’s Bureau of Land Management was selling coal leases at below-market prices. In a separate study of federal lands in the Powder River Basin in Montana and Wyoming, Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis, found that taxpayers missed out on an estimated $28.9 billion in revenues over 30 years due to the failure of the DOI’s Bureau of Land Management to get fair market value for U.S.-owned coal mined in the region.
In February, the Trump administration informed oil, gas, and coal companies operating on public lands that they do not need to pay royalties according to rules that took effect on January 1, 2017. Suspension of the rule was important to coal producer Cloud Peak Energy and other coal producers in the Powder River Basin, according to Colin Marshal, Cloud Peak’s president and CEO. “It was among the most egregious of the Obama administration’s punitive regulations designed to close coal mines, kill coal jobs, destroy coal communities, and raise energy prices for most Americans,” Marshal said in a statement.
Bucks countered that coal and other fossil fuel companies should be required to pay royalties on the fair market value of coal. What the coal companies are really arguing is that they should receive “hidden subsidies” from the U.S. taxpayer, he said.
“Coal companies should be required to follow the law. If coal production is not economically viable by following the law, perhaps it’s because other energy sources are better option,” Bucks said.
The plan to eliminate the ONRR rule adds to a growing list of handouts from Zinke’s department to oil, gas, and coal interests, according to Zimmerman. In July, DOI announced that it was cutting royalty rates on offshore leases by one-third, from 18.75 percent to 12.5 percent.
“This decision flies in the face of experts and government watchdogs who agree that a 12.5 percent royalty is excessively low, costing taxpayers, states, and the U.S. government much-needed revenues,” Zimmerman wrote. “In fact, the excessively low 12.5 percent royalty rate for onshore oil and gas production is a primary reason the Interior Department has been flagged since 2011 by the Government Accountability Office as a high-risk area vulnerable to fraud, waste, abuse, and mismanagement.”