December 29, 2017 Read More →

How Federal Giveaways to Big Coal Leave Ranchers and Taxpayers Out in the Cold

InsideClimate News:

Since coal mining took off there 40 years ago, investigations by federal agencies and independent analysts have repeatedly shown that the leasing process shortchanges taxpayers. The first two coal leases sold in 1982 “were legally suspect and publicly criticized for not receiving fair market value,” leading to a major Congressional inquiry, Squillace wrote in a 2013 law journal article.

In 1990, the Interior Department under Pres. George H.W. Bush rescinded the Powder River Basin’s status as a federal coal-producing region for reasons that remain unclear. The move loosened coal leasing restrictions. Rather than Interior deciding where, when and how much coal should be mined, those decisions fell to industry.

U.S. taxpayers have lost billions of dollars in revenue over decades from undervalued coal lease sales and royalty payments that benefit coal companies. Credit: Anna Belle Peevey

U.S. taxpayers have lost billions of dollars in revenue over decades from undervalued coal lease sales and royalty payments that benefit coal companies, investigations by federal agencies and independent analysts have shown.

One enduring effect of this has been to make noncompetitive lease sales the norm. A corporation will pick a tract of coal to expand an existing mine and petition Interior to lease it. These parcels are too small to be standalone mines that would otherwise invite competitors, Squillace said. So when the coal lease is put up for sale, there’s usually only a single bidder, the nonpartisan Government Accountability Office (GAO) reported in 2013.

In a survey of 107 leased parcels, 96 of them, or 90 percent, went to a sole bidder, almost always a company seeking to expand an existing mine, the report found.

This lack of competition means rock-bottom rates and sparse returns to taxpayers. Over the years, the federal government has sold leases in the Powder River Basin for about $1.00 per ton of coal or less. The market price of Powder River Basin coal is about $12.00 a ton, according to the Energy Information Administration.

Besides the lack of competition, leases are so cheap because the Interior Department itself sets the initial price for a coal tract at far below market value. The process for calculating a lease’s value is confidential, but separate studies by the Interior Department’s Inspector General and the GAO determined the process is flawed. It fails to account for growing overseas demand and other market forces, and deprives taxpayers of millions of dollars annually.

The government collects royalties on the sale of the coal. But the way royalties are calculated also benefits coal companies at the expense of taxpayers. The official royalty rate is 8 percent on sales of coal from underground mines, and 12.5 percent for strip-mined coal like in the Powder River Basin. But corporations often convince federal officials to reduce those rates if the companies are facing financial hardship, or if the coal is expensive to mine for technological reasons, according to Pamela Eaton, senior adviser for the energy and climate program at the Wilderness Society, a conservation group.  

For instance, in September, the Interior Department signed off on an expansion of Arch Coal’s underground West Elk Mine in Colorado—despite warnings about high greenhouse emissions—and cut the royalty to 5 percent because Arch said the coal was especially difficult to mine.

Between 1982 and 2011, taxpayers lost around $28.9 billion from undervalued lease sales and royalty payments, or about $1 billion a year, according to an analysis by the Institute for Energy Economics & Financial Analysis, a think tank working to encourage a transition away from fossil fuels.

The biggest royalty losses to the Treasury occur once coal has been mined and is sold. By law, royalties are assessed on the first sale after the coal has come out of the ground.

Companies have succeeded in minimizing payments to the government by setting up networks of subsidiaries, to which they make the first sale at low prices. The coal then gets sold, and resold at higher and higher prices, until a power plant buys it.

Taxpayers get a royalty payment only on that first, captive transaction.

How Federal Giveaways to Big Coal Leave Ranchers and Taxpayers Out in the Cold

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