Battle Royal: Coal Companies, Critics Face Off over Proposal to Reform Federal Royalties

(Casper Star Tribune, February 23) – Coal companies and industry critics are increasingly at odds over a federal proposal to change the way royalties are levied on coal mined from public land.

Mining companies say the plan represents an attempt to hinder firms’ ability to develop export markets, arguing it is the latest front in what they term the Obama administration’s war on coal.

Industry critics say the federal coal leasing program lacks transparency. They contend royalties on coal sales may be undervalued. The proposal, while imperfect, would improve transparency and help guarantee a fair rate of return for taxpayers, they say.

The proposal calls for scraping a series benchmarks used to calculate the value of coal sold by mining companies to affiliated firms. Instead, the plan would levy royalties on the first sale between two non-affiliated companies.

“The purpose of the proposed regulations is to offer greater simplicity and certainty in production valuation,” said Patrick Etchart, a spokesman for the Department of Interior’s Office of Natural Resources Revenue.

The current regulations, he noted, have not been updated since the late 1980s.

“They are old rules and they have not been keeping pace with the current market,” Etchart said.

The issue is something of a holdover from the beginning part of the decade, when coal exports to Asia were on the rise. Many companies in the Powder River Basin sell coal to subsidiaries, which then market the product and transport it to the customer. The practice is less common with domestic sales and generally limited to exports.

The tide of exports, which always represented a tiny fraction of America coal sales, has slowed in recent years, as a glut of coal has driven down international prices and eroded profits on firms’ overseas shipments.


If there is agreement among coal companies and their critics, it is this: a change in the way federal royalties are levied carries important implications for the future of coal exports.

The Obama administration has sought to limit the domestic coal market by calling for more stringent regulations on carbon dioxide emissions for coal-fired power plants, said Richard Reavey, vice president of public affairs at Cloud Peak Energy, a Gillette-based coal company.

“And the ONRR rule is designed to make sure the states don’t offset that by export volume,” he said. “All these measures are designed to keep the coal in the ground.”

He framed the proposal as a double tax. Royalties are traditionally levied on the value of the mineral where it is produced, which, in this case, would be at the mine, he said.

By imposing the royalty on the first sale between two non-affiliated companies, the government is taxing not just the value of the coal, but the cost of marketing and transporting it, Reavey said.

Cloud Peak’s logistics business already pays income taxes on the money it makes, he said.

“What they are actually after is trying to make it unprofitable,” he said.

The federal plan would allow companies to deduct the cost of transportation and washing from the royalty payment, but does not include deductions for demurrage – the fee shipping companies impose when vessels are forced to wait in port for a product to be loaded.

A recent report by the Center for American Progress, a left-leaning think tank, suggests coal companies are using affiliates to avoid higher royalty payments. The report found that sales from companies to affiliates rose from 4 percent in 2004 to 42 percent in 2012.

Federal law requires companies pay a 12.5 percent royalty on coal produced from surface mines on public lands. But the possibility exists companies are selling coal at lower prices to affiliates, incurring a lower payment then on the open market. The affiliates could turn around and sell the coal for higher prices to customers in Asia, the center said.

Whether market manipulation is occurring is difficult to tell, said Matt Lee-Ashley, public lands director at the Center for American Progress. Royalty and price information on individual contracts is not publicly available. Coal companies contest that claim, saying those figures are reported to state auditors.

“Because the royalty and pricing information is not public, no one can verify this except the government,” Lee-Ashley said. “They’ve created subsidiaries to help with distribution, but the fact is that creates a situation where a coal company sells coal to itself and is then asking taxpayers to trust them.”

The government should instead levy the royalty on the market price of coal, or the price utilities pay, he said. Utility payments are publicly available information. It would also eliminate deductions for transportation and other distribution costs, he said.

Royalties levied on market transactions would have netted taxpayers an additional $850 million between 2008 and 2012, according to an analysis by Headwaters Economics, a nonprofit research firm based in Bozeman, Montana.

Cloud Peak and other industry representatives dismiss the argument coal companies are undervaluing sales to associates. They point to a recent Montana Supreme Court ruling, which found Cloud Peak had not undervalued its sales, as state regulators contended.


Current federal policy uses a series of five benchmarks for valuing transactions between affiliates. Such transactions are frequently referred to as “non-arms length” deals.

The first benchmark pegs the value of a non-arms length deal to a comparable sale between two independent companies. The other benchmarks, which are applied subsequently if the first does not apply, are the price of coal paid by utilities, prices reported by the U.S. Energy Information Agency, prices reported by public indexes and netbacks – the final market price minus the cost of transportation and washing.

In a 2011 letter to ONRR, Michael Geesey, then the director of the Wyoming Department of Audit, wrote the state would like to see the benchmarks abolished.

“Considering non-arm’s-length transactions are highly susceptible to manipulation, value should be based on the higher of the resale price or index price, if the index price is appropriate,” Geesey wrote.

The methodology, he added, should not be applied to mine mouth power plants, which are supplied by affiliated mines nearby.

The state is reviewing the ONRR proposal and deciding whether to submit additional comments, said Jeffrey Vogel, the current director of the Department of Audit.

Public comment on the proposal closes May 8.

Original article here.