There are many taxpayer subsidies for coal companies. Some in plain sight. Some hidden in regulatory minutiae. The Powder River Basin coal leasing policies of the Bureau of Land Management (BLM) is a perfect example of a devil in the details.
Some of the taxpayer gifts to the coal companies in the Powder River Basin include: (a) below market value leasing of extraction rights on federal and state lands; (b) sweetheart leasing that allows existing mining operators to freeze out competition; and virtual exemption from environmental and land use impact considerations.
The BLM has just rejected another challenge to these subsidies.
The Reagan loophole to the Federal Coal Leasing Act of 1976
The sweetheart leasing protocol in the Powder River Basin has its roots in the Reagan administration. The Federal Coal Leasing Act of 1976 required competitive leasing, limited leasing to American corporations, and subjected leases to environmental and land use review. Prior to any lease sale, the BLM was also required to set "fair market value" of the coal extracted from public lands to allow reasonable return.
In 1982, Interior Secretary James Watt opened up coal leases in the Powder River Basin and created a Regional Coal Team (RCT) to oversee the permitting process. The RCT for Powder River consisted of governors of Wyoming and Montana and BLM directors for the two states. The problem was that leasing through the RCT required public hearings and transparency.
Regional coal leasing requires the BLM to select potential coal leasing tracts based on multiple land use planning, expected coal demand, and potential environmental and economic impacts. This process requires close consultation with local governments and citizens through a Federal/state advisory board known as a Regional Coal Team.
The leasing process was soon challenged in court on environmental grounds and market valuation of coal for royalty collection. Federal courts with Reagan appointees defended market valuations applied by BLM as "fair" and noted that the agency was not required to maximize revenues for the taxpayer. A congressional investigation indicated that the BLM cost taxpayers billions in royalties because of low-ball estimates of fair market value.
To limit public scrutiny of the leases and subvert the requirements for competitive bidding, a loophole was soon born. The RCT was given the authority to "decertify" the region as coal producing. In rapid succession beginning in 1987, all six federally designated coal producing regions, including the Powder River Basin, petitioned the BLM to decertify the regions. As a result, the leasing process reverted to "leasing by application," a process that gave the BLM ultimate discretionary power and gave preference to leasing contiguous tracts by existing mine operators.
The irony is delicious. The Powder River Basin, the most productive coal region in the United States was no longer recognized as a coal producing region for the purposes of competitive leasing. Leasing by application typically only attracts bids from existing mine operators looking to expand their operations.
Since decertification of the Powder River Federal Coal Region in 1990, 20 coal leases containing approximately 5.8 billion tons of federal coal have been issued following competitive sealed-bid sales, BLM said. Only three of those leases have attracted more than one bid.
So much for competitive bids. As extensions of existing operations, fair market value assessments for royalty collection change little over time. The change in leasing requirements also allowed UK-Australian mining giant Rio Tinto to become a major player in the Powder River Basin.
To further compound the irony, BLM decision-making still largely rests with the RCTs despite decertification. Here is the public hearing announcement for the most recent lease sale in the Powder River Basin. The RCT for the non-coal producing Powder River Basin region consists of Montana Governor Brian Schweitzer, Wyoming Governor Dave Freudenthal, BLM Montana State Director Gene Terland, BLM Wyoming State Director, Don Simpson, and BLM Wyoming Deputy State Director of Minerals and Lands Larry Claypool.
Challenging the status quo
The handling of federal coal leases by the BLM is one of many areas long overdue for overhaul. The program operates today the same way James Watt left it. A coalition of conservation groups lead by WildEarth Guardians has challenged the BLM leasing program in the Powder River Basin, both in court and direct petition to BLM director Bob Abbey. The trigger for the challenge was a massive lease sale in 2009 that would provide rights to an estimated 5.8 billion tons of coal, which is equal to all the coal extracted from the Powder River Basin during the past 20 years. These challenges primarily focus on two issues: (a) reforming the leasing process to allow for greater transparency and public input, and (b) serious consideration of climate change as part of environmental impact assessments.
The lease by application (LBA) process short-circuits the transparency, public input, competition for resources, and land use review required in regional leasing. WildEarth Guardians has petitioned the courts and the BLM to reinstate certification of the Powder River Basin as a federal coal producing region and close the Reagan loophole to the Federal Coal Leasing Act of 1976. The lease by application process is little more than a secret negotiation between mining companies, state government officials, and BLM representatives.
Coal from the Powder River Basin is a major source of greenhouse gas emissions in the United States. The argument is straightforward.
Located in northeastern Wyoming and southeastern Montana, hundreds of millions of tons of coal are mined from the Powder River Basin every year and burned in coal-fired power plants throughout the country. In 2007, the region produced 42% of all coal in the U.S.—more than any other region of the country—and was the source of 40% of all carbon dioxide emitted by the nation’s coal-fired power plants. Coal-fired power plants are the largest source of greenhouse gases in the U.S.; coal mining in the Powder River Basin is the primary source of coal to America’s coal-fired power plants.
Undermining the Climate, page 4
WildEarth Guardians proposed several mechanisms to address the contribution of Powder River Basin coal to climate change. One mechanism would be to create a regional strategy to balance coal extraction with renewable energy generation as part of a systematic transition to clean energy. The second would be to require coal companies to pay a carbon fee for new leases. The fees would be used to support renewable energy development, habitat restoration, and other climate change mitigation efforts.
Not surprisingly, the mining industry has rushed to defend the current leasing process, even petitioning the court to join the lawsuit against Interior Secretary Salazar and the BLM. Who can blame them? The process stacks the deck in their favor. When a particular leased area starts to play out, they can nominate an adjacent parcel with promising geological characteristics and wait for it to appear on the next lease sale. They are assured of having their bid approved without having to worry about competition or public scrutiny.
Rather than take the opportunity to review and revise the coal leasing process, the Obama administration has aggressively supported the status quo in the Powder River Basin (with strong encouragement from state officials). Here is a glimpse at the defense of the current lease by application approach by BLM director Bob Abbey:
Under both regional leasing and the LBA process, the sales are always competitive, even if there is only one bidder, because the BLM sets a FMV (using the process explained in the BLM Handbook, H-3070-1, Economic Evaluation of Coal Properties) and will not accept any bid that does not meet that value. These values are not disclosed, and bidders recognize that they need to bid a fair value or the bids will be rejected. The BLM has rejected numerous bids that were the apparent high bid.
All of this evidence demonstrates that the BLM practice has ensured fair market values are received for LBA tracts and allows production to be maintained at already operating mines. Meanwhile, the coal resource is managed to avoid bypass and isolation and encourage competition.
BLM Director Response, page 5
How single party, secret bidding encourages competition and ensures fair market value for coal extracted is one of life's glorious mysteries. It ignores history where there have been few leases over the past twenty years that received more than one bid. Those few instances involved proposed lease areas that were adjacent to two existing mines and were resolved by creating new lease boundaries that permitted extension of both operations. As for rejecting "numerous" bids, the mining companies would be foolish not to try to low-ball bids knowing there would not be any competition.
As for fair market value, let's take a peak at reality. Technically, federal coal leases require royalty payments of 12.5% on the "fair" market value of the coal extracted from surface mines. Here is the SEC filing for Cloud Peak Energy, which operates several mines at the heart of the most recent lease sale. Since their only play is in the Powder River Basin, their numbers are instructive. They paid $93 million in lease royalty payments in 2009 for 91 million tons of coal, sold at $11.85 per ton. This works out to be a royalty rate of 8.6% on the actual market value of $1,078,350,000. In this gilded age of austerity, does it make sense for a mining company to pocket nearly $42 million that should have gone to the taxpayer?
There is nothing unique about Cloud Peak Energy. They operate 3 of the 15 active mines in the Powder River Basin. However, their royalty payments on their federal coal leases is a good indication of the extent to which the BLM is deeply discounting fair market value from actual market value. Please remember the vast difference between the BLM's idea of fair market value and actual market value when you hear our politicians talk about cutting the Low Income Home Energy Assistance Program (LIHEAP). The LIHEAP program could be funded completely by revenues the BLM is not collecting from federal coal leases. Just because the courts have ruled the BLM is not required to collect royalties on actual market value, it does not mean that they are not entitled to do so. In this day and age, there are no technological obstacles to base royalties on actual value instead of an arbitrarily assigned fair value.
The Obama administration's defense of environmental impact assessments ranged from absurd to ridiculous.
Responding to comments to its draft Wright Area EIS, BLM stated that greenhouse gas emissions are not a byproduct of the leasing process, but rather are caused by the mining and burning of coal in power plants.
"BLM does not authorize mining by issuing a lease for federal coal," the agency wrote, adding that mining companies must obtain permits from separate state and federal agencies to mine the coal. "But the impacts of mining the coal are considered in this EIS, because it is a logical consequence of issuing a maintenance lease to an existing mine."
There is no relationship between coal extracted from federal leases and greenhouse gas emissions from burning that coal!?!? Once federal leases for coal have been granted, few mining permits are denied by state and federal agencies. The only exceptions have been in Appalachia because of enforcement of the Clean Water Act in permits for valley fills as part of mountaintop removal mining.
The BLM coal LBA NEPA analyses in the PRB recognizes and discusses the issues of greenhouse gases (GHG) and climate change. Foremost, the NEPA analysis clearly states that policies regulating specific levels of significance have not yet been established for GHG emissions. Given the state of the science, it is not possible to associate specific actions with the specific global impacts such as potential climate effects.
When that statement was translated into legalese by the Justice Department in their defense of the BLM in the WildEarth lawsuit, it was quickly portrayed as climate change denial in the media, particularly in Gillette, Wyoming, home to many of the Powder River Basin mining operations. Nicely played.
The BLM director is pointing to outdated National Environmental Policy Act (NEPA) guidance. That matters because federal courts require agencies to consider the NEPA as the best available information for policy guidance and legal challenges. The Obama administration is well aware of the deficiencies in that NEPA and has proposed changes that would incorporate stronger language about climate science. Unfortunately, they have also gone to great lengths to exclude greenhouse gas emissions from consideration in land and resource management such as those under the purview of the BLM.
The draft guidance does not apply to land and resource management actions and does not propose to regulate greenhouse gases.
It looks like the only the thing that will be changing in the Powder River Basin any time soon will be the landscape. The leasing process, royalty assessments, and environmental impact assessments will remain stacked in the mining industry's favor.