There's been a fair amount of reporting on the OIG evaluation of coal leases on federal lands published yesterday. As it turns out, the environmentalists and conservationists have been right all along: coal companies are stealing from us.
The headlines I've seen are mostly focused on the IG's assertion of $60 million in potential lost revenues resulting from undervalued lease modifications. Let me say here that I agree: If we must tear coal out of the earth, we should damned sure make sure we get every last penny we can from the extractors. That said, I think it's a mistake to focus on the $60 million in potential losses.
Regarding the $60M... First, the IG comes to that number by totaling all potential losses since 2000. So we're really talking less than $5M/yr. Second, the use of the word “potential” is really strained. I'm not going to bore you with a technical discussion, but the actual loss almost certainly doesn't come close to the IG's upper bound. Finally, more than anything else, the $60M operates as a distraction. The coal lease process is riddled through with stunning and outrageous policy and management failures, any one of which may, even now, result in losses that dwarf anything associated with lease modification. Honestly, I'm having difficulty understanding why the IG chose to include this “potential” loss rather than any of several others that could have been more accurately quantified. Some of those may be huge.
Finding said huge potential losses isn't difficult. As described by the IG, vulnerabilities are obvious from the very first step of a lease sale.
By law, coal companies are required to pay a fair price for the coal they strip from public lands In the context of coal lease auctions, the BLM must set a minimum acceptable bid (the fair market value, “FMV”). Any bid below that benchmark is supposed to be rejected.
Obviously, an accurate FMV is crucial to everything that comes afterward. If it's too low, coal operators walk away with windfall gains that should have been returned to the public.
As it turns out, the FMV process is, of course, irreparably broken
Here's the IG's description the first step in the coal lease process:
In general, the process for a coal lease sale begins with a company applying for and receiving a license to explore an area for possible coal production. If the exploration has been successful, the company submits a “lease by application” request to BLM to initiate planning for the sale. The lease by application contains a variety of information such as the geographic coordinates and size of the proposed lease, expected production volumes, quality of the coal, and a mine plan detailing such information as the coal extraction methods, disposition and use of the coal, and the reclamation plan for restoring the land.
Sounds reasonable, right? The coal operator identifies what it wants, and then makes an offer. What could be wrong with that?
A lot.
From the report, recommendations #7 & 8, emphasis added:
Before a lease sale takes place, a mining company explores the site for the existence and extent of coal seams, including the energy content and quality of the coal. The mining company is required to furnish the information to BLM, which helps form the basis of BLM’s FMV determination. BLM, however, does not independently verify the data, relying instead on test results supplied by the mining company. Further, an independent laboratory does not furnish exploration data directly to BLM. This constitutes a risk in that BLM might not receive accurate data. Although “H-3486-1- Inspection and Enforcement” handbook recommends that BLM staff witness exploration activities, at least one State Office does not conduct such field inspections.
Our evaluation did not uncover specific indicators of data misrepresentation, however, there are risks in current exploration-data management. Without verification, a company could provide incorrect data to BLM, resulting in BLM’s undervaluing the FMV and unknowingly accepting a low bid. Further, a company could use unverified data to justify a request for a reduced royalty rate
I've got a call pending at the IG's office. I'd like to know what they did to justify the emphasized statement above. What exactly did they do to investigate this issue? It seems like there should be a simple way of checking compliance: compare the records of what was actually mined and shipped against operator lease applications. If the coal extracted is consistently of higher quality, or the quantity of shipped coal exceeds the operator's representations to BLM, at a minimum, the BLM should recover for breech of contract. Of course, if a threshold is crossed - a record of serial or inexcusable misrepresentations is discovered - the guilty party should be held criminally liable under the false statement statute.
This just begins scratching the surface of BLM's coal lease deficiencies. Over the next few days, I'll cover a few more in this space.