Coal Producers Say Obama’s Royalty Reform May Shut Them Down

(Bloomberg) — The Obama administration has proposed to

change how it collects royalties on coal mined from federal

land, a move that environmentalists hope, and the industry

worries, will cut use of the fuel linked to climate change.

The Interior Department says the accounting change is

needed to update rules adopted almost three decades ago, and

streamline the program for companies such as Peabody Energy

Corp. and Arch Coal Inc. And more changes are on the way.

“It’s time for an honest and open conversation about

modernizing the federal coal program,” Interior Secretary Sally Jewell said in a speech last week to the Center for Strategic

and International Studies in Washington. “How do we manage the

program in a way that is consistent with our climate-change

objectives?”

For industry, the broad effort is seen through the prism of

their ongoing complaints that President Barack Obama is waging a

“War on Coal.” Sales of federally owned coal from the Powder

River Basin in Wyoming and Montana — the biggest source —

topped 350 million tons last year, generating company revenues

of almost $5 billion, government data showed.

The Interior Department wants to assess the royalty when

mining companies sell the coal to an unaffiliated buyer, not

when sales are made to related intermediaries. Those sales have

been growing, which has raised suspicions from advocacy groups

that the prices are artificially low.

‘Sneaky, Underhanded’

“It’s a sneaky, underhanded backdoor approach to do

something through regulation that they don’t have the authority

to do,” said Richard Reavey, vice president for Cloud Peak

Energy, a Gillette, Wyoming-based company with three mines on

public lands in the Powder River Basin. “What they are saying

is: ‘We want the coal to stay in the ground and here are all the

ways we’re going to do it.’ ”

Environmental advocates are prodding Obama to halt sales of

coal from federal lands, thereby living up to his soaring

rhetoric on climate change. They say he has ignored the impact

of mining and drilling for fossil fuels on government land.

“The administration has done a lot of work on energy

efficiency and power plant emissions, but we think there should

be more of a discussion on the actual resources pulled from

federal land,” said Joshua Mantell, a government relations

representative at the Wilderness Society. “This has been a real

blind spot in terms of the climate debate.”

Asian Customers

A report by the Wilderness Society said 10 percent of U.S.

carbon emissions come from coal extracted on federal land. In

order to prevent the most catastrophic impacts of global

warming, 90 percent of U.S. coal can’t be mined and burned,

according to a paper in the journal Nature this year.

“You have to leave that coal in the ground,” said Josh

Nelson, who is running a campaign for CREDO Action that has

persuaded 70,000 people to write Interior as part of this

rulemaking to seek an end for coal leasing altogether. “If it

doesn’t stop the coal from being burned, it’s not going to

tackle the challenge of climate change.”

Powder River Basin coal is some of the cheapest to mine,

and companies like Cloud Peak are hoping to sell to customers in

China, Taiwan and other energy-hungry Asian nations. Wyoming

coal production doubled from 1990 until 2008, to more than 400

million tons. The 10 largest U.S. mines are in the Powder River

Basin, nine in Wyoming and one in neighboring Montana. Coal

accounts for nearly 40 percent of U.S. electricity generation,

the largest source.

Technical Fix

“It’s hard to find a better value for consumers or benefit

to the government than Powder River Basin coal,” Chris Curran,

a spokesman for Peabody, said in an e-mail. “It is among the

most heavily taxed coal products and provides the federal

government with substantial and appropriate levels of funding,

while fueling very low cost electricity.”

The Interior Department said its proposal is a technical

fix only. The 12.5 percent royalty is now assessed on the price

paid by whatever entity first buys the coal, such as an electric

utility or cement maker.

However, many mining companies also sell to operations they

own that clean, transport and deliver coal either to smaller

consumers or exporters. Those so-called affiliate transactions

jumped to about 40 percent of sales of Wyoming coal in 2012,

from about 5 percent a decade ago, according to government data.

Calculating Royalty

The department’s proposal would collect the royalty on the

price of the first arms-length sale, excluding some costs such

as transportation. When a mine also owns an adjacent power plant

that burns the coal, the royalty would be tied to the retail

electric price, minus all the costs along the way. The

department estimates the change won’t increase payments to the

Treasury.

Environmental advocates such as the Center for American

Progress, a Washington think tank with close ties to the Obama

administration, and CREDO back this fix, but also want the

administration to go further in overhauling the program.

“We have identified this as a key opportunity to rethink

how royalties are collected on coal,” said Nidhi Thakar, deputy

director of the public lands project at the Center for American

Progress. “It’s very clear that the Department of Interior is

thinking very hard about this issue.”

Complex Process

Reavey, of Cloud Peak, said the Interior Department is

combating a problem that doesn’t exist. Companies now calculate

the appropriate royalty by comparing sales to affiliates to

those of similar arms-length transactions. And figuring out how

to subtract costs from sales well down the line will just muddy

the program further, he said.

The change may create the biggest impact on exports, which

had been expanding for Powder River Basin coal. Those shipments

have slowed as prices slump and demand weakens in Asia. Shutting

the export market is a key push by climate activists, who are

seeking to block new West Coast ports that would ship to Asia.

“There is going to be a market for Powder River Basin coal

exports, and this makes for an uncertain operating

environment,” Reavey said. “This absolutely does not

streamline the administrative process.”

The royalty change may be the first of many for the U.S.

leasing program. The Center for American Progress has urged

higher royalty rates and reworking the process to avoid single-bidder sales. It also proposed adding the costs to society of

carbon emissions into the fees paid by mining companies to

extract coal.

Former Interior Department deputy secretary David Hayes,

nominated by Obama in 2009, endorsed that proposal Tuesday in a

New York Times opinion article. And that approach got an

unexpected boost from Jewell in her speech last week.

“We need to ask ourselves: Are taxpayers and local

communities getting a fair return from these resources?” Jewell

said. “How can we make the program more transparent and more

competitive?”

To contact the reporter on this story:

Mark Drajem in Washington at

mdrajem@bloomberg.net

To contact the editors responsible for this story:

Jon Morgan at

jmorgan97@bloomberg.net

Steve Geimann

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