Coal Valuation Rule

This rule closes gaping loopholes that coal companies have exploited to keep American taxpayers from getting millions of dollars owed for drilling and mining in public lands and waters.

H.J. Res. 71 is sponsored by U.S. Rep. Scott Tipton (R-Colo.).

OVERVIEW

Fairly valuing the public’s coal prevents coal companies from self-dealing. Coal companies have built a complex system of affiliates to reduce paying federal royalties. A 2012 Reuters investigation revealed that companies were engaging in non-arm’s-length, also known as captive transactions, selling coal to their own subsidiaries at depressed prices to pay a lower royalty.

Data from the U.S. Energy Information Administration, or EIA, shows that 42 percent of all coal produced in Wyoming in 2012 was sold through captive transactions, a tenfold increase from just four percent in 2004. In 2013, all coal mined for export in Montana was sold through a captive transaction.

According to Taxpayers for Commonsense, “Arm’s-length transactions are the gold standard for setting a market price, but they’ve often been ignored as sales between related corporations produce artificially low prices. These regulations require that the value be set at the first arm’s-length sale between non-related parties.” By requiring the royalty be paid on non-subsidiary sales, the taxpayer return would reflect market prices and the true value of our shared public resources.

It saves taxpayers money. Experts have calculated that lax regulation and loopholes in the program’s administration have cost taxpayers an average of $124 million between 2008 and 2012. What’s more, 90 percent of the coal leased since 1990 has been sold in uncompetitive single-bidder auctions at below fair market value. Estimates of the extent to which taxpayers have been shortchanged due to the noncompetitive nature of the leasing process range from the millions of dollars to the tens of billions of dollars, and that’s before fully considering environmental and public health costs.

It ensures we get our fair share when exporting to China by closing the loophole that allows coal producers to shirk royalty payments on exported coal. Through rampant self-dealing, coal companies have avoided paying millions of dollars in federal royalties for coal sold overseas. A recent report by the Sightline Institute found that much of the coal that U.S. coal companies shipped overseas over the last decade was originally owned by the American public. The government sold the right to mine that coal for almost inconceivably low prices. And at the height of the Pacific Rim coal bubble that ended in 2014, those companies exploited the loophole by selling coal between domestic subsidiaries at low prices—and then re-selling the coal at higher prices on export markets,earning up to 80 times as much in profit as they paid for the coal in the first place. In taking advantage of this loophole, the coal industry is gaming rules that were never intended to subsidize coal exports—and that, indeed, were intended to bolster American jobs rather than supplying overseas competitors.

IMPACTS

The rule saves U.S. taxpayers hundreds of millions of dollars. Experts have calculated that lax regulation and loopholes in the program’s administration have cost taxpayers an average of $124 million annually between 2008 and 2012. With the rule in place, the American people and coal states are no longer losing millions of dollars each year that can be used to fund schools, roads and needed infrastructure improvements.

Eliminating the rule would allow coal producers to keep taxpayers from getting their fair share of royalties on coal that is exported and sold for higher prices. Rampant self-dealing has allowed coal companies to pocket at least $40 million more on coal exports from Wyoming and Montana alone in 2011. Rescinding the rule would lower the value of U.S. exports and allow industry to keep gaming the system to subsidize coal exports.

OPPONENTS

Cloud Peak Energy operates in three of the biggest mines in the United States, and they all span across taxpayer-owned public lands in the Powder River Basin in Montana. In 2015, Cloud Peak forcefully criticized the Obama administration’s initial proposal to close the loophole that enabled coal companies to dodge royalty payments by selling coal to their own subsidiaries. The company’s rhetoric was so alarmist that even Peabody Energy, the world’s largest coal company, downplayed to investors Cloud Peak’s assertions about the financial impacts of closing the loophole. Now that the promulgated rule is in effect, U.S. Sen. Steve Daines (R-Mont.) included a quote by Cloud Peak Energy’s CEO denouncing the rule in a February 23, 2017 press release.

In 2015, then-Representative Ryan Zinke (R-Mont.) proposed a budget rider to block the rule’s implementation. Cloud Peak Energy was one of Zinke’s top campaign contributors in the most recent election cycle.

According to a 2015 review of corporate documents, the five largest coal companies operating in the Powder River Basin – home to the vast majority of currently mined publicly-owned coal – have “hundreds of affiliates and subsidiaries of parent companies with names such as Excelven Pty Ltd., licensed in the British Virgin Islands, and Jacobs Ranch Holdings LLC, licensed in Delaware.” The same analysis revealed Cloud Peak has at least 31 domestic subsidiaries. According to data compiled by the U.S. Energy Information Administration, sales of Powder River Basin coal through the networks of coal companies’ subsidiaries have skyrocketed in the past decade.

The resolution repealing the coal valuation rule is sponsored in the House by U.S. Rep. Scott Tipton (R-Colo.). He received over $100,000 in political contributions from oil, gas and coal companies during his 2016 campaign according to OpenSecrets.org.

CONTACTS

Mary Ellen Kustin, Center for American Progress, mekustin@americanprogress.org, (202) 478-6334

Pam Eaton, The Wilderness Society, pam_eaton@tws.org, (303) 802-1400

Clark Williams-Derry, Sightline Institute, clark@sightline.org, (206) 447-1880 ext. 106

Dan Bucks, former director of Montana’s Department of Revenue from 2005 to 2013, danbucks@publicrevenues.com, (406) 531-4823

NEWS AND RESOURCES

Trump’s Latest Gift to the Coal Industry Might Be Illegal
Think Progress: March 1, 2017

Big Coal Just Saw One of Its Favorite Loopholes Closed
Think Progress: July 6, 2016

Coal Exports and the Hidden Value of Federal Coal
Sightline Institute: June 17, 2016

Peabody Downplays Impact of Interior Lease Reforms
E&E News: March 31, 2015

Federal Coal Royalty Valuation: Current Structure, Effective Rates, and Reform Options
Headwaters Economics: January 30, 2015

Cutting Subsidies and Closing Loopholes in ihe U.S. Department of the Interior’s Coal Program
Center for American Progress: January 6, 2015