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Coal Producers: Obama Royalty Reform May Shut Us Down

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?”

source: http://www.bloomberg.com