WORC Testifies Against Coal Leasing Loopholes

Cubin Proposes to Relax Coal Leasing

Beginning in the mid-1960s, coal companies began acquiring large federal coal leases. Only about ten percent of these leases were actually developed, however. Most leases were acquired in the speculative fever that gripped the coal and electric power industries after the OPEC oil embargo in 1973.

Congress took action to control this speculation in 1976, when it passed the Federal Coal Leasing Amendments Act. This Act required diligent development of federal coal leases and a fair return to federal and state taxpayers for the use of public minerals.

Now, U.S. Representative Barbara Cubin (R-WY) has introduced a bill, H.R. 794 that would eliminate many of these protections. On March 6, WORC testified at a hearing before the House of Representatives' Energy and Minerals Subcommittee, expressing concern about the impacts H.R. 794 would have on federal and state taxpayers, as well as energy development. Below is WORC's testimony:

Statement of Sara Kendall on behalf of the Western Organization of Resource Councils
Legislative hearing on H.R. 794, The Coal Leasing Amendments Act of 2003
Subcommittee on Energy and Mineral Resources
U.S. House of Representatives
March 6, 2003

Madam Chairwoman, my name is Sara Kendall. I am the Washington, D.C. Office Director for WORC - the Western Organization of Resource Councils. WORC is a network of grassroots organizations from seven western states that include 8,250 members and 46 local community groups - the Dakota Resource Council in North Dakota, Dakota Rural Action in South Dakota, the Idaho Rural Council, the Northern Plains Resource Council in Montana, Oregon Rural Action, the Powder River Basin Resource Council in Wyoming and Western Colorado Congress.

Many of WORC's members live and work in communities impacted by coal mining, and most are taxpayers in coal-producing states. We have worked for over 30 years to ensure that the benefits of natural resource development are shared with local people, and that federal coal management takes into account the needs of local people communities to plan with certainty for their futures. WORC was one of the principle organizations advocating for the passage of the Coal Leasing Amendments Act of 1976. This Act was passed in direct response to a decade of rampant speculation on federal coal leases, and enjoyed the strong bipartisan support of members of Congress from coal producing areas.

Thank you for the opportunity to present our views on H.R. 794. WORC is concerned that this bill would eliminate many of the requirements Congress placed on the federal coal leasing program to encourage a fair return to federal and state taxpayers for the use of public minerals, and promote the diligent development of those minerals. We are quite concerned that the broad changes proposed in H.R. 794 would result in a return to policies that allowed coal companies to amass control of large amounts of public land and coal, and hold them for an indefinite period without mining. We have four concerns with the bill.

First, by eliminating the 160-acre limit on lease modifications, H.R. 794 would effectively allow mines to expand indefinitely without having to bid competitively and make bonus payments. In areas where there has been competition to secure leases for the remaining unleased acreage, such as the Powder River Basin, a coal company seeking to expand its operation could submit a plan modification for additional acreage and not have to compete for the coal as is currently the case.

While there are some limits on the Secretary's discretion to approve lease modifications, we believe that maintaining an acreage limit is necessary to ensure that the lease by application process remains part of common practice in order to ensure that the public's coal is properly valued. In removing the acreage limit, we remove the incentive for lessees to design lease tracts that are big enough, and allow lease configurations that split deposits that would be competitive as a whole into a series of noncompetitive parcels that can be added later without undergoing the competitive bid process. An acreage limit helps ensure that the lease modification process is used as it was intended, for adjustments to borders, and that the lease by application process is used when the lessee needs more coal.

Second, although the Mineral Leasing Act's requirement that lessees produce commercial quantities of coal within ten years would not be changed, a series of provisions in H.R. 794 would remove other important protections that currently ensure that coal leases are developed in a timely way, and that the leasing program is not misused to speculate with the peoples' coal. When the investment required to hold a lease is reduced below the fair market value, and the requirements for timely production are relaxed, a lessee is more free to hold a lease during the period when it can be economically mined, then terminate the lease and walk away.

H.R. 794 would:

• Eliminate the requirements of a surety bond or other financial assurance to guarantee cash bonus payments,
• Allow operators to mine "logical mining units" for longer than 40 years,
• Allow companies to stop producing coal for 20 years instead of ten, and pay advance royalties instead of production royalties during this period,
• Give the Secretary the discretion to reduce, suspend or forgive advance royalties during such periods of non-production, and
• Eliminate the requirement that operating and reclamation plans be submitted within three years of lease issuance.

The provision that would allow the waiving of advance royalties is particularly disturbing. I see no protection against uneven application of royalty waivers. The only way this provision, when implemented, could be viewed as anything other than a special favor for specific companies is if it's applied across the board to all lessees. Neither of these options is a desirable alternative.

Congress had the foresight to allow bonus payments to be deferred over a five-year period. In return, the lessee must secure a surety bond or other financial assurance mechanism to protect the government's interests. Requiring such financial assurance is a well-established business practice and entirely appropriate in this case. Bonus payments are part of the cost of securing a federal leasehold, and should not be forgiven if a lessee changes its business plan or the market changes.

Third, we are concerned about the impact many of these amendments would have on the states. Since bonus payments and royalties are shared equally with the states in which the coal is located, state as well as federal revenues would be impacted if:

• Removal of the 160-acre limit on lease modifications results in reduced bonus payments,
• Deferred bonus payments are not paid in full due to lack of financial assurance,
• Advance royalty waivers are granted, and/or
• We see a return to speculation that reduces the overall development of federal coal resources.

Finally, H.R. 794 would change the method for computing advance royalties from the amount of production royalties that would have been paid to be based instead on the average price of coal sold in the spot market from the region. It is unclear how this system would work and whether it would result in a fair return to the public.

In closing, although there may be specific cases where the requirements of current law are impeding further development, we do not believe that the case has been made that the overall program is not functioning well and that broad changes are needed. We are not opposed to allowing narrow exemptions for individual companies in specific cases where burdensome problems can be alleviated, but we are concerned that the amendments proposed in H.R. 794 would return us to a day of speculation with public resources. We urge you to reconsider this approach. Thank you again for the opportunity to testify.