Coal royalty loophole returning?

The Interior Department has stumbled all over itself in its enthusiasm to serve the wishes of Cloud Peak Energy, the American Petroleum Institute, and a handful of other fossil fuel companies and trade organizations when it comes to the coal royalty loophole that pays energy companies millions per year out of taxpayers’ pockets.

At issue is payment of royalties to the federal government when a private company profits from extracting and selling public minerals. Interior Secretary Ryan Zinke is working to reopen a loophole that allowed companies mining and drilling federally-owned coal, oil, and gas to dramatically underpay the royalties they owe. This is a subsidy worth millions of dollars per year to coal companies in the West. The loophole was closed in July 2016 by the Obama Administration, ensuring that companies who profit from public minerals pay their fair share.

How do royalties work?

Here’s how royalties work: A company mining public coal that it has leased from the government is required to pay a portion of the value of that coal back to the government in exchange for the right to mine and sell a public resource. That portion is 12.5%, and the feds split it 50-50 with the states. So for every $1 million in sales value for a company mining federal coal in Wyoming, the company pays $125,000. Half of that — $62,500 — goes to the U.S. Treasury and half goes to the State of Wyoming.

How does the coal royalty loophole work?

Companies pay a smaller royalty if they sell the coal for less. So coal companies that mine federal coal began calculating their royalties based on below-market sales to their own subsidiaries. The company makes less money from the sale and therefore pays a smaller royalty. But the parent company owns the subsidiary “customer,” and therefore still owns the coal. When the subsidiary sells the coal again — this time at the market price — the parent company rakes in the full value of the coal, but doesn’t have to pay a royalty on the higher price.

A study by Headwaters Economics compared the royalty rate that companies are supposed to pay on federal coal (12.5%) to the “effective” royalty rate — the amount that companies were actually paying. The effective royalty rate was 4.9%, less than half of what was owed.

If you apply Headwaters’ numbers to our earlier example, for every $1 million of profit that a coal company mining federal coal makes in Wyoming, the U.S. Government and the State of Wyoming are paying that coal company $76,000. Given that federal coal makes up 41% of the coal mined in the country every year, that’s a lot of cheese that taxpayers are handing over to coal companies.

Taxpayers are missing out on even more when coal companies are selling into a lucrative export market. In fact, this coal royalty loophole first came to the attention of Senators Lisa Murkowski (R-AK) and Ron Wyden (D-OR) in 2011 when coal companies exporting federal coal from the Powder River Basin pocketed over $40 million that should have gone to taxpayers. Companies paid royalties on the domestic price of coal, but collected profits on the export price, which was ten times greater at the time.

The Obama Administration closed this loophole by directing the Office of Natural Resources Revenue (ONRR) — an obscure agency within the Interior Department that deals with royalties on all federal minerals — to change the way it calculates royalties. Instead of charging 12.5% of the first sale of coal, oil, or gas, ONRR would charge 12.5% of the first “arm’s-length” sale of coal, oil, and gas. The rule only eliminated the practice of calculating royalties on artificially low sales to subsidiaries, and trusted the free market to provide a fair return.

This was a simple fix to a simple problem, but we may never know how it would have worked. Zinke’s Interior Department made sure the new method of calculating royalties was never implemented.

What is Zinke doing?

Zinke’s Interior Department has gone far out of its way — seeming to break the law at least once — to reopen this loophole for the coal, oil and gas industries. Here’s the timeline.

July 1, 2016 – The Obama Administration finalized the royalty rule. It was set to go into effect and close the loophole on January 1, 2017.

December 29, 2016 – After Donald Trump won the presidential election, Cloud Peak Energy, the American Petroleum Institute, and a handful of other fossil fuel companies and trade associations filed a lawsuit against the royalty rule in Wyoming.

January 1, 2017 – The royalty rule went into effect, and all companies extracting and selling federal minerals were required to comply with the rule’s new reporting requirements at the first reporting deadline at the end of February.

February 17, 2017 – Cloud Peak, API, and the other plaintiffs sent a letter to ONRR Director Gregory Gould asking him to stay the rule before the reporting deadline.

February 22, 2017 – Gould replied to Cloud Peak’s letter stating, “ONRR will postpone the effective date of the Rule until the issues raised in the judicial actions challenging it have been definitively resolved.” The legality of this action has been questioned because Gould doesn’t have the power to unilaterally remove a regulation that has undergone the formal rulemaking process. Even an executive order from the President himself can’t unilaterally stay a final rule after it has gone into effect.

February 27, 2016 – ONRR published a notice in the Federal Register declaring that the agency had decided to “postpone effectiveness” of the royalty rule. And the Justice Department requested that the Wyoming judge put a hold on the lawsuit while ONRR reconsiders its rule.

April 4, 2017 – ONRR published two notices in the Federal Register and invited public comment on each for 30 days. The documents are somewhat confusing. Their intent, however, is clear: to “repeal” and “replace” the royalty rule and ensure that coal, oil, and gas companies can continue to pocket millions of taxpayer dollars per year.

The first notice proposes to repeal the royalty rule, reopening the loophole for coal, oil, and gas companies.

The second notice is an “Advance Notice of Proposed Rulemaking” that asks the public to provide ONRR with any suggestions for how to improve either royalty policy: the new royalty rule or the loophole that serves as the status quo.

What now?

All of the problems with federal royalties that existed before the royalty rule still exist today. If ONRR continues to repeal and replace the royalty rule, the agency will have to prove that the royalty loophole is not preventing the government from earning a maximum return on a publicly-owned resource. That should be difficult.

It will be more difficult if ONRR hears from you that you don’t want your tax dollars to be used to subsidize an expansion of mining and drilling on our public lands.
Click here to comment on Zinke’s plan to repeal, replace, and give Big Coal back its favorite loophole.

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