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GAO Report: Coal Companies Win and Taxpayers Lose, Got Any Questions?

Theo Spencer

Posted February 5, 2014 in Curbing Pollution, Solving Global Warming, U.S. Law and Policy

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Senator Ed Markey asked a lot of good questions yesterday, and the Department of Interior should answer them as requested by the end of the month. Please find the questions farther down in this post.

Yesterday the Government Accountability Office (GAO) released a report that investigated whether or not taxpayers are getting shortchanged when the Department of Interior sells coal from public land I think the headline above answers that question.

That headline, incidentally, is the same one (minus "GAO" and "Got Any Questions") that appeared in the St. Louis Post Dispatch. (The sub-head for the story reads: "Investigation Finds Wide-spread Problems in How the Government Values Public Coal Reserves). St. Louis is home to the nation's two largest coal companies, Peabody and Arch. Nice.

The GAO inestigation came at the request of then Congressman and now Senator Ed Markey (D-MA). The Markey press release is here, a fact sheet is also available on the report.  You can find my blog on the report release here.

The GAO has concluded in its report that:

•    Industry competition for federal coal leases is lacking;

•    The process for determining the Fair Market Value of coal leases, which is critical because of the lack of competition, lacks rigor and oversight;

•    The Interior Department is not properly considering the potential for coal exports in setting the value of federal coal; and

•    The federal coal program lacks transparency for the American people.

The GAO report shows there is no available rationale for how much BLM charges for federally owned coal. What’s more, there have been no independent assessments of 107 lease sales over a 23 year period. The GAO report found that in nearly 90 percent of lease sales, only a single coal company submits a bid for coal mining rights, even though federal law requires that sales should be competitive among multiple companies.

An investigation by DOI’s own Inspector General last year found that for every penny the BLM undervalues a ton of coal, the taxpayer loses $3 in a lease sale. Senator Markey estimates its $7 for the largest leases. Billions of tons have been leased since the last audit. (You can read more on the IG report here and here.)

As part of his release of the report, Senator Markey sent a letter to Interior Secretary Sally Jewell asking the questions below. My apologies, because there's a lot of text below. But it's worth airing.

The bottom line: No more taxpayer-owned coal should be leased until the currently broken system of leasing is fixed.

 

1.  In examining more than 100 recent coal lease sales, the GAO found "a similar lack of competition for federal coal leases" as existed in the 1982 coal lease sales in the Powder River Basin (PRB) that the GAO examined at my request. Specifically, the GAO found in the public report I am releasing today, that roughly 90 percent of federal coal lease tracts received a bid from only a single coal company. The GAO further found that the Department accepted that first coal company bid more than 80 percent of the time. According to the GAO, in the 18 instances where the initial bid was rejected by the Department, coal companies always bid again for the tract and did so at higher levels.

This raises the question of whether taxpayers are receiving a proper return on the majority of coal lease sales conducted by the Department.

a.   Do you believe that the overwhelming lack of industry competition for federal coal tracts and the acceptance of initial coal company bids by the Department is leading to a loss of revenue for the American people? If not, why not? If so, what steps is the Department taking to address this lack of competition and when will those steps be completed?

b.   Bureau of Land Management (BLM) officials told the GAO that the BLM uses the tract modification process to encourage competition. However, the GAO found that Interior modified the lease tract boundaries to enhance competition in 23 percent of the lease sales examined yet none of these modified leases received multiple bids. It therefore appears that the BLM's attempts to modify coal tracts to increase industry competition is not working successfully. What steps is the Department taking to improve the tract modification process to increase competition and when will those steps be completed?

 

2.   BLM's guidance lays out two approaches for developing an estimate of Fair Market Value - one that looks at past sales and one that takes into account revenue from mining -- but found that not all states use both evaluations, as recommended by the appraisal organizations GAO interviewed. GAO concluded that states that only use past sales "may not be fully considering current or new trends in coal markets when estimating Fair Market Value.''

a.   Do you agree with GAO's conclusion that states that only use past sales to determine an estimate of FMV may not be considering current or new trends in coal markets and therefore may be generating a deficient estimate of Fair Market Value? If not, why not?

b.   Do you intend to require that all state offices use both of these types of evaluations as recommended by appraisal organizations interviewed by the GAO and, if so, when will such a requirement be put in place? If not, why not?

 

3.   The GAO found that DOl is using coal lease sales that are outdated in setting an estimate of Fair Market Value, that some states did not even update these outdated sales to account for inflation and one state that did not prepare a formal appraisal report to justify setting the FMV at the lowest possible level.

a.   The GAO found that several comparable sales being used were more than five years old and that an appraisal organization interviewed by the GAO suggested such a sale might not reflect current market conditions. Do you believe that DOl should not use comparable sales that are five or more years old in generating an estimate of FMV? If not, why not? If so, what actions is the Department taking to ensure that states do not use outdated lease sale information and when will those actions be implemented?

b.   The GAO found that some states did not even adjust outdated sales information to account for inflation. Do you believe that lease sale information should always be adjusted for inflation in calculating the FMV estimate? If not, why not? If so, what steps are you taking to ensure that all BLM offices adjust this information to account for inflation?

c.   The GAO found three related lease sales in Oklahoma where a formal appraisal report was not prepared at all to justify setting the Fair Market Value at the lowest level allowed in law. Do you believe that the procedures in place in Oklahoma and all state offices should be reviewed to ensure that proper justification for the Fair Market Value estimate is completed for every lease sale? If not, why not? If so, when will such a review be completed?

 

4.   In response to the problems uncovered with the 1982 PRB sales, it was recommended that Interior conduct periodic independent reviews of coal leasing.

a.   The GAO found that Interior is not using an independent third party office within Interior with appraisal expertise. Do you believe that all federal coal lease sales should be reviewed by Interior's Office of Valuation Services or another independent entity? If not, why not? If so, when will such a requirement be implemented?

b.   The GAO found that BLM headquarters currently only reviews a tiny percentage -between five and ten percent - of appraisal reports prior to lease sales. As a result, the GAO concluded that appraisal reports "may not be receiving the scrutiny they deserve." Do you believe that BLM headquarters officials should review every appraisal report prior to lease sales? If not, why not? If so, what actions will the Department take to ensure that this review by top BLM officials occurs prior to lease sales?

 

5.   BLM's guidance states that appraisal reports determining Fair Market Value should consider specific markets for the coal being leased, including export potential. But the GAO found that some offices, such as Wyoming, typically contained only "generic boilerplate statements about the possibility of coal exports in the future and the uncertainty surrounding them." Further, many other states did not consider coal exports at all when valuing federal coal, according to the GAO. What steps are you taking to protect taxpayers by ensuring that the BLM follows its guidance to conduct a meaningful consideration of the possibility of coal exports in determining the Fair Market Value of public coal resources, given that coal leases are issued for a period of at least 20 years?

 

6.   The GAO also found that the Interior Department is providing limited information to the public about federal coal leasing activities. It is vital that there is transparency in the federal coal program so that the American people can be assured that they are receiving a proper return.

a.   Although BLM guidance states that Interior should prepare and release a public version of the Fair Market Value appraisal reports that removes all proprietary or confidential information, the GAO found that the BLM is not following this guidance. Do you disagree with the agency guidance that states that public versions of appraisal reports should be disseminated? If so, why? If not, what steps are you taking to ensure that such documents are prepared and released by BLM?

b.   The GAO found that the main BLM webpage does not post consolidated information on federal coal lease sales and that most BLM state offices do not maintain information on past lease sales on their state webpages. Do you believe that this information should be posted in an easily accessible and searchable fashion on BLM websites for the public? If not, why not? If so, what actions are you taking to ensure that this information is posted on government websites and when will those actions be completed?

 

7.   The GAO report highlights the outdated fees coal companies are paying on public lands.

a.   Rental rates were set decades ago at $3 per acre. The GAO found that in fiscalyear 2012, we generated $1.4 million in rent revenue from federal coal leases, comprising 0.1 percent of the annual revenue related to coal. Do you believe the rental rates should be updated to account for current market conditions or inflation? If not, why not? If so, what actions does the Department plan to take to update these rates?

b.   The minimum bid that Interior can accept for a coal lease is $100 per acre. Do you believe that this minimum bid amount should be updated to reflect current market conditions or inflation? If not, why not?

 

8.   Are there any other recommendations made by the GAO in its report with which you disagree? If so, why? If not, what steps will you take to implement those additional reforms and when will those actions occur?

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