Coal industry advocates say that a new royalty scheme for leasing coal on federal lands would render Montana and Wyoming coal exports unprofitable, and they dispute left-wing environmentalist claims that taxpayers are somehow “getting ripped off” by the current royalty scheme.
A study authored by University of Wyoming Distinguished Professor of Energy Economics Timothy J. Considine — and funded under a consulting agreement with coal producer Cloud Peak Energy — argues that coal production on federal lands would decrease significantly because new rules would grant the U.S. Secretary of Interior “unrestricted authority to assign a ‘reasonable’ value to coal mined on federal lands for determining royalty payments,” because giving arbitrary power to the Secretary “would create a great deal of uncertainty” about payments.
“Instead of benefiting from this proposed change, American taxpayers would likely receive less in royalty revenue because production to support coal exports would likely not occur under this provision,” states the study.
The study notes that the Office of Natural Resource Revenue (ONRR) would now have the power to set coal royalties by discretionary methods on a case by case basis rather than by “using standard valuation methods.”
At issue is the amount of tax royalty that coal companies pay for coal mined on federal land. The current royalty rate is 12.5 percent for surface coal mines and 8.5 percent for underground mines. The royalty is applied to the coal when it is sold at or near the mine. Coal companies will sometimes — usually for coal that is bound for export — sell the coal “at the mine gate” to a subsidiary — thereby incurring a royalty payment that will market the coal and and sell it to the final buyer.
Environmentalists argue that this system is unfair to taxpayers, because the subsidiary will often make the final sale of coal at a much higher price than the initial “mine gate” sale. However, since the royalty has already been paid, the higher priced sale is not subject to the royalty. With the coal export market growing, critics claim that this is becoming an increasingly common issue and say that taxpayers have lost out on more than $1 billion annually in under collected royalties.
Part of the proposed new ONRR rules would apply further royalty payments to the final sale price of the coal. Included in this provision is a “netback” rule that would help coal producers offset the cost of the new royalty payments by allowing them to deduct either the full or partial costs transporting the coal from the final sale price before the royalty payment is applied.
However, The University of Wyoming/Cloud Peak study estimates that, given a final sale price of $50 per ton and a transport cost of $40 a ton, the default “netback” rule, allowing companies to deduct the full transport cost from final sale price would still lead to a profit margin of $-0.04 or essentially zero. Another proposal that would cap the transport deduction amount at 50 percent of the cost would lead to losses greater than $4 per ton on exported coal.
In an email to Media Trackers, Chuck Denowh of the coal advocacy group Count on Coal Montana argued that the ultimate goal of the rules was to end coal mining in Montana.
“The rules they’re pushing for are designed to decrease the amount of federal coal produced in Montana, and ultimately to end coal mining in our state,” Denowh stated. “If that were to happen, Montana property taxpayers would have to make up the difference for the hundreds of millions that coal contributes to government coffers in Montana annually.”
The claims that taxpayers are somehow short-changed by current royalty policies are strongly disputed by coal industry advocates. At a recent hearing in Billings staged by the U.S. Dept. of Interior, senior vice-president of marketing and government affairs Jim Orchard of Cloud Peak Energy told the Billings Gazette that only 8 percent of Cloud Peak’s sales from its Spring Creek Mine in Decker were through a subsidiary, mostly to foreign buyers. 92 percent of its sales go to domestic buyers who buy coal at the mine gate.
In a recent op-ed published by Lee Newspapers, Cloud Peak Energy Chairman Keith Bailey took on the idea that somehow taxpayers are not “getting their fair share” by pointing out that the company paid 5 times more state and federal taxes than it earned in profits last year.
“Our company earned a profit of $78 million in 2014 by producing and delivering approximately 86 million tons of coal which, in turn, generated some 4 percent of our nation’s electricity,” Bailey worte. “Contrast that return to the $354 million we paid last year in taxes and royalties to the federal government, Wyoming and Montana, and an additional $69 million for coal leases. Taxpayers received over five times more from our business than did our shareholders.”
Bailey’s sentiments were echoed by Brent Mead, executive director of the Montana Policy Institute, a Helena based right-leaning economic thinktank.
“Taxpayers, not shareholders, are the prime beneficiaries of the coal industry,” Mead told Media Trackers. “Each year, coal companies generate more in tax revenue for federal, state, and local governments than they do in profits. This is revenue that funds our schools, builds our roads, and provides for public safety.”
Mead also emphasized that the the slew of regulations foisted upon the coal industry could put coal companies “on the verge of bankruptcy.”
Media Trackers Montana is a conservative non-profit, non-partisan organization dedicated to promoting accountability in the media and government. Read more at mediatrackers.org/montana. Follow Media Trackers on Twitter @mediatrackersmt.