A conservation group seeking to ensure taxpayers a fair return on mineral royalties says the Department of the Interior opposes its effort to join a lawsuit to defend that position.
Concerned by the fossil-fuel friendly Trump administration, the Powder River Basin Resource Council seeks to join the case Cloud Peak Energy, Inc., et al. versus Department of the Interior, et al. The group hopes to ensure the federal government will defend itself — and taxpayer interests — against the industry in a legal battle over coal royalties.
If successful in its motion, the Resource Council would work alongside the federal government on the case. However, the Department of the Interior has signaled it does not want the group involved in the case, and will file a motion opposing their intervention later this week, PRBRC attorney Shannon Anderson said.
The Resource Council has rarely intervened in a case on behalf of the federal government, Anderson said. Normally, it’s the landowners’ group suing the federal government to push enforcement of environmental regulation.
“It’s more likely that industry comes to the government’s defense in our cases,” she said. But this time is different. “We’re sort of in uncharted territory.”
The coal industry, led by Cloud Peak Energy, has sued the Department of the Interior to block a new rule governing the calculation of royalties. Wyoming conservationists fear the Department of the Interior under Secretary Ryan Zinke won’t put up a fight.
The Resource Council is worried that newly-confirmed Secretary of the Interior Ryan Zinke won’t stand up for taxpayer interests. So the group asked the court to name it as an additional defendant alongside the U.S. Department of the Interior. Cloud Peak Energy, Black Hills Energy and both the National Mining Association and the Wyoming Mining Association sued the DOI to block a new rule. The rule revamps how federal minerals are valued for royalties.
The Office of Natural Resources Revenue finalized the rule in July. The office is a small division of the Department of the Interior. The rule would force mineral companies to pay more in royalties, supporters say, by closing what they claim is a huge loophole.
The PRBRC and other public interest advocates have complained for years that the companies underpay royalties, cheating the American public of the true value of its resources. They say the producers sell the coal to a subsidiary at a below-market price, reducing the amount of royalties owed the public. Subsidiaries then resell the coal to its eventual buyer for more. They estimate that hundreds of millions of dollars has been lost to this loophole. Coal companies dispute the numbers.
The industry argues the rule is redundant since ONRR has the authority to fine a company that underpays. The rule is an illegal attempt to make coal mining unfeasible, industry argues. The ONRR has found the rule would not raise any additional revenue from coal.
The steps of the U.S. District Court of Wyoming, where the Powder River Basin Resource Council and their allies filed a motion to intervene in a case between the coal industry and the Department of the Interior (Dan Neal/WyoFile)
The rule is separate from a a review of the federal coal leasing program set in motion by the Obama administration in January 2016. While the review is ongoing, a three-year moratorium had been placed on new federal coal leases. President Trump promised to repeal the moratorium during his campaign. Reuters reported the repeal was expected last week, as part of a sweeping rollback of Obama-era climate change policy which has still not been announced.
Meanwhile, even if the ONRR is on firm legal footing in creating the royalties rule, conservationists still fear Zinke will be an unlikely champion for it.
“It is unclear whether Secretary Zinke’s Interior Department will aggressively defend the standard against the legal challenge from Cloud Peak,” the PRBRC, the Western Organization of Resource Councils, and the Wilderness Society wrote in a statement. The Wilderness Society and WORC also filed motions to intervene in the case.
Zinke, a former congressman from Montana, has frequently railed against the Obama administration’s actions on coal. As a congressman, he tried to kill the royalties rule with an amendment to an appropriations bill.
“This administration is fighting a more aggressive war against American coal than they are against ISIS,” he said when introducing it.
Zinke was confirmed as secretary of the interior on March 1.
Democrats in Congress protest the stay
The industry lawsuit against the new royalty valuation rule was filed Dec. 29, but the rule went into effect on the first day of the year. On Feb. 17, industry actors sent the ONRR a letter requesting postponement, according to the Federal Register. Nearly two months after the rule’s enactment, the ONRR stayed the rule Feb. 27.
The stay came one day before mineral companies would have been required to report and pay royalties under the new rule.
The move infuriated some Democratic lawmakers. Sen. Maria Cantwell, the ranking Democrat on the energy and natural resources committee, wrote Zinke claiming the ONRR had violated the Administrative Procedures Act by postponing an already effective rule.
The ONRR had exceeded its authority and broken the law, she wrote. “You should lift the stay and let the valuation rule go back into effect,” the Washington senator wrote.
Representatives of the industry suing the Department of the Interior are led by Cloud Peak Energy, which operates two mines near Gillette, along with the Spring Creek Mine in Montana. The company believes the rule is unnecessary, unconstitutional, and does not reflect the reality of the coal industry, according to public comments by Cloud Peak CEO Colin Marshall.
Regardless of whether it’s a subsidiary of the mining company, an entity charged with moving coal is a separate business, with its own costs, he wrote. The company’s comments also suggested the ONRR already has authority to fine any company that undervalue royalty payments. The rule’s real intention, the company claimed, was to impose an “unconstitutional tax” on coal exports, and fulfill an Obama administration goal of keeping coal in the ground by making mining infeasible.
“Neither the ONRR nor the Department of the Interior is authorized under the Mineral Leasing Act of 1920 to establish energy policy or to use their regulatory authority under the Act to address climate change concerns,” he wrote.
Cloud Peak spokesman Rick Curtsinger was more direct. In an email to WyoFile, he said the rules can be traced back to “special interest groups” aligned against coal.
“These groups’ goal is to drive up electricity prices to make risky and expensive green energy bets pay off for billionaire investors,” he wrote. “They want to keep America’s energy in the ground, resulting in $0 revenue or benefit for taxpayers.”
Quoting the Mineral Leasing Act, he wrote that the Secretary of the Interior is required to develop regulations that “ensure the maximum economic recovery of coal.”
He noted that the loss in revenue if coal is not mined specifically affects schools and education. Such has indeed been the case in Wyoming, as the state Legislature failed this last session to find a solution to a $400 million annual deficit in education funding brought on by a sharp decline in mineral revenues over the last several years.
But tax-reform supporters say coal companies’ evasive maneuvers on royalty payments have kept hundreds of millions of dollars from reaching state and federal coffers over the years. Curtsinger called such claims “false economics.”
In May 2016, hundreds showed up in Casper to comment at a Department of the Interior meeting on the future of the federal coal leasing program. (Tim Kupsick/WyoFile)
The agency itself, in its findings on the rule, said revenue from mineral royalties would increase by as much as $85 million a year. The majority of that increase would come from oil and gas, despite coal becoming the flashpoint in the public battle. The ONRR reported that all of the public comments on the rule, collected over five months, were about coal.
Estimates from Headwaters Economics, a nonprofit group in Bozeman, Montana, that considers itself nonpartisan, suggest taxpayers have been shortchanged. Had the rule been in place from 2008 to 2013, Wyoming production would have generated an extra $126 million a year in federal coal royalties. Slightly less than half of that would have been distributed to the states.
Given the significantly lowered coal production since 2013, Headwaters’ Mark Haggerty said numbers would be roughly a third to a half of that amount today.
The difference in Headwater’s findings as opposed to the ONRR’s come from the price of coal each group chooses to use. Headwaters used a price calculation from a prominent industry research company, SNL Energy, which includes the cost of transporting coal from the mine to the first buyer, Haggerty said. Using that number, the price of coal being delivered at its final destination is higher than the price coal companies have used to calculate their royalty payments.
The ONRR has been using data from the Energy Information Administration, a government agency. The price of coal EIA reports comes from the coal companies, Haggerty said. For the ONRR to arrive at a better estimate of the actual price, the agency would have to “get inside the corporate structure and follow coal as it is traded,” from subsidiary to subsidiary and eventually to the buyer, he said.
In a letter to former Secretary of the Interior Sally Jewell, Haggerty wrote that one third of Wyoming coal is first sold from a mining company to a subsidiary, citing EIA data. Using the price calculation Headwaters chose would be more accurate and transparent, Haggerty said.
“You would be guaranteed that you get the extra revenue and you could provide more assurances that the public … could track and come up with pretty good estimates of what royalties are actually due,” he said in an interview.
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Cloud Peak Energy has taken issue with Headwaters’ assessment. A company it hired to review the nonprofit’s work concluded it was biased and based on bad data. Headwaters was “seeking data to support a conclusion which it had already reached,” the company, Energy Ventures Analysis, wrote. For example, Headwaters specifically focused on coal states that proved their hypotheses — Montana and Wyoming — and ignored those that countered it.
Also at issue was the data provided by SNL Energy, which Energy Ventures Analysis said was flawed, in part because it did not match the EIA’s estimates. SNL’s numbers overestimate the cost of mining coal because it does not accurately value the transportation costs of shipping it by rail, among other problems, the company wrote.
SNL’s data is not flawed, Haggerty argued, it just incorporates other costs that industry chooses to ignore.
Step in the right direction
Regardless of how much revenue it raises, supporters consider the rule part of a broader effort to reform how federal coal is leased and taxed, in an effort to ensure greater returns for taxpayers.
“It was a good rule, a step in the right direction in terms of a fair return to the American taxpayer and coal states and coal communities,” said Dan Bucks, a former director of the Montana Department of Revenue. He’s testified before Congress and been a frequent advocate for better accounting of federal coal leasing and royalty payments.
Royalties have been underpaid because the system allowed companies to exclude value from the coal they have to report, Bucks said. Neither Bucks nor Haggerty was confident the ONRR’s rule would survive litigation.
“You have an administration saying we’ll wait for the courts to decide, but who is supposed to defend the rule in court?” Bucks asked.
The PRBRC is waiting to hear whether the federal judge will allow it to intervene. If the ruling is in its favor, the organization will be able to participate in the court proceedings, Anderson said. It will also be able to object to any proposed settlement between the government and industry.
“We’re hoping to do what we can to defend the rule,” Anderson said.
