Powder River Basin coal leasing prompts IG, GAO reviews

The government’s longtime practice of auctioning coal mining rights to a single bidder may have cost taxpayers as much as $28.9 billion over the past 30 years, according to an analysis to be released Monday by the Institute for Energy Economics and Financial Analysis, a Cambridge, Mass.-based think tank.

The non-competitive nature of the federal leasing program is being reviewed by the Interior Department’s inspector general and also will be the subject of an audit by the Government Accountability Office, according to officials at the Bureau of Land Management, which oversees the leasing program.

The phenomenon — in which a mining company draws up a proposed area for leasing, and the Interior Department’s BLM auctions it off to that same firm — is the rule rather than the exception in the country’s single biggest coal producing region. In the 26 coal leases the federal government has awarded in southeastern Montana and northeastern Wyoming since 1991, 22 have gone to a single bidder. In the other four instances, there were only two bidders involved.

On Thursday, the BLM will auction off the right to extract 721.2 million tons of coal from Wyoming’s North Porcupine tract in a region known as the Powder River Basin. Barring an unforeseen development, there will be one bidder for the lease: Peabody Energy, which bought the lease to mine 402 million tons on the adjacent tract in May.

Rep. Edward J. Markey (D-Mass.), whose April 24 letter has prompted the first GAO review of the program in three decades, said he is concerned that the bidding system has depressed leasing rights in the Powder River Basin, the way it did in the early 1980s. In 1983, the GAO concluded that the BLM auctioned off lease rights there for $100 million below their fair market value.

“There’s a long history of under-market coal sales from the Powder River Basin,” Markey said in an interview. “Mark Twain used to say, ‘History doesn’t repeat itself, but it does tend to rhyme.’ We need to ensure that the taxpayers are not being shortchanged the way they were back in the 1980s.”

Interior and mining industry officials said the lack of competition stems from the fact that there are only four major coal companies operating in the Powder River Basin, and mining equipment is so large and expensive that firms confine themselves to one place.

“The reason why a single company sometimes bids on a tract for leasing is that the company, which already has the existing infrastructure in place, is bidding on the adjacent parcel to their existing leased parcel,” said BLM spokeswoman Megan Crandall. “It would be too expensive for a new company to come in and build.”

Crandall added that the BLM, which oversees mineral rights for nearly 700 million acres of federal land, ”strives to ensure that public coal resources are developed in a manner that is in the best interests of taxpayers and returns fair market value,” and will cooperate with both federal probes.

All four coal companies operating in the region — Peabody, Alpha Natural Resources, Arch Coal and Cloud Peak Energy — declined to comment, deferring questions to the National Mining Association.

NMA general counsel Katie Sweeney said coal companies are complying with federal rules. The BLM establishes a secret floor price for each lease, she noted, and withholds mineral rights if bidders fail to meet it.

“BLM is the one who determines that” price, Sweeney said. “Nobody else is weighing in on that. They're using the government standards for appraisal.”

But Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis and the author of the report estimating that the federal government has lost billions of dollars in coal leasing revenue, said the BLM’s system is fundamentally flawed. Sanzillo, who has testified as an expert witness for advocacy groups such as the Sierra Club and WildEarth Guardians, said robust competition is traditionally defined as four or five bidders.

“When you draw up a tract for one company, it’s a market of one,” said Sanzillo, who spent nearly two decades working in financial management positions for New York City and New York State.

These lease sales then form the basis for the prices that the BLM expects from future lease sales. “You can’t use anti-competitive prices for future valuations of coal,” he said.

Part of this procedure reflects the fact that federal officials decertified the Powder River Basin as a coal production region in 1990, which would have compelled BLM officials to identify both potential lease tracts and how much overall coal should be leased in a region.

The Powder River Basin supplies 44 percent of the nation’s coal and 47 percent of the coal in the United States used for electricity. “If the Powder River Basin isn’t a coal production region, then Fenway Park is not a ballpark,” Markey quipped.

But Sweeney said coal production regions are defined by areas where there are several companies interested in leasing tracts. “That’s why it was decertified, and that’s why it stayed decertified,” she said of the Powder River Basin. “Look at the interest of new companies; you’re not seeing that.”

For now, the market appears to be rewarding the handful of companies operating there when they obtain leasing rights at a low cost. Cloud Peak Energy’s stock price rose 4.8 percent in a single day last year when it obtained a federal lease for a lower-than-expected price, and the target price was raised 19 percent by analysts.

“I don’t really blame the companies, though they’re complicit in it,” said Mark Squillace, director of the Natural Resources Law Center at the University of Colorado Law School. ”They’re taking advantage of what the government is allowing them to do.”

By contrast, Montana leases state mineral rights in the Powder River Basin by subjecting its price appraisals to public comment before accepting bids.

“There’s a very deliberate process,” said Tony Preite, director of economic outreach for Montanta State University-Northern’s USDA Rural Development Program. “We’re not giving anything away.”

While the U.S. coal industry more broadly faces several challenges — stricter federal regulations that are prompting several coal-fired plants to close down, low natural gas prices that are prompting utilities to switch to gas-fired plants, and a warm winter that reduced the nation’s overall energy demand — the low price of Powder River Basin coal makes it more competitive compared with coal mined in other parts of the country.

Marie Shmaruk, a primary credit analyst at Standard & Poor’s Ratings Services, said that although coal from the Powder River Basin is less energy-intensive and costs more to transport than coal mined in central Appalachia, “even with all of those adjustments, it’s cheaper.”

Still, the economic future of the Powder River Basin may depend on whether it can export its coal overseas, where it can sell for more than six times what it costs to mine. All four firms there predict a rise in exports and support building new shipping terminals in the Pacific Northwest.

Environmental groups are hoping to block those terminals, just as they oppose the lease auction that the BLM plans to hold Thursday.

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