Powder River Basin coal leasing prompts IG, GAO reviews

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.