* Taxpayers stand to lose on short royalty payments
* Billions at stake if Asian exports increase as industry
By Patrick Rucker
WASHINGTON, Dec 20 Western states that rely on
receipts from coal sales to help fund their governments are
concerned the mining industry is dodging royalty payments on
lucrative U.S. exports to Asia.
By valuing coal at low domestic prices rather than the much
higher price fetched overseas, coal producers can skip a large
royalty payout when mining federal land.
The practice could add up to hundreds of millions of dollars
in forgone royalties if exports to Asia surge in coming years as
the industry hopes, Reuters found.
Wyoming warned federal officials about flaws in the royalty
system a year and a half ago. Last week Montana Governor Brian
Schweitzer said he will not tolerate the coal industry skirting
royalties: "If there's phony baloney going on, we have to get to
the bottom of it."
Montana and Wyoming get half of federal royalties on coal
from their states.
Asian energy demands mean several million tons of the black
rock typically move from the Powder River Basin in eastern
Wyoming and Montana across the Pacific each year. Taxpayers have
a stake in those sales since the region is mostly on public
Powder River Basin sales are uncommonly profitable for
miners like Arch Coal, Peabody Energy Corp. and
Cloud Peak Energy since coal worth about $13 a ton last
year domestically could have fetched roughly 10 times that in
Last year less than 5 percent of Cloud Peak coal was shipped
to Asia but that accounted for nearly 19 percent of revenue, or
about $290 million.
Federal and state officials have said that the mining
industry is two steps ahead of regulation as it moves into Asian
markets and that the current rules that value coal are open to
Questions about royalties and taxpayer interests could
flavor a dispute about whether coal export terminals should be
built in the Pacific Northwest.
Activists in Oregon and Washington have vowed to block coal
trains that the mining industry hopes will link the Powder River
Basin and Asian markets. Coal export foes say local communities
will be harmed by mile-long coal train traffic, and scientists
warn that coal power is worsening the impacts of climate change.
VAGARIES OF ROYALTIES
Officials expect coal royalties to be paid on the highest
value for the fuel, which is typically the price utilities are
willing to pay.
But regulators fret that miners are selling to sister
companies at low domestic prices and then pocketing gains when
that coal eventually reaches Asian power plants, thus
circumventing the higher royalty.
Arch Coal, Cloud Peak and Peabody Energy declined to comment
on how they book Asian sales, but they boast to investors about
their profitable trade and brokering business.
That business is booming.
About 54 percent of coal export sales from the Powder River
Basin was handled by brokers last year while only about 16
percent of such sales east of the Mississippi River was handled
that way, according to the Energy Information Administration.
The Office of Natural Resources Revenue, an agency of the
Interior Department, has struggled to find the true value of
coal when brokered deals and direct-to-utility sales produce
different prices for the fuel.
The agency's benchmarks for finding the true value of coal
"have proven difficult to use in practice," the agency wrote in
May 2011 as it mulled royalty rules that it said were open to
In a letter supporting tougher rules, the Wyoming Department
of Audit beseeched ONRR to "not allow coal producers to create
affiliates to reduce the royalties paid."
The mining industry, though, defended the status quo in
several letters to regulators.
An ONRR spokesman said officials were committed to
collecting every dollar due taxpayers, but he could not comment
on when final royalty valuation rules might be proposed.
Autumn Hanna with nonpartisan Taxpayers for Common Sense
said the government must quickly put rules in place to protect
the public interest on coal sales.
"Taxpayers stand to lose day by day with the existing
rules," she said. "The new rules are needed now."
The coal trade has become a controversial issue in the
Pacific Northwest where miners want new terminals to allow about
150 million tons of coal a year to be exported from the Powder
While politicians spar over whether those ports should be
built, there is less friction about what taxpayers are due.
"The Department of the Interior should ensure these
companies pay royalties on the full value," said Oregon Senator
Ron Wyden, whose staff has met with federal officials in recent
weeks to discuss the issues raised by Reuters reporting.
Wyden, a Democrat, will chair the Energy and Natural
Resources Committee in the next Congress.
Alaska Senator Lisa Murkowski, the ranking Republican on
that committee, believes the government should allow coal
exports but officials must protect taxpayers' stake in such
"We know Interior is looking at this and we wait to hear
what they find," said a Murkowski spokesman, who noted the
senator believes Congress should be setting rules on royalty
Montana Governor Schweitzer, who leaves office next month,
has roundly supported the coal terminal expansion, but the
straight-talking rancher and miner said taxpayers must get a
fair cut on those Asian sales.
"We need to collect on the actual value," Schweitzer told
Reuters in an interview.