* Cloud Peak says Interior blessed coal export business
* Regulators aware miners book exports through sister firms
* Taxpayers stand to lose on existing sales practices
By Patrick Rucker
WASHINGTON, Feb 14 A coal producer at the center
of a U.S. Interior Department investigation into whether miners
and traders skirted royalty payments on lucrative exports to
Asia says the government agency gave the green light for such
practices in 2009.
Cloud Peak Energy Inc CEO Colin Marshall said in a
letter to Interior Secretary Ken Salazar that sales through
affiliates that helped it and other companies avoid royalty
payments had been cleared by Interior, adding that the miners
have been open about their trading practices.
"Cloud Peak Energy clearly delineated ... our views on the
appropriateness of continuing the existing royalty valuation
system and structure," Marshall said in the letter, noting that
it was in response to a recent Reuters article.
The clearance from the department was delivered through a
PowerPoint presentation in 2009, Marshall wrote, when officials
also cited a 2003 case involving natural gas sales as an example
of how coal royalties should be treated.
Last week, Salazar announced the investigation, telling
lawmakers in a letter that Interior would aim to determine
whether miners on federal land wrongly cleared their sales
through sister companies to dodge royalty payments.
The Interior Department had no comment on Marshall's letter,
which was sent in January and seen by Reuters.
Using affiliates to handle coal exports stands to cost
taxpayers hundreds of millions of dollars in forgone royalties
in coming years if miners fulfill their plans to ship more of
the fuel from the Powder River Basin of eastern Montana and
Wyoming to coal-hungry Asian markets, the Reuters investigation
found. [ID: nL1E8N4AJI]
By moving their sales through affiliated brokers, coal
companies can clear royalties at a low price and actually
collect more than that value when prices in Asia climb.
Salazar said that one clue to a royalty shortfall would be
if miners gain more from a coal sale than what they claim the
fuel was worth.
U.S. taxpayers are due a 12.5 percent royalty on coal sales
from federal land.
Interior officials will, Salazar wrote, "aggressively pursue
any company found in violation of the laws and regulations
related to the valuation of federal coal."
Arch Coal Inc and Peabody Energy Corp, two
other dominant miners in the Powder River Basin, declined to
comment on the investigation.
Cloud Peak's insistence that broker sales are permitted, and
how that meshes with Interior's reading of its own royalty
rules, could frame the dispute over how large the royalty
payments to the government will be on Asian coal sales that the
industry hopes will soar in coming years.
GUIDANCE FROM INTERIOR
Interior's Office of Natural Resources Revenue (ONRR), the
steward of federal royalties, routinely instructs mining and
drilling interests how to best interpret the rules.
One court ruling cited in a 116-page Interior presentation
on regulations, which has been seen by Reuters, led Cloud Peak
to value coal for royalties using a broad range of benchmarks
such as prices in the domestic market, Marshall wrote.
Cloud Peak and the Interior Department did not reply to
several requests for comment on royalty payments or the
presentation, which is available via the ONRR website.
Coal exports from Montana increased more than sixfold to
more than 13 million tons in the three years since that ONRR
presentation, according to the Energy Information
And those sales have been profitable.
In 2011, less than 5 percent of Cloud Peak's coal production
was shipped to Asia but that accounted for nearly 19 percent of
total revenue or about $290 million.
In May 2011, Interior proposed new royalty rules that might
have closed off the gains from affiliated sales and Cloud Peak
defended the status quo in comments to regulators at that time,
The company made a similar defense of the existing royalty
rules at a meeting with regulators in October 2011 that was led
by ONRR Director Gregory Gould, according to a transcript.
The Interior Department has not finalized those rules.
Interior's message to the industry over royalties would be
important to settling any dispute but the case cited in the
Cloud Peak letter is not comparable, said Peter Appel, a former
Justice Department attorney who has reviewed coal and gas rules.
In the letter, Cloud Peak says Interior guided it to a
federal court decision (Fina Oil and Chemicals Co. v. Norton)
that shielded a natural gas supplier from paying royalties on
fuel it received from producers.
"But it appears that many of these transactions in the coal
market are structured differently than the marketing agreements
in the gas market," said Appel, who prosecuted cases for the
Justice Department's Environment and Natural Resources Division
and teaches at the University of Georgia School of Law.
Senator Ron Wyden, chairman of the Energy and Natural
Resources Committee, said the coal industry's reading of the
existing rules is troubling.
"This should have set off warning lights," Wyden said on
Monday. "And it makes the case for a thorough investigation."
Wyden, a Democrat, and Senator Lisa Murkowski, the senior
Republican on the committee, last month called for an
investigation into coal royalties.
"We are going to monitor this very closely," said Wyden, who
expressed satisfaction with the rigor of the investigation
proposed by Salazar. "This is a taxpayer issue, first and
foremost. It is critical that taxpayers get every penny due."