White House report suggests hike in federal coal lease costs to boost revenue

The White House Council of Economic Advisers on June 22 released a report outlining options to increase the amount of federal revenue derived from leasing of and production from federal coal reserves.

Said Laura Sheehan, senior vice president of communications for the American Coalition for Clean Coal Electricity, in a June 22 e-mail statement about the report: “Today’s White House report once again puts politics ahead of practicality. At a time when millions of low- and middle-income families are struggling to pay their electric bill, any decision that further restricts access to affordable power from coal should be followed by a legitimate explanation. Unfortunately, it seems the only answer the administration is willing to provide is one that conflates issues and picks winners and losers in our energy markets.”

House Committee on Natural Resources Chairman Rob Bishop, R-Utah, who represents a state with several coal mines using federal leases, said in a June 22 statement: “Once you scratch through the thin veneer of objectivity, this report is nothing more than card-stacking from the President. I appreciate this attempt by the White House to create a semblance of credibility for this moratorium, but this type of propaganda is beneath the Council of Economic Advisers.”

Radha Adhar, an energy expert for the Sierra Club, said in a June 22 statement: “The findings of this report confirm what so many Americans are learning the hard way: polluting coal companies will do anything they can to protect their dirty profits. They routinely exploit loopholes, ripping off hard-working American families and taxpayers. For decades, coal companies have taken 400 million tons of coal from our public lands annually, burning it in power plants, slowing clean energy development, worsening climate disruption, and polluting our communities. We hope this report will persuade the Department of Interior to develop and adopt a plan that will keep coal from public lands in the ground.”

The National Mining Association, which represents major coal producers, said in a June 22 statement: “Today’s report from the White House Council of Economic Advisors is the latest assault from the ‘Keep It in the Ground’ movement. This collaboration between the Obama administration and extreme environmental interests again demonstrates the White House working overtime to advance more job crushing and market distorting policies. Coal is the largest source of electricity generation in the U.S., and coal mined from the federal coal lease program last year accounted for more than 44 percent of that total. To raise costs on the U.S. economy by deliberately creating a less diverse, less affordable energy supply constitutes political malpractice.”

Federal coal is a particularly dominant factor in the western U.S. The Powder River Basin in Wyoming and Montana, for example, is by far the largest U.S. coal production region and is dominated by coal reserves that private operators like Peabody Energy and Arch Coal lease from the federal government through the Bureau of Land Management. BLM and its parent, the Interior Dept., in January put a hold on new federal coal leasing while the agencies look at the future of that leasing program.

The federal coal leasing program accounted for nearly 40% of coal production in the United States in 2015, including some of the lowest-cost coal available. Low-Btu coal out of the PRB is very cheap to produce via surface mining methods, with a low sulfur content for that coal being a particularly valuable attribute for power plants operators trying to control stack emissions.

While the program brings in hundreds of millions of dollars of government revenue per year, it has been widely criticized in recent years by economic and environmental experts for providing a supposedly poor return to the taxpayer and for not adequately addressing the environmental costs of coal extraction, processing and combustion.

Federal leasing program has lately been under review by Interior Dept.

The report noted: “In January 2016, U.S. Department of the Interior began the first programmatic review of the Federal coal leasing program in 30 years in order to address a range of issues, including the return to the taxpayer and coal leasing impacts on the environment. This report focuses on the issue of whether the Federal coal leasing program provides a fair return to the taxpayer and draws upon relevant academic research to provide an economic perspective.

“A review of the coal leasing program indicates that the program has been structured in a way that misaligns incentives going back decades, resulting in a distorted coal market with an artificially low price for most Federal coal and unnecessarily low government revenue from the leasing program.

“Typically when the government owns a resource, whether it is timber, electromagnetic spectrum, or coal, a common objective is to ensure that the government maximizes revenue to the extent feasible, while also taking into consideration positive or negative externalities associated with the use of that resource. When it is impractical or inefficient for the government to use the resource itself, then the key task is designing an arrangement that aligns the incentives of the agent who harvests or produces the resource with the public interest.

“The coal leasing program offers companies 20-year leases on Federal lands, and brings in revenue to Federal and State governments through three channels: (1) bonus bids from an auction for the right to lease land with coal resources, (2) land rental fee payments, and (3) production royalty payments as a percentage of the sale price of the coal produced. A review of these features finds that they have not fostered an efficient, competitive system that provides a fair return to taxpayers. For example, although intended to be competitive, the bonus bid auctions appear to be less and less competitive, typically with only one to two bids submitted at prices very near the lowest selling price possible, or reserve price, set by the government. Similarly, by assessing royalty payments through a royalty rate, there is an incentive for companies to reduce reported coal sales prices in order to minimize the royalty payments owed and companies have employed several tactics to lower the selling price of coal without losing revenue.

“All of these factors lead to lower returns to the taxpayer from the coal leasing program. They have been exacerbated over the past few decades as Federal coal has considerably expanded its share of the overall coal market by offering coal at a much lower price on average than non-Federal coal, bringing down the equilibrium price of coal on the market.”

This report examines the market implications of changing royalty rates based on three potential approaches motivated by the current structure of the coal market. Specifically, it considers basing royalty payments on nearby regional coal prices, nationwide coal prices, and the price of natural gas, which is a close substitute for coal in the electricity market. All three prices are in terms of dollars per one million British Thermal Units (MMBtu) to account for differences in heat rates of different types of coal (and natural gas).

Further, the report considers a fourth approach that establishes royalty payments based on the objective of maximizing government revenues, consistent with how the government manages many other resources. A critical question that arises in any discussion of changing royalty rates is whether an increase will actually increase government revenue or if it will lower auction revenues sufficiently, thus decreasing government revenues. “Using results from the well-known Integrated Planning Model (IPM), we find that the answer to this is unambiguous: increasing coal royalty payments for Federal leases could bring in substantially greater revenue for States and the Federal government,” said the report. “Modestly increasing coal royalty payments, such as basing the payments on the price of nearby regional coal, would lead to a slight decline in Federal coal production and a very slight increase in non-Federal coal production. On net, it would lead to a slight reduction in aggregate coal production across the United States that leads to subsequent emissions reductions from coal combustion. The results for the other scenarios mirror these, with larger decreases in Federal coal production, but considerable increases in government revenue.

“These findings highlight the potential of royalty reform to provide a fair return to taxpayers while simultaneously reducing the environmental effects of coal extraction and combustion. Finally, it is important to note that this report does not analyze the full range of considerations relevant to potential changes to the Federal coal leasing program, ranging from development benefits and employment effects to impacts on natural resources such as water and wildlife habitat.”

In 2014, just over one billion tons of coal were produced in the United States, down from just under 1.2 billion tons of coal in 2006, and comparable to production levels over the past two decades. Roughly 74 million tons were exported in 2015, with net exports of about 73 million tons, most of which was metallurgical coal used for industrial purposes. Gross and net exports peaked in 2012 with net exports in 2012 of about 116 million tons. With retirements of aging coal plants and low natural gas prices, coal production declined 11% in 2015 (by 109 million tons) and a slight decline is forecasted to continue over the next two years. Yet, despite the declines, coal is still expected to remain one of the primary feedstocks for electricity generation over the next decade, the report added.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.