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50% hike in federal coal royalties proposed in next step of lease reform

Thenext step in the U.S. Department of the Interior's effort to address concernsabout the federal coal lease program will consider an array of new policyproposals intended to update the current approach, including a 50% hike inroyalty payments for some U.S. producers.

March 24, the nextstep in the review process involves a Programmatic Environmental ImpactStatement, or PEIS, which will include a series of six public meetings tosolicit input to inform the scope of the review while the agency enforces amoratorium on newleases.

Asexpected, the meetings will consider a number of proposals that the industryhas stated would threaten an already beleaguered domestic sector. Most notably,the meetings will consider an increased royalty rate on surface mining to18.75% from the current 12.5%, matching the current rate for offshore oil andgas production in federal waters. Meanwhile, the PEIS makes no mention of anypossible increase in royalty rates paid by underground mines, which iscurrently set at 8%.

Accordingto a BLM release, the meetings will also consider a limit on the use of royaltyrate reductions and a change in the methodology for determining fair marketvalue "when establishing the minimum bid or valuing lease modifications,"including a possible consideration of the "social cost of mining."

Further,reforms could include an increase in rental rates to adjust for inflation, arule to not lease to companies with more than 10 years of recoverable reservesand an evaluation of "whether there is an over-supply of federal coal thatis undercutting market prices for coal in the United States and thereby leadingto lower royalty revenue."

ThePEIS process will also consider a number of environmental issues related tofederal coal leasing, including an effort to reduce acreage allowed for miningin accordance with the country's environmental goals, adjusting royalty ratesto "reflect the cost of the harm to the public from negative externalitiesfrom coal development" and prohibiting or limiting leasing to entitiesthat are "not meeting their environmental responsibilities."

Whilethe entire review process has drawn strong criticism from political and coalsector leaders in those states most likely to be impacted by program changes,the meetings will also include policy proposals submitted by industryadvocates.

These include the proposed lowering of royaltyrates, broadening the applicability of rate reductions, accelerating theleasing process, basing bonus bids on the amount of recoverable coal, ratherthan reserves, converting revenue streams to pay-as-you go and reestablishingthe royalty policy committee to guide changes to royalties.

Themeetings are currently planned to be held in May and June in Casper, Wyo.;Grand Junction, Colo.; Knoxville, Tenn.; Pittsburgh; Salt Lake City; andSeattle. Final information on dates, times and locations of the meetings willbe announced soon.

More input needed, say critics

Theabsence of Montana on the meeting agenda spurred a response from one of themost vocal critics of federal coal lease reform, Sen. Steve Daines, R-Mont.

"It'sunconscionable that the Obama administration refuses to sit down with hardworkingMontanans—including union and tribal members who will be most impacted by thesedecisions," Daines said. "Yet again, the Obama administration wouldrather raise costs for those who can afford it the least instead ofprioritizing a dependable, reliable source of energy. This is a war ongood-paying Montana jobs and made-in-Montana energy."

Whileany changes to the current program would affect coal production on all federalland across the country, much of the impact would be felt in Western producing stateslike Montana and Wyoming. Accordingto the DOI's Bureau of Land Management, federal leases for about 40% of all coal minedin the U.S., much of which comes from Western states, with Wyoming and Montanaresponsible for over 85% of all federal coal production.

The heavy impact on Western states has spurredpolitical leaders like Daines and Wyoming's Republican Sen. John Barrasso toquestion the entirereview process, calling the effort part of a larger administration effort tokill coal entirely.

"I am having trouble figuring out why theagency is taking this step because over the last three years, demand forfederal coal has collapsed," Barrasso said in late February. "Is itreally the time to raise the price on coal?"

The program review was announced in January to address concerns ofthe public, multiple stakeholders and government agencies. The review isexpected to take about three years. Most coal companies have said the delaywould not immediately affect their operations, but have also said the rule isill-advised.

The Interior Department will release an interim report on the PEISby the end of 2016 with a summary of substantive comments received and conclusionsfrom the scoping process about alternatives that will be evaluated.