Is coal paying its fair share?

HELENA – The coal industry and the state are worried a proposed new rule is a backdoor approach to shutting down coal mining on federal land.

The Department of the Interior is weighing a coal royalties reform proposal that would allow the secretary of the Interior to decide that a mining company hasn't priced its coal correctly and then set a different value on the coal mined on federal land. The new rule could mean more money for federal, state and county governments, or, opponents fear, hamstring the industry.

Overall, the proposed rule would set the royalty the federal government collects not by the price the coal goes for at the mine but by the price when it's sold. That's to get around cases where the mine is selling the coal to itself and then selling it again at a higher price for export.

However, whenever, it shakes out, the final coal royalties rule must be "fair and predictable," Gov. Steve Bullock argued in a letter sent to the agency.

The provision that lets the agency set the value of coal combined with an "unreasonable and unacceptable" lag time in royalty audits (sometimes as long as eight years) "could stifle new investment by creating too much uncertainty," Bullock wrote.

The rule would have a chilling effect "because of the great uncertainty" involved, said Rick Curtsinger, spokesman for Cloud Peak Energy, which operates Montana's largest coal mine.

The company could find itself paying 12.5 percent on any value dreamed up by the agency, "whether fair market or not," he said.

"A number of the proponents of the proposed rule are anti-energy development groups. If these groups have their way, the state and federal government would receive significantly fewer funds because production would stop — and so would the royalties and the good-paying jobs," Curtsinger said.

"The stated intention is to simplify but the rule has the exact opposite effect," he said. "That could lead to questions of what is the real intent — to simplify or curb federal energy production, which has fallen under the current administration."

Cloud Peak's Spring Creek Mine near Decker employs about 250 people, mines 17.4 million tons of coal and paid the state $49 million in royalties and taxes.

About 70 percent of the coal goes from the mine to upper Midwest utilities, cement plants, sugar beet processing plants and other small industrial users. The other 30 percent goes to Cloud Peak Logistics, which exports the coal to South Korea, Taiwan and Japan.

Cloud Peak had a net income of $79 million last year, but, Curtsinger said, paid $315 million in royalties and excise taxes.

The rule would extend unparalleled and unrestricted power to the secretary of the Interior, argued Timothy Considine of the University of Wyoming's School of Energy Resources. He argued in a study of the proposed rule that the government would see a reduction in royalties because the industry would produce less coal.

The Interior Department announced last week the royalty rate itself is also under consideration.

The federal rules are outdated, said Dan Bucks, who was director of the Montana Department of Revenue under former Gov. Brian Schweitzer's administration. He's now an adviser with the Western Organization of Resource Councils in Wisconsin.

"The way royalties are calculated shortchanges citizens who own those resources — which is the American public," Bucks said. The federal government owns about one-third of the country's coal reserves.

The basic lesson from analyzing the proposed rule is that it would likely have a small impact on the domestic coal market but distort the export market, said economist Mark Haggerty of Headwaters Economics, a Bozeman public policy think tank.

That would probably not be good news for Cloud Peak, Haggerty said. With the rule, Cloud Peak would pay a royalty on what it sells the coal for at the export terminal. A competing company that bought the coal in Decker from Cloud Peak would have cheaper coal to sell because the royalty was taken on the price at the mine.

"They have significant competition, EPA regulation on carbon emissions and the domestic industry is not good for the coal industry right now," Haggerty said. The rule aims to get maximum value for the public but does it in a way that's not uniform.

The government could instead stick with the mine price or could look at the final price the coal fetches regardless of who sells it. The second option is what Haggerty thinks gives the public the bang for its natural resources.

The current system is expensive to administer and collects were more like 5 percent of the real value of the coal than the 12 the government is supposed to collect, according to his findings. That cost the government about $850 million between 2008 and 2012.

"The industry would prefer the option it currently has," he noted.

Indeed, Curtsinger said, the current system of using comparable sales is best but if new rules go ahead, the federal government should use a public index price from a third-party source to establish the value of the coal for the purpose of collecting royalties.

"Not allowing the use of index seemed to be a very heavy-handed way to write the rule to penalize federal coal production," he said.

One thing everyone seems to agree on is the need for more transparency in setting the royalties.

Calculating natural resource royalties is a "persistent problem," Bucks said. "It seems like there's a scandal once every 20 years" all the way back to the 1920s Teapot Dome scandal that revealed bribery at the highest levels of government.

"Everything is secret," he said. "The public owns the minerals but doesn't know the basis of royalty payments. The solution is to open the books, let the public know the value of each lease and what amount is paid and how it's calculated. We need a public royalties statement that explains how this process is working."

Bullock wrote that the process needs more transparency on what the agency is using to determine royalty receipts so the public can understand how the government is managing the land.

"The coal itself is owned by the American public and a careful balance between these interests is necessary," he wrote.

The industry would be better off if the right amount of royalties was paid because they want the public to support mining coal in Montana and cite the economic benefits, Bucks said.

"They should be able to assure the public the industry is pulling its weight and paying its full and fair share," he said.

Reach Tribune Staff Writer Kristen Inbody at kinbody@greatfallstribune.com. Follow her on Twitter at @GFTrib_KInbody.