December 31, 2015

A Royal Mess For Public Land Payments

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A train carries coal from the Powder River Basin.

Michael Werner

A train carries coal from the Powder River Basin.

Stephanie Joyce / Inside Energy

The coal pile at the Comanche power plant in Pueblo, CO.

This is a story about accounting.

I know, you’re already clicking out of the story, right?

But wait. This is a story about accounting for your money. Lots of money you may not even know you had. It’s buried on federal and tribal lands in the form of natural resources, in states like Wyoming and Colorado. For the past few years, a controversy has been quietly raging over how much companies owe you when they extract those resources, and how much you’re allowed to know about it.

Accounting is not sexy. So let’s start with two people who are – Ryan Adams and Taylor Swift. This fall, Ryan Adams released an entire album of Taylor Swift songs. He called it 1989—just like she did. In exchange for using Swift’s property—her songs—Adams has to pay her a portion of whatever money he makes from selling that recording. That’s known as a “royalty.”

When it comes to natural resources on public lands, the American people are Taylor Swift. We own the property—in this case, coal, oil and natural gas. The companies that want to extract those resources are Ryan Adams. They pay us a percentage of whatever they make from selling our property. Those funds are our royalties, paid to us in the form of deposits into the federal treasury.

To make sure we’re paid the right amount of royalties, somebody has to figure out what those resources are worth at the time of sale. That job belongs to Greg Gould, the director of the Office of Natural Resources Revenue, or ONRR.

“The best way to determine market value for a product, is the first true arm’s length sale to an unaffiliated party,” Gould said.

That phrase, “true arm’s length sale,” is at the heart of the first royalty controversy we’re going to explore here. This gets a little wonky, so let’s zero in on one example: coal exports. Many coal companies set up subsidiary businesses to transport coal from their mines to ports on the coast. The coal is essentially sold twice: first to the company’s own subsidiary at the domestic price, and then to a foreign customer, like a utility, for a price that could be many times higher. So, which price should we use to assess the royalty payment? Right now, we use the domestic price. But Gould says we should be using the “true arm’s length sale” – the price the foreign customer pays, not the subsidiary. He says that’s how it works in other industries and, “We just wanted to try and clarify and simplify the regulations,” he says, “and make them consistent across all the products.”

The coal industry sees it differently. Rick Curtsinger is with Wyoming-based Cloud Peak Energy, one of the country’s largest coal companies. He said, ““We would argue that ONRR is trying to make the valuation system much more complicated.”  According to Curtsinger, it is fair to base the royalty rate on the domestic price, because the coal is the same, no matter where it’s headed after it leaves the mine: “And so a train can be loaded to go to Detroit Edison, or it can be loaded to go to a South Korean power plant. It’s comparable coal produced in the same period and of similar quality,” Curtsinger explained.

But if that “comparable coal” ultimately fetches a much higher price when it’s sold to the South Korean power plant, don’t Americans deserve to receive a higher royalty for it? Industry says no. They say the price difference is due to transportation and marketing costs, which they are legally allowed to deduct.

But here’s the thing: to verify that they’re calculating those deductions fairly, we would need to look at their books. And that leads us to the second issue at play here – transparency. Only the ONRR is allowed to review the industry’s accounting records. Ryan Adams has to disclose to Taylor Swift exactly how many copies of her songs he sold last year, but when it comes to our natural resources, Dan Bucks, former director of the Department of Revenue for the state of Montana, says the American people have been left in the dark for years. “The American people do not get a royalty report. They’re not told what they’re being paid or not paid. They’re not being told how the value was calculated and whether or not it conforms to the requirements of the law. And they should know. They have a right to know,” he claims.

So how much money is at stake here? Some analysts estimate upwards of a hundred million dollars in coal royalties are left on the table each year, and Bucks says historically, billions of dollars may have been lost. The coal industry disputes those figures, but unless they open up their books, there’s no way for outsiders to know exactly what’s going on.

“Openness is and sunshine are always the greatest disinfectant to stop abuses,” Bucks said.

As of now, no one outside of industry and the federal government can see—lease by lease—exactly what royalty was assessed on a particular sale, and the process used to get there.

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