Department of Interior's own Watchdog in New Report Says Program to Sell Taxpayer-Owned Coal Deeply Flawed

The Department of Interior’s Inspector General released a scathing report today on the way Interior (DOI) sells taxpayer-owned coal to big coal companies at cut-rate prices.

Most of the coal the report focuses on is from the Powder River Basin (PRB) in Wyoming and Montana. The report is timely because the BLM has close to 4 billion tons of coal ready for sale from the PRB, the nation’s largest coal producing region. The report urges the government take quick action to strengthen its coal sales program to prevent further losses.

That’s important because as the IG’s report notes "even a 1-cent-per-ton undervaluation in the FMV calculation could result in a $3 million revenue loss."

The Powder River Regional Coal Team is scheduled to meet Wednesday, June 19, in Casper, WY to discuss proposed further sales of publicly-owned coal.

Though written in neutral language, the report by the department’s investigative branch takes a fairly thick stick to the behind of the DOI’s Bureau of Land Management (BLM), which is manages the sale of coal on federal land. BLM has been widely perceived to be in collusion with Big Coal, and an investigation into BLM’s coal leasing program in the 1980’s proved this to be the case. In the wake of that scandal, new policies and safeguards were put in place. The Inspector General’s report makes clear few were followed.

You can find a brief Reuters story on the report here, as well as one by the AP, and the New York Times here

A Washington Post story last summer prodded DOI into investigating its coal leasing program. The Post story was the result of a study that found BLM had short-changed taxpayers nearly $30 billion.

Today’s Inspector General report stated:

We found weakness in the current coal sale process that could put the Government at risk of not receiving the full, fair market value for the leases. For instance, we identified lost bonus revenues of $2 million in recent lease sales and $60 million in potentially undervalued lease modifications. In addition, flaws in the inspection and enforcement program could prevent BLM personal from detecting noncompliance with laws, regulations and lease terms.

The BLM determines the price per ton of the coal through its “Fair Market Value (FMV)” process. The Bureau has “a legal obligation to the American public to secure a fair market value for coal” on public minerals that it allows private corporations to mine, the Inspector General report notes.

However, the IG makes clear that BLM does not have the expertise to determine fair market value for a ton of coal…AND it’s not the agency within Interior that’s supposed to be doing that anyway.

Once again from the Investigator’s report:

BLM does not use the Department’s Office of Valuation Services (OVS) to prepare the FMV appraisals. Instead, BLM has continued to prepare the appraisals using its own appraisers, which does not comply with Secretarial Order No. 3300, issued in May 2010. The order intended to foster independence by taking responsibility for the valuation process from the bureaus and placing it with OVS.

The report goes on to note that mineral valuation is a “complex and unique field of appraisal, requiring special training.” Thus for the billions of tons of taxpayer-owned coal “an accurate valuation of the mineral is essential for ensuring the Government receives the proper amount for each lease.”

The Inspector General’s office early this year recommended that BLM have its methodology for coal lease valuation and the Fair Market Value determination “peer reviewed independently.” BLM responded that it would consider “possible revision,” today’s report says.

According to The New York Times story, Senator Ron Wyden, an Oregon Democrat, made a statement today on the IG report, although that statement was not available on the senator’s website. In January, Senator Wyden along with Alaska Republican Lisa Murkowski (Chair and ranking member of the Senate Energy and Natural Resources Committee) wrote to then Interior Secretary Ken Salazar calling for an investigation into DOI’s coal program

The Times today quoted Wyden as saying of the Inspector General’s study:

Today’s report highlights the issue of whether the B.L.M. properly appraises the value of federal coal when it sells leases and the inspector general clearly thinks the agency came up short on this point.”

“Because these issues are so important to taxpayers and Western states, Congress ought to dust off the books and take another look to ensure taxpayers are collecting every dime they’re owed.

The Times story also said Wyden stated the report raised new questions about whether the BLM was serving the interests of the people or Big Coal.

The BLM gives outsize power to its state offices (WY and MT) to make decisions about coal leasing. Those offices are, to put it mildly, sympathetic to coal interests. In addition, there are not individual valuation experts in the state offices whose sole responsibility is to determine a fair price for this public coal.

The Investigator’s report instead found  a round-robin of staff handles the task. When the IG raised this concern earlier this year, the report notes, BLM said it would address it through training “…new or existing coal specialists by establishing mentoring or peer groups.”

That sure is comforting.

The BLM has often used a low benchmark price for determining the value of coal when a higher price was more fitting, the report concludes. The report also found BLM does not properly account for the value of Powder River Basin coal in export markets - particularly Asia.

In February, DOI’s Office of Natural Resources Revenue said it is investigating possible violations involving royalties on export-bound coal, which sells at prices four to seven times higher than what domestic users pay.

The Government Accountability Office is conducting an investigation into BLM’s coal leasing program at the request of Congressman Ed Markey (D-MA). That report is expected out later this summer. The House Subcommittee on Energy and Mineral Resources is holding a hearing next Thursday on coal leasing practices. BLM is expected to turn over more information on Its coal leasing program to Markey’s staff before the hearing in response to a letter Markey sent the Bureau last summer.

The Inspector General’s report noted that the government collected $2.4 billion in coal royalties and lease payments in 2012, a figure that is expected to rise in coming years as demand rises for coal in Asia and elsewhere around the world.

The report makes 13 recommendations for strengthening the program to make sure taxpayers are not getting shortchanged.

According to The Times story:

The Bureau of Land Management concurred with most of the findings and said it was carrying out most of the recommendations in the report. Neil Kornze, the bureau’s deputy director, said that the agency was rewriting its procedures and creating a task force to review its process of evaluating coal lands.

Mr. Kornze disputed the report’s conclusion that the government lost as much as $60 million by undervaluing lease modifications, saying the figure was most likely considerably lower.

The Center for American Progress has a helpful blog on the report here.