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Proposed Rule Change Sparks Debate Over Coal Royalties

Montana Activists Rally Against Coal Trains
Flickr user Erin Kinney (CC-BY-NC-ND-2)
Critics claim coal companies are not paying their fair share of coal royalties.

Critics say that for decades the coal industry has gamed the system to underpay its fair share of federal coal royalties. They say those alleged schemes have padded the bottom lines of coal companies while short-changing state and local governments of tens of millions of dollars.The federal government is now considering a rule to change how coal mined from public land is valued. The first hearing on the proposal will be held this week.

State Senator Duane Ankney says the proposal is the Obama Administration's latest salvo in what he calls the "war on coal".

"Yes I do. I truly do. The whole administration is pretty much dedicated to just leaving coal in the ground and letting the consumer pay the price," Ankney says.

Ankney, a Colstrip Republican, doesn't believe coal companies are, or even could, manipulate the market to pay lower royalties. But others say it's not particularly difficult.

Coal is valued when it's sold at the mine. Critics accuse companies of selling their coal to their own subsidiaries at lower-than-normal prices and then reselling it later at higher prices.

Mark Haggerty is a policy analyst at the Bozeman-based research firm Headwaters Economics. He says it's hard to determine how much coal companies have underpaid in taxes, if anything.

"It turns out that's a really hard number to pin down."

Haggerty says that's because there's precious little transparency in the taxing process.

"The companies are reporting to the government what they're selling coal for, but they don't have to report that to the public. In fact, those are considered trade secrets. It's proprietary information. The public is not privy to the prices that federal coal is receiving either at the mine or downstream to a final consumer."

But by looking at previously published prices, Haggerty says the lost tax revenue could amount to anywhere from zero to $175 million.

"We don't think it's zero, and the reaction by industry that this would be a horrible thing to do and it would cost them a lot of money, suggests that the reform would actually change the valuation basis for federal coal," Haggerty says.

The federal government now proposes companies pay taxes based on the price they charge companies that are not their subsidiaries.

State Senator Duane Ankney says this might just well put an end to the federal coal program.

"If you crank these royalties up, that coal won't be sold. It'll stay in the ground."

And that, according to Ankney, will result in a corresponding reduction in coal revenue which could lead to higher property taxes.

He adds energy prices could also spike.

Ankney also warns that developing countries are buying coal on the global market.

"So they're buying dirty coal from Australia, Indonesia, wherever they can get it that has a very high mercury and sulphur content. And where does the jet stream bring that? It brings it right back over the United States."

Ankney says the federal government should do what it can to get more of Montana's low sulphur, cleaner coal onto international markets.

Montana's Republican Congressman Ryan Zinke also opposes the Interior Department's proposal. He predicts it will lead to unpredictable and unstable market conditions and lost jobs.

Headwaters Economics' Mark Haggerty disagrees. He says it would actually simplify and ease compliance. Furthermore, he doubts higher federal coal taxes would lead to a devastating disruption in the coal industry.

"To switch from coal to natural gas is very expensive. Even to switch from Powder River Basin coal to coal from another part of the country because of the qualities and the content of sulphur and mercury and the like. It's quite 'sticky'. We don't see a lot of substitution. A small change in valuation is not going to have a big impact in the market, or jobs in Montana," Haggerty says.

The Interior Department's first public listening session on the federal coal program reform proposal will be held this Wednesday in Washington D.C. The next will be held in Billings on August 11.

O’Brien first landed at Montana Public Radio three decades ago as a news intern while attending the University of Montana School of Journalism. His first career job out of school was covering the 1995 Montana Legislature. When the session wrapped up, O’Brien was fortunate enough to land a full-time position at the station as a general assignment reporter. Feel free to drop him a line at
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