Tom Power Commentary: “Getting Fair Market Value for Federal Leases of Powder River”

The Federal Government finds itself in control of about half of all the coal burned in the United States, mostly to produce electricity. This situation came about because one of the world’s largest and cheapest sources of coal, the Powder River Basin, is located in the Western United States where the Federal Government retained mineral rights and much of the land when the Western states entered the Union.
Until the 1970s this coal was of little interest to anyone but coal-fueled railroad locomotives passing through, because it was located on the Northern Great Plains, hundreds or thousands of miles from population and industrial centers. Even the railroads lost interest in that coal when they shifted from steam to diesel engines.
The Clean Air Act of the 1970s and amendments since changed that. Because Powder River Basin coal was very low in sulfur, it could be mixed with higher sulfur coals or burned by itself to meet increasingly strict federal limits on sulfur emissions. Suddenly this isolated but low cost source of coal was attractive to electric generators across most of the continental United States.
By law, the Federal Government is supposed to lease the development rights to this coal for its full “fair market value,” thus returning to the owners, namely us as citizens and taxpayers, the full value that any private owner would demand and receive. However, in the Powder River Basin, the federal watchdog agency, the General Accounting Office, found that in the 1981 leases of federal coal there, the Federal Government only got 40 percent of the fair market value of those coal development rights.
It is possible that this result, while in contradiction of the law, was not just an oversight or a gift to the coal companies. The 1970s and early 1980s were a period of energy price shocks that rocked the American economy as other nations purposely restricted their production of oil to drive oil prices upward. The Federal Government may have seen the development of Powder River Basin coal as a way of increasing the supply of inexpensive domestic energy sources as well as a way of assisting electric utilities in reducing the cost of meeting air quality standards. It was, after all, at that time that the Northern Great Plains were discussed as a “sacrifice area” in America’s efforts to weather its energy crises.
The market setting of Powder River Basin coal has shifted dramatically again. The environmental problems associated with burning coal to generate electricity, including greenhouse gas emissions, have created considerable regulatory uncertainty, undermining the financial viability of coal-fired electric generation. In addition, natural gas prices have tumbled to lows not seen since the 1990s and projections are for a large enough supply to keep them low. That has made natural gas an increasingly attractive alternative fuel for electric generation on both environmental and economic grounds. As a result, coal has been almost abandoned as a fuel for new electric generators, older existing coal-fired electric generators are being abandoned, and existing natural gas fueled generators are being operated more frequently as coal-fired generators are backed down. Not surprisingly, the demand for Powder River Basin coal has declined and the mine-mouth price of that coal has plummeted. Some mines are also talking about laying off some of their miners.
But the news for Powder River Basin coal is not all bleak. Burgeoning demand and very high prices for coal in coastal Asia have seized the attention of Powder River Basin coal mines. That coal is the closest major American coal field to Asia. If coal companies can get coal ports built on the West coast, they can refocus their business plans on sending coal west to Asia rather than east to declining U.S. domestic markets.
These changed market circumstances raise the question of the appropriate price that the Federal Government should charge Powder River Basin coal miners for the right to develop additional quantities of that coal. If this coal is going to be shipped to China to help the Chinese meet their energy needs, while the resulting pollution blows back to the Western United States and greenhouse gas emissions and climate change grow, what is the point of giving this coal away at below market value?
Coal mining companies have been in the process of seeking to lease much more coal in the Powder River Basin, something that would seem inexplicable given the current weak domestic coal demand and low coal prices. The coal companies almost certainly have their eye on Asian markets and want to tie up as much coal as possible so that they can both continue to serve existing U.S. customers and enter the Asian export market. Now might be just the right time to try to purchase those leases cheaply, when the domestic market is depressed and conventional analysis would suggest that the value of that coal was low. That, of course, is also exactly what a rational owner of the coal would seek to avoid, namely selling the coal in a down market so that the buyers can increase their profits from accessing the much higher priced Asian markets.
The Federal Government should call a timeout, declaring a moratorium on leasing more Powder River Basin coal. It should use that time to carefully evaluate the new shape of the market for that coal. If it is exports of coal to Asia that is going to be driving that market, the Federal Government needs to significantly increase its estimate of the fair market value of those leases and reject all lease applications that do not offer to pay at least that much. Given the past history of federal land management agencies underestimating the value of natural resources and entering into sweetheart deals with mineral developers, the Federal Government should bring in outside experts to conduct that market analysis.
There is no plausible justification for the American people to subsidize the mining of Powder River Basin coal if it is headed for export markets while leaving behind serious environmental problems and creating new environmental problems when it is burned.


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