US Interior Secretary Ken Salazar released a letter to Congress on Friday declaring that the probe was underway and that no violations have yet been issued. He said one federal coal lessee is under investigation but did not provide further information.
The investigation will focus on companies’ use of affiliates or brokers to sell coal from mines in the western US to customers throughout Asia.
The issue came to light after Reuters published an article on December 4 alleging that coal companies were selling to in-house trading affiliates, which in turn sold the coal to international buyers for a premium. The arrangement would allow companies to report a lower sales price, undervaluing domestic product and effectively robbing US taxpayers of millions of dollars in royalties.
Coal royalties nationwide totalled $876 million last year, from 460 million tons of coal mined from federal land. US coal exports this year are estimated to reach 124 million tons.
Salazar wrote that the issue highlights the need for reforms in how royalties are calculated, which was last updated in 1989, before the recent spike in coal exports.
“The Department is committed to working closely with Congress on legislative changes to improve our management of the federal and Indian mineral resources and to fulfil our stewardship responsibilities to the Nation,” Salazar wrote.
“These good-government reforms include adjustments to royalty rates to achieve better returns for taxpayers, efforts to support and encourage the diligent development of existing leases, and the modernization and simplification of the royalty management statutes to improve revenue collection processes, eliminate unwarranted industry subsidies, and reduce unnecessary administrative burdens for both the Department and industry.”
Salazar said that the Office of Natural Resources Revenue will initially focus on coal sales and contracts the Power River Basin in Wyoming and Montana from 2009 and 2011. The review will later expand to Utah and Colorado for sales dating to 2001. The domestic price of coal mined in the Powder River Basin is roughly $13 per ton, according to press reports, which is less than half of international prices that are $30 a ton or more. That price difference would translate to a royalty shortfall to the federal government of more than $2 per ton.
Companies generally argue that the higher price that their product fetches in Asia reflects shipping costs and other logistical issues. The AP also reported that in a letter to Salazar, Cloud Peak Energy CEO Colin Marshall said the company considers transportation logistics work as “fundamentally different than our business of selling coal at the mine.” He said the company plans to list mining and logistics as separate businesses in its upcoming annual report.
The secretary’s letter to Congress is in response to a January 3 letter Senators Ron Wyden (Oregon) and Lisa Murkowski (Alaska) sent to the secretary. The letter expressed concern about how the Salazar’s department conducts audits, reports international coal sales and handles underpayment of royalties. Wyden and Murkowski are the chairman and ranking member, respectively, of the Senate Energy and Natural Resources Committee.
In a joint statement, Murkowski and Wyden said they were “pleased with the formation of a task force to ensure coal companies have paid their fair share when coal is mines on public lands and sold overseas.”