Leasing of Federal Coal Resources—A Continuing Problem

The basic legislation authorizing leasing of federal coal lands is the Minerals Leasing Act. Enacted on February 25, 1920, it gives a lessee exclusive rights to mine coal subject only to the terms of the lease and to federal and state laws. Because nearly all of the federal coal is found west of the Mississippi River, where past demand was low, for the first forty years (1920 to 1960), only 166 leases covering 143,000 acres were granted. As a result, neither potential policy issues nor the administration of the leases by the Department of the Interior received much public or congressional attention.

About 1960, the character and ownership patterns of the coal industry changed rapidly as coal production started to recover from the depressed state it was in in the 1950s. A large share of production came from surface mining operations, and mines became increasingly mechanized, with a resulting rapid rise in productivity. Mechanization required much larger capital investments, and productive capacity became concentrated in larger companies. In addition, while in the past the industry had been characterized by many companies engaged only in coal production (and a few steel companies with captive mines), it came to consist mainly of energy companies heavily involved in oil and gas production and of conglomerates engaged in a variety of industrial activities.

These larger firms had much greater capital resources, a wider interest than coal, and were faced with declining domestic reserves of oil and natural gas. They actively sought to acquire western coal resources for eventual use in synthetic fuel production and as a fuel source for the rapidly expanding western utility industry. This meant acquiring federal leases as 50 to 60 percent of western coal resources are on federal lands. As a result, from 1960 to 1970 the number of federal coal leases increased nearly threefold and the leased acreage by fivefold.

Those federal leases were acquired at relatively low cost and with minimum difficulty. Under terms of the Mineral Leasing Act, by exploring for and discovering coal on land where no deposits previously had been known, a prospector could obtain a lease under a procedure known as a Preference Rights Lease Application. On federal lands with known coal deposits, a competitive lease sale was required. Most sales attracted only one bidder and acquisition costs also were low under this "competitive" means of attaining a federal lease. In all, nearly three-quarters of the leases were acquired under essentially noncompetitive conditions. A third method of acquiring a lease was by assignment (sales of existing leases); by 1970 a large number of leases had been assigned to new owners—often more than one time.

The 1971 leasing moratorium (1971-81)

The rapid expansion in new leases and the increased rate at which leases were being assigned demonstrated clearly that federal coal resources had acquired an important economic value. With this change, a new method of lease disposal was needed that was fairer to prospective lessees and to the public—owners of the resource. To provide time to devise a new method, Interior Secretary Rogers Morton created an informal moratorium on leasing in 1971; a formal moratorium was adopted in February 1973.

Congress also recognized the need for changes and, after considerable debate, provided a new legislative basis for a comprehensive leasing program through the Federal Coal Leasing Amendments Act of 1976. This was designed to provide a more orderly procedure and "less-speculative" means for development of federally owned coal with its newly enhanced economic value. The major provisions were:

• All leasing was to be by competitive bidding and at fair market value.
• The Preference Rights Lease Application procedure was abolished.
• All new leases were to be in commercial production within ten years or the lease was to be terminated.
• Holders of old leases not in production in ten years were to be penalized in other ways.
• Higher royalty fees were to be collected.

Nearly all of these and other provisions were directed at preventing what Congress considered the greatest threat—"speculation" on federal coal leases.

Even before leasing was resumed in January 1981, it had become obvious that efficient and fair management of the federal coal resources would be more difficult in the future because of their greater value. Further complicating the administration of these lands were about twenty other new legislative actions that would affect the coal leasing program once it was resumed. Two of the most important were the Federal Land Policy and Management Act of 1976 and the Surface Mining Control Act of 1977. The first introduced a much more extensive land use planning requirement as an integral part of the leasing process and the second greatly strengthened the environmental regulations controlling surface mining, the method used nearly universally on federally owned coal deposits. Other evidence that increased difficulties were to be expected in the leasing and effective management of these resources was litigation over various provisions of these new legislative acts and over the regulations issued to implement them.

After much, sometimes acrimonious, discussion, the Department of the Interior issued regulations in 1979 to implement the new legislative requirements and court decisions, particularly provisions relating to fair market value, competition, and diligent development. The new leasing procedure included detailed land use planning, a method for selecting tracts to be offered, and a "minimum acceptable bid" concept for each tract, which became the official estimate of fair market value. The minimum bids were to be published before the sale and a sealed cash-bonus fixed-royalty bidding method was to be used, followed by oral bidding where more than one bid was received. As with nearly everything else involving coal leasing in that period, the regulations were challenged in the courts.

Lifting the moratorium

These problems did not prevent lifting the moratorium in January 1981 and Interior conducted a number of sales under the provisions of these new regulations that resulted in the leasing of 0.5 billion tons of coal that year. In March 1982, just about one month before the Powder River Basin coal lease sale (the largest ever conducted) was to be held, the first of two changes in the 1979 regulations was issued. A number of procedural and substantive modifications were made, with the major one shifting the determination of fair market value from before the bidding to after it. The "minimum acceptable bid" concept was replaced with an "entry level bid" procedure. This set a minimum acceptable bid below the department's evaluation of the estimated tract value in the hope that the oral competition at the sale, following the opening of the sealed bids, would establish a "true" value for the tract or a fair market value. With the apparent failure of the earlier presale evaluation procedures to establish a satisfactory fair market value, it was thought that a postsale evaluation method would overcome the difficulties.

Unfortunately, the Powder River Basin sale was marred by allegations that proprietary and lease valuation data had been disclosed prior to the sale. Moreover, strong disagreement was voiced about whether the new bidding system had resulted in more or less competition and a more realistic approach to reaching a fair market value. There was general agreement, however, that competition was weak at the Powder River Basin sale. Of the thirteen tracts offered, two received no bids and eight received only one bid.

The fallout from the Powder River Basin sale

If the sale did not generate strong competition, it did create what coal leasing has been best at—vigorous controversy. The March 1982 notice of sale was challenged in the courts for the standards and procedures that had been adopted. In addition, two court actions were initiated with respect to the sale itself—one by the Cheyenne tribe and the other by various environmental groups, both charging violations of various federal laws. These suits have not yet been adjudicated.

The allegations of unauthorized disclosure of valuation data also resulted in two separate investigations of the sale—one by the General Accounting Office (requested by the House Interior and Insular Affairs Committee) and another by the Surveys and Investigations staff of the House Appropriations Committee. Both reports went much beyond the question of unauthorized disclosure. They discussed the wide range of problems and conflicting goals that coal leasing was expected to satisfy and recommended new changes in regulations and procedures to ensure competition and bids that reflected fair market value. The General Accounting Office (GAO) report recommended a "postponement" of leasing until some of these policy issues, standards, and procedures could be reviewed carefully.

As these studies were proceeding, a second Powder River Basin lease sale was held on October 15, 1982, at which only two tracts were offered (one of which had been previously offered), using still another bidding procedure. In this sale, a participating bidder was allowed only one sealed bid, with no oral bidding. The "entry level" bid system used in the first Powder River Basin sale was abandoned and minimum bidding was used. Although these minimum bids were floors below which bids would not be considered, they did not officially represent a fair market value. As in the first Powder River Basin sale, emphasis was placed on postsale evaluation. Only one bid was received on each of the two tracts offered, so that the effectiveness of this third leasing method in achieving competition and reaching fair market value cannot be judged.

At least part of the complexity and the frequent changes in the leasing procedures and program resulted from the large number of interested parties to the debate—the coal industry, environmental groups, representatives of several levels of government, ranchers, and Native American tribes. To add further confusion, in November 1982, Secretary of the Interior James Watt met with nine Western governors who were seeking further modifications in the leasing regulations and procedures to meet the special desires of their states. After the meeting, the governors submitted extensive written suggestions on a large number of issues, but "concessions" were made on only a few minor points.

Congressional reaction

No general lease sales were scheduled during the early part of 1983, but Interior's intention to offer for lease large tonnages of federally owned coal remained unchanged. The department continued to defend its policy vigorously despite congressional and public concerns and directly challenged those who questioned the adequacy of the competition and receipt of fair market value for the leases already offered. The Interior appropriations hearing before the House in late April brought into focus the policy, economic, and procedural issues that had been raised. The committee's investigative report had been released and Interior's comments on the report were available, as were the responses of the House committee staff. The hearings can best be described as "heated."

Shortly afterward, hearings were held on the GAO report on coal leasing by a subcommittee of the House Interior and Insular Affairs Committee. In the Fiscal Year 1983 supplemental appropriations, the House recommended a leasing moratorium. The Conference Committee recommended the creation of a Commission on Fair Market Value for Federal Coal Leasing in place of the House moratorium. The Senate rejected a moratorium in June but by September had adopted it. The final bill adopted by the Congress in late October mandated a partial moratorium on coal leasing until the commission had reported.

The switch in sentiment in the Senate and a hardening of the resolution on the moratorium in the House probably resulted from several factors. One was the continuing confrontation between Secretary Watt and a number of critics over a multitude of environmental and resource administration policies, of which coal was only one. The other was the department's resolve to carry out its large coal leasing program as originally planned. The secretary insisted on holding the Fort Union leasing sale in September 1983, even though the newly appointed Commission on Fair Market Value to study ways of improving the leasing process had not started to function. The position of the department was reflected by Watt's statement that "I've leased more coal than was asked during the previous ten years, but I'm a piker compared to Secretary Udall—he's six secretaries ago. I've leased 50% of what he did." By October, when the moratorium was under active consideration, the secretary had come under severe criticism for his comments on the membership of the commission.

Tying the moratorium to the commission's work increased the potential importance of its final report. The commission's charter is very broad: it was directed "to review the Department of the Interior's coal leasing statutes, policies, and procedures to ensure receipt of fair market value." Composed of five members appointed by the secretary, the commission was sworn in at the end of August and hearings started in September. A final report is due January 29, 1984.

The task of the commission

Given the tortuous history, and the many interest groups with different agendas for coal leasing, the commission faces an enormously diverse and complicated set of problems that even a superb report will not "solve." The issues range from procedural matters (how to offer and value a lease) and establishment of standards (how to manage them) to a host of major public policy objectives relating to leasing of any federal resource. At one level, the commission must examine the impact of various methods of bidding and leasing terms on federal and state income compared with other leasing objectives that might be achieved. At another level, it must study the question of whether emergency leases, production maintenance leases, small business tracts and public body set-asides should be treated differently from each other and from general lease sales. If so, how? What is the justification for treating them differently?

To illustrate, consider only two major issues. The commission has been directed to examine methodologies for determining fair market value and for increasing competition. Fair market value seems to be an easily understandable economic concept but, as evidenced by the debate over the issue, in practice it can be interpreted in a variety of ways. Even the economic questions can be difficult. What evaluation method results in the "best" estimates of fair market value? A number of different methods already have been used, with disagreement over their effectiveness. Even leaving aside what probably is the most important economic consideration—the existing market for coal and its uncertainty and variability over time—a large number of other factors must be considered. They include the quality of the coal (with respect to a number of physical and chemical characteristics), the differing geologic conditions (coal and overburden thickness, overburden type, and slope of coal seam), ease of environmental controls, water conditions at the site, and availability of transportation. Finally, there is the key question, To receive fair market value, how much coal should be offered and at what rate?

It is no easier to determine the adequacy of competition for leases. It too is tied to coal leasing rates and tonnage, but in a different way. Because of the large size of the leases required to produce competitively in western coal markets and the large capital investments and long development time before any economic return can be expected, there will be comparatively few lease bidders. But the major coal consumers, the electric utility industry, which uses vast tonnages over long periods, need a large number of suppliers if they and their customers are not to be at the mercy of the suppliers—the coal lessees. Thus, to maintain competition in the coal market, large blocks of uncommitted reserves have to be available at any time. Unless the federal government wants to play the role of "speculator," it should lease so as to be certain that coal buyers are in a competitive market to assure that electricity consumers are not penalized.

The commission cannot provide answers to these and many other questions without some agreement on the social as well as the economic goals of leasing. Coal-leasing history leaves no room for optimism that any reasonable compromise will be possible, let alone durable.

In early December the commission released thirty-nine tentative draft recommendations with requests for public comment by December 18, but with no accompanying report showing how the recommendations were reached. If adopted, the recommendations would make major modifications in the federal coal-leasing program, including repeal of the requirement for commercial coal production on pre-1976 leases by 1986 and of the restrictions on railroads holding federal coal leases. Other recommendations included endorsement of accelerated coal leasing to ensure adequate competition among mining companies, providing for the right of eminent domain for coal-slurry pipelines and a number of changes in leasing procedures.

The recommendations were generally well received by industry, but several environmental groups that commented on the recommendations believed the commission had avoided addressing its assignment and had only further aggravated the existing leasing controversy.

The political process will gnaw at the commission report when it is completed, and long delays in developing any new leasing program are probable since no single solution will be best for all the parties at interest. Once "settled," the room for further delaying actions is enormous and some of those unsatisfied with the outcome will be certain to reopen the question at the political level or in the courts, or both.