By Patrick Rucker
WASHINGTON (Reuters) - Western states that rely on receipts from coal sales to help fund their governments are concerned the mining industry is dodging royalty payments on lucrative U.S. exports to Asia.
By valuing coal at low domestic prices rather than the much higher price fetched overseas, coal producers can skip a large royalty payout when mining federal land.
The practice could add up to hundreds of millions of dollars in forgone royalties if exports to Asia surge in coming years as the industry hopes, Reuters found.
Wyoming warned federal officials about flaws in the royalty system a year and a half ago. Last week Montana Governor Brian Schweitzer said he will not tolerate the coal industry skirting royalties: "If there's phony baloney going on, we have to get to the bottom of it."
Montana and Wyoming get half of federal royalties on coal from their states.
Asian energy demands mean several million tons of the black rock typically move from the Powder River Basin in eastern Wyoming and Montana across the Pacific each year. Taxpayers have a stake in those sales since the region is mostly on public land.
Powder River Basin sales are uncommonly profitable for miners like Arch Coal, Peabody Energy Corp. and Cloud Peak Energy since coal worth about $13 a ton last year domestically could have fetched roughly 10 times that in China.
Last year less than 5 percent of Cloud Peak coal was shipped to Asia but that accounted for nearly 19 percent of revenue, or about $290 million.
Federal and state officials have said that the mining industry is two steps ahead of regulation as it moves into Asian markets and that the current rules that value coal are open to abuse.
Questions about royalties and taxpayer interests could flavor a dispute about whether coal export terminals should be built in the Pacific Northwest.
Activists in Oregon and Washington have vowed to block coal trains that the mining industry hopes will link the Powder River Basin and Asian markets. Coal export foes say local communities will be harmed by mile-long coal train traffic, and scientists warn that coal power is worsening the impacts of climate change.
VAGARIES OF ROYALTIES
Officials expect coal royalties to be paid on the highest value for the fuel, which is typically the price utilities are willing to pay.
But regulators fret that miners are selling to sister companies at low domestic prices and then pocketing gains when that coal eventually reaches Asian power plants, thus circumventing the higher royalty.
Arch Coal, Cloud Peak and Peabody Energy declined to comment on how they book Asian sales, but they boast to investors about their profitable trade and brokering business.
That business is booming.
About 54 percent of coal export sales from the Powder River Basin was handled by brokers last year while only about 16 percent of such sales east of the Mississippi River was handled that way, according to the Energy Information Administration.
The Office of Natural Resources Revenue, an agency of the Interior Department, has struggled to find the true value of coal when brokered deals and direct-to-utility sales produce different prices for the fuel.
The agency's benchmarks for finding the true value of coal "have proven difficult to use in practice," the agency wrote in May 2011 as it mulled royalty rules that it said were open to abuse.
In a letter supporting tougher rules, the Wyoming Department of Audit beseeched ONRR to "not allow coal producers to create affiliates to reduce the royalties paid."
The mining industry, though, defended the status quo in several letters to regulators.
An ONRR spokesman said officials were committed to collecting every dollar due taxpayers, but he could not comment on when final royalty valuation rules might be proposed.
Autumn Hanna with nonpartisan Taxpayers for Common Sense said the government must quickly put rules in place to protect the public interest on coal sales.
"Taxpayers stand to lose day by day with the existing rules," she said. "The new rules are needed now."
The coal trade has become a controversial issue in the Pacific Northwest where miners want new terminals to allow about 150 million tons of coal a year to be exported from the Powder River Basin.
While politicians spar over whether those ports should be built, there is less friction about what taxpayers are due.
"The Department of the Interior should ensure these companies pay royalties on the full value," said Oregon Senator Ron Wyden, whose staff has met with federal officials in recent weeks to discuss the issues raised by Reuters reporting.
Wyden, a Democrat, will chair the Energy and Natural Resources Committee in the next Congress.
Alaska Senator Lisa Murkowski, the ranking Republican on that committee, believes the government should allow coal exports but officials must protect taxpayers' stake in such sales.
"We know Interior is looking at this and we wait to hear what they find," said a Murkowski spokesman, who noted the senator believes Congress should be setting rules on royalty payments.
Montana Governor Schweitzer, who leaves office next month, has roundly supported the coal terminal expansion, but the straight-talking rancher and miner said taxpayers must get a fair cut on those Asian sales.
"We need to collect on the actual value," Schweitzer told Reuters in an interview.
(Reporting by Patrick Rucker; editing by Prudence Crowther)