US coal lease changes could greatly boost revenue: CEA

The US could bring in substantially more revenue by changing the federal coal leasing system, a report released today by the White House Council of Economic Advisors (CEA) showed.

CEA studied four scenarios, all of which showed that state and federal coffers would be at least several hundred million dollars richer in 2025 than they would be if the leasing program did not change at all. Moderate production declines as a result of the changes would be more than offset by increased collection rates and potentially higher coal prices.

The report comes in the early stages of the Interior Department's review of its federal coal leasing program and supports the notion that significant changes need to be made. According to the CEA, loopholes in the existing program have limited competition for available tracts and have resulted in a lower average royalty rate on leases.

"There is a strong case for reform here," CEA chairman Jason Furman said today.

CEA cited a 2012 Government Accountability Office report that showed the effective royalty rate on revenues from federal leases averaged 11pc that fiscal year, and in some cases was as low as 5.6pc. The current royalty rate for surface coal mines on federal land is supposed to be 12.5pc,while the rate for underground mines is 8pc.

The difference between what the government is supposed to collect and what it actually does can be traced to a number of factors. Companies may receive waivers and suspensions that lower the rates. Royalties are based on the first point of sale, and in some cases producers have sold coal to subsidiaries at a reduced rate, lowering the royalties to the government.

Companies can also deduct self-reported costs for washing and transporting coal.

By changing the program, "the potential to bring in additional revenue to the public is quite substantial," CEA said.

Three of the four options analyzed by CEA kept the 12.5pc royalty rate but used a per-Btu market delivered price, rather than the self-reported per-ton basis now used. The first option, which would assess royalties off of regional delivered coal prices, would put revenue in 2025 as much as $290mn higher than the current program with only a 3pc reduction in coal production on federal land.

The second and third options — basing rates off of either a nationwide average coal price or natural gas prices — would lead to as much as as $730mn in additional royalty revenue in 2025 with only a 7pc decline in federal coal production. But the volatility of natural gas prices could make basing royalty rates for coal on natural gas also more volatile and subject to market forces, Michael Greenstone from the University of Chicago and Brookings Institution senior fellow Adele Morris said. The two spoke at an event sponsored by Resources for the Future where CEA's report was presented.

The final option, which would increase royalty rates until revenues peaked, would bring in as much as $3.1bn more revenue in 2025, but coal production on federal lands would be 53pc lower.

The National Mining Association criticized the report as "political malpractice."

"There is no legitimate rationale for freezing coal leases and raising royalty rates on federal coal leases that are already valued above market," NMA said. "Discouraging production from federal lands and from further investment in this valuable energy resource will put at risk Americans' most reliable, abundant and affordable source of energy."

But decreased production from federal lands would be at least partially offset by gains from private property, CEA said. The increased royalty rates would prompt producers to raise prices for coal produced on federal land and that would support nationwide price increases, CEA said. It estimated that eastern coal production, including in the Illinois basin, could increase by 1pc-25pc, depending on which scenario is used.

None of the options outlined in the report are policy proposals, CEA senior economist Kenneth Gillingham said. The CEA is an agency within the executive branch that provides advice and empirical research about economic policy to the president.

Interior put a moratorium on new coal leases in January, with some exceptions, while it reviews how to change the federal coal leasing program. The complete review process is expected to take about three years.