Center for American Progress

CAP Review: Interior Department Rule Will Close Royalty Loophole but Preserve Taxpayer-Funded Subsidies for Coal Production in the Powder River Basin
Press Release

CAP Review: Interior Department Rule Will Close Royalty Loophole but Preserve Taxpayer-Funded Subsidies for Coal Production in the Powder River Basin

Washington, D.C. — Despite the U.S. Department of the Interior’s proposal today of a new rule to close a key loophole that enables coal companies to dodge federal royalty payments, a Center for American Progress analysis finds that coal companies will still be able to use their elaborate network of affiliates and subsidiaries to continue to collect hundreds of millions of dollars in taxpayer-funded subsidies.

A CAP issue brief finds that five of the largest coal companies operating on federal lands in Wyoming and Montana’s Powder River Basin, or PRB—the largest coal producing region in the United States—have built networks of at least 566 affiliated companies through which they market and sell coal. Deals like these between a company and its affiliate are known as “captive transactions” and accounted for 42 percent of all coal produced in Wyoming in 2012—up from just 4 percent in 2004. The CAP brief presents evidence that major coal companies are using captive transactions through these networks to manipulate prices, dodge payments to federal and state governments, and the maximize taxpayer-funded subsidies they receive.

“Increasingly, the major coal companies are selling Powder River Basin coal not on an open market but to an elaborate network of shell companies that they own and control,” said Matt Lee-Ashley, a Senior Fellow and Director of the Public Lands Project at CAP. “This gaming of the system is costing federal and state governments millions of dollars in lost royalty payments and giving the Powder River Basin an unfair advantage over other U.S. coal-producing regions. While Interior’s proposed rule is a good first step toward preventing the worst abuses, clearly more must be done to modernize the royalty system and rein in the largest subsidies it provides.”

According to the CAP brief, the U.S. Department of the Interior is providing coal companies three types of subsidies through its current royalty rules:

  • Interior’s royalty rules allow coal companies to pay royalties on a price that is below the true market value.
  • Regulators grant royalty reductions to noneconomically viable coal mines.
  • Coal companies are allowed to deduct transportation and washing costs from their royalty payments.

The brief recommends that federal royalty rules for coal be simplified further to require that companies pay royalties on the market value of coal when it is sold to an end user, such as a power plant or an exporter, and that transportation and washing subsidies be reduced.

By assessing royalties based on this true market price of coal—which is already disclosed and publicly available through the Energy Information Administration—Interior would help improve transparency, reduce opportunities for abuse, and help meet President Barack Obama and Secretary of the Interior Sally Jewell’s goals under the U.S. Extractive Industries Transparency Initiative.

Click here to read the brief.

For more information, contact Tom Caiazza at [email protected] or 202.481.7141.