TODAY’S STUDY: BIG COAL’S TAKE FROM THE TAXPAYER

Coal Leasing: BLM Could Enhance Appraisal Process, More Explicitly Consider Coal Exports, and Provide More Public Information

December 2013 (Government Accounting Office)

What GAO Found

Since January 1990, the Bureau of Land Management (BLM) has leased 107 coal tracts, and associated coal production and revenues have grown. Most lease sales have had a single bidder and were leased the first time offered. The amount of coal produced from federal leases and associated revenues have increased since 1990, although production has leveled off since 2002. Revenues from federal coal leases have generated about $1 billion annually in recent years. Royalties paid when coal is sold and bonus bids paid for the right to mine a federal coal tract account for nearly all of these revenues.

BLM’s guidance offers flexibility in how to estimate fair market value, and BLM state offices vary in the approaches they used to develop an estimate of fair market value. In estimating fair market value, some BLM state offices used both the comparable sales approach––where bonus bids received for past sales are used to value the tract being appraised––and the income approach––which uses estimates of the future net revenue streams from the sale of coal from the appraised tract. However, some offices relied solely on the comparable sales approach and may not be fully considering future market conditions as a result.

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In addition, GAO found that BLM did not consistently document the rationale for accepting bids that were initially below the fair market value presale estimate. Furthermore, some state offices were not following guidance for review of appraisal reports, and no independent review of these reports was taking place. Adequate review of the fair market value process is critical to ensure that its results are sound and key decisions are fully documented. In addition, BLM is not currently taking advantage of a potential independent third-party reviewer with appraisal expertise within the Department of the Interior (Interior), specifically, the Office of Valuation Services.

BLM considers exports to a limited extent when estimating fair market value and generally does not explicitly consider estimates of the amount of coal that can be mined economically, known as domestic reserve estimates. As a result, BLM may not be factoring specific export information into appraisals or may not be fully considering the export potential of a lease tract’s coal as called for in agency guidance. The Wyoming and Montana BLM state offices considered exports, but they generally included only generic statements about exports in the reports they prepared. In the other seven states with leasing activity, exports were generally not considered during the appraisal process. According to BLM officials, domestic reserve estimates, which vary based on market conditions and the costs to extract the coal, are not considered due to their variable nature.

BLM generally provides limited information on federal coal lease sales to the public because of the sensitive and proprietary nature of some of this information. The Wyoming BLM state office posts information on its website, including information on past lease sales, but most state office websites provide only general information. BLM’s guidance states that redacted public versions of its appraisal reports should be prepared, but no BLM state office has prepared such reports. BLM supplied redacted versions of fair market value documents in response to a recent public information request only after being advised to do so by Interior’s Solicitor’s office.

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Background

Coal is an important domestic energy source, and BLM is responsible for managing coal resources on about 570 million acres of federal, state, and private land. Since 1990, all federal coal leasing has taken place through a lease-by-application process where companies propose lease tracts to be put up for sale by BLM. In fiscal year 2012, about 1.05 billion tons of coal was produced in the United States, including production from federal coal leases, and the biggest coal production area for federal coal was the Powder River Basin in northeast Wyoming and southeast Montana. Coal is also an important fuel source worldwide and consumption of coal continues to increase. To meet this growing demand, there has been an increase in global trade of coal, including exports from the United States…

Since 1990, Over 100 Coal Tracts Have Been Leased, and Coal Production and Associated Revenues Have Generally Grown…BLM’s Implementation of the Fair Market Value Process Lacks Sufficient Rigor and Oversight…BLM Considers Coal Exports to Limited Extent When Estimating Fair Market Value and Does Not Consider Domestic Reserve Estimates Because of Their Variable Nature…BLM Provides Limited Information on Federal Coal Lease Sales to the Public…

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Conclusions

With about 40 percent of the nation’s coal produced from federal coal lease tracts in recent years, the federal coal leasing program plays an important role in the nation’s energy portfolio. In managing the leasing program, BLM is required to obtain fair market value for coal leases.

Because there is typically little competition for federal leases, BLM plays a critical role in ensuring that the public receives fair market value for the coal that is leased. However, we found differences across BLM state offices in the approaches they use to estimate fair market value and the rigor of these reports. Moreover, BLM state offices are not documenting the rationale for choosing their approaches for the appraisal process.

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Adequate oversight of the fair market value process is critical to ensuring that its results are sound and properly reviewed. However, BLM’s guidance on the valuation of coal properties is out of date, and officials are not reviewing and signing appraisal reports in accordance with BLM’s guidance. Without a mechanism to ensure consistent reviews by three officials, as specified in the guidance, and independent third-party reviews, appraisal reports may not be receiving the scrutiny they deserve. BLM’s guidance allows for additional information and analyses to be considered as part of the post-sale review process, which could result in a lower revised fair market value estimate and acceptance of bids below the presale fair market value estimate but above the revised estimate.

The guidance calls for such decisions to be fully justified and that a revised fair market value be clearly documented and reviewed. However, we found instances where BLM’s justification to accept such bids was not adequately documented. Without proper documentation of these decisions, adequate oversight cannot take place, and BLM does not have assurance that accepted bids were in compliance with the Minerals Leasing Act.

Coal exports make up a small but growing proportion of total U.S. coal production, yet BLM state offices were generally not tracking the export activity for mines on federal leases and were including only generic statements about exports in their appraisal reports, and some state offices were not routinely including export information in appraisal reports.

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Moreover, BLM officials were largely unaware of the various sources of mine-level information about exports, such as the information that EIA collects and the information collected by private companies. By not tracking and considering all available export information, BLM may not be factoring specific export information into appraisals for lease tracts that are adjacent to mines currently exporting coal or keeping abreast of emerging trends in this area.

BLM state offices are not following agency guidance because they have not prepared public versions of appraisal reports, and there is a lack of agreement within the agency on the extent and type of information related to the estimation of fair market value to be shared in response to public requests. Without updated guidance and a consensus, there may continue to be a disconnect between BLM’s guidance and its standard practice of not releasing this information publicly. Finally, BLM provides little summary information on its websites on past lease sales or links to sale-related documents. Having additional information online could increase the transparency of federal coal leasing program.

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Recommendations for Executive Action

We are recommending that the Secretary of the Interior direct the Director of the Bureau of Land Management to take the following eight actions: To ensure that appraisal reports reflect future trends in coal markets, BLM should revise its guidance to have state offices use both comparable sales and income approaches to estimate fair market value where practicable. Where it is not practicable to do so, the rationale should be documented in the appraisal report.

To ensure that appraisal reports receive the scrutiny they deserve and are reviewed by specified officials, BLM should take the following actions:

• update its guidance so that it reflects the current titles of officials who should review appraisal reports;

• develop a mechanism to ensure that state offices are reviewing and signing appraisal reports consistent with the guidance;

• develop a process for independent review of appraisal reports and work with the Office of Valuation Service to determine its role, if any, in this process.

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To ensure that all accepted bids comply with the Minerals Leasing Act by meeting or exceeding BLM’s estimate of fair market value, BLM should update its guidance to specify the documentation needed for post-sale analyses in instances where a decision is made to revise the fair market value estimate and accept a bonus bid that was below the presale estimate of fair market value but above the revised estimate. Such documentation for postsale analyses should include the revised estimate of fair market value, the rationale for this revision, and review of this decision by appropriate officials.

To ensure that appraisal reports reflect the current state of export activity for mines on federal leases, BLM headquarters should develop guidance on how to consider exports as part of the appraisal process and identify potential sources of information on coal exports that state offices should use when conducting appraisals.

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To eliminate the disconnect between its guidance and BLM state offices’ practice of not releasing appraisal documents to the public, BLM headquarters, state office officials, and Interior’s Office of the Solicitor should come to agreement on the extent and type of information related to the estimation of fair market value that should be shared in response to public requests for this information and make sure that its guidance reflects this consensus.

To make electronic information on the coal leasing program more accessible to the public, BLM should provide summary information on its websites on results of past lease sales (e.g., amount of coal offered, coal quality, bonus bids received ) and status of any upcoming coal lease sales along with links to sale-related documents.

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