[Federal Register Volume 63, Number 56 (Tuesday, March 24, 1998)]
[Notices]
[Pages 14131-14134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7547]


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DEPARTMENT OF THE INTERIOR

Minerals Management Service


Royalty Computation on Phosphate Production on Western Public 
Lands

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of proposed revision of method for determining value 
used to compute royalty payments on phosphate ore mined on western 
public lands.

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SUMMARY: The Minerals Management Service (MMS) is soliciting comments 
on a proposal to adopt a new method for determining the value of 
production used to compute royalties on phosphate ore produced from 
Federal leases in the State of Idaho.

DATES: Submit comments on or before April 23, 1998.

ADDRESSES: Send your written comments to David S. Guzy, Chief, Rules 
and Publications Staff, Royalty Management Program, Minerals Management 
Service, PO Box 25165, MS 3021, Denver, Colorado 80225-0165; or e-Mail 
RMP.[email protected].

FOR FURTHER INFORMATION CONTACT: Herbert B. Wincentsen, Chief, Solid 
Minerals Valuation and Reporting Branch, Minerals Management Service, 
PO Box 25165, Mail Stop 3153, Denver, Colorado 80225-0165, telephone 
(303) 275-7210.

SUPPLEMENTARY INFORMATION: On October 16, 1997, the Secretary of the 
Interior (Secretary) approved an April 16, 1997, recommendation from 
the Royalty Policy Committee (RPC) to revise the current method of 
adjusting the value used to compute royalty payments on Federal 
phosphate production.
    RPC is a committee of the MMS Advisory Board (Board). The Board was 
created under the authority of the Federal Advisory Committee Act. The 
Board's purpose includes, in relevant part, providing advice to the 
Secretary, the Director, MMS, and other Department of the Interior 
(Department) officials on royalty management of Federal and Indian 
leases. RPC includes representatives of States which share in mineral 
revenues from Federal lands; Indian tribes and allottees whose mineral 
revenues MMS collects in trust; and oil and gas and solid minerals 
producing industries who pay royalties; and the public.

RPC Recommendations

    RPC made the following recommendations concerning phosphate 
valuation which were approved by the Secretary:
    1. The current indexing procedure, which utilizes the Gross 
Domestic Product--Implicit Price Deflator (GDP-IPD) to annually adjust 
the phosphate value for royalty calculation purposes, should be 
discontinued.
    2. The phosphate value should be determined using a weighted 
composite index methodology having the following indices and weights:
     The Chemical and Fertilizer Minerals Mining Index 
(Standard Industry Code (SIC) 147), weighted at 50 percent.
     The Phosphate Rock Index (SIC 1475), weighted at 25 
percent.
     The Phosphatic Fertilizers Index (SIC 2874), weighted at 
25 percent.
    The phosphate unit value would be recalculated annually, as under 
the existing indexing procedure.
    3. This recommended methodology should continue for 5 years, at 
which time the methodology and the values determined thereunder will be 
examined to assure there is a continued relationship to the 
marketplace.
    4. The valuation methodology applies only to Federal phosphate 
production; there is no Indian phosphate production. State or fee 
phosphate leases are also unaffected unless the parties to a State or 
fee lease elect to use the Federal valuation methodology.

[[Page 14132]]

    5. The recommended composite indexing method will not be 
retroactive. The methodology will become effective if and when approved 
by the Department.

Problems Identified in RPC Report

    RPC identified the following problems with the current phosphate 
valuation method:
    1. There is a lack of open market (arm's-length) sales of phosphate 
ore, the product on which the value for royalty purposes is based. The 
Western phosphate industry has been, and continues to be, characterized 
by vertically integrated companies. These companies consume virtually 
all phosphate ore production internally, to make a variety of 
downstream refined phosphate based fertilizers and elemental 
phosphorus.
    2. About 16 years have elapsed since the Department adopted an 
indexed valuation adjustment method using GDP-IPD. As expected, the 
P205 unit value has steadily increased each year, 
consistent with the use of a broad-based measure of price changes such 
as the GDP-IPD.
    3. Comparison of the Federal GDP-IPD indexed-valuation methodology 
to the market shows that its use has failed to accurately track the 
relative rise and fall of a single product or market such as that for 
phosphate rock; therefore, a valuation problem currently exists.
    4. The valuation problem will grow with continued use of the GDP-
IPD. The continued use of the GDP-IPD will increase the 
P205 unit value at the same rate as the IPD 
deflates the GDP. This is not a true reflection of changes in the 
phosphate marketplace because it does not take into consideration the 
changing phosphate product consumption pattern and the ancillary price 
impacts on phosphate ore.

Background of Phosphate Ore Valuation

Valuation Before 1975

    Before 1975, phosphate royalty payments were based on a lease-
imposed minimum rate of $0.25 per ton. Federal phosphate leases have 
historically carried lease terms requiring royalty to be paid on the 
greater of either $0.25 per ton or 5 percent of the gross value. Under 
this term, the 5 percent rate applies whenever the gross value exceeds 
$5 per ton. Before 1975, the value was assumed to be less than $5 per 
ton and thus the royalty rate remained fixed at $0.25 per ton.

Valuation From 1975 to 1981

    In the early 1970's phosphate rock prices rapidly increased, 
surpassing the $5 per ton benchmark price for application of the 5-
percent royalty rate. In 1974, an audit by the Department (the Office 
of Audit and Investigation) concluded that the Federal Government was 
not following its statutory mandate to collect not less than 5 percent 
of the gross value.
    However, required use of the ad valorem royalty rate introduced a 
new problem. The Western phosphate industry is, for the most part, a 
vertically integrated industry internally consuming phosphate lease ore 
production in either electric furnaces to make elemental phosphorus or 
in wet acid plants to make a variety of phosphate-based fertilizers. 
The absence of significant quantities of open market sales was 
problematic since the ad valorem royalty was based on the unit sale or 
contract price obtained under bona fide arm's-length sales, as 
specified by regulations at 30 CFR 206.301 (1997).
    Following extensive analysis over several years, then Secretary 
Thomas S. Kleppe decided on May 13, 1976, to use a net back valuation 
methodology where in open market (arm's-length) sales of beneficiated 
phosphate rock would be adjusted for beneficiation and related costs to 
arrive at the gross value of mine output, which is phosphate ore. This 
``Kleppe Method'' valuation procedure was made retroactive to January 
1, 1975.
    The Kleppe Method was difficult to administer. In an advance notice 
published in the Federal Register (45 FR 74065, November 7, 1980), the 
Department stated that there were two problems related to the continued 
use of the Kleppe formula:

    During the period 1975 through 1979, arm's-length sales, both 
long-term sales and spot sales, were of sufficient magnitude to 
establish a realistic product value. In 1980, however, arm's-length 
sales diminished to less than 1 percent of total mine production in 
the western phosphate region...
    Also, this method was cumbersome, as it required the phosphate 
lessees to submit all their cost and sales data. These data, in 
turn, were audited by the Department and, after several months, a 
gross value was established. In most years, the royalty assessment 
was not determined until after the mining year was completed.

    To overcome these problems, the Department recommended adoption of 
an index adjustment methodology; however, no specific index was 
recommended. The Department also solicited proposals on other methods 
for valuing phosphate ore.

Valuation From 1981 to the Present

    Effective January 1, 1981, the Department adopted the index-based 
adjustment for P205 unit value determination in a Federal Register 
release (46 FR 9210, January 28, 1981). The index selected was the GDP-
IPD, as published by the U.S. Department of Commerce, Bureau of 
Economic Analysis. In selecting that index, the Department left open 
the question of future valuation procedures, stating:

    If a better method is developed that more accurately reflects 
the value of phosphate rock, it will be considered at that time.

    MMS has routinely recalculated each year's value and provided that 
value to industry. By 1995, MMS recognized that the GDP-IPD adjustment 
mechanism was developing values that did not appear to correlate with 
phosphate market changes. Moreover, if allowed to continue, the GDP-IPD 
adjusted phosphate value would eventually become completely unrelated 
to the marketplace. Operating under the RPC, the Phosphate Study Group 
and later, the Phosphate Valuation Subcommittee, was formed to examine 
whether an alternative valuation methodology could be agreed upon to 
replace the GDP-IPD index.

Chronology of Meetings

    In March 1995, MMS contacted the State of Idaho, industry, and the 
Bureau of Land Management (BLM) asking for expressions of interest to 
form a study group to examine the Federal phosphate royalty valuation 
issue. All parties contacted agreed to meet to discuss the Federal 
phosphate valuation issue and, on June 22, 1995, these parties met with 
MMS representatives at BLM's Pocatello office. MMS representatives 
briefed the parties on (1) the phosphate valuation issue, (2) the 
Federal Advisory Committee Act, and (3) the relationships of the RPC 
and the various subcommittees.
    In 1995, when RPC was initially formed, a subcommittee named the 
Phosphate and Other Leasable Solid Minerals Subcommittee was formed. 
This subcommittee was intended not only to address the phosphate 
valuation issue but perhaps other, not yet specified issues for other 
solid minerals. However, no additional meetings of this subcommittee 
occurred subsequent to its formation.
    In a letter dated February 2, 1996, the RPC Chair notified the 
Chair of the Phosphate and Other Leasable Solid Minerals Subcommittee 
of his decision to segregate the phosphate valuation issue. In doing 
so, the Phosphate Subcommittee was created.
    The Phosphate Subcommittee initially met on April 25, 1996, at J.R. 
Simplot's office in Pocatello, Idaho. Rules for

[[Page 14133]]

conducting the meeting and for approving recommendations were 
established. The composition of the Phosphate Subcommittee was 
modified, with the Caribou County Treasurer substituting for the 
representative from the Idaho State Treasurer's office. The final 
composition of the Phosphate Subcommittee included industry 
representatives, the Caribou County Treasurer, a representative from 
the Idaho State Lands, and a member of the public. MMS facilitators and 
BLM representatives also attended the meetings, providing background 
material, detailed analysis of the issue, and guiding the discussion. 
The Phosphate Subcommittee agreed to address the following issues:
    1. Has the phosphate market changed in the last 15 years? If so, 
how has it impacted valuation?
    2. Is the index adjustments using the GDP-IPD accurate or is there 
a more accurate method of valuing phosphate ore that should replace the 
GDP-IPD adjustment method?
    3. Is the value accurate or should it be adjusted?
    The Phosphate Subcommittee agreed not to reconvene until a proposal 
had been made. In the interim, MMS representatives and Idaho BLM 
representatives met on July 23 and 24, 1996, with a Washington Office 
BLM official for briefing on the purpose of the Phosphate Subcommittee.
    The Phosphate Subcommittee reconvened on November 19, 1996, at 
BLM's Pocatello office to discuss an October 31 proposal to use a 
weighted-average composite index to adjust the annual unit value for 
phosphate valuation. The members agreed to review the proposal and 
reconvene in January 1997.
    The Phosphate Subcommittee reconvened on January 22, 1997, at BLM's 
Pocatello office. Industry concurred with the proposal. The State and 
County officials, while agreeing that a valuation problem existed under 
the present methodology, were unable to recommend adoption of an 
alternative methodology that might impact royalty revenue streams that 
benefit the school system and county infrastructure.
    The nonconsensus recommendation was presented to the RPC for 
consideration on April 16, 1997. RPC approved the recommendation under 
its voting rules, with 9 votes in favor, 1 opposed, and 4 abstentions.
    Later, in a letter dated June 4, 1997, the Idaho State Treasurer 
wrote to the Chair, RPC, endorsing the RPC recommendation and asking 
that the Secretary accept and implement the recommendation.
    On October 16, 1997, the Secretary approved the RPC recommendation 
for revising the methodology used to compute the value used for Federal 
phosphate production royalty payments.

Principal Provisions of the Proposed Valuation Revision

    The following constitute the principal provisions of the proposed 
valuation revisions:
    1. Use Producer Price Indexes (PPI) because PPI:
     Measures average changes in selling prices received by 
domestic producers (import prices are excluded);
     Emphasizes the reporting of realistic transaction prices, 
including discounts, premiums, rebates, allowances, etc., rather than 
list or book prices. No ``futures markets'' are used; and
     Reflects ``point of production'' prices exclusive of 
transportation.
    2. No single index best represents the western phosphate industry. 
However, a composite of PPI's that are closely related to the phosphate 
mining industry provide a measurement that is better than the existing 
GDP-IPD index:
     The Phosphatic Fertilizers Index emphasizes price 
movements of downstream phosphate-based fertilizers that were 
manufactured from phosphate rock. All phosphate producers do not make 
fertilizers. Some are elemental phosphorus producers whose downstream 
refined products are not used in the fertilizer industry. Therefore, 
this index, in itself, does not represent downstream price changes for 
all phosphate producers.
     The Chemical and Fertilizer Minerals Mining Index 
represents the output of basic mining for phosphate, sodium, borates, 
and potash. This is the principal index for measuring mining output, 
excluding nonfuel and nonmetals. Also, these minerals are produced 
extensively in the western United States; therefore, this index is 
responsive to changes in western mine production.
     The Phosphate Rock Index represents beneficiated rock 
prices, nationwide. The nationwide output of phosphate rock is 
dominated by Florida's production; therefore, even though this index 
would seem to be most closely allied with the western phosphate 
producers, it cannot represent the single best indicator of Idaho 
production, particularly since almost all of the Idaho phosphate 
production is not sold on the open market.
    The weighted composite index methodology is shown in Table 1 below:

                      Table 1.--Composite Index Methodology for Federal Phosphate Valuation                     
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                                                  Phosphatic   Fertilizer                                       
                      Year                        fertilizer     mining     Rock price   Composite    Index unit
                                                    index        index        index        index        value   
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1988...........................................       127.30        99.60        81.30       101.95      $0.5310
1989...........................................       126.00       104.70        88.20       105.90       0.5516
1990...........................................       115.70       106.70        93.80       105.73       0.5507
1991...........................................       117.90       108.50        96.80       107.93       0.5621
1992...........................................       107.60       108.30       103.70       106.98       0.5572
1993...........................................        97.50       104.30        97.40       100.88       0.5254
1994...........................................       118.60       102.10        94.60       104.35       0.5435
1995...........................................       139.10       104.20        98.00       111.38       0.5801
1996...........................................       150.40       108.60       101.80       117.35       0.6112
Weight Factor (percent)........................           25           50           25  ...........  ...........
Base Year 1987.................................       110.90        96.40        83.20        96.73       0.5038
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    As under the existing methodology, the unit value of phosphate ore 
is determined with reference to the prior year's index value compared 
to the base year value. For example:

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Existing Methodology
[GRAPHIC] [TIFF OMITTED] TN24MR98.092

Revised Methodology
[GRAPHIC] [TIFF OMITTED] TN24MR98.093

    The revised methodology would not be applied retroactively. 
However, the weighted composite index calculated value would be 
compared retroactively to the GDP-IPD based value to form a basis for 
correcting for actual phosphate market trends. Using this comparison 
technique, 1987 forms a new base value year, when the GDP-IPD indexed 
value and the composite indexed (market based) value coalesced.
    No attempt would be made to apply a one-time Kleppe Formula (net 
back) to determine actual industry production costs and revenues for 
the same reasons that were acknowledged by the Department in 1980:
     There is a continued lack of bona fide open market sales 
from which to base overall revenues and prices.
     The process takes too long and is cumbersome, entailing 
extensive data collection and consuming audit resources.
    The phosphate value computed under the revised methodology would be 
examined through a market analysis every 5 years, to ensure that the 
new valuation methodology is, in fact, reflecting changes in the 
western phosphate industry. Since the analysis that was part of the 
Phosphate Subcommittee's work occurred in 1996, the values computed for 
phosphate ore will be examined and compared to market data in 2001.

Potential Revenue Impact

    The revenue impact associated with this proposed revision to the 
value adjustment methodology is difficult to predict because the 
selected indexes are relatively more volatile than the GDP-IPD and they 
will follow market trends. Had this index been adopted for 1996 the 
impact would have been an annual reduction in royalty of about 
$444,000, or about 10.6 percent. However, royalty revenue is also 
impacted by the level of production from Federal leases as well as the 
unit value. Thus, royalty could either increase or decrease based 
solely on changes to the level of production even without any change to 
the valuation methodology.

    Dated: March 17, 1998.
Lucy Querques Denett,
Associate Director for Royalty Management.
[FR Doc. 98-7547 Filed 3-23-98; 8:45 am]
BILLING CODE 4310-MR-P