[Federal Register Volume 88, Number 139 (Friday, July 21, 2023)]
[Rules and Regulations]
[Pages 47003-47020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15310]



[[Page 47003]]

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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1202 and 1206

[Docket No. ONRR-2022-0002; DS63644000 DR2000000.CH7000 223D1113RT]
RIN 1012-AA34


Partial Repeal of Consolidated Federal Oil & Gas and Federal & 
Indian Coal Reform

AGENCY: Office of Natural Resources Revenue (``ONRR''), Interior.

ACTION: Final rule.

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SUMMARY: ONRR is republishing and revising certain subparts of its 
regulations to implement an order and judgment from the United States 
District Court for the District of Wyoming that vacated the Federal and 
Indian coal valuation provisions of the 2016 Consolidated Federal Oil & 
Gas and Federal & Indian Coal Valuation Reform rule. ONRR is further 
making non-substantive punctuation and grammatical corrections as part 
of this republication.

DATES: This rule is effective on January 1, 2017, because the District 
Court vacated certain provisions of the rule that became effective on 
that date (81 FR 43338).

FOR FURTHER INFORMATION CONTACT: For questions, contact Ginger Hensley, 
Regulatory Specialist, Appeals & Regulations, ONRR, by email at 
[email protected].

SUPPLEMENTARY INFORMATION: 

I. Background

A. ONRR Regulations

    ONRR performs oil, gas, coal, solid minerals, and geothermal 
minerals revenue management responsibilities for the Secretary of the 
Interior (``Secretary''). See U.S. Department of the Interior 
Departmental Manual (``Departmental Manual''), 112 DM 34.1 (Sept. 9, 
2020). ONRR regulations are published at 30 CFR Chapter XII. The 
regulations contain 18 parts addressing different aspects of minerals 
revenue management. This final rule covers Part 1202--Royalties and 
Part 1206--Product Valuation.

B. District Court Orders and Judgment

    On July 1, 2016, ONRR published the Consolidated Federal Oil & Gas 
and Federal & Indian Coal Valuation Reform Rule (``2016 Valuation 
Rule''). See 81 FR 43338-43402. The 2016 Valuation Rule revised the 
Federal oil and gas and Federal and Indian coal sections of Parts 1202 
and 1206, effective January 1, 2017. Id. at 43338.
    On June 12, 2019, industry members and trade organizations filed a 
lawsuit in the United States District Court for the District of Wyoming 
to challenge the 2016 Valuation Rule. See Petition for Review, Cloud 
Peak Energy Inc. v. U.S. Dep't of the Interior, No. 19-CV-120-SWS, ECF 
No. 1.
    On September 8, 2021, the District Court issued an Order Upholding 
in Part and Reversing in Part the 2016 Valuation Rule (``the Order''). 
Cloud Peak Energy Inc. v. U.S. Dep't of the Interior, 559 F. Supp. 3d 
1203 (D. Wyo. 2021). The Order states that ``the new valuation methods 
for [F]ederal and Indian coal must be vacated.'' Id. at 1208. It 
further states that ``[a]s the coal-specific 2016 Valuation Rule 
provisions have never been put into practice (due to the earlier 
preliminary injunction), the pre-2016 valuation methodologies for 
[F]ederal and Indian coal shall continue to govern.'' Id. at 1226. The 
District Court's judgment (``District Court's Judgment'') was entered 
the same day and states: ``the [F]ederal and Indian coal valuation 
provisions of the 2016 Valuation Rule are hereby set aside and 
vacated.'' Id. Because no party sought review of the portions of the 
District Court's Order and Judgment applicable to Federal and Indian 
coal, the District Court's vacatur of the Federal and Indian coal 
valuation provisions is final. Accordingly, to ensure the rules 
applicable to Federal and Indian coal, as determined by the District 
Court, appear in the Code of Federal Regulations, ONRR must publish a 
final rule containing the coal valuation regulations in effect before 
the 2016 Valuation Rule.

C. Recodification and Revision

1. Recodification of Part 1202, Subpart F
    Prior to the 2016 Valuation Rule, Subpart F of Part 1202 contained 
only Sec.  1202.250, concerning overriding royalty interests. Part 
1206, Subpart F, 1206.253, and Part 1206, Subpart J, Section 1206.452 
addressed what coal is subject to Federal or Indian royalties. The 2016 
Valuation Rule consolidated and moved Sec. Sec.  1206.253 and 1206.452 
to Part 1202, Subpart F, Sec.  1202.251. See 81 FR 43369.
    This final rule recodifies Part 1202 Subpart F--Coal as it appeared 
prior to the 2016 Valuation Rule. As further discussed below, this 
final rule also recodifies Part 1206, Subparts F and J, including 
Sec. Sec.  1206.253 and 1206.452. This effectively removes Sec.  
1202.251 from Part 1202 and returns the regulatory language addressing 
what coal is subject to royalties to Part 1206.
2. Recodification of Part 1206, Subparts F and J
    Prior to the 2016 Valuation Rule, Part 1206 contained Subparts F--
Federal Coal and J--Indian Coal. These Subparts set forth various 
provisions for the valuation of Federal and Indian Coal, including 
definition sections at Sec. Sec.  1206.251 and 1206.451. The 2016 
Valuation Rule retained but substantially revised Subparts F and J. See 
81 FR 43369-43402. This final rule recodifies the prior Subparts F and 
J, including the definition sections at Sec. Sec.  1206.251 and 
1206.451, as those Subparts appeared prior to the 2016 Valuation Rule.
3. Revisions to Sec. Sec.  1206.20, 1206.251, and 1206.451
    Prior to the 2016 Valuation Rule, Part 1206, Subpart A--General 
Provisions contained only Sec.  1206.10, which discussed information 
collection requirements. Additionally, Part 1206, Subparts C--Federal 
Oil, D--Federal Gas, F--Federal Coal, and J--Indian Coal contained 
definition sections at Sec. Sec.  1206.101, 1206.151, 1206.251 and 
1206.451, respectively.
    The 2016 Valuation Rule changed the title of Part 1206, Subpart A 
to ``General Provisions and Definitions,'' added Sec.  1206.20 titled 
``What Definitions Apply to this Part?,'' and consolidated and moved 
the definitions from Sec. Sec.  1206.101, 1206.151, 1206.251, and 
1206.451 to Sec.  1206.20. See 81 FR 43369-43372. Some of these 
consolidated definitions contain, in part, language only applicable to 
coal. For example, after broadly defining the term ``lessee,'' Sec.  
1206.20 clarified that ``lessee'' also includes ``[i]n the case of 
leases for Indian coal or Federal coal, an operator, payor, or other 
person with no lease interest who makes payments on the lessee's 
behalf.''
    Because the District Court vacated only the Federal and Indian coal 
valuation provisions of the 2016 Valuation Rule, this final rule 
retains, in part, Sec.  1206.20. To implement the District Court's 
Order and Judgment, however, this final rule removes from Sec.  1206.20 
the definitions of the following coal-specific terms: ``Ad valorem 
lease,'' ``Coal,'' ``Coal cooperative,'' ``Coal washing,'' ``Region,'' 
``Short ton,'' ``Tonnage,'' and ``Washing allowance.'' This final rule 
further revises the definitions of the following terms in Sec.  1206.20 
to remove coal-specific language: ``Gross proceeds,'' ``Lessee,'' 
``Marketable

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condition,'' ``Net Output,'' ``Sale,'' and ``Transportation 
allowance.''
    Prior to the 2016 Valuation Rule, Part 1206, Subparts F and J used, 
but did not define, the terms ``affiliate,'' ``designee,'' ``lease 
products,'' ``misconduct,'' ``payor,'' ``processing,'' and ``sale.'' 
The 2016 Valuation Rule defined these terms in Sec.  1206.20. See 81 FR 
43369-43372. Because other Subparts of Part 1206 also use these terms, 
this final rule leaves these definitions in Sec.  1206.20. To recodify 
the version of the Federal and Indian coal valuation provisions in 
effect prior to the 2016 Valuation Rule, however, this final rule adds 
introductory text to Sec. Sec.  1206.20, 1206.251 and 1206.451 stating 
that the definitions in Sec.  1206.20 do not apply to Subparts F and J, 
and that the definitions in Sec. Sec.  1206.251 and 1206.451 apply to 
their respective subparts.

II. Procedural Matters

    ONRR finds good cause to issue this final rule without notice and 
opportunity for public comment under 5 U.S.C. 553(b)(B). The 
publication of this final rule was necessitated by the District Court's 
Order and Judgment that vacated the Federal and Indian coal valuation 
provisions of the 2016 Valuation Rule. Because ONRR is acting to comply 
with a final court order, public comment is unnecessary.
    Additionally, a 30-day period between publication of a final rule 
and its effective date is not required by 5 U.S.C. 553(d) because the 
District Court's Order and Judgment found that pre-2016 valuation 
provisions shall continue to govern Federal and Indian coal.

A. Regulatory Planning and Review (Executive Orders 12866 and 13563)

    Executive Order (``E.O.'') 12866 provides that the Office of 
Information and Regulatory Affairs (``OIRA'') of the Office of 
Management and Budget (``OMB'') will review all significant rules. This 
final rule is not significant because it does not change the law in any 
way and only publishes the current law as established by the District 
Court's Order and Judgment.
    E.O. 14094 reaffirms the principles of E.O. 12866 and E.O. 13563 
and states that regulatory analysis should facilitate agency efforts to 
develop regulations that serve the public interest, advance statutory 
objectives, and are consistent with E.O. 12866, E.O. 13563, and the 
Presidential Memorandum of January 20, 2021 (Modernizing Regulatory 
Review). Regulatory analysis, as practicable and appropriate, shall 
recognize distributive impacts and equity, to the extent permitted by 
law. E.O 13563 further emphasizes those regulations must be based on 
the best available science and that the rulemaking process must allow 
for public participation and an open exchange of ideas. ONRR has 
demonstrated, however, good cause to issue this final rule without 
notice and opportunity for public comment pursuant to 5 U.S.C. 
553(b)(B) because this final rule is published to comply with the 
District Court's Order and Judgment.

B. Regulatory Flexibility Act

    The Department of the Interior (``the Department'') certified that 
the 2016 Valuation Rule did not have a significant economic effect on a 
substantial number of small entities under the Regulatory Flexibility 
Act (5 U.S.C. 601 et seq.). See 81 FR 43367. Thus, a Regulatory 
Flexibility Analysis and a Small Entity Compliance Guide were not 
required. Similarly, the republication of the coal valuation 
regulations that were in effect prior to the 2016 Valuation Rule does 
not require a Regulatory Flexibility Analysis and Small Entity 
Compliance Guide.

C. Congressional Review Act

    The republication of the coal valuation regulations in effect prior 
to the 2016 Valuation Rule is not considered a major rule under the 
Congressional Review Act (5 U.S.C. 804(2)). This final rule:
    (1) Does not have an annual effect on the economy of $100 million 
or more.
    (2) Does not cause a major increase in costs or prices for 
consumers; individual industries; Federal, State, or local government 
agencies; or geographic regions.
    (3) Does not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
U.S.-based enterprises to compete with foreign-based enterprises.

D. Unfunded Mandates Reform Act

    The republication of the Federal and Indian coal valuation 
provisions in effect prior to the 2016 Valuation Rule does not impose 
an unfunded mandate on State, local, or Tribal governments or the 
private sector of more than $100 million per year. This final rule does 
not have a significant or unique effect on State, local, or Tribal 
governments or the private sector. Therefore, ONRR is not required to 
provide a statement under the Unfunded Mandates Reform Act (2 U.S.C. 
1501 et seq.) because this final rule is not an unfunded mandate.

E. Takings (E.O. 12630)

    Under the criteria in E.O. 12630, section 2, this final rule has no 
significant takings implications. Hence, this final rule does not 
impose conditions or limitations on the use of any private property and 
does not require a Takings Implication Assessment.

F. Federalism (E.O. 13132)

    Under the criteria in E.O. 13132, section 1, this final rule does 
not have sufficient Federalism implications to warrant the preparation 
of a Federalism summary impact statement. This final rule does not 
impose administrative costs on States or local governments and does not 
substantially and directly affect the relationship between the Federal 
and State governments. Thus, a Federalism summary impact statement is 
not required.

G. Civil Justice Reform (E.O. 12988)

    This final rule complies with the requirements of E.O. 12988. 
Specifically, this final rule:
    (1) Meets the criteria of section 3(a), which requires that ONRR 
review all regulations to eliminate errors and ambiguity to minimize 
litigation.
    (2) Meets the criteria of section 3(b)(2), which requires that all 
regulations be written in clear language using clear legal standards.

H. Consultation With Indian Tribal Governments (E.O. 13175)

    ONRR strives to strengthen its government-to-government 
relationship with Indian Tribes through a commitment to consultation 
with Indian Tribes and in recognition of their right to self-governance 
and Tribal sovereignty. ONRR evaluated this final rule and the criteria 
in E.O. 13175 and determined that the final rule will not have 
substantial direct effects on Federally recognized Indian Tribes. Thus, 
consultation under ONRR's Tribal consultation policy is not required.

I. Paperwork Reduction Act

    This final rule does not contain any new information collection 
requirements or meet the definition of ``collection of information'' 
under 44 U.S.C. 3502(3). A submission to OMB under the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.) is not required.

J. National Environmental Policy Act

    This final rule does not constitute a major Federal action 
significantly affecting the quality of the human environment. A 
detailed statement under the National Environmental Policy Act of 1969 
(``NEPA'') is not

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required because this final rule implements a court order to vacate the 
2016 Valuation Rule's Federal and Indian coal amendments. See 43 CFR 
46.210(i) and the Departmental Manual, 516 DM 15.4.D. ONRR determined 
that this final rule does not involve any of the extraordinary 
circumstances under 43 CFR 46.215 that would require further analysis 
under NEPA. The procedural changes resulting from these amendments have 
no consequence with respect to the physical environment. This final 
rule will not alter in any material way natural resource exploration, 
production, or transportation.

K. Effects on the Energy Supply (E.O. 13211)

    This final rule is not a significant energy action under the 
definition in E.O. 13211 and, therefore does not require a Statement of 
Energy Effects.

L. Clarity of This Regulation

    ONRR is required by E.O. 12866 (section 1(b)(12)), E.O. 12988 
(section 3(b)(1)(B)), and E.O. 13563 (section 1(a)), and by the 
Presidential Memorandum of June 1, 1998, to write all rules in plain 
language. This means that each rule ONRR publishes must:
    (1) Be logically organized.
    (2) Use the active voice to address readers directly.
    (3) Use common, everyday words and clear language rather than 
jargon.
    (4) Be divided into short sections and sentences.
    (5) Use lists and tables wherever possible.
    If you feel that ONRR has not met these requirements, send your 
comments to [email protected]. To guide ONRR in 
developing future changes to this final rule, your remarks should be as 
specific as possible. For example, you should tell ONRR the numbers of 
the sections or paragraphs that are not clearly written, which sections 
or sentences are too long, the sections where you feel lists or tables 
would be useful, etc.

List of Subjects

30 CFR Part 1202

    Coal, Continental shelf, Government contracts, Indian lands, 
Mineral royalties, Natural gas, Oil and gas exploration, Public lands--
mineral resources, Reporting and recordkeeping requirements.

30 CFR Part 1206

    Coal, Continental shelf, Government contracts, Indian lands, 
Mineral royalties, Oil and gas exploration, Public lands--mineral 
resources, Reporting and recordkeeping requirements.

Howard Cantor,
Acting Director, Office of Natural Resources Revenue.

Authority and Issuance

    For the reasons discussed in the preamble and to comply with the 
District Court's Order and Judgment, ONRR amends 30 CFR parts 1202 and 
1206 as set forth below:

PART 1202--ROYALTIES

0
1. The authority citation for part 1202 is revised to read as follows:

    Authority: 5 U.S.C. 301 et seq., 25 U.S.C. 396, 396a et seq., 
398, 398a et seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 
1001 et seq., 1701 et seq.; 43 U.S.C. 1301 et seq., 1331 et seq., 
and 1801 et seq.

Subpart F--Coal


Sec.  1202.251  [Removed]

0
2. Remove Sec.  1202.251.

PART 1206--PRODUCT VALUATION

0
3. The authority citation for part 1206 is revised to read as follows:

    Authority:  5 U.S.C. 301 et seq., 25 U.S.C. 396, 396a et seq., 
398, 398a et seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 
1001 et seq., 1701 et seq.; 43 U.S.C. 1301 et seq., 1331 et seq., 
and 1801 et seq.

Subpart A--General Provisions and Definitions

0
4. Amend Sec.  1206.20 by:
0
a. Adding introductory text;
0
b. Removing the definitions of ``Ad valorem lease'', ``Coal'', ``Coal 
cooperative'', and ``Coal washing'';
0
c. Revising the definitions for ``Gross proceeds'', ``Lessee'', 
``Marketable condition'', and ``Net output'';
0
d. Removing the definition of ``Region'';
0
e. Revising the definition of ``Sale'':
0
f. Removing the definitions of ``Short ton'' and ``Tonnage'';
0
g. Revising the definition of ``Transportation allowance''; and
0
h. Removing the definition of ``Washing allowance''.
    The revisions read as follows:


Sec.  1206.20  What definitions apply to this part?

    The definitions in this section do not apply to subparts F and J of 
this part.
* * * * *
    Gross proceeds means the total monies and other consideration 
accruing for the disposition of any of the following:
    (1) Oil. Gross proceeds also include, but are not limited to, the 
following examples:
    (i) Payments for services such as dehydration, marketing, 
measurement, or gathering which the lessee must perform at no cost to 
the Federal Government.
    (ii) The value of services, such as salt water disposal, that the 
producer normally performs but that the buyer performs on the 
producer's behalf.
    (iii) Reimbursements for harboring or terminalling fees, royalties, 
and any other reimbursements.
    (iv) Tax reimbursements, even though the Federal royalty interest 
may be exempt from taxation.
    (v) Payments made to reduce or buy down the purchase price of oil 
produced in later periods by allocating such payments over the 
production whose price that the payment reduces and including the 
allocated amounts as proceeds for the production as it occurs.
    (vi) Monies and all other consideration to which a seller is 
contractually or legally entitled but does not seek to collect through 
reasonable efforts.
    (2) Gas, residue gas, and gas plant products. Gross proceeds also 
include, but are not limited to, the following examples:
    (i) Payments for services such as dehydration, marketing, 
measurement, or gathering that the lessee must perform at no cost to 
the Federal Government.
    (ii) Reimbursements for royalties, fees, and any other 
reimbursements.
    (iii) Tax reimbursements, even though the Federal royalty interest 
may be exempt from taxation.
    (iv) Monies and all other consideration to which a seller is 
contractually or legally entitled, but does not seek to collect through 
reasonable efforts.
* * * * *
    Lessee means any person to whom the United States, an Indian Tribe, 
and/or individual Indian mineral owner issues a lease, and any person 
who has been assigned all or a part of record title, operating rights, 
or an obligation to make royalty or other payments required by the 
lease. Lessee includes any person who has an interest in a lease.
* * * * *
    Marketable condition means lease products which are sufficiently 
free from impurities and otherwise in a condition that they will be 
accepted by a purchaser under a sales contract typical for the field or 
area for Federal oil and gas.
* * * * *

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    Net output means the quantity of gas residue gas and each gas plant 
product that a processing plant produces.
* * * * *
    Sale means a contract between two persons where:
    (1) The seller unconditionally transfers title to the oil, gas, or 
gas plant product to the buyer and does not retain any related rights, 
such as the right to buy back similar quantities of oil, gas, or gas 
plant product from the buyer elsewhere;
    (2) The buyer pays money or other consideration for the oil, gas, 
or gas plant product; and
    (3) The parties' intent is for a sale of the oil, gas, or gas plant 
product to occur.
* * * * *
    Transportation allowance means a deduction in determining royalty 
value for the reasonable, actual costs that the lessee incurs for 
moving:
    (1) Oil to a point of sale or delivery off of the lease, unit area, 
or communitized area. The transportation allowance does not include 
gathering costs.
    (2) Unprocessed gas, residue gas, or gas plant products to a point 
of sale or delivery off of the lease, unit area, or communitized area, 
or away from a processing plant. The transportation allowance does not 
include gathering costs.
* * * * *

0
5. Revise Subpart F to read as follows:
Subpart F--Federal Coal
Sec.
1206.250 Purpose and scope.
1206.251 Definitions.
1206.252 Information collection.
1206.253 Coal subject to royalties--general provisions.
1206.254 Quality and quantity measurement standards for reporting 
and paying royalties.
1206.255 Point of royalty determination.
1206.256 Valuation standards for cents-per-ton leases.
1206.257 Valuation standards for ad valorem leases.
1206.258 Washing allowances--general.
1206.259 Determination of washing allowances.
1206.260 Allocation of washed coal.
1206.261 Transportation allowances--general.
1206.262 Determination of transportation allowances.
1206.263 [Reserved]
1206.264 In-situ and surface gasification and liquefaction 
operations.
1206.265 Value enhancement of marketable coal.

Subpart F--Federal Coal


Sec.  1206.250  Purpose and scope.

    (a) This subpart is applicable to all coal produced from Federal 
coal leases. The purpose of this subpart is to establish the value of 
coal produced for royalty purposes, of all coal from Federal leases 
consistent with the mineral leasing laws, other applicable laws and 
lease terms.
    (b) If the specific provisions of any statute or settlement 
agreement between the United States and a lessee resulting from 
administrative or judicial litigation, or any coal lease subject to the 
requirements of this subpart, are inconsistent with any regulation in 
this subpart then the statute, lease provision, or settlement shall 
govern to the extent of that inconsistency.
    (c) All royalty payments made to the Office of Natural Resources 
Revenue (ONRR) are subject to later audit and adjustment.


Sec.  1206.251  Definitions.

    The definitions in Sec.  1206.20 do not apply to this subpart. For 
purposes of this subpart:
    Ad valorem lease means a lease where the royalty due to the lessor 
is based upon a percentage of the amount or value of the coal.
    Allowance means a deduction used in determining value for royalty 
purposes. Coal washing allowance means an allowance for the reasonable, 
actual costs incurred by the lessee for coal washing. Transportation 
allowance means an allowance for the reasonable, actual costs incurred 
by the lessee for moving coal to a point of sale or point of delivery 
remote from both the lease and mine or wash plant.
    Area means a geographic region in which coal has similar quality 
and economic characteristics. Area boundaries are not officially 
designated and the areas are not necessarily named.
    Arm's-length contract means:
    (1) A contract or agreement that has been arrived at in the 
marketplace between independent, nonaffiliated persons with opposing 
economic interests regarding that contract. For purposes of this 
subpart, two persons are affiliated if one person controls, is 
controlled by, or is under common control with another person. For 
purposes of this subpart, based on the instruments of ownership of the 
voting securities of an entity, or based on other forms of ownership:
    (i) Ownership in excess of 50 percent constitutes control;
    (ii) Ownership of 10 through 50 percent creates a presumption of 
control; and
    (iii) Ownership of less than 10 percent creates a presumption of 
noncontrol which ONRR may rebut if it demonstrates actual or legal 
control, including the existence of interlocking directorates.
    (2) Notwithstanding any other provisions of this subpart, contracts 
between relatives, either by blood or by marriage, are not arm's-length 
contracts. The ONRR may require the lessee to certify ownership 
control. To be considered arm's-length for any production month, a 
contract must meet the requirements of this definition for that 
production month as well as when the contract was executed.
    Audit means a review, conducted in accordance with generally 
accepted accounting and auditing standards, of royalty payment 
compliance activities of lessees or other interest holders who pay 
royalties, rents, or bonuses on Federal leases.
    BLM means the Bureau of Land Management of the Department of the 
Interior.
    Coal means coal of all ranks from lignite through anthracite.
    Coal washing means any treatment to remove impurities from coal. 
Coal washing may include, but is not limited to, operations such as 
flotation, air, water, or heavy media separation; drying; and related 
handling (or combination thereof).
    Contract means any oral or written agreement, including amendments 
or revisions thereto, between two or more persons and enforceable by 
law that with due consideration creates an obligation.
    Gross proceeds (for royalty payment purposes) means the total 
monies and other consideration accruing to a coal lessee for the 
production and disposition of the coal produced. Gross proceeds 
includes, but is not limited to, payments to the lessee for certain 
services such as crushing, sizing, screening, storing, mixing, loading, 
treatment with substances including chemicals or oils, and other 
preparation of the coal to the extent that the lessee is obligated to 
perform them at no cost to the Federal Government. Gross proceeds, as 
applied to coal, also includes but is not limited to reimbursements for 
royalties, taxes or fees, and other reimbursements. Tax reimbursements 
are part of the gross proceeds accruing to a lessee even though the 
Federal royalty interest may be exempt from taxation. Monies and other 
consideration, including the forms of consideration identified in this 
paragraph, to which a lessee is contractually or legally entitled but 
which it does not seek to collect through

[[Page 47007]]

reasonable efforts are also part of gross proceeds.
    Lease means any contract, profit-share arrangement, joint venture, 
or other agreement issued or approved by the United States for a 
Federal coal resource under a mineral leasing law that authorizes 
exploration for, development or extraction of, or removal of coal--or 
the land covered by that authorization, whichever is required by the 
context.
    Lessee means any person to whom the United States issues a lease, 
and any person who has been assigned an obligation to make royalty or 
other payments required by the lease. This includes any person who has 
an interest in a lease as well as an operator or payor who has no 
interest in the lease but who has assumed the royalty payment 
responsibility.
    Like-quality coal means coal that has similar chemical and physical 
characteristics.
    Marketable condition means coal that is sufficiently free from 
impurities and otherwise in a condition that it will be accepted by a 
purchaser under a sales contract typical for that area.
    Mine means an underground or surface excavation or series of 
excavations and the surface or underground support facilities that 
contribute directly or indirectly to mining, production, preparation, 
and handling of lease products.
    Net-back method means a method for calculating market value of coal 
at the lease or mine. Under this method, costs of transportation, 
washing, handling, etc., are deducted from the ultimate proceeds 
received for the coal at the first point at which reasonable values for 
the coal may be determined by a sale pursuant to an arm's-length 
contract or by comparison to other sales of coal, to ascertain value at 
the mine.
    Net output means the quantity of washed coal that a washing plant 
produces.
    Netting is the deduction of an allowance from the sales value by 
reporting a one line net sales value, instead of correctly reporting 
the deduction as a separate line item on the form ONRR-4430.
    Person means by individual, firm, corporation, association, 
partnership, consortium, or joint venture.
    Sales type code means the contract type or general disposition 
(e.g., arm's-length or non-arm's-length) of production from the lease. 
The sales type code applies to the sales contract, or other 
disposition, and not to the arm's-length or non-arm's-length nature of 
a transportation or washing allowance.
    Spot market price means the price received under any sales 
transaction when planned or actual deliveries span a short period of 
time, usually not exceeding one year.


Sec.  1206.252  Information collection.

    The information collection requirements contained in this subpart 
have been approved by the Office of Management and Budget (OMB) under 
44 U.S.C. 3501 et seq. The forms, filing date, and approved OMB control 
numbers are identified in part 1210 of this subchapter.


Sec.  206.253  Coal subject to royalties--general provisions.

    (a) All coal (except coal unavoidably lost as determined by BLM 
under 43 CFR part 3400) from a Federal lease subject to this part is 
subject to royalty. This includes coal used, sold, or otherwise 
disposed of by the lessee on or off the lease.
    (b) If a lessee receives compensation for unavoidably lost coal 
through insurance coverage or other arrangements, royalties at the rate 
specified in the lease are to be paid on the amount of compensation 
received for the coal. No royalty is due on insurance compensation 
received by the lessee for other losses.
    (c) If waste piles or slurry ponds are reworked to recover coal, 
the lessee shall pay royalty at the rate specified in the lease at the 
time the recovered coal is used, sold, or otherwise finally disposed 
of. The royalty rate shall be that rate applicable to the production 
method used to initially mine coal in the waste pile or slurry pond; 
i.e., underground mining method or surface mining method. Coal in waste 
pits or slurry ponds initially mined from Federal leases shall be 
allocated to such leases regardless of whether it is stored on Federal 
lands. The lessee shall maintain accurate records to determine to which 
individual Federal lease coal in the waste pit or slurry pond should be 
allocated. However, nothing in this section requires payment of a 
royalty on coal for which a royalty has already been paid.


Sec.  1206.254  Quality and quantity measurement standards for 
reporting and paying royalties.

    For all leases subject to this subpart, the quantity of coal on 
which royalty is due shall be measured in short tons (of 2,000 pounds 
each) by methods prescribed by the BLM. Coal quantity information will 
be reported on appropriate forms required under 30 CFR part 1210 of 
this subchapter.


Sec.  1206.255  Point of royalty determination.

    (a) For all leases subject to this subpart, royalty shall be 
computed on the basis of the quantity and quality of Federal coal in 
marketable condition measured at the point of royalty measurement as 
determined jointly by BLM and ONRR.
    (b) Coal produced and added to stockpiles or inventory does not 
require payment of royalty until such coal is later used, sold, or 
otherwise finally disposed of. ONRR may ask BLM to increase the lease 
bond to protect the lessor's interest when BLM determines that 
stockpiles or inventory become excessive so as to increase the risk of 
degradation of the resource.
    (c) The lessee shall pay royalty at a rate specified in the lease 
at the time the coal is used, sold, or otherwise finally disposed of, 
unless otherwise provided for at Sec.  1206.256(d).


Sec.  1206.256  Valuation standards for cents-per-ton leases.

    (a) This section is applicable to coal leases on Federal lands 
which provide for the determination of royalty on a cents-per-ton (or 
other quantity) basis.
    (b) The royalty for coal from leases subject to this section shall 
be based on the dollar rate per ton prescribed in the lease. That 
dollar rate shall be applicable to the actual quantity of coal used, 
sold, or otherwise finally disposed of, including coal which is 
avoidably lost as determine by BLM pursuant to 43 CFR part 3400.
    (c) For leases subject to this section, there shall be no 
allowances for transportation, removal of impurities, coal washing, or 
any other processing or preparation of the coal.
    (d) When a coal lease is readjusted pursuant to 43 CFR part 3400 
and the royalty valuation method changes from a cents-per-ton basis to 
an ad valorem basis, coal which is produced prior to the effective date 
of readjustment and sold or used within 30 days of the effective date 
of readjustment shall be valued pursuant to this section. All coal that 
is not used, sold, or otherwise finally disposed of within 30 days 
after the effective date of readjustment shall be valued pursuant to 
the provisions of Sec.  1206.257, and royalties shall be paid at the 
royalty rate specified in the readjusted lease.


Sec.  1206.257  Valuation standards for ad valorem leases.

    (a) This section is applicable to coal leases on Federal lands 
which provide for the determination of royalty as a percentage of the 
amount of value of coal (ad valorem). The value for royalty purposes of 
coal from such leases shall

[[Page 47008]]

be the value of coal determined under this section, less applicable 
coal washing allowances and transportation allowances determined under 
Sec. Sec.  1206.258 through 1206.262, or any allowance authorized by 
Sec.  1206.265. The royalty due shall be equal to the value for royalty 
purposes multiplied by the royalty rate in the lease.
    (b)(1) The value of coal that is sold pursuant to an arm's-length 
contract shall be the gross proceeds accruing to the lessee, except as 
provided in paragraphs (b)(2), (3), and (5) of this section. The lessee 
shall have the burden of demonstrating that its contract is arm's-
length. The value which the lessee reports, for royalty purposes, is 
subject to monitoring, review, and audit.
    (2) In conducting reviews and audits, ONRR will examine whether the 
contract reflects the total consideration actually transferred either 
directly or indirectly from the buyer to the seller for the coal 
produced. If the contract does not reflect the total consideration, 
then the ONRR may require that the coal sold pursuant to that contract 
be valued in accordance with paragraph (c) of this section. Value may 
not be based on less than the gross proceeds accruing to the lessee for 
the coal production, including the additional consideration.
    (3) If ONRR determines that the gross proceeds accruing to the 
lessee pursuant to an arm's-length contract do not reflect the 
reasonable value of the production because of misconduct by or between 
the contracting parties, or because the lessee otherwise has breached 
its duty to the lessor to market the production for the mutual benefit 
of the lessee and the lessor, then ONRR shall require that the coal 
production be valued pursuant to paragraph (c)(2)(ii), (iii), (iv), or 
(v) of this section, and in accordance with the notification 
requirements of paragraph (d)(3) of this section. When ONRR determines 
that the value may be unreasonable, ONRR will notify the lessee and 
give the lessee an opportunity to provide written information 
justifying the lessee's reported coal value.
    (4) ONRR may require a lessee to certify that its arm's-length 
contract provisions include all of the consideration to be paid by the 
buyer, either directly or indirectly, for the coal production.
    (5) The value of production for royalty purposes shall not include 
payments received by the lessee pursuant to a contract which the lessee 
demonstrates, to ONRR's satisfaction, were not part of the total 
consideration paid for the purchase of coal production.
    (c)(1) The value of coal from leases subject to this section and 
which is not sold pursuant to an arm's-length contract shall be 
determined in accordance with this section.
    (2) If the value of the coal cannot be determined pursuant to 
paragraph (b) of this section, then the value shall be determined 
through application of other valuation criteria. The criteria shall be 
considered in the following order, and the value shall be based upon 
the first applicable criterion:
    (i) The gross proceeds accruing to the lessee pursuant to a sale 
under its non-arm's-length contract (or other disposition of produced 
coal by other than an arm's-length contract), provided that those gross 
proceeds are within the range of the gross proceeds derived from, or 
paid under, comparable arm's-length contracts between buyers and 
sellers neither of whom is affiliated with the lessee for sales, 
purchases, or other dispositions of like-quality coal produced in the 
area. In evaluating the comparability of arm's-length contracts for the 
purposes of these regulations, the following factors shall be 
considered: Price, time of execution, duration, market or markets 
served, terms, quality of coal, quantity, and such other factors as may 
be appropriate to reflect the value of the coal;
    (ii) Prices reported for that coal to a public utility commission;
    (iii) Prices reported for that coal to the Energy Information 
Administration of the Department of Energy;
    (iv) Other relevant matters including, but not limited to, 
published or publicly available spot market prices, or information 
submitted by the lessee concerning circumstances unique to a particular 
lease operation or the saleability of certain types of coal;
    (v) If a reasonable value cannot be determined using paragraph 
(c)(2)(i), (ii), (iii), or (iv) of this section, then a net-back method 
or any other reasonable method shall be used to determine value.
    (3) When the value of coal is determined pursuant to paragraph 
(c)(2) of this section, that value determination shall be consistent 
with the provisions contained in paragraph (b)(5) of this section.
    (d)(1) Where the value is determined pursuant to paragraph (c) of 
this section, that value does not require ONRR's prior approval. 
However, the lessee shall retain all data relevant to the determination 
of royalty value. Such data shall be subject to review and audit, and 
ONRR will direct a lessee to use a different value if it determines 
that the reported value is inconsistent with the requirements of these 
regulations.
    (2) Any Federal lessee will make available upon request to the 
authorized ONRR or State representatives, to the Inspector General of 
the Department of the Interior or other persons authorized to receive 
such information, arm's-length sales value and sales quantity data for 
like-quality coal sold, purchased, or otherwise obtained by the lessee 
from the area.
    (3) A lessee shall notify ONRR if it has determined value pursuant 
to paragraph (c)(2)(ii), (iii), (iv), or (v) of this section. The 
notification shall be by letter to the Director for Office of Natural 
Resources Revenue of his/her designee. The letter shall identify the 
valuation method to be used and contain a brief description of the 
procedure to be followed. The notification required by this section is 
a one-time notification due no later than the month the lessee first 
reports royalties on the form ONRR-4430 using a valuation method 
authorized by paragraph (c)(2)(ii), (iii), (iv), or (v) of this 
section, and each time there is a change in a method under paragraph 
(c)(2)(iv) or (v) of this section.
    (e) If ONRR determines that a lessee has not properly determined 
value, the lessee shall be liable for the difference, if any, between 
royalty payments made based upon the value it has used and the royalty 
payments that are due based upon the value established by ONRR. The 
lessee shall also be liable for interest computed pursuant to Sec.  
1218.202 of this subchapter. If the lessee is entitled to a credit, 
ONRR will provide instructions for the taking of that credit.
    (f) The lessee may request a value determination from ONRR. In that 
event, the lessee shall propose to ONRR a value determination method, 
and may use that method in determining value for royalty purposes until 
ONRR issues its decision. The lessee shall submit all available data 
relevant to its proposal. The ONRR shall expeditiously determine the 
value based upon the lessee's proposal and any additional information 
ONRR deems necessary. That determination shall remain effective for the 
period stated therein. After ONRR issues its determination, the lessee 
shall make the adjustments in accordance with paragraph (e) of this 
section.
    (g) Notwithstanding any other provisions of this section, under no 
circumstances shall the value for royalty purposes be less than the 
gross proceeds accruing to the lessee for the disposition of produced 
coal less applicable provisions of paragraph (b)(5) of this section and 
less applicable allowances determined pursuant to Sec. Sec.  1206.258 
through 1206.262 and 1206.265.

[[Page 47009]]

    (h) The lessee is required to place coal in marketable condition at 
no cost to the Federal Government. Where the value established under 
this section is determined by a lessee's gross proceeds, that value 
shall be increased to the extent that the gross proceeds has been 
reduced because the purchaser, or any other person, is providing 
certain services, the cost of which ordinarily is the responsibility of 
the lessee to place the coal in marketable condition.
    (i) Value shall be based on the highest price a prudent lessee can 
receive through legally enforceable claims under its contract. Absent 
contract revision or amendment, if the lessee fails to take proper or 
timely action to receive prices or benefits to which it is entitled, it 
must pay royalty at a value based upon that obtainable price or 
benefit. Contract revisions or amendments shall be in writing and 
signed by all parties to an arm's-length contract, and may be 
retroactively applied to value for royalty purposes for a period not to 
exceed two years, unless ONRR approves a longer period. If the lessee 
makes timely application for a price increase allowed under its 
contract but the purchaser refuses, and the lessee takes reasonable 
measures, which are documented, to force purchaser compliance, the 
lessee will owe no additional royalties unless or until monies or 
consideration resulting from the price increase are received. This 
paragraph shall not be construed to permit a lessee to avoid its 
royalty payment obligation in situations where a purchaser fails to 
pay, in whole or in part or timely, for a quantity of coal.
    (j) Notwithstanding any provision in these regulations to the 
contrary, no review, reconciliation, monitoring, or other like process 
that results in a redetermination by ONRR of value under this section 
shall be considered final or binding as against the Federal Government 
or its beneficiaries until the audit period is formally closed.
    (k) Certain information submitted to ONRR to support valuation 
proposals, including transportation, coal washing, or other allowances 
under Sec.  1206.265, is exempted from disclosure by the Freedom of 
Information Act, 5 U.S.C. 522. Any data specified by the Act to be 
privileged, confidential, or otherwise exempt shall be maintained in a 
confidential manner in accordance with applicable law and regulations. 
All requests for information about determinations made under this part 
are to be submitted in accordance with the Freedom of Information Act 
regulation of the Department of the Interior, 43 CFR part 2.


Sec.  1206.258  Washing allowances--general.

    (a) For ad valorem leases subject to Sec.  1206.257, ONRR shall, as 
authorized by this section, allow a deduction in determining value for 
royalty purposes for the reasonable, actual costs incurred to wash 
coal, unless the value determined pursuant to Sec.  1206.257 was based 
upon like-quality unwashed coal. Under no circumstances will the 
authorized washing allowance and the transportation allowance reduce 
the value for royalty purposes to zero.
    (b) If ONRR determines that a lessee has improperly determined a 
washing allowance authorized by this section, then the lessee shall be 
liable for any additional royalties, plus interest determined in 
accordance with Sec.  1218.202 of this subchapter, or shall be entitled 
to a credit without interest.
    (c) Lessees shall not disproportionately allocate washing costs to 
Federal leases.
    (d) No cost normally associated with mining operations and which 
are necessary for placing coal in marketable condition shall be allowed 
as a cost of washing.
    (e) Coal washing costs shall only be recognized as allowances when 
the washed coal is sold and royalties are reported and paid.


Sec.  1206.259  Determination of washing allowances.

    (a) Arm's-length contracts. (1) For washing costs incurred by a 
lessee under an arm's-length contract, the washing allowance shall be 
the reasonable actual costs incurred by the lessee for washing the coal 
under that contract, subject to monitoring, review, audit, and possible 
future adjustment. The lessee shall have the burden of demonstrating 
that its contract is arm's-length. ONRR's prior approval is not 
required before a lessee may deduct costs incurred under an arm's-
length contract. The lessee must claim a washing allowance by reporting 
it as a separate line entry on the Form ONRR-4430.
    (2) In conducting reviews and audits, ONRR will examine whether the 
contract reflects more than the consideration actually transferred 
either directly or indirectly from the lessee to the washer for the 
washing. If the contract reflects more than the total consideration 
paid, then the ONRR may require that the washing allowance be 
determined in accordance with paragraph (b) of this section.
    (3) If ONRR determines that the consideration paid pursuant to an 
arm's-length washing contract does not reflect the reasonable value of 
the washing because of misconduct by or between the contracting 
parties, or because the lessee otherwise has breached its duty to the 
lessor to market the production for the mutual benefit of the lessee 
and the lessor, then ONRR shall require that the washing allowance be 
determined in accordance with paragraph (b) of this section. When ONRR 
determines that the value of the washing may be unreasonable, ONRR will 
notify the lessee and give the lessee an opportunity to provide written 
information justifying the lessee's washing costs.
    (4) Where the lessee's payments for washing under an arm's-length 
contract are not based on a dollar-per-unit basis, the lessee shall 
convert whatever consideration is paid to a dollar value equivalent. 
Washing allowances shall be expressed as a cost per ton of coal washed.
    (b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations 
where the lessee performs washing for itself, the washing allowance 
will be based upon the lessee's reasonable actual costs. All washing 
allowances deducted under a non-arm's-length or no contract situation 
are subject to monitoring, review, audit, and possible future 
adjustment. The lessee must claim a washing allowance by reporting it 
as a separate line entry on the Form ONRR-4430. When necessary or 
appropriate, ONRR may direct a lessee to modify its estimated or actual 
washing allowance.
    (2) The washing allowance for non-arm's-length or no contract 
situations shall be based upon the lessee's actual costs for washing 
during the reported period, including operating and maintenance 
expenses, overhead, and either depreciation and a return on 
undepreciated capital investment in accordance with paragraph 
(b)(2)(iv)(A) of this section, or a cost equal to the depreciable 
investment in the wash plant multiplied by the rate of return in 
accordance with paragraph (b)(2)(iv)(B) of this section. Allowable 
capital costs are generally those for depreciable fixed assets 
(including costs of delivery and installation of capital equipment) 
which are an integral part of the wash plant.
    (i) Allowable operating expenses include: Operations supervision 
and engineering; operations labor; fuel; utilities; materials; ad 
valorem property taxes, rent; supplies; and any other directly 
allocable and attributable operating expense which the lessee can 
document.
    (ii) Allowable maintenance expenses include: Maintenance of the 
wash plant; maintenance of equipment; maintenance labor; and other 
directly

[[Page 47010]]

allocable and attributable maintenance expenses which the lessee can 
document.
    (iii) Overhead attributable and allocable to the operation and 
maintenance of the wash plant is an allowable expense. State and 
Federal income taxes and severance taxes, including royalties, are not 
allowable expenses.
    (iv) A lessee may use either paragraph (b)(2)(iv)(A) or (B) of this 
section. After a lessee has elected to use either method for a wash 
plant, the lessee may not later elect to change to the other 
alternative without approval of the ONRR.
    (A) To compute depreciation, the lessee may elect to use either a 
straight-line depreciation method based on the life of equipment or on 
the life of the reserves which the wash plant services, whichever is 
appropriate, or a unit of production method. After an election is made, 
the lessee may not change methods without ONRR approval. A change in 
ownership of a wash plant shall not alter the depreciation schedule 
established by the original operator/lessee for purposes of the 
allowance calculation. With or without a change in ownership, a wash 
plant shall be depreciated only once. Equipment shall not be 
depreciated below a reasonable salvage value.
    (B) ONRR shall allow as a cost an amount equal to the allowable 
capital investment in the wash plant multiplied by the rate of return 
determined pursuant to paragraph (b)(2)(v) of this section. No 
allowance shall be provided for depreciation. This alternative shall 
apply only to plants first placed in service or acquired after March 1, 
1989.
    (v) The rate of return must be the industrial rate associated with 
Standard and Poor's BBB rating. The rate of return must be the monthly 
average rate as published in Standard and Poor's Bond Guide for the 
first month for which the allowance is applicable. The rate must be 
redetermined at the beginning of each subsequent calendar year.
    (3) The washing allowance for coal shall be determined based on the 
lessee's reasonable and actual cost of washing the coal. The lessee may 
not take an allowance for the costs of washing lease production that is 
not royalty bearing.
    (c) Reporting requirements--(1) Arm's-length contracts. (i) The 
lessee must notify ONRR of an allowance based on incurred costs by 
using a separate line entry on the Form ONRR-4430.
    (ii) ONRR may require that a lessee submit arm's-length washing 
contracts and related documents. Documents shall be submitted within a 
reasonable time, as determined by ONRR.
    (2) Non-arm's-length or no contract. (i) The lessee must notify 
ONRR of an allowance based on the incurred costs by using a separate 
line entry on the Form ONRR-4430.
    (ii) For new washing facilities or arrangements, the lessee's 
initial washing deduction shall include estimates of the allowable coal 
washing costs for the applicable period. Cost estimates shall be based 
upon the most recently available operations data for the washing system 
or, if such data are not available, the lessee shall use estimates 
based upon industry data for similar washing systems.
    (iii) Upon request by ONRR, the lessee shall submit all data used 
to prepare the allowance deduction. The data shall be provided within a 
reasonable period of time, as determined by ONRR.
    (d) Interest and assessments. (1) If a lessee nets a washing 
allowance on the Form ONRR-4430, then the lessee shall be assessed an 
amount up to 10 percent of the allowance netted not to exceed $250 per 
lease sales type code per sales period.
    (2) If a lessee erroneously reports a washing allowance which 
results in an underpayment of royalties, interest shall be paid on the 
amount of that underpayment.
    (3) Interest required to be paid by this section shall be 
determined in accordance with Sec.  1218.202 of this subchapter.
    (e) Adjustments. (1) If the actual coal washing allowance is less 
than the amount the lessee has taken on Form ONRR-4430 for each month 
during the allowance reporting period, the lessee shall pay additional 
royalties due plus interest computed under Sec.  1218.202 of this 
subchapter from the date when the lessee took the deduction to the date 
the lessee repays the difference to ONRR. If the actual washing 
allowance is greater than the amount the lessee has taken on Form ONRR-
4430 for each month during the allowance reporting period, the lessee 
shall be entitled to a credit without interest.
    (2) The lessee must submit a corrected Form ONRR-4430 to reflect 
actual costs, together with any payment, in accordance with 
instructions provided by ONRR.
    (f) Other washing cost determinations. The provisions of this 
section shall apply to determine washing costs when establishing value 
using a net-back valuation procedure or any other procedure that 
requires deduction of washing costs.


Sec.  1206.260  Allocation of washed coal.

    (a) When coal is subjected to washing, the washed coal must be 
allocated to the leases from which it was extracted.
    (b) When the net output of coal from a washing plant is derived 
from coal obtained from only one lease, the quantity of washed coal 
allocable to the lease will be based on the net output of the washing 
plant.
    (c) When the net output of coal from a washing plant is derived 
from coal obtained from more than one lease, unless determined 
otherwise by BLM, the quantity of net output of washed coal allocable 
to each lease will be based on the ratio of measured quantities of coal 
delivered to the washing plant and washed from each lease compared to 
the total measured quantities of coal delivered to the washing plant 
and washed.


Sec.  1206.261  Transportation allowances--general.

    (a) For ad valorem leases subject to Sec.  1206.257, where the 
value for royalty purposes has been determined at a point remote from 
the lease or mine, ONRR shall, as authorized by this section, allow a 
deduction in determining value for royalty purposes for the reasonable, 
actual costs incurred to:
    (1) Transport the coal from a Federal lease to a sales point which 
is remote from both the lease and mine; or
    (2) Transport the coal from a Federal lease to a wash plant when 
that plant is remote from both the lease and mine and, if applicable, 
from the wash plant to a remote sales point. In-mine transportation 
costs shall not be included in the transportation allowance.
    (b) Under no circumstances will the authorized washing allowance 
and the transportation allowance reduce the value for royalty purposes 
to zero.
    (c)(1) When coal transported from a mine to a wash plant is 
eligible for a transportation allowance in accordance with this 
section, the lessee is not required to allocate transportation costs 
between the quantity of clean coal output and the rejected waste 
material. The transportation allowance shall be authorized for the 
total production which is transported. Transportation allowances shall 
be expressed as a cost per ton of cleaned coal transported.
    (2) For coal that is not washed at a wash plant, the transportation 
allowance shall be authorized for the total production which is 
transported. Transportation allowances shall be expressed as a cost per 
ton of coal transported.
    (3) Transportation costs shall only be recognized as allowances 
when the

[[Page 47011]]

transported coal is sold and royalties are reported and paid.
    (d) If, after a review and/or audit, ONRR determines that a lessee 
has improperly determined a transportation allowance authorized by this 
section, then the lessee shall pay any additional royalties, plus 
interest, determined in accordance with Sec.  1218.202 of this 
subchapter, or shall be entitled to a credit, without interest.
    (e) Lessees shall not disproportionately allocate transportation 
costs to Federal leases.


Sec.  1206.262  Determination of transportation allowances.

    (a) Arm's-length contracts. (1) For transportation costs incurred 
by a lessee pursuant to an arm's-length contract, the transportation 
allowance shall be the reasonable, actual costs incurred by the lessee 
for transporting the coal under that contract, subject to monitoring, 
review, audit, and possible future adjustment. The lessee shall have 
the burden of demonstrating that its contract is arm's-length. The 
lessee must claim a transportation allowance by reporting it as a 
separate line entry on the Form ONRR-4430.
    (2) In conducting reviews and audits, ONRR will examine whether the 
contract reflects more than the consideration actually transferred 
either directly or indirectly from the lessee to the transporter for 
the transportation. If the contract reflects more than the total 
consideration paid, then the ONRR may require that the transportation 
allowance be determined in accordance with paragraph (b) of this 
section.
    (3) If ONRR determines that the consideration paid pursuant to an 
arm's-length transportation contract does not reflect the reasonable 
value of the transportation because of misconduct by or between the 
contracting parties, or because the lessee otherwise has breached its 
duty to the lessor to market the production for the mutual benefit of 
the lessee and the lessor, then ONRR shall require that the 
transportation allowance be determined in accordance with paragraph (b) 
of this section. When ONRR determines that the value of the 
transportation may be unreasonable, ONRR will notify the lessee and 
give the lessee an opportunity to provide written information 
justifying the lessee's transportation costs.
    (4) Where the lessee's payments for transportation under an arm's-
length contract are not based on a dollar-per-unit basis, the lessee 
shall convert whatever consideration is paid to a dollar value 
equivalent for the purposes of this section.
    (b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations 
where the lessee performs transportation services for itself, the 
transportation allowance will be based upon the lessee's reasonable 
actual costs. All transportation allowances deducted under a non-arm's-
length or no contract situation are subject to monitoring, review, 
audit, and possible future adjustment. The lessee must claim a 
transportation allowance by reporting it as a separate line entry on 
the Form ONRR-4430. When necessary or appropriate, ONRR may direct a 
lessee to modify its estimated or actual transportation allowance 
deduction.
    (2) The transportation allowance for non-arm's-length or no-
contract situations shall be based upon the lessee's actual costs for 
transportation during the reporting period, including operating and 
maintenance expenses, overhead, and either depreciation and a return on 
undepreciated capital investment in accordance with paragraph 
(b)(2)(iv)(A) of this section, or a cost equal to the depreciable 
investment in the transportation system multiplied by the rate of 
return in accordance with paragraph (b)(2)(iv)(B) of this section. 
Allowable capital costs are generally those for depreciable fixed 
assets (including costs of delivery and installation of capital 
equipment) which are an integral part of the transportation system.
    (i) Allowable operating expenses include: Operations supervision 
and engineering; operations labor; fuel; utilities; materials; ad 
valorem property taxes; rent; supplies; and any other directly 
allocable and attributable operating expense which the lessee can 
document.
    (ii) Allowable maintenance expenses include: Maintenance of the 
transportation system; maintenance of equipment; maintenance labor; and 
other directly allocable and attributable maintenance expenses which 
the lessee can document.
    (iii) Overhead attributable and allocable to the operation and 
maintenance of the transportation system is an allowable expense. State 
and Federal income taxes and severance taxes and other fees, including 
royalties, are not allowable expenses.
    (iv) A lessee may use either paragraph (b)(2)(iv)(A) or (B) of this 
section. After a lessee has elected to use either method for a 
transportation system, the lessee may not later elect to change to the 
other alternative without approval of ONRR.
    (A) To compute depreciation, the lessee may elect to use either a 
straight-line depreciation method based on the life of equipment or on 
the life of the reserves which the transportation system services, 
whichever is appropriate, or a unit of production method. After an 
election is made, the lessee may not change methods without ONRR 
approval. A change in ownership of a transportation system shall not 
alter the depreciation schedule established by the original 
transporter/lessee for purposes of the allowance calculation. With or 
without a change in ownership, a transportation system shall be 
depreciated only once. Equipment shall not be depreciated below a 
reasonable salvage value.
    (B) ONRR shall allow as a cost an amount equal to the allowable 
capital investment in the transportation system multiplied by the rate 
of return determined pursuant to paragraph (b)(2)(v) of this section. 
No allowance shall be provided for depreciation. This alternative shall 
apply only to transportation facilities first placed in service or 
acquired after March 1, 1989.
    (v) The rate of return must be the industrial rate associated with 
Standard and Poor's BBB rating. The rate of return must be the monthly 
average rate as published in Standard and Poor's Bond Guide for the 
first month for which the allowance is applicable. The rate must be 
redetermined at the beginning of each subsequent calendar year.
    (3) A lessee may apply to ONRR for exception from the requirement 
that it compute actual costs in accordance with paragraphs (b)(1) and 
(2) of this section. ONRR will grant the exception only if the lessee 
has a rate for the transportation approved by a Federal agency or by a 
State regulatory agency (for Federal leases). ONRR shall deny the 
exception request if it determines that the rate is excessive as 
compared to arm's-length transportation charges by systems, owned by 
the lessee or others, providing similar transportation services in that 
area. If there are no arm's-length transportation charges, ONRR shall 
deny the exception request if:
    (i) No Federal or State regulatory agency costs analysis exists and 
the Federal or State regulatory agency, as applicable, has declined to 
investigate under ONRR timely objections upon filing; and
    (ii) The rate significantly exceeds the lessee's actual costs for 
transportation as determined under this section.
    (c) Reporting requirements--(1) Arm's-length contracts. (i) The 
lessee must notify ONRR of an allowance based on incurred costs by 
using a

[[Page 47012]]

separate line entry on the form ONRR-4430.
    (ii) ONRR may require that a lessee submit arm's-length 
transportation contracts, production agreements, operating agreements, 
and related documents. Documents shall be submitted within a reasonable 
time, as determined by ONRR.
    (2) Non-arm's-length or no contract. (i) The lessee must notify 
ONRR of an allowance based on the incurred costs by using a separate 
line entry on Form ONRR-4430.
    (ii) For new transportation facilities or arrangements, the 
lessee's initial deduction shall include estimates of the allowable 
coal transportation costs for the applicable period. Cost estimates 
shall be based upon the most recently available operations data for the 
transportation system or, if such data are not available, the lessee 
shall use estimates based upon industry data for similar transportation 
systems.
    (iii) Upon request by ONRR, the lessee shall submit all data used 
to prepare the allowance deduction. The data shall be provided within a 
reasonable period of time, as determined by ONRR.
    (iv) If the lessee is authorized to use its Federal- or State-
agency-approved rate as its transportation cost in accordance with 
paragraph (b)(3) of this section, it shall follow the reporting 
requirements of paragraph (c)(1) of this section.
    (d) Interest and assessments. (1) If a lessee nets a transportation 
allowance on Form ONRR-4430, the lessee shall be assessed an amount of 
up to 10 percent of the allowance netted not to exceed $250 per lease 
sales type code per sales period.
    (2) If a lessee erroneously reports a transportation allowance 
which results in an underpayment of royalties, interest shall be paid 
on the amount of that underpayment.
    (3) Interest required to be paid by this section shall be 
determined in accordance with Sec.  1218.202 of this subchapter.
    (e) Adjustments. (1) If the actual coal transportation allowance is 
less than the amount the lessee has taken on Form ONRR-4430 for each 
month during the allowance reporting period, the lessee shall pay 
additional royalties due plus interest computed under Sec.  1218.202 of 
this subchapter from the date when the lessee took the deduction to the 
date the lessee repays the difference to ONRR. If the actual 
transportation allowance is greater than amount the lessee has taken on 
Form ONRR-4430 for each month during the allowance reporting period, 
the lessee shall be entitled to a credit without interest.
    (2) The lessee must submit a corrected Form ONRR-4430 to reflect 
actual costs, together with any payments, in accordance with 
instructions provided by ONRR.
    (f) Other transportation cost determinations. The provisions of 
this section shall apply to determine transportation costs when 
establishing value using a net-back valuation procedure or any other 
procedure that requires deduction of transportation costs.


Sec.  1206.263  [Reserved]


Sec.  1206.264  In-situ and surface gasification and liquefaction 
operations.

    If an ad valorem Federal coal lease is developed by in-situ or 
surface gasification or liquefaction technology, the lessee shall 
propose the value of coal for royalty purposes to ONRR. The ONRR will 
review the lessee's proposal and issue a value determination. The 
lessee may use its proposed value until ONRR issues a value 
determination.


Sec.  1206.265  Value enhancement of marketable coal.

    If, prior to use, sale, or other disposition, the lessee enhances 
the value of coal after the coal has been placed in marketable 
condition in accordance with Sec.  1206.257(h), the lessee shall notify 
ONRR that such processing is occurring or will occur. The value of that 
production shall be determined as follows:
    (a) A value established for the feedstock coal in marketable 
condition by application of the provisions of Sec.  1206.257(c)(2)(i) 
through (iv); or,
    (b) In the event that a value cannot be established in accordance 
with paragraph (a) of this section, then the value of production will 
be determined in accordance with Sec.  1206.257(c)(2)(v) and the value 
shall be the lessee's gross proceeds accruing from the disposition of 
the enhanced product, reduced by ONRR-approved processing costs and 
procedures including a rate of return on investment equal to two times 
the Standard and Poor's BBB bond rate applicable under Sec.  
1206.259(b)(2)(v).


0
6. Revise subpart J to read as follows:
Subpart J--Indian Coal
Sec.
1206.450 Purpose and scope.
1206.451 Definitions.
1206.452 Coal subject to royalties--general provisions.
1206.453 Quality and quantity measurement standards for reporting 
and paying royalties.
1206.454 Point of royalty determination.
1206.455 Valuation standards for cents-per-ton leases.
1206.456 Valuation standards for ad valorem leases.
1206.457 Washing allowances--general.
1206.458 Determination of washing allowances.
1206.459 Allocation of washed coal.
1206.460 Transportation allowances--general.
1206.461 Determination of transportation allowances.
1206.462 [Reserved]
1206.463 In-situ and surface gasification and liquefaction 
operations.
1206.464 Value enhancement of marketable coal.

Subpart J--Indian Coal


Sec.  1206.450  Purpose and scope.

    (a) This subpart prescribes the procedures to establish the value, 
for royalty purposes, of all coal from Indian Tribal and allotted 
leases (except leases on the Osage Indian Reservation, Osage County, 
Oklahoma).
    (b) If the specific provisions of any statute, treaty, or 
settlement agreement between the Indian lessor and a lessee resulting 
from administrative or judicial litigation, or any coal lease subject 
to the requirements of this subpart, are inconsistent with any 
regulation in this subpart, then the statute, treaty, lease provision, 
or settlement shall govern to the extent of that inconsistency.
    (c) All royalty payments are subject to later audit and adjustment.
    (d) The regulations in this subpart are intended to ensure that the 
trust responsibilities of the United States with respect to the 
administration of Indian coal leases are discharged in accordance with 
the requirements of the governing mineral leasing laws, treaties, and 
lease terms.


Sec.  1206.451  Definitions.

    The definitions in Sec.  1206.20 do not apply to this subpart. For 
purposes of this subpart:
    Ad valorem lease means a lease where the royalty due to the lessor 
is based upon a percentage of the amount or value of the coal.
    Allowance means an approved, or an ONRR-initially accepted 
deduction in determining value for royalty purposes. Coal washing 
allowance means an allowance for the reasonable, actual costs incurred 
by the lessee for coal washing, or an approved or ONRR-initially 
accepted deduction for the costs of washing coal, determined pursuant 
to this subpart. Transportation allowance means an allowance for the 
reasonable, actual costs incurred by the lessee for moving coal to a 
point of sale or point of delivery remote from both the lease and mine 
or wash plant, or an approved ONRR-initially accepted deduction for 
costs of such

[[Page 47013]]

transportation, determined pursuant to this subpart.
    Area means a geographic region in which coal has similar quality 
and economic characteristics. Area boundaries are not officially 
designated and the areas are not necessarily named.
    Arm's-length contract means a contract or agreement that has been 
arrived at in the marketplace between independent, nonaffiliated 
persons with opposing economic interests regarding that contract. For 
purposes of this subpart, two persons are affiliated if one person 
controls, is controlled by, or is under common control with another 
person. For purposes of this subpart, based on the instruments of 
ownership of the voting securities of an entity, or based on other 
forms of ownership: ownership in excess of 50 percent constitutes 
control; ownership of 10 through 50 percent creates a presumption of 
control; and ownership of less than 10 percent creates a presumption of 
noncontrol which ONRR may rebut if it demonstrates actual or legal 
control, including the existence of interlocking directorates. 
Notwithstanding any other provisions of this subpart, contracts between 
relatives, either by blood or by marriage, are not arm's-length 
contracts. ONRR may require the lessee to certify ownership control. To 
be considered arm's-length for any production month, a contract must 
meet the requirements of this definition for that production month, as 
well as when the contract was executed.
    Audit means a review, conducted in accordance with generally 
accepted accounting and auditing standards, of royalty payment 
compliance activities of lessees or other interest holders who pay 
royalties, rents, or bonuses on Indian leases.
    BIA means the Bureau of Indian Affairs of the Department of the 
Interior.
    BLM means the Bureau of Land Management of the Department of the 
Interior.
    Coal means coal of all ranks from lignite through anthracite.
    Coal washing means any treatment to remove impurities from coal. 
Coal washing may include, but is not limited to, operations such as 
flotation, air, water, or heavy media separation; drying; and related 
handling (or combination thereof).
    Contract means any oral or written agreement, including amendments 
or revisions thereto, between two or more persons and enforceable by 
law that with due consideration creates an obligation.
    Gross proceeds (for royalty payment purposes) means the total 
monies and other consideration accruing to a coal lessee for the 
production and disposition of the coal produced. Gross proceeds 
includes, but is not limited to, payments to the lessee for certain 
services such as crushing, sizing, screening, storing, mixing, loading, 
treatment with substances including chemicals or oils, and other 
preparation of the coal to the extent that the lessee is obligated to 
perform them at no cost to the Indian lessor. Gross proceeds, as 
applied to coal, also includes but is not limited to reimbursements for 
royalties, taxes or fees, and other reimbursements. Tax reimbursements 
are part of the gross proceeds accruing to a lessee even though the 
Indian royalty interest may be exempt from taxation. Monies and other 
consideration, including the forms of consideration identified in this 
paragraph, to which a lessee is contractually or legally entitled but 
which it does not seek to collect through reasonable efforts are also 
part of gross proceeds.
    Indian allottee means any Indian for whom land or an interest in 
land is held in trust by the United States or who holds title subject 
to Federal restriction against alienation.
    Indian Tribe means any Indian Tribe, band, nation, pueblo, 
community, rancheria, colony, or other group of Indians for which any 
land or interest in land is held in trust by the United States or which 
is subject to Federal restriction against alienation.
    Lease means any contract, profit-share arrangement, joint venture, 
or other agreement issued or approved by the United States for an 
Indian coal resource under a mineral leasing law that authorizes 
exploration for, development or extraction of, or removal of coal--or 
the land covered by that authorization, whichever is required by the 
context.
    Lessee means any person to whom the Indian Tribe or an Indian 
allottee issues a lease, and any person who has been assigned an 
obligation to make royalty or other payments required by the lease. 
This includes any person who has an interest in a lease as well as an 
operator or payor who has no interest in the lease but who has assumed 
the royalty payment responsibility.
    Like-quality coal means coal that has similar chemical and physical 
characteristics.
    Marketable condition means coal that is sufficiently free from 
impurities and otherwise in a condition that it will be accepted by a 
purchaser under a sales contract typical for that area.
    Mine means an underground or surface excavation or series of 
excavations and the surface or underground support facilities that 
contribute directly or indirectly to mining, production, preparation, 
and handling of lease products.
    Net-back method means a method for calculating market value of coal 
at the lease or mine. Under this method, costs of transportation, 
washing, handling, etc., are deducted from the ultimate proceeds 
received for the coal at the first point at which reasonable values for 
the coal may be determined by a sale pursuant to an arm's-length 
contract or by comparison to other sales of coal, to ascertain value at 
the mine.
    Net output means the quantity of washed coal that a washing plant 
produces.
    ONRR means the Office of Natural Resources Revenue of the 
Department of the Interior.
    Person means by individual, firm, corporation, association, 
partnership, consortium, or joint venture.
    Sales type code means the contract type or general disposition 
(e.g., arm's-length or non-arm's-length) of production from the lease. 
The sales type code applies to the sales contract, or other 
disposition, and not to the arm's-length or non-arm's-length nature of 
a transportation or washing allowance.
    Spot market price means the price received under any sales 
transaction when planned or actual deliveries span a short period of 
time, usually not exceeding one year.


Sec.  1206.452  Coal subject to royalties--general provisions.

    (a) All coal (except coal unavoidably lost as determined by BLM 
pursuant to 43 CFR group 3400) from an Indian lease subject to this 
part is subject to royalty. This includes coal used, sold, or otherwise 
disposed of by the lessee on or off the lease.
    (b) If a lessee receives compensation for unavoidably lost coal 
through insurance coverage or other arrangements, royalties at the rate 
specified in the lease are to be paid on the amount of compensation 
received for the coal. No royalty is due on insurance compensation 
received by the lessee for other losses.
    (c) If waste piles or slurry ponds are reworked to recover coal, 
the lessee shall pay royalty at the rate specified in the lease at the 
time the recovered coal is used, sold, or otherwise finally disposed 
of. The royalty rate shall be that rate applicable to the production 
method used to initially mine coal in the waste pile or slurry pond; 
i.e., underground mining method or surface mining method. Coal in waste 
pits or slurry ponds initially mined from

[[Page 47014]]

Indian leases shall be allocated to such leases regardless of whether 
it is stored on Indian lands. The lessee shall maintain accurate 
records to determine to which individual Indian lease coal in the waste 
pit or slurry pond should be allocated. However, nothing in this 
section requires payment of a royalty on coal for which a royalty has 
already been paid.


Sec.  1206.453  Quality and quantity measurement standards for 
reporting and paying royalties.

    For all leases subject to this subpart, the quantity of coal on 
which royalty is due shall be measured in short tons (of 2,000 pounds 
each) by methods prescribed by the BLM. Coal quantity information will 
be reported on appropriate forms required under part 1210 of this 
subchapter.


Sec.  1206.454  Point of royalty determination.

    (a) For all leases subject to this subpart, royalty shall be 
computed on the basis of the quantity and quality of Indian coal in 
marketable condition measured at the point of royalty measurement as 
determined jointly by BLM and ONRR.
    (b) Coal produced and added to stockpiles or inventory does not 
require payment of royalty until such coal is later used, sold, or 
otherwise finally disposed of. ONRR may ask BLM or BIA to increase the 
lease bond to protect the lessor's interest when BLM determines that 
stockpiles or inventory become excessive so as to increase the risk of 
degradation of the resource.
    (c) The lessee shall pay royalty at a rate specified in the lease 
at the time the coal is used, sold, or otherwise finally disposed of, 
unless otherwise provided for at Sec.  1206.455(d).


Sec.  1206.455  Valuation standards for cents-per-ton leases.

    (a) This section is applicable to coal leases on Indian Tribal and 
allotted Indian lands (except leases on the Osage Indian Reservation, 
Osage County, Oklahoma) which provide for the determination of royalty 
on a cents-per-ton (or other quantity) basis.
    (b) The royalty for coal from leases subject to this section shall 
be based on the dollar rate per ton prescribed in the lease. That 
dollar rate shall be applicable to the actual quantity of coal used, 
sold, or otherwise finally disposed of, including coal which is 
avoidably lost as determined by BLM pursuant to 43 CFR part 3400.
    (c) For leases subject to this section, there shall be no 
allowances for transportation, removal of impurities, coal washing, or 
any other processing or preparation of the coal.
    (d) When a coal lease is readjusted pursuant to 43 CFR part 3400 
and the royalty valuation method changes from a cents-per-ton basis to 
an ad valorem basis, coal which is produced prior to the effective date 
of readjustment and sold or used within 30 days of the effective date 
of readjustment shall be valued pursuant to this section. All coal that 
is not used, sold, or otherwise finally disposed of within 30 days 
after the effective date of readjustment shall be valued pursuant to 
the provisions of Sec.  1206.456, and royalties shall be paid at the 
royalty rate specified in the readjusted lease.


Sec.  1206.456  Valuation standards for ad valorem leases.

    (a) This section is applicable to coal leases on Indian Tribal and 
allotted Indian lands (except leases on the Osage Indian Reservation, 
Osage County, Oklahoma) which provide for the determination of royalty 
as a percentage of the amount of value of coal (ad valorem). The value 
for royalty purposes of coal from such leases shall be the value of 
coal determined pursuant to this section, less applicable coal washing 
allowances and transportation allowances determined pursuant to 
Sec. Sec.  1206.457 through 1206.461, or any allowance authorized by 
Sec.  1206.464. The royalty due shall be equal to the value for royalty 
purposes multiplied by the royalty rate in the lease.
    (b)(1) The value of coal that is sold pursuant to an arm's-length 
contract shall be the gross proceeds accruing to the lessee, except as 
provided in paragraphs (b)(2), (3), and (5) of this section. The lessee 
shall have the burden of demonstrating that its contract is arm's-
length. The value which the lessee reports, for royalty purposes, is 
subject to monitoring, review, and audit.
    (2) In conducting reviews and audits, ONRR will examine whether the 
contract reflects the total consideration actually transferred either 
directly or indirectly from the buyer to the seller for the coal 
produced. If the contract does not reflect the total consideration, 
then ONRR may require that the coal sold pursuant to that contract be 
valued in accordance with paragraph (c) of this section. Value may not 
be based on less than the gross proceeds accruing to the lessee for the 
coal production, including the additional consideration.
    (3) If ONRR determines that the gross proceeds accruing to the 
lessee pursuant to an arm's-length contract do not reflect the 
reasonable value of the production because of misconduct by or between 
the contracting parties, or because the lessee otherwise has breached 
its duty to the lessor to market the production for the mutual benefit 
of the lessee and the lessor, then ONRR shall require that the coal 
production be valued pursuant to paragraph (c)(2)(ii), (iii), (iv), or 
(v) of this section, and in accordance with the notification 
requirements of paragraph (d)(3) of this section. When ONRR determines 
that the value may be unreasonable, ONRR will notify the lessee and 
give the lessee an opportunity to provide written information 
justifying the lessee's reported coal value.
    (4) ONRR may require a lessee to certify that its arm's-length 
contract provisions include all of the consideration to be paid by the 
buyer, either directly or indirectly, for the coal production.
    (5) The value of production for royalty purposes shall not include 
payments received by the lessee pursuant to a contract which the lessee 
demonstrates, to ONRR's satisfaction, were not part of the total 
consideration paid for the purchase of coal production.
    (c)(1) The value of coal from leases subject to this section and 
which is not sold pursuant to an arm's-length contract shall be 
determined in accordance with this section.
    (2) If the value of the coal cannot be determined pursuant to 
paragraph (b) of this section, then the value shall be determined 
through application of other valuation criteria. The criteria shall be 
considered in the following order, and the value shall be based upon 
the first applicable criterion:
    (i) The gross proceeds accruing to the lessee pursuant to a sale 
under its non-arm's-length contract (or other disposition of produced 
coal by other than an arm's-length contract), provided that those gross 
proceeds are within the range of the gross proceeds derived from, or 
paid under, comparable arm's-length contracts between buyers and 
sellers neither of whom is affiliated with the lessee for sales, 
purchases, or other dispositions of like-quality coal produced in the 
area. In evaluating the comparability of arm's-length contracts for the 
purposes of these regulations, the following factors shall be 
considered: price, time of execution, duration, market or markets 
served, terms, quality of coal, quantity, and such other factors as may 
be appropriate to reflect the value of the coal;
    (ii) Prices reported for that coal to a public utility commission;
    (iii) Prices reported for that coal to the Energy Information 
Administration of the Department of Energy;
    (iv) Other relevant matters including, but not limited to, 
published or publicly available spot market prices, or

[[Page 47015]]

information submitted by the lessee concerning circumstances unique to 
a particular lease operation or the salability of certain types of 
coal;
    (v) If a reasonable value cannot be determined using paragraph 
(c)(2)(i), (ii), (iii), or (iv) of this section, then a net-back method 
or any other reasonable method shall be used to determine value.
    (3) When the value of coal is determined pursuant to paragraph 
(c)(2) of this section, that value determination shall be consistent 
with the provisions contained in paragraph (b)(5) of this section.
    (d)(1) Where the value is determined pursuant to paragraph (c) of 
this section, that value does not require ONRR's prior approval. 
However, the lessee shall retain all data relevant to the determination 
of royalty value. Such data shall be subject to review and audit, and 
ONRR will direct a lessee to use a different value if it determines 
that the reported value is inconsistent with the requirements of these 
regulations.
    (2) An Indian lessee will make available upon request to the 
authorized ONRR or Indian representatives, or to the Inspector General 
of the Department of the Interior or other persons authorized to 
receive such information, arm's-length sales and sales quantity data 
for like-quality coal sold, purchased, or otherwise obtained by the 
lessee from the area.
    (3) A lessee shall notify ONRR if it has determined value pursuant 
to paragraph (c)(2)(ii), (iii), (iv), or (v) of this section. The 
notification shall be by letter to the Director for Office of Natural 
Resources Revenue or his/her designee. The letter shall identify the 
valuation method to be used and contain a brief description of the 
procedure to be followed. The notification required by this section is 
a one-time notification due no later than the month the lessee first 
reports royalties on the Form ONRR-4430 using a valuation method 
authorized by paragraph (c)(2)(ii), (iii), (iv), or (v) of this 
section, and each time there is a change in a method under paragraph 
(c)(2)(iv) or (v) of this section.
    (e) If ONRR determines that a lessee has not properly determined 
value, the lessee shall be liable for the difference, if any, between 
royalty payments made based upon the value it has used and the royalty 
payments that are due based upon the value established by ONRR. The 
lessee shall also be liable for interest computed pursuant to Sec.  
1218.202 of this subchapter. If the lessee is entitled to a credit, 
ONRR will provide instructions for the taking of that credit.
    (f) The lessee may request a value determination from ONRR. In that 
event, the lessee shall propose to ONRR a value determination method, 
and may use that method in determining value for royalty purposes until 
ONRR issues its decision. The lessee shall submit all available data 
relevant to its proposal. ONRR shall expeditiously determine the value 
based upon the lessee's proposal and any additional information ONRR 
deems necessary. That determination shall remain effective for the 
period stated therein. After ONRR issues its determination, the lessee 
shall make the adjustments in accordance with paragraph (e) of this 
section.
    (g) Notwithstanding any other provisions of this section, under no 
circumstances shall the value for royalty purposes be less than the 
gross proceeds accruing to the lessee for the disposition of produced 
coal less applicable provisions of paragraph (b)(5) of this section and 
less applicable allowances determined pursuant to Sec. Sec.  1206.457 
through 1206.461 and 1206.464.
    (h) The lessee is required to place coal in marketable condition at 
no cost to the Indian lessor. Where the value established pursuant to 
this section is determined by a lessee's gross proceeds, that value 
shall be increased to the extent that the gross proceeds has been 
reduced because the purchaser, or any other person, is providing 
certain services, the cost of which ordinarily is the responsibility of 
the lessee to place the coal in marketable condition.
    (i) Value shall be based on the highest price a prudent lessee can 
receive through legally enforceable claims under its contract. Absent 
contract revision or amendment, if the lessee fails to take proper or 
timely action to receive prices or benefits to which it is entitled, it 
must pay royalty at a value based upon that obtainable price or 
benefit. Contract revisions or amendments shall be in writing and 
signed by all parties to an arm's-length contract, and may be 
retroactively applied to value for royalty purposes for a period not to 
exceed two years, unless ONRR approves a longer period. If the lessee 
makes timely application for a price increase allowed under its 
contract but the purchaser refuses, and the lessee takes reasonable 
measures, which are documented, to force purchaser compliance, the 
lessee will owe no additional royalties unless or until monies or 
consideration resulting from the price increase are received. This 
paragraph shall not be construed to permit a lessee to avoid its 
royalty payment obligation in situations where a purchaser fails to 
pay, in whole or in part or timely, for a quantity of coal.
    (j) Notwithstanding any provision in these regulations to the 
contrary, no review, reconciliation, monitoring, or other like process 
that results in a redetermination by ONRR of value under this section 
shall be considered final or binding as against the Indian Tribes or 
allottees until the audit period is formally closed.
    (k) Certain information submitted to ONRR to support valuation 
proposals, including transportation, coal washing, or other allowances 
pursuant to Sec. Sec.  1206.457 through 1206.461 and 1206.464, is 
exempted from disclosure by the Freedom of Information Act, 5 U.S.C. 
522. Any data specified by the Act to be privileged, confidential, or 
otherwise exempt shall be maintained in a confidential manner in 
accordance with applicable law and regulations. All requests for 
information about determinations made under this part are to be 
submitted in accordance with the Freedom of Information Act regulation 
of the Department of the Interior, 43 CFR part 2. Nothing in this 
section is intended to limit or diminish in any manner whatsoever the 
right of an Indian lessor to obtain any and all information as such 
lessor may be lawfully entitled from ONRR or such lessor's lessee 
directly under the terms of the lease or applicable law.


Sec.  1206.457  Washing allowances--general.

    (a) For ad valorem leases subject to Sec.  1206.456, ONRR shall, as 
authorized by this section, allow a deduction in determining value for 
royalty purposes for the reasonable, actual costs incurred to wash 
coal, unless the value determined pursuant to Sec.  1206.456 was based 
upon like-quality unwashed coal. Under no circumstances will the 
authorized washing allowance and the transportation allowance reduce 
the value for royalty purposes to zero.
    (b) If ONRR determines that a lessee has improperly determined a 
washing allowance authorized by this section, then the lessee shall be 
liable for any additional royalties, plus interest determined in 
accordance with Sec.  1218.202 of this subchapter, or shall be entitled 
to a credit, without interest.
    (c) Lessees shall not disproportionately allocate washing costs to 
Indian leases.
    (d) No cost normally associated with mining operations and which 
are necessary for placing coal in marketable condition shall be allowed 
as a cost of washing.
    (e) Coal washing costs shall only be recognized as allowances when 
the washed coal is sold and royalties are reported and paid.

[[Page 47016]]

Sec.  1206.458  Determination of washing allowances.

    (a) Arm's-length contracts. (1) For washing costs incurred by a 
lessee pursuant to an arm's-length contract, the washing allowance 
shall be the reasonable actual costs incurred by the lessee for washing 
the coal under that contract, subject to monitoring, review, audit, and 
possible future adjustment. ONRR's prior approval is not required 
before a lessee may deduct costs incurred under an arm's-length 
contract. However, before any deduction may be taken, the lessee must 
submit a completed page one of Form ONRR-4292, Coal Washing Allowance 
Report, in accordance with paragraph (c)(1) of this section. A washing 
allowance may be claimed retroactively for a period of not more than 3 
months prior to the first day of the month that Form ONRR-4292 is filed 
with ONRR, unless ONRR approves a longer period upon a showing of good 
cause by the lessee.
    (2) In conducting reviews and audits, ONRR will examine whether the 
contract reflects more than the consideration actually transferred 
either directly or indirectly from the lessee to the washer for the 
washing. If the contract reflects more than the total consideration 
paid, then ONRR may require that the washing allowance be determined in 
accordance with paragraph (b) of this section.
    (3) If ONRR determines that the consideration paid pursuant to an 
arm's-length washing contract does not reflect the reasonable value of 
the washing because of misconduct by or between the contracting 
parties, or because the lessee otherwise has breached its duty to the 
lessor to market the production for the mutual benefit of the lessee 
and the lessor, then ONRR shall require that the washing allowance be 
determined in accordance with paragraph (b) of this section. When ONRR 
determines that the value of the washing may be unreasonable, ONRR will 
notify the lessee and give the lessee an opportunity to provide written 
information justifying the lessee's washing costs.
    (4) Where the lessee's payments for washing under an arm's-length 
contract are not based on a dollar-per-unit basis, the lessee shall 
convert whatever consideration is paid to a dollar value equivalent. 
Washing allowances shall be expressed as a cost per ton of coal washed.
    (b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations 
where the lessee performs washing for itself, the washing allowance 
will be based upon the lessee's reasonable actual costs. All washing 
allowances deducted under a non-arm's-length or no contract situation 
are subject to monitoring, review, audit, and possible future 
adjustment. Prior ONRR approval of washing allowances is not required 
for non-arm's-length or no contract situations. However, before any 
estimated or actual deduction may be taken, the lessee must submit a 
completed Form ONRR-4292 in accordance with paragraph (c)(2) of this 
section. A washing allowance may be claimed retroactively for a period 
of not more than 3 months prior to the first day of the month that Form 
ONRR-4292 is filed with ONRR, unless ONRR approves a longer period upon 
a showing of good cause by the lessee. ONRR will monitor the allowance 
deduction to ensure that deductions are reasonable and allowable. When 
necessary or appropriate, ONRR may direct a lessee to modify its actual 
washing allowance.
    (2) The washing allowance for non-arm's-length or no contract 
situations shall be based upon the lessee's actual costs for washing 
during the reported period, including operating and maintenance 
expenses, overhead, and either depreciation and a return on 
undepreciated capital investment in accordance with paragraph 
(b)(2)(iv)(A) of this section, or a cost equal to the depreciable 
investment in the wash plant multiplied by the rate of return in 
accordance with paragraph (b)(2)(iv)(B) of this section. Allowable 
capital costs are generally those for depreciable fixed assets 
(including costs of delivery and installation of capital equipment) 
which are an integral part of the wash plant.
    (i) Allowable operating expenses include: Operations supervision 
and engineering; operations labor; fuel; utilities; materials; ad 
valorem property taxes; rent; supplies; and any other directly 
allocable and attributable operating expense which the lessee can 
document.
    (ii) Allowable maintenance expenses include: Maintenance of the 
wash plant; maintenance of equipment; maintenance labor; and other 
directly allocable and attributable maintenance expenses which the 
lessee can document.
    (iii) Overhead attributable and allocable to the operation and 
maintenance of the wash plant is an allowable expense. State and 
Federal income taxes and severance taxes, including royalties, are not 
allowable expenses.
    (iv) A lessee may use either paragraph (b)(2)(iv)(A) or (B) of this 
section. After a lessee has elected to use either method for a wash 
plant, the lessee may not later elect to change to the other 
alternative without approval of ONRR.
    (A) To compute depreciation, the lessee may elect to use either a 
straight-line depreciation method based on the life of equipment or on 
the life of the reserves which the wash plant services, whichever is 
appropriate, or a unit of production method. After an election is made, 
the lessee may not change methods without ONRR approval. A change in 
ownership of a wash plant shall not alter the depreciation schedule 
established by the original operator/lessee for purposes of the 
allowance calculation. With or without a change in ownership, a wash 
plant shall be depreciated only once. Equipment shall not be 
depreciated below a reasonable salvage value.
    (B) ONRR shall allow as a cost an amount equal to the allowable 
capital investment in the wash plant multiplied by the rate of return 
determined pursuant to paragraph (b)(2)(v) of this section. No 
allowance shall be provided for depreciation. This alternative shall 
apply only to plants first placed in service or acquired after March 1, 
1989.
    (v) The rate of return shall be the industrial rate associated with 
Standard and Poor's BBB rating. The rate of return shall be the monthly 
average rate as published in Standard and Poor's Bond Guide for the 
first month of the reporting period for which the allowance is 
applicable and shall be effective during the reporting period. The rate 
shall be redetermined at the beginning of each subsequent washing 
allowance reporting period (which is determined pursuant to paragraph 
(c)(2) of this section).
    (3) The washing allowance for coal shall be determined based on the 
lessee's reasonable and actual cost of washing the coal. The lessee may 
not take an allowance for the costs of washing lease production that is 
not royalty bearing.
    (c) Reporting requirements--(1) Arm's-length contracts. (i) With 
the exception of those washing allowances specified in paragraphs 
(c)(1)(v) and (vi) of this section, the lessee shall submit page one of 
the initial Form ONRR-4292 prior to, or at the same time, as the 
washing allowance determined pursuant to an arm's-length contract is 
reported on Form ONRR-4430, Solid Minerals Production and Royalty 
Report. A Form ONRR-4292 received by the end of the month that the Form 
ONRR-4430 is due shall be considered to be received timely.
    (ii) The initial Form ONRR-4292 shall be effective for a reporting 
period beginning the month that the lessee is

[[Page 47017]]

first authorized to deduct a washing allowance and shall continue until 
the end of the calendar year, or until the applicable contract or rate 
terminates or is modified or amended, whichever is earlier.
    (iii) After the initial reporting period and for succeeding 
reporting periods, lessees must submit page one of Form ONRR-4292 
within 3 months after the end of the calendar year, or after the 
applicable contract or rate terminates or is modified or amended, 
whichever is earlier, unless ONRR approves a longer period (during 
which period the lessee shall continue to use the allowance from the 
previous reporting period).
    (iv) ONRR may require that a lessee submit arm's-length washing 
contracts and related documents. Documents shall be submitted within a 
reasonable time, as determined by ONRR.
    (v) Washing allowances which are based on arm's-length contracts 
and which are in effect at the time these regulations become effective 
will be allowed to continue until such allowances terminate. For the 
purposes of this section, only those allowances that have been approved 
by ONRR in writing shall qualify as being in effect at the time these 
regulations become effective.
    (vi) ONRR may establish, in appropriate circumstances, reporting 
requirements that are different from the requirements of this section.
    (2) Non-arm's-length or no contract. (i) With the exception of 
those washing allowances specified in paragraphs (c)(2)(v) and (vii) of 
this section, the lessee shall submit an initial Form ONRR-4292 prior 
to, or at the same time as, the washing allowance determined pursuant 
to a non-arm's-length contract or no contract situation is reported on 
Form ONRR-4430, Solid Minerals Production and Royalty Report. A Form 
ONRR-4292 received by the end of the month that the Form ONRR-4430 is 
due shall be considered to be timely received. The initial reporting 
may be based on estimated costs.
    (ii) The initial Form ONRR-4292 shall be effective for a reporting 
period beginning the month that the lessee first is authorized to 
deduct a washing allowance and shall continue until the end of the 
calendar year, or until the washing under the non-arm's-length contract 
or the no contract situation terminates, whichever is earlier.
    (iii) For calendar-year reporting periods succeeding the initial 
reporting period, the lessee shall submit a completed Form ONRR-4292 
containing the actual costs for the previous reporting period. If coal 
washing is continuing, the lessee shall include on Form ONRR-4292 its 
estimated costs for the next calendar year. The estimated coal washing 
allowance shall be based on the actual costs for the previous period 
plus or minus any adjustments which are based on the lessee's knowledge 
of decreases or increases which will affect the allowance. Form ONRR-
4292 must be received by ONRR within 3 months after the end of the 
previous reporting period, unless ONRR approves a longer period (during 
which period the lessee shall continue to use the allowance from the 
previous reporting period).
    (iv) For new wash plants, the lessee's initial Form ONRR-4292 shall 
include estimates of the allowable coal washing costs for the 
applicable period. Cost estimates shall be based upon the most recently 
available operations data for the plant, or if such data are not 
available, the lessee shall use estimates based upon industry data for 
similar coal wash plants.
    (v) Washing allowances based on non-arm's-length or no contract 
situations which are in effect at the time these regulations become 
effective will be allowed to continue until such allowances terminate. 
For the purposes of this section, only those allowances that have been 
approved by ONRR in writing shall qualify as being in effect at the 
time these regulations become effective.
    (vi) Upon request by ONRR, the lessee shall submit all data used by 
the lessee to prepare its Forms ONRR-4292. The data shall be provided 
within a reasonable period of time, as determined by ONRR.
    (vii) ONRR may establish, in appropriate circumstances, reporting 
requirements which are different from the requirements of this section.
    (3) ONRR may establish coal washing allowance reporting dates for 
individual leases different from those specified in this subpart in 
order to provide more effective administration. Lessees will be 
notified of any change in their reporting period.
    (4) Washing allowances must be reported as a separate line on the 
Form ONRR-4430, unless ONRR approves a different reporting procedure.
    (d) Interest assessments for incorrect or late reports and failure 
to report. (1) If a lessee deducts a washing allowance on its Form 
ONRR-4430 without complying with the requirements of this section, the 
lessee shall be liable for interest on the amount of such deduction 
until the requirements of this section are complied with. The lessee 
also shall repay the amount of any allowance which is disallowed by 
this section.
    (2) If a lessee erroneously reports a washing allowance which 
results in an underpayment of royalties, interest shall be paid on the 
amount of that underpayment.
    (3) Interest required to be paid by this section shall be 
determined in accordance with Sec.  1218.202 of this subchapter.
    (e) Adjustments. (1) If the actual coal washing allowance is less 
than the amount the lessee has taken on Form ONRR-4430 for each month 
during the allowance form reporting period, the lessee shall be 
required to pay additional royalties due plus interest computed 
pursuant to Sec.  1218.202 of this subchapter, retroactive to the first 
month the lessee is authorized to deduct a washing allowance. If the 
actual washing allowance is greater than the amount the lessee has 
estimated and taken during the reporting period, the lessee shall be 
entitled to a credit, without interest.
    (2) The lessee must submit a corrected Form ONRR-4430 to reflect 
actual costs, together with any payment, in accordance with 
instructions provided by ONRR.
    (f) Other washing cost determinations. The provisions of this 
section shall apply to determine washing costs when establishing value 
using a net-back valuation procedure or any other procedure that 
requires deduction of washing costs.


Sec.  1206.459  Allocation of washed coal.

    (a) When coal is subjected to washing, the washed coal must be 
allocated to the leases from which it was extracted.
    (b) When the net output of coal from a washing plant is derived 
from coal obtained from only one lease, the quantity of washed coal 
allocable to the lease will be based on the net output of the washing 
plant.
    (c) When the net output of coal from a washing plant is derived 
from coal obtained from more than one lease, unless determined 
otherwise by BLM, the quantity of net output of washed coal allocable 
to each lease will be based on the ratio of measured quantities of coal 
delivered to the washing plant and washed from each lease compared to 
the total measured quantities of coal delivered to the washing plant 
and washed.


Sec.  1206.460  Transportation allowances--general.

    (a) For ad valorem leases subject to Sec.  1206.456, where the 
value for royalty purposes has been determined at a point remote from 
the lease or mine, ONRR shall, as authorized by this section, allow a 
deduction in determining value

[[Page 47018]]

for royalty purposes for the reasonable, actual costs incurred to:
    (1) Transport the coal from an Indian lease to a sales point which 
is remote from both the lease and mine; or
    (2) Transport the coal from an Indian lease to a wash plant when 
that plant is remote from both the lease and mine and, if applicable, 
from the wash plant to a remote sales point. In-mine transportation 
costs shall not be included in the transportation allowance.
    (b) Under no circumstances will the authorized washing allowance 
and the transportation allowance reduce the value for royalty purposes 
to zero.
    (c)(1) When coal transported from a mine to a wash plant is 
eligible for a transportation allowance in accordance with this 
section, the lessee is not required to allocate transportation costs 
between the quantity of clean coal output and the rejected waste 
material. The transportation allowance shall be authorized for the 
total production which is transported. Transportation allowances shall 
be expressed as a cost per ton of cleaned coal transported.
    (2) For coal that is not washed at a wash plant, the transportation 
allowance shall be authorized for the total production which is 
transported. Transportation allowances shall be expressed as a cost per 
ton of coal transported.
    (3) Transportation costs shall only be recognized as allowances 
when the transported coal is sold and royalties are reported and paid.
    (d) If, after a review and/or audit, ONRR determines that a lessee 
has improperly determined a transportation allowance authorized by this 
section, then the lessee shall pay any additional royalties, plus 
interest, determined in accordance with Sec.  1218.202 of this 
subchapter, or shall be entitled to a credit, without interest.
    (e) Lessees shall not disproportionately allocate transportation 
costs to Indian leases.


Sec.  1206.461  Determination of transportation allowances.

    (a) Arm's-length contracts. (1) For transportation costs incurred 
by a lessee pursuant to an arm's-length contract, the transportation 
allowance shall be the reasonable, actual costs incurred by the lessee 
for transporting the coal under that contract, subject to monitoring, 
review, audit, and possible future adjustment. ONRR's prior approval is 
not required before a lessee may deduct costs incurred under an arm's-
length contract. However, before any deduction may be taken, the lessee 
must submit a completed page one of Form ONRR-4293, Coal Transportation 
Allowance Report, in accordance with paragraph (c)(1) of this section. 
A transportation allowance may be claimed retroactively for a period of 
not more than 3 months prior to the first day of the month that Form 
ONRR-4293 is filed with ONRR, unless ONRR approves a longer period upon 
a showing of good cause by the lessee.
    (2) In conducting reviews and audits, ONRR will examine whether the 
contract reflects more than the consideration actually transferred 
either directly or indirectly from the lessee to the transporter for 
the transportation. If the contract reflects more than the total 
consideration paid, then ONRR may require that the transportation 
allowance be determined in accordance with paragraph (b) of this 
section.
    (3) If ONRR determines that the consideration paid pursuant to an 
arm's-length transportation contract does not reflect the reasonable 
value of the transportation because of misconduct by or between the 
contracting parties, or because the lessee otherwise has breached its 
duty to the lessor to market the production for the mutual benefit of 
the lessee and the lessor, then ONRR shall require that the 
transportation allowance be determined in accordance with paragraph (b) 
of this section. When ONRR determines that the value of the 
transportation may be unreasonable, ONRR will notify the lessee and 
give the lessee an opportunity to provide written information 
justifying the lessee's transportation costs.
    (4) Where the lessee's payments for transportation under an arm's-
length contract are not based on a dollar-per-unit basis, the lessee 
shall convert whatever consideration is paid to a dollar value 
equivalent for the purposes of this section.
    (b) Non-arm's-length or no contract. (1) If a lessee has a non-
arm's-length contract or has no contract, including those situations 
where the lessee performs transportation services for itself, the 
transportation allowance will be based upon the lessee's reasonable 
actual costs. All transportation allowances deducted under a non-arm's-
length or no contract situation are subject to monitoring, review, 
audit, and possible future adjustment. Prior ONRR approval of 
transportation allowances is not required for non-arm's-length or no 
contract situations. However, before any estimated or actual deduction 
may be taken, the lessee must submit a completed Form ONRR-4293 in 
accordance with paragraph (c)(2) of this section. A transportation 
allowance may be claimed retroactively for a period of not more than 3 
months prior to the first day of the month that Form ONRR-4293 is filed 
with ONRR, unless ONRR approves a longer period upon a showing of good 
cause by the lessee. ONRR will monitor the allowance deductions to 
ensure that deductions are reasonable and allowable. When necessary or 
appropriate, ONRR may direct a lessee to modify its estimated or actual 
transportation allowance deduction.
    (2) The transportation allowance for non-arm's-length or no 
contract situations shall be based upon the lessee's actual costs for 
transportation during the reporting period, including operating and 
maintenance expenses, overhead, and either depreciation and a return on 
undepreciated capital investment in accordance with paragraph 
(b)(2)(iv)(A) of this section, or a cost equal to the depreciable 
investment in the transportation system multiplied by the rate of 
return in accordance with paragraph (b)(2)(iv)(B) of this section. 
Allowable capital costs are generally those for depreciable fixed 
assets (including costs of delivery and installation of capital 
equipment) which are an integral part of the transportation system.
    (i) Allowable operating expenses include: Operations supervision 
and engineering; operations labor; fuel; utilities; materials; ad 
valorem property taxes; rent; supplies; and any other directly 
allocable and attributable operating expense which the lessee can 
document.
    (ii) Allowable maintenance expenses include: Maintenance of the 
transportation system; maintenance of equipment; maintenance labor; and 
other directly allocable and attributable maintenance expenses which 
the lessee can document.
    (iii) Overhead attributable and allocable to the operation and 
maintenance of the transportation system is an allowable expense. State 
and Federal income taxes and severance taxes and other fees, including 
royalties, are not allowable expenses.
    (iv) A lessee may use either paragraph (b)(2)(iv)(A) or (B) of this 
section. After a lessee has elected to use either method for a 
transportation system, the lessee may not later elect to change to the 
other alternative without approval of ONRR.
    (A) To compute depreciation, the lessee may elect to use either a 
straight-line depreciation method based on the life of equipment or on 
the life of the reserves which the transportation system services, 
whichever is appropriate, or a unit of production method. After an 
election is made, the lessee may not change methods without

[[Page 47019]]

ONRR approval. A change in ownership of a transportation system shall 
not alter the depreciation schedule established by the original 
transporter/lessee for purposes of the allowance calculation. With or 
without a change in ownership, a transportation system shall be 
depreciated only once. Equipment shall not be depreciated below a 
reasonable salvage value.
    (B) ONRR shall allow as a cost an amount equal to the allowable 
capital investment in the transportation system multiplied by the rate 
of return determined pursuant to paragraph (b)(2)(v) of this section. 
No allowance shall be provided for depreciation. This alternative shall 
apply only to transportation facilities first placed in service or 
acquired after March 1, 1989.
    (v) The rate of return shall be the industrial rate associated with 
Standard and Poor's BBB rating. The rate of return shall be the monthly 
average as published in Standard and Poor's Bond Guide for the first 
month of the reporting period of which the allowance is applicable and 
shall be effective during the reporting period. The rate shall be 
redetermined at the beginning of each subsequent transportation 
allowance reporting period (which is determined pursuant to paragraph 
(c)(2) of this section).
    (3) A lessee may apply to ONRR for exception from the requirement 
that it compute actual costs in accordance with paragraphs (b)(1) and 
(2) of this section. ONRR will grant the exception only if the lessee 
has a rate for the transportation approved by a Federal agency for 
Indian leases. ONRR shall deny the exception request if it determines 
that the rate is excessive as compared to arm's-length transportation 
charges by systems, owned by the lessee or others, providing similar 
transportation services in that area. If there are no arm's-length 
transportation charges, ONRR shall deny the exception request if:
    (i) No Federal regulatory agency cost analysis exists and the 
Federal regulatory agency has declined to investigate pursuant to ONRR 
timely objections upon filing; and
    (ii) The rate significantly exceeds the lessee's actual costs for 
transportation as determined under this section.
    (c) Reporting requirements--(1) Arm's-length contracts. (i) With 
the exception of those transportation allowances specified in 
paragraphs (c)(1)(v) and (vi) of this section, the lessee shall submit 
page one of the initial Form ONRR-4293 prior to, or at the same time 
as, the transportation allowance determined pursuant to an arm's-length 
contract is reported on Form ONRR-4430, Solid Minerals Production and 
Royalty Report.
    (ii) The initial Form ONRR-4293 shall be effective for a reporting 
period beginning the month that the lessee is first authorized to 
deduct a transportation allowance and shall continue until the end of 
the calendar year, or until the applicable contract or rate terminates 
or is modified or amended, whichever is earlier.
    (iii) After the initial reporting period and for succeeding 
reporting periods, lessees must submit page one of Form ONRR-4293 
within 3 months after the end of the calendar year, or after the 
applicable contract or rate terminates or is modified or amended, 
whichever is earlier, unless ONRR approves a longer period (during 
which period the lessee shall continue to use the allowance from the 
previous reporting period). Lessees may request special reporting 
procedures in unique allowance reporting situations, such as those 
related to spot sales.
    (iv) ONRR may require that a lessee submit arm's-length 
transportation contracts, production agreements, operating agreements, 
and related documents. Documents shall be submitted within a reasonable 
time, as determined by ONRR.
    (v) Transportation allowances that are based on arm's-length 
contracts and which are in effect at the time these regulations become 
effective will be allowed to continue until such allowances terminate. 
For the purposes of this section, only those allowances that have been 
approved by ONRR in writing shall qualify as being in effect at the 
time these regulations become effective.
    (vi) ONRR may establish, in appropriate circumstances, reporting 
requirements that are different from the requirements of this section.
    (2) Non-arm's-length or no contract. (i) With the exception of 
those transportation allowances specified in paragraphs (c)(2)(v) and 
(vii) of this section, the lessee shall submit an initial Form ONRR-
4293 prior to, or at the same time as, the transportation allowance 
determined pursuant to a non-arm's-length contract or no contract 
situation is reported on Form ONRR-4430, Solid Minerals Production and 
Royalty Report. The initial report may be based on estimated costs.
    (ii) The initial Form ONRR-4293 shall be effective for a reporting 
period beginning the month that the lessee first is authorized to 
deduct a transportation allowance and shall continue until the end of 
the calendar year, or until the transportation under the non-arm's-
length contract or the no contract situation terminates, whichever is 
earlier.
    (iii) For calendar-year reporting periods succeeding the initial 
reporting period, the lessee shall submit a completed Form ONRR-4293 
containing the actual costs for the previous reporting period. If the 
transportation is continuing, the lessee shall include on Form ONRR-
4293 its estimated costs for the next calendar year. The estimated 
transportation allowance shall be based on the actual costs for the 
previous reporting period plus or minus any adjustments that are based 
on the lessee's knowledge of decreases or increases that will affect 
the allowance. Form ONRR-4293 must be received by ONRR within 3 months 
after the end of the previous reporting period, unless ONRR approves a 
longer period (during which period the lessee shall continue to use the 
allowance from the previous reporting period).
    (iv) For new transportation facilities or arrangements, the 
lessee's initial Form ONRR-4293 shall include estimates of the 
allowable transportation costs for the applicable period. Cost 
estimates shall be based upon the most recently available operations 
data for the transportation system, or, if such data are not available, 
the lessee shall use estimates based upon industry data for similar 
transportation systems.
    (v) Non-arm's-length contract or no contract-based transportation 
allowances that are in effect at the time these regulations become 
effective will be allowed to continue until such allowances terminate. 
For purposes of this section, only those allowances that have been 
approved by ONRR in writing shall qualify as being in effect at the 
time these regulations become effective.
    (vi) Upon request by ONRR, the lessee shall submit all data used to 
prepare its Form ONRR-4293. The data shall be provided within a 
reasonable period of time, as determined by ONRR.
    (vii) ONRR may establish, in appropriate circumstances, reporting 
requirements that are different from the requirements of this section.
    (viii) If the lessee is authorized to use its Federal-agency-
approved rate as its transportation cost in accordance with paragraph 
(b)(3) of this section, it shall follow the reporting requirements of 
paragraph (c)(1) of this section.
    (3) ONRR may establish reporting dates for individual lessees 
different than those specified in this paragraph in order to provide 
more effective administration. Lessees will be notified as to any 
change in their reporting period.
    (4) Transportation allowances must be reported as a separate line 
item on Form

[[Page 47020]]

ONRR-4430, unless ONRR approves a different reporting procedure.
    (d) Interest assessments for incorrect or late reports and failure 
to report. (1) If a lessee deducts a transportation allowance on its 
Form ONRR-4430 without complying with the requirements of this section, 
the lessee shall be liable for interest on the amount of such deduction 
until the requirements of this section are complied with. The lessee 
also shall repay the amount of any allowance which is disallowed by 
this section.
    (2) If a lessee erroneously reports a transportation allowance 
which results in an underpayment of royalties, interest shall be paid 
on the amount of that underpayment.
    (3) Interest required to be paid by this section shall be 
determined in accordance with Sec.  1218.202 of this subchapter.
    (e) Adjustments. (1) If the actual transportation allowance is less 
than the amount the lessee has taken on Form ONRR-4430 for each month 
during the allowance form reporting period, the lessee shall be 
required to pay additional royalties due plus interest, computed 
pursuant to Sec.  1218.202 of this subchapter, retroactive to the first 
month the lessee is authorized to deduct a transportation allowance. If 
the actual transportation allowance is greater than the amount the 
lessee has estimated and taken during the reporting period, the lessee 
shall be entitled to a credit, without interest.
    (2) The lessee must submit a corrected Form ONRR-4430 to reflect 
actual costs, together with any payment, in accordance with 
instructions provided by ONRR.
    (f) Other transportation cost determinations. The provisions of 
this section shall apply to determine transportation costs when 
establishing value using a net-back valuation procedure or any other 
procedure that requires deduction of transportation costs.


Sec.  1206.462  [Reserved]


Sec.  1206.463  In-situ and surface gasification and liquefaction 
operations.

    If an ad valorem Federal coal lease is developed by in-situ or 
surface gasification or liquefaction technology, the lessee shall 
propose the value of coal for royalty purposes to ONRR. ONRR will 
review the lessee's proposal and issue a value determination. The 
lessee may use its proposed value until ONRR issues a value 
determination.


Sec.  1206.464  Value enhancement of marketable coal.

    If, prior to use, sale, or other disposition, the lessee enhances 
the value of coal after the coal has been placed in marketable 
condition in accordance with Sec.  1206.456(h), the lessee shall notify 
ONRR that such processing is occurring or will occur. The value of that 
production shall be determined as follows:
    (a) A value established for the feedstock coal in marketable 
condition by application of the provisions of Sec.  1206.456(c)(2)(i) 
through (iv); or,
    (b) In the event that a value cannot be established in accordance 
with paragraph (a) of this section, then the value of production will 
be determined in accordance with Sec.  1206.456(c)(2)(v) and the value 
shall be the lessee's gross proceeds accruing from the disposition of 
the enhanced product, reduced by ONRR-approved processing costs and 
procedures including a rate of return on investment equal to two times 
the Standard and Poor's BBB bond rate applicable under Sec.  
1206.458(b)(2)(v).

[FR Doc. 2023-15310 Filed 7-20-23; 8:45 am]
BILLING CODE 4335-30-P