Mineral Resources: Federal Coal-Leasing Program Needs Strengthening
(Chapter Report, 09/16/94, GAO/RCED-94-10).

In 1976, only 59 of the 533 existing federal coal leases were producing
coal. In response, Congress passed legislation to discourage the
speculative holding of federal coal leases and to encourage the
development of leased coal. Yet GAO found that the Bureau of Land
Management (BLM) has taken actions that do not further these goals. For
example, BLM has issued 36 federal oil, gas, and coal leases to an
unqualified lessee. This report assesses Interior's actions to (1)
encourage the development of federal coal leases, (2) address the
cumulative environmental impacts of additional coal leasing, and (3)
consider projected demand in coal-leasing decisions.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-94-10
     TITLE:  Mineral Resources: Federal Coal-Leasing Program Needs 
             Strengthening
      DATE:  09/16/94
   SUBJECT:  Coal leases
             Mineral bearing lands
             Land management
             Energy law
             Fair market value
             Leasing policies
             Environmental monitoring
             Mineral resources
             Environmental impact statements
             Land use agreements
IDENTIFIER:  Federal Coal Management Program
             Powder River Basin
             Uinta Coal Region (UT)
             Wasatch-Cache National Forest (UT)
             Book Cliffs (UT)
             Rocky Butte Tract (WY)
             West Black Thunder Tract (WY)
             Warrior Basin (AL)
             Wyoming
             Montana
             Utah
             Colorado
             
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Cover
================================================================ COVER


Report to Congressional Requesters

September 1994

MINERAL RESOURCES - FEDERAL
COAL-LEASING PROGRAM NEEDS
STRENGTHENING

GAO/RCED-94-10

Federal Coal-Leasing


Abbreviations
=============================================================== ABBREV

  BLM - Bureau of Land Management
  DOE - Department of Energy
  EA - Environmental Assessment
  EIS - Environmental Impact Statement
  FCLAA - Federal Coal Leasing Amendments Act of 1976
  GAO - General Accounting Office
  LBA - lease-by-application
  LMU - logical mining unit
  MLA - Mineral Leasing Act of 1920
  NEPA - National Environmental Policy Act
  NWR - Northwestern Resources Company

Letter
=============================================================== LETTER


B-252412

September 16, 1994

The Honorable Richard Lehman
Chairman, Subcommittee on Energy
 and Mineral Resources
Committee on Natural Resources
House of Representatives

The Honorable Nick J.  Rahall, II
House of Representatives

This report responds to the Subcommittee's request that we address a
number of issues related to the Federal Coal Management Program. 
This report discusses the measures taken by the Department of the
Interior's Bureau of Land Management to (1) encourage the development
of federal coal leases, (2) address the cumulative environmental
impacts of additional coal leasing, and (3) consider projected demand
in coal-leasing decisions. 

As agreed, unless you publicly announce its contents earlier, we plan
no further distribution of this report until 10 days from the date of
this letter.  At that time, we will send copies to the Secretary of
the Interior; the Acting Director, Bureau of Land Management; the
Secretary of Agriculture; the Chief, Forest Service; and the
Director, Office of Management and Budget.  We will make copies
available to others on request. 

This work was performed under the direction of James Duffus III,
Director, Natural Resources Management Issues, who may be reached on
(202) 512-7756 if you or your staff have any questions.  Major
contributors to this report are listed in appendix XII. 

Sincerely yours,

Keith O.  Fultz
Assistant Comptroller General


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

In 1976, only 59 of the 533 existing federal coal leases were
producing coal.  To discourage the speculative holding of federal
coal leases and encourage the development of leased coal, the
Congress enacted the Federal Coal Leasing Amendments Act of 1976
(FCLAA).  Concerned about whether the Department of the Interior's
Bureau of Land Management (BLM) was properly implementing FCLAA, the
Chairman, Subcommittee on Mining and Natural Resources, House
Committee on Interior and Insular Affairs (now the Subcommittee on
Energy and Mineral Resources, House Committee on Natural Resources),
asked GAO to assess Interior's actions to (1) encourage the
development of federal coal leases, (2) address the cumulative
environmental impacts of additional coal leasing, and (3) consider
projected demand in coal-leasing decisions. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Because many federal coal leases were being held and not developed
while leases with more stringent terms on private and state lands
were being developed, the Congress amended the Mineral Leasing Act of
1920 (MLA) by passing FCLAA.  To discourage the speculative holding
of federal coal leases and encourage the development of leased coal,
FCLAA requires lessees of coal tracts leased after the act's passage
to produce commercial quantities of coal within 10 years (referred to
as diligent development); otherwise, the lease will be terminated. 
Holders of leases in effect when FCLAA was passed in 1976 who have
held such leases for more than 10 years since then must be producing
coal in commercial quantities; otherwise, the holder is disqualified
from obtaining new oil, gas, coal, and other mineral leases covered
by the MLA.  FCLAA also authorized the combining of contiguous
federal leases and nonfederal lands into a logical mining unit (LMU)
to promote the efficient, economical, and orderly development of coal
resources if the Secretary of the Interior determines that an LMU
will result in the maximum economic recovery of coal.  FCLAA
authorizes the Secretary to consider diligent development and
continued operation and production on any lease within the LMU to be
occurring on all leases in the LMU. 

Interior established a new federal coal-leasing program in 1979 and
designated geographic areas with significant amounts of federal coal
as federal coal regions.  Within these regions, Interior conducted
lease sales through a process in which it established regional
coal-leasing levels after considering many factors, including the
projected demand for coal, and prepared regionwide environmental
impact statements (EIS).  Outside these regions, Interior leased coal
tracts by a process known as lease-by-application, in which
applicants requested specific tracts and Interior prepared
environmental documents for each tract.  Both leasing approaches
required competitive sales procedures. 

In March 1984, the Secretary suspended regional lease sales, pending
the development of revised coal-leasing procedures.  From March 1984
to February 1987, federal coal leases within the federal coal regions
could be sold only to continue existing operations or to avoid
leaving coal in the ground that could not be subsequently mined. 
Between 1987 and 1990, all of the federal coal regions "decertified,"
or disbanded, because of decreased interest in coal leasing.  As
regions disbanded, BLM changed its sales procedures from regional
sales to lease-by-application.  From February 1987 through December
1992, BLM received 40 applications for 1.9 billion tons of coal--less
than 1 percent of total reserves in these areas. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

BLM has taken actions that do not further FCLAA's goals of
discouraging speculation and encouraging the development of federal
coal leases.  GAO found that BLM has issued 36 federal oil, gas, and
coal leases to an unqualified lessee, contrary to FCLAA's lessee
qualification provisions, while disqualifying other companies with
nonproducing federal coal leases.  In some cases, other companies
have taken actions such as surrendering nonproducing coal leases to
remain qualified to obtain additional federal mineral leases. 

BLM has also allowed the act's LMU provision to be used when the
lessee's primary purpose for using the provision was to extend the
life of a federal coal lease that was within months of being
terminated for lack of production.  GAO is concerned that BLM's
action may encourage other coal lessees to form LMUs for the primary
purpose of extending the diligent development periods of their
nonproducing federal coal leases. 

National Environmental Policy Act (NEPA) regulations require that
cumulative impacts be adequately assessed, and federal regulations
and agency policies require that these impacts be documented in
environmental assessments (EA) and EISs.  BLM's Wyoming and Eastern
States offices addressed cumulative environmental impacts on most
resources affected by coal mining in environmental analyses they
prepared.  In Utah, analyses prepared by BLM and the Forest Service
addressed cumulative impacts on only about 22 percent of the
potentially affected resources. 

BLM can meet FCLAA's objectives without using projected demand to set
leasing levels.  BLM has used projected demand to set leasing levels
for its regional sales in order to meet various objectives of the
coal-leasing program.  While setting leasing levels in this way could
help meet some of FCLAA's objectives, the act has specific
requirements that more directly ensure that its objectives are met. 
For example, the act requires BLM to obtain fair market value when
leasing federal coal, and FCLAA's diligent development requirement is
intended to ensure that federal coal leases are developed and not
held for speculation. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      CERTAIN ACTIONS BY BLM DO
      NOT DISCOURAGE SPECULATION
      OR ENCOURAGE FEDERAL COAL
      DEVELOPMENT
-------------------------------------------------------- Chapter 0:4.1

GAO found that BLM issued federal mineral leases to a lessee who does
not meet FCLAA's qualification requirements.  FCLAA requires that in
order to remain qualified to obtain additional oil, gas, coal, and
other mineral leases covered by MLA, holders of leases issued before
FCLAA was passed who have held such leases for more than 10 years
must be producing commercial quantities of coal from them.  BLM
determined that although a company held two pre-FCLAA coal leases in
an LMU from which no coal had been produced since February 1988, the
company was qualified to obtain additional federal mineral leases. 
From March 1988 through November 1992, BLM issued 36 additional
federal mineral leases to this company, while BLM disqualified other
companies with nonproducing federal coal leases.  In addition, other
companies have taken actions such as surrendering nonproducing coal
leases to remain qualified to obtain additional federal mineral
leases. 

BLM has also allowed the act's LMU provision to be used when the
lessee's primary purpose for using the provision was to extend the
life of a federal coal lease that was within months of being
terminated for lack of production.  In Wyoming, a nonproducing
federal coal lease estimated to contain about 545 million tons of
recoverable coal was due to terminate in February 1993 because
commercial quantities of coal had not been produced from the lease. 
However, the lessee applied for an adjoining federal coal lease
containing an estimated 55 million tons of recoverable coal with the
stated intent of forming an LMU.  By leasing the smaller tract and
combining it with the much larger tract into an LMU, the lessee has
extended the diligent development period of the larger tract for 10
years without compensation to the government.  BLM's actions were
taken without criteria defining when the formation of an LMU would
further FCLAA's goals of discouraging the speculative holding of
federal coal leases and encouraging the development of coal
production from federal leases. 

In July 1994, Interior advised GAO that the Department was in the
process of drafting regulations that would help prevent lessees from
using an LMU primarily to extend the life of a nonproducing lease. 
GAO believes that it is important for Interior to develop these
criteria because other nonproducing federal leases are approaching
the end of their diligent development periods.  GAO found that 89
federal coal leases were considered active but not producing and were
due to expire within the next 5 years.  Without such criteria, GAO is
concerned that other coal lessees will seek to form LMUs for the
primary purpose of extending the diligent development periods of
their nonproducing federal coal leases.  This would postpone, without
compensation to the government, the time when commercial production
levels must be achieved and royalty payments begin. 


      NOT ALL CUMULATIVE IMPACTS
      ADDRESSED IN UTAH'S
      ENVIRONMENTAL ANALYSES
-------------------------------------------------------- Chapter 0:4.2

NEPA regulations require agencies to evaluate cumulative impacts when
preparing site-specific EAs or EISs.  Since the decertification of
the coal regions, surface-managing agencies have addressed cumulative
environmental impacts on tract (site)-specific EAs and EISs rather
than on regionwide EISs.  Specifically, NEPA regulations and BLM and
the Forest Service's policies require the agencies to evaluate
cumulative impacts on specific resources such as air, surface water,
and groundwater and to document the results of these analyses in EAs
and EISs. 

Eleven environmental documents prepared for lease sales in Alabama,
Kentucky, Utah, and Wyoming show a wide range in content and format
for addressing cumulative impacts.  For purposes of this review, GAO
considered cumulative impacts to be addressed if EAs or EISs
demonstrated no significant cumulative impact to the individual
resource or referenced an analysis in a prior study.  Documents
prepared by BLM in Alabama, Kentucky, and Wyoming addressed
cumulative impacts on most resources, whereas documents prepared by
BLM and the Forest Service in Utah addressed cumulative impacts on
only about 22 percent of the resources potentially affected by coal
mining.  BLM and Forest Service officials in Utah said that some
cumulative impacts were addressed in previously prepared EISs or that
effects on other resources were not raised as issues during their
scoping process.  However, BLM and the Forest Service did not clearly
make reference to previous cumulative impact analyses done for other
EISs, nor did they document why certain resources were not addressed. 


      THE USE OF PROJECTED DEMAND
      IS NOT NECESSARY TO MEET
      FCLAA'S OBJECTIVES
-------------------------------------------------------- Chapter 0:4.3

Although FCLAA does not require that BLM's leasing decisions be tied
to projected demand, BLM used projected demand in the regional coal
sale process in deciding on the amount of coal to be offered for
lease.  Interior does not have to use projected demand to obtain fair
market value or ensure that the amount of coal leased is developed in
a reasonable time because FCLAA contains specific provisions that, if
enforced, will ensure that these and other objectives are met. 

Proponents of using projected demand argue that tying leasing
decisions to demand results in higher values for each tract. 
However, the government is not required to maximize revenues but is
only required to obtain fair market value.  Furthermore, GAO does not
believe Interior could count on receiving a higher value for leases
if it adjusted leasing levels to meet projected demand. 

To obtain fair market value, BLM independently assesses the market
value of each coal tract and uses the assessed value as the minimum
bid it will accept.  BLM also has specific regulations intended to
ensure that leases are developed.  If these provisions are enforced,
FCLAA's objectives could be met without attempting to match leasing
levels to projected demand. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO recommends that the Secretary of the Interior cease issuing any
additional MLA leases to unqualified companies and amend existing
regulations to ensure that lessees holding pre-FCLAA leases will not
be issued new mineral leases under the MLA unless they have met the
coal production requirements that FCLAA added to the MLA. 

With respect to the MLA leases already improperly issued to the
company that GAO found to be unqualified or to other companies that
were not qualified, GAO recommends that the Secretary review these
leases for action in accordance with all applicable statutory and
regulatory provisions. 

In addition, GAO recommends that Interior continue its efforts to
revise its regulations to provide criteria that BLM can use to
determine whether the formation of an LMU is consistent with FCLAA's
goals of discouraging speculation and encouraging the development of
federal coal leases.  GAO also recommends that for each LMU approved,
BLM document how the approved LMU meets these regulatory criteria. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

Interior, the Department of Agriculture, and the company GAO found to
be unqualified provided GAO with written comments on a draft of this
report. 

Interior and the company disagree with GAO's position that the
company was unqualified to be issued federal mineral leases.  In
summary, the Solicitor's opinion, as well as the company's opinion,
is that the Secretary has the authority to issue regulations that
substitute an LMU's diligent development requirement for commercial
production requirements that holders of pre-FCLAA leases must meet to
remain eligible to obtain additional federal mineral leases.  GAO
believes that the MLA does not provide authority for exempting pre-
FCLAA leases from the requirement to produce coal from those leases
in order for the company to continue to be eligible.  The Solicitor
indicated that BLM's interpretation of the regulation substituting an
LMU's diligent development requirement for commercial production
requirements was the policy of past administrations and appeared to
be inconsistent with FCLAA's goal of reducing coal speculation.  He
noted the regulation could be amended and pointed out that Interior's
proposed rulemaking may address this issue. 

In commenting on GAO's recommendation that criteria be established
for approving LMUs, Interior stated that in December 1993 it
published an advance notice of proposed rulemaking requesting public
comments on all aspects of LMUs, including the need for criteria.  In
July 1994, Interior told GAO that it is considering a draft of
proposed regulations that would provide criteria for BLM to use in
determining whether an LMU will foster the maximum economic recovery
and the economical, efficient, and orderly development of coal
resources.  Interior believes that these criteria will help prevent
lessees from using an LMU principally to extend the life of
nonproducing leases. 

Both Interior and Agriculture accepted GAO's proposal to reemphasize
to field personnel the importance of complying with requirements for
identifying cumulative environmental impacts from coal leasing and
development.  As a result, GAO is no longer making a recommendation. 

The comments of Interior, Interior's Office of the Solicitor, the
company GAO found to be unqualified to receive additional mineral
leases under the MLA, and Agriculture have been incorporated in the
report where appropriate and are presented and evaluated in detail in
appendixes VII, VIII, IX, X, and XI. 


INTRODUCTION
============================================================ Chapter 1

The federal government owns and administers about one-third of the
country's coal resources.  These resources are located on about 76
million acres, primarily in the western United States.  The
Department of the Interior's Bureau of Land Management (BLM) is
responsible for leasing coal on these federal lands, even when other
agencies such as the Department of Agriculture's Forest Service have
primary jurisdiction over the lands.  BLM conducts its leasing
activities primarily through six of its state offices that are
located in areas containing almost two-thirds of the federal coal
resources. 

Almost 960 million tons of coal was produced in the United States in
1993.  And about 260 million tons, or about 27 percent, came from
federal lands--up from about 8 percent in 1979.  Federal royalties of
$264 million were collected from this production.  About 97 percent
of this coal came from the following four western states:  Colorado,
Montana, Utah, and Wyoming.  (See table 1.1.)



                          Table 1.1
           
             Federal Coal Production for Calendar
                          Year 1993

                            Federal coal
                       production (short    Percent of total
State                            tons\a)  federal production
--------------------  ------------------  ------------------
Wyoming                      193,742,000                  74
Montana                       25,013,000                  10
Utah                          19,248,000                   7
Colorado                      13,905,000                   5
All others                     8,244,000                   3
------------------------------------------------------------
\a A short ton equals 2,000 pounds. 

Source:  U.S.  Department of the Interior, Minerals Management
Service. 

Federal coal has become an increasing share of total U.S.  production
since 1979.  Much of the increase has come from large surface mines
in the Powder River Basin of Wyoming and Montana.  In fiscal year
1991, federal lands in this area produced about 200 million short
tons of coal--about 20 percent of the nation's total.  The Department
of the Interior noted in 1990 that the Clean Air Act Amendments of
1990 could stimulate significantly greater demand for low-sulfur coal
from western federal lands. 


   PROCEDURES FOR LEASING FEDERAL
   COAL UNDER THE MINERAL LEASING
   ACT OF 1920
---------------------------------------------------------- Chapter 1:1

The Mineral Leasing Act of 1920 (MLA) gave Interior responsibility
for leasing coal on federal lands.  In areas with known coal
reserves, parties interested in leasing a particular federal coal
tract filed their applications with the BLM state office.  BLM
generally held a competitive lease sale for a single tract and
awarded the lease to the highest bidder.  In areas where commercial
coal deposits were not known to exist, an applicant could apply for a
prospecting permit.  If the permittee subsequently discovered a
commercial coal deposit, he or she could file a noncompetitive,
"preference right," lease application with BLM and could be issued a
lease. 

Until 1960, little demand existed for federal coal, and little
leasing occurred.  In the 1960s, leasing greatly increased, but by
1970, coal was being produced from only about 10 percent of the
acreage under lease.  Leases could be held virtually forever and at
minimal cost.  In 1971, Interior imposed a moratorium on coal leasing
in response to public concern that federal leases were being acquired
mainly for speculation rather than development.  In 1973, Interior
instituted a complete moratorium on the issuance of new prospecting
permits and a near-total moratorium on the issuance of new federal
coal leases.  New leases could be issued only to avoid situations
where small tracts of coal would be bypassed if not leased, to
maintain existing mines, or supply reserves for production in the
near future. 


   LEASING PROCEDURES UNDER THE
   FEDERAL COAL LEASING AMENDMENTS
   ACT OF 1976
---------------------------------------------------------- Chapter 1:2

In 1976, the Congress amended the MLA by passing the Federal Coal
Leasing Amendments Act (FCLAA).  FCLAA was passed to discourage the
speculative holding of and encourage the development of federal coal
leases and to help create a more efficient and environmentally sound
leasing process.  A key factor leading to passage of FCLAA was the
Congress' concern that nonproducing leases were being held for
speculative purposes.  The House Report on FCLAA\1 noted that as of
1976, only 59 of 533 active federal coal leases were actually
producing coal.  The report also observed that under then- existing
requirements, any coal lease issued by the Secretary of the Interior
was effective virtually forever, and the report criticized the near
impossibility of terminating nonproducing leases.  Thus, according to
the report, the Congress sought to spur coal production on federal
leases by ending the practice of speculating on coal prices by
allowing leases to remain idle for years. 

FCLAA established production requirements for leases and penalties
for lessees when those requirements are not met.  FCLAA also
eliminated preference right leasing and required Interior to complete
comprehensive land use plans and consider environmental impacts
before coal leasing could occur.  In addition, FCLAA established a
minimum royalty rate, established exploration licenses, and required
a Department of Justice review before leases are issued to ensure
compliance with antitrust laws. 


--------------------
\1 H.R.  Rep.  No.  681, 94th Cong., 1st Sess.  at 9-11 (1975). 


      REQUIREMENTS FOR PRODUCING
      AND PENALTIES FOR NOT
      PRODUCING
-------------------------------------------------------- Chapter 1:2.1

The MLA, as amended by FCLAA, contains two penalties for lessees who
do not develop their federal coal leases.  These penalties are
designed to encourage development of federal coal leases and
discourage speculative holding of leases.  Depending on conditions
within the coal market, some lessees could be forced to produce from
their leases under uneconomic conditions, give up their leases to
remain qualified, or allow their leases to terminate. 

First, the diligent development provisions under section 7 of the MLA
require that lessees produce coal in commercial quantities\2 within
10 years of the lease's issuance or, for leases existing when FCLAA
was passed, within 10 years after the lease becomes subject to
section 7.\3 If a lease does not achieve commercial production within
this time period, the lease terminates.  According to Interior's
regulations, diligent development is achieved once an operator has
cumulatively produced, within the 10-year period, 1 percent of the
recoverable reserves. 

Second, section 2(a)(2)(A) of the MLA penalizes holders of
nonproducing leases issued prior to FCLAA's passage.  Specifically,
section 2(a)(2)(A) disqualifies any lessee who holds and has held a
coal lease for more than 10 years (not counting any years prior to
FCLAA's passage) from receiving new mineral leases under the MLA
(oil, gas, coal, and other mineral leases), unless the lease is
producing coal in commercial quantities.\4

For leases subject to section 7 of the MLA, as amended by FCLAA, once
diligent development has been achieved, the lessee must continue to
produce 1 percent of the recoverable coal reserves annually, unless
BLM grants a suspension.  In some instances, this can result in the
lessee's paying an advance royalty.\5 The effect of these provisions
is to ensure that commercial production begins within a reasonable
time after leasing and that coal continues to be produced at a
reasonable rate. 


--------------------
\2 For the purpose of FCLAA's diligent development requirement,
Interior's regulations define commercial quantities as annual
production of 1 percent of the recoverable coal reserves. 
(Interior's prior definition, for leases issued before Aug.  4, 1976,
was 2.5 percent.)

\3 A lease issued before FCLAA's passage becomes subject to the
diligent development provisions of FCLAA when the lease's terms and
conditions are readjusted. 

\4 Section 2(a)(2)(A) will rarely apply to nonproducing leases issued
after FCLAA's enactment in 1976 because under section 7 such leases
terminate after 10 years. 

\5 An advance royalty is a royalty paid on coal not yet produced. 
When coal is produced, the advance royalty is subtracted from the
royalties due from actual production. 


      LOGICAL MINING UNITS
-------------------------------------------------------- Chapter 1:2.2

FCLAA also authorized the formation of logical mining units (LMUs) to
foster the maximum economic recovery and the efficient, economical,
and orderly development of coal resources.  An LMU may consist of two
or more contiguous tracts of land, at least one of which must be a
federally leased tract.  Within an LMU, diligent development,
continued operation, and production occurring on one lease are
construed as occurring on all of the LMU's federal leases.\6 Thus,
the diligence requirement could be met through a mining operation
that began anywhere on the LMU and proceeded according to a logical
mine plan. 

The LMU provision was enacted in recognition that in some instances,
requiring adjoining federal leases to meet separate diligence
requirements would not result in the efficient, economical, and
orderly development of coal resources.  However, because the LMU
assumes the date of the newest federal lease for meeting lease
diligence requirements,\7 the date by which production is required on
the older federal lease(s) is extended and the time for beginning
royalty payments to the government is delayed.  The extension of the
diligence requirement is provided to the applicant without
compensation to the government. 


--------------------
\6 The Solicitor's office at Interior has concluded that FCLAA
"allows production in commercial quantities (as defined for section
2(a)(2)(A) purposes) anywhere within a logical mining unit to be
construed as occurring on all federal leases in the unit for purposes
of section 2(a)(2)(A)."

\7 This means that the diligence period for most LMUs will be less
than 10 years.  For LMUs containing a pre-FCLAA lease, not readjusted
since FCLAA's passage and before the LMU's effective date, the
diligent development period begins on the LMU's effective date. 


      REGIONAL COAL SALES
-------------------------------------------------------- Chapter 1:2.3

In 1979, Interior issued regulations implementing a new federal
coal-leasing program pursuant to FCLAA and lifted the moratorium on
federal coal leasing.  These regulations originally identified eight
geographic areas as containing significant amounts of federal coal
and designated them as federal coal regions or subregions.  Because
industry had expressed little leasing interest in two areas, BLM
promptly reduced the number of designated coal regions to six.  In
the designated coal regions, BLM formed regional coal teams,
consisting of BLM and state government representatives, to guide
leasing decisions.  The federal coal regions were certified, or
authorized, to lease groups of federal coal tracts within the regions
at formal regional sales. 

After completing a comprehensive land use plan for a federal coal
region, BLM was required to solicit industry's expressions of
interest in leasing specific tracts and review these tracts for
compatibility with the comprehensive land use plan.  On the basis of
environmental, social, and economic impacts; advice from governors of
affected states; interest from industry; projections of future demand
for federal coal; anticipated coal production; and consideration of
national energy needs, the regional coal team recommended to the
Secretary the amount of coal that should be leased in the federal
coal region.  After the Secretary established a regional leasing
level,\8 the regional coal team was to rank and select a group of
tracts that approximated this level.  This selection was to be based
on the economics, environmental impacts, and socioeconomic impacts of
coal.  BLM was then to prepare a regionwide environmental impact
statement (EIS) on the recommended combination of tracts as well as
on other possible combinations.  After consulting with
surface-managing agencies, governors, and affected Indian tribes, the
Secretary could approve the tracts, and BLM could offer them through
a competitive sale. 


--------------------
\8 Between July 1979 and July 1982, the Secretary established
regional leasing targets.  Interior's July 1982 regulatory revisions
changed the targets to levels to reflect a change in leasing policy
from a specific amount to a range of amounts. 


      LEASE-BY-APPLICATION
-------------------------------------------------------- Chapter 1:2.4

Federal coal tracts outside of federal coal regions can be sold
through a simpler set of procedures known as lease-by-application
(LBA).  Tracts sold under this process must conform to a
comprehensive land use plan, but BLM does not have to recommend a
leasing level, nor does it solicit expressions of industry interest. 
Under the LBA procedures, an interested party can file an application
for a specific tract which, if approved, will be offered for
competitive bid.  BLM reviews the application and prepares an EIS or
environmental assessment (EA)\9 on the proposed tract.  After BLM
consults with the same parties that would be consulted for regional
leasing, the Secretary can approve the tract, and BLM can offer it
through a competitive lease sale. 


--------------------
\9 An EA is less detailed than an EIS.  If the EA results in a
finding of no significant impact, the coal tract can be offered for
sale.  Otherwise, an EIS must be prepared before the sale. 


      FAIR MARKET VALUE
-------------------------------------------------------- Chapter 1:2.5

The MLA, as amended, requires that the government be compensated for
its coal.  The compensation is provided in three forms.  In BLM's
competitive lease sales, applicants submit bids called bonus bids
that set out the amount they will pay to BLM to receive a lease.\10
The lease is awarded to the highest bidder provided that the
applicant's bid meets or exceeds the value BLM establishes as the
fair market value of the lease.\11 Lessees also pay rent on leases. 
And once production begins, lessees pay a royalty, calculated as a
percentage of the value of the coal produced. 

In 1983, as a result of controversies over leasing procedures, the
Congress established the Commission on Fair Market Value Policy for
Federal Coal Leasing (the Linowes Commission) to review coal-leasing
procedures to ensure receipt of fair market value, and the Congress
imposed a moratorium on most lease sales.  The moratorium was to last
until 90 days after the Linowes Commission submitted its report to
the Congress.  In March 1984, the Secretary of the Interior again
suspended regional lease sales, pending the development and
implementation of revised coal-leasing procedures.  From March 1984
to February 1987, federal coal within the federal coal regions could
be sold only to applicants under emergency criteria.\12


--------------------
\10 A bonus is a sum of money paid at the time of the lease sale to
the lessor, in this case the federal government, in addition to
royalty payments. 

\11 According to Interior's regulations, fair market value is the
amount for which the coal deposit would be sold by an owner who is
willing but not obligated to sell to a knowledgeable purchaser who
desires but is not obligated to buy. 

\12 An emergency sale could be held if an existing mining operation
needed the coal within 3 years, if an existing operation needed the
coal to fulfill contracts signed prior to July 19, 1979, or if the
coal would be bypassed in the reasonably foreseeable future. 
Reserves are limited to 8 years' worth of production. 


   LEASING SINCE DECERTIFICATION
   OF FEDERAL COAL REGIONS
---------------------------------------------------------- Chapter 1:3

From 1987 through 1990, regional coal teams recommended that Interior
decertify, or disband, all six federal coal regions.  The Powder
River, Uinta-Southwestern Utah, and Southern Appalachian regional
coal teams cited a declining interest in leasing coal and poor coal
market conditions as reasons for decertifying.  The
Uinta-Southwestern Utah regional coal team further concluded that
existing coal production capacity was sufficient to meet near-term
regional needs.  The Utah and Eastern States BLM offices also cited
substantial savings in administrative costs by changing from regional
leasing to LBA.  Although all regions have been decertified, several
regional coal teams still meet periodically to advise BLM on leasing
decisions. 

Since decertification, BLM regions have leased coal under the LBA
procedures.  From February 1987 through December 1992, BLM received
40 applications for 1.9 billion tons of recoverable coal in the
decertified federal coal regions and Kentucky--less than 1 percent of
the federal, state, and private in-place reserves in these areas. 
Thirty-three of these lease applications are for tracts adjacent to
existing mines.  The added reserves will allow these mines to
maintain production and extend the life of the mines.  Within 4
months of the Powder River Region's decertification, industry filed
four applications for about 800 million tons of recoverable coal to
maintain existing mines in that region.  Similarly, industry filed
three applications for slightly over 100 million tons of recoverable
reserves within the first year after decertification of the Uinta-
Southwestern Utah Region to maintain mines in the Wasatch Plateau. 
BLM officials attributed the initial surge of applications to
industry's pent-up demand for coal stemming from the fact that
Interior had not leased major coal reserves since the last regional
sale in 1984. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

Concerned about whether BLM was properly implementing FCLAA, the
Chairman, Subcommittee on Mining and Natural Resources, House
Committee on Interior and Insular Affairs (now the Subcommittee on
Energy and Mineral Resources, House Committee on Natural Resources),
asked us to review various aspects of the federal coal program. 
Specifically, we examined actions taken by (1) BLM to encourage the
development of federal coal leases, (2) BLM and the Forest Service to
address the cumulative environmental impacts of additional coal
leasing, and (3) BLM to consider projected demand in coal-leasing
decisions. 

We selected for review four geographic coal-leasing areas:  the
Wyoming portion of the Powder River Basin, the Wasatch Plateau and
Book Cliffs areas of central Utah, the Warrior Basin of Alabama, and
the Appalachian Basin of eastern Kentucky.  Descriptions of these
areas appear in appendix I.  At the time we developed our audit
methodology, these four geographic areas contained 23, or 68 percent,
of the 34 lease applications filed since decertification; 80 percent
of the acreage under application; and 93 percent of the coal reserves
under application.  The four areas selected are also diverse in terms
of their geology, topography, and environmental impacts.  Finally,
the areas contain lands administered by different surface-managing
agencies, such as BLM and the Forest Service. 

To determine if BLM was taking actions that would encourage the
development of federal coal leases, we concentrated on BLM's
rationale for approving the formation of LMUs.  To determine whether
BLM was allowing companies to use LMUs primarily to extend the life
of existing leases, we reviewed all 13 existing LMUs in the
geographic areas we selected.  We reviewed BLM's files to determine
if each LMU was currently producing coal, how the formation of the
LMU affected the termination of individual leases within each LMU,
and the justification cited in each LMU application for forming the
LMU.  We also reviewed BLM's nationwide data on outstanding leases to
determine the number of active, nonproducing leases with fewer than 5
years remaining to meet their diligence requirements.  These leases
constitute the universe of leases that potentially could be
candidates for LMUs formed to extend the life of leases that would
otherwise terminate. 

During discussions with BLM and Interior officials, we learned that a
potentially unqualified lessee had acquired mineral leases contrary
to the provisions of FCLAA.  To assess this situation, we interviewed
BLM officials in Washington, D.C., and in Casper and Cheyenne,
Wyoming.  We also sought the legal views of Interior's Office of the
Solicitor and examined relevant laws, legislative histories, and
agency regulations.  We did not review all existing federal leases to
determine if Interior awarded any mineral leases to lessees that were
not qualified to obtain additional mineral leases.  Such a review
would have required that we examine hundreds of lease files and make
determinations of the lessees' qualifications.  However, we did
review Interior's files and internal controls to determine whether
the Department was disqualifying lessees that did not met FCLAA's
lessee qualification provisions. 

To assess the extent to which environmental documents prepared under
the LBA process addressed cumulative environmental impacts and met
BLM's and the Forest Service's requirements that the agencies analyze
and document these impacts, we reviewed pertinent legislation and
regulations.  For example, we reviewed the National Environmental
Policy Act (NEPA), FCLAA, and the Surface Mining Control and
Reclamation Act of 1977.  We also reviewed BLM's and the Forest
Service's NEPA handbooks to identify the agencies' requirements for
documenting cumulative impacts.  We considered that the agency had
addressed cumulative impacts if the EA or EIS (1) contained a brief
discussion presenting evidence demonstrating no significant
cumulative impact on the individual resources or (2) referenced
directly to a section in a prior environmental document or study. 

We also interviewed personnel who prepare and review environmental
analyses in (1) BLM's District Offices in Price, Utah; Jackson,
Mississippi; and Casper, Wyoming; (2) the Manti-LaSal National Forest
Supervisor's Office; and (3) the Office of Surface Mining's offices
in Denver, Colorado, and Knoxville, Tennessee.  The leaders and
resource specialists on the teams who prepare environmental documents
in these areas informed us of the resources for which cumulative
environmental impacts must be analyzed.  We also contacted
environmental groups in Kentucky, Utah, and Wyoming to determine
their level of participation in environmental reviews. 

We then analyzed the environmental documents prepared under the LBA
process in the Wyoming portion of the Powder River Basin, the Book
Cliffs and Wasatch Plateau of central Utah, and the Warrior Basin of
Alabama, since their respective coal regions were decertified to
determine how cumulative impacts were documented.  We also examined
environmental assessments prepared in eastern Kentucky under the LBA
process since February 6, 1987.  For the areas examined, we also
reviewed pertinent documents such as cumulative hydrologic impact
assessments, BLM's tract delineation and geological reports, regional
EISs, and hydrologic reports prepared by the U.S.  Geological Survey. 

To determine how BLM uses market demand in leasing federal coal, we
interviewed BLM personnel and industry representatives to ascertain
how demand had been used and is presently being used in the federal
coal-leasing program.  In addition, we reviewed the legislative
history of FCLAA and reviewed the literature on the federal coal
program to identify any requirements for using demand. 

We performed our review from December 1991 through April 1994 in
accordance with generally accepted government auditing standards. 


BLM HAS TAKEN ACTIONS THAT DO NOT
FURTHER FCLAA'S GOALS OF
DISCOURAGING SPECULATION AND
ENCOURAGING DEVELOPMENT
============================================================ Chapter 2

BLM has taken actions that do not further FCLAA's goals of
discouraging speculation and encouraging the development of federal
coal leases.  In the first action, BLM issued federal oil, gas, and
coal leases to a lessee who is unqualified to receive them.  The
lessee holds two pre-FCLAA leases which have not met the coal
production requirements that FCLAA added to the MLA.  In the second
action, BLM allowed the act's LMU provision to be used for the
primary purpose of extending the life of a federal coal lease that
was within months of being terminated for lack of production.  The
lessee acquired a new, much smaller federal coal lease, formed an LMU
with the two leases, and thus obtained a 10-year extension of the
older lease's diligent development period.  This action could set a
precedent for allowing nonproducing federal coal leases to be formed
into LMUs to avoid being terminated. 


   UNQUALIFIED LESSEE ALLOWED TO
   ACQUIRE ADDITIONAL MINERAL
   LEASES
---------------------------------------------------------- Chapter 2:1

BLM has issued federal mineral leases to a lessee who does not meet
the coal production qualification requirements that FCLAA added as
section 2(a)(2)(A) to the MLA.  Under section 2(a)(2)(A), no lessee
who holds and has held a pre-FCLAA coal lease for more than 10 years
is qualified to be issued new mineral leases under the MLA (oil, gas,
coal, and other mineral leases), unless the coal lease is producing
coal in commercial quantities.  The provision seeks to spur
development of pre-FCLAA federal coal leases by discouraging holders
of pre-FCLAA leases from keeping those leases for long periods of
time without producing coal from them.  BLM considers that, although
the Kerr-McGee Coal Corporation has held two pre-FCLAA coal leases in
an LMU from which no coal had been produced since February 1988,
Kerr-McGee is qualified to be issued additional federal mineral
leases.\1 From March 1988 through November 1992, Kerr-McGee acquired
36 additional federal mineral leases--35 oil and gas leases and 1
coal lease. 

If found to be disqualified, companies can reestablish their
qualifications in a number of ways.  Among these ways are (1)
relinquishing the nonproducing lease, (2) assigning the lease to an
unrelated entity, or (3) combining the lease into an LMU that is
producing in commercial quantities.  Once these actions have been
taken, the company and its affiliates are removed from the list of
disqualified lessees.  However, if the company holds any
disqualifying leases, it remains disqualified from being issued
additional mineral leases.  For example, a company included four
nonproducing federal coal leases in a producing LMU, and BLM
determined that while these leases no longer were disqualifying
leases, because the company had other disqualifying leases, it
remained disqualified.  In another case, a company included leases in
an LMU; however, BLM determined that because the LMU was not
producing, these leases continued to disqualify the company. 


--------------------
\1 BLM's headquarters provides its state offices with a list of
lessees who are disqualified under section 2(a)(2)(A) on the basis of
their production activities on federal coal lease tracts in all
states.  In the past few years, these disqualification lists have
identified 20 to 30 companies that are not qualified to obtain
additional mineral leases. 


      HISTORY OF KERR-MCGEE LEASES
-------------------------------------------------------- Chapter 2:1.1

In 1965 and 1970, Kerr-McGee obtained two federal coal leases.  After
the passage of FCLAA in 1976, Kerr-McGee became subject to the act's
requirement that it produce coal in commercial quantities from these
leases after December 30, 1986, or become disqualified from obtaining
additional oil, gas, coal, or other mineral leases covered by the
MLA.  As of September 26, 1986, these two pre-FCLAA leases had not
produced coal, and Kerr-McGee had combined these leases with an
adjoining producing state coal lease to form an LMU.  As a result,
Kerr-McGee would be a qualified lessee as long as the LMU was
producing coal in commercial quantities.  Under the act, production
on any lands contained in the LMU is considered as occurring on all
federal leases in the LMU.  On October 26, 1987, Kerr-McGee notified
BLM's Wyoming State Office that it intended to place the LMU on
temporary standby, and production stopped in February 1988. 

The question of Kerr-McGee's qualification arose several days before
a scheduled September 1991 coal lease sale in which Kerr-McGee would
be a bidder.  BLM staff raised questions of how to interpret a
lessee's qualifications under section 2(a)(2)(A) for leases in an LMU
that was not producing and had not yet produced in commercial
quantities.  On October 1, 1991, attorneys for Kerr-McGee wrote to
Interior's Regional Solicitor's office to explain why the company was
qualified to bid under section 2(a)(2)(A) for this and other federal
mineral leases.  They noted that because of depressed market
conditions and contract requirements, Kerr-McGee temporarily
suspended mining operations on the LMU.  They asserted that in
accordance with Interior's regulations implementing this provision,
Kerr-McGee had a "producing" mine because it was "operating an
ongoing mining operation consistent with standard industry practice."
As evidence, their letter cited the multimillion-dollar investment
already made in the LMU and the fact that the company was maintaining
all its permits.  Furthermore, they contended that the temporary
cessation of production was typical of industry practice.  The letter
also indicated that Kerr-McGee expected to resume production in the
near future.  Over the next year, discussion took place between the
district and state offices, headquarters, and the Regional and
Headquarters Solicitors' offices about whether Kerr- McGee was
qualified. 

On February 22, 1993, we asked Interior's Solicitor to provide its
opinion on whether Kerr-McGee was qualified to receive new mineral
leases.  (See app.  III.) On August 4, 1993, Interior's Associate
Solicitor for Energy and Resources advised us that BLM had been
properly issuing MLA leases to Kerr-McGee since March 1988, despite
the continued absence of commercial production on its LMU.  (See app. 
IV.) The Associate Solicitor did not rely on the reason cited by
Kerr-McGee's attorneys in their 1991 letter.  Instead, the Associate
Solicitor argued that a federal lease is producing coal in commercial
quantities pursuant to section 2(a)(2)(A) if that lease is within an
LMU that is producing in accordance with its "stipulations of
approval."\2 The stipulations of approval for Kerr-McGee's LMU
provide that Kerr-McGee must meet the 10-year diligent development
requirement, under which the operator promises to produce coal in
commercial quantities from the LMU within 10 years of the LMU's
effective date.  Accordingly, in the Associate Solicitor's view, "the
holder of a lease in an LMU meets the production in commercial
quantities requirements of section 2(a)(2) (A) when the LMU is
meeting the diligent development requirement for the LMU."

The Associate Solicitor concluded that section 2(a)(2)(A) has not
prohibited BLM from issuing leases to Kerr-McGee.  However, the
Associate Solicitor acknowledged that this view was "not entirely
free from doubt" and represented an interpretation that was "a matter
of policy formulated by the previous administration that meets the
letter of the law." Furthermore, the Associate Solicitor conceded
that this interpretation "appears not to be in concert with a major
goal of FCLAA, which was to reduce speculation."


--------------------
\2 Stipulations of approval are provisions governing a lessee's
operations under a specific LMU. 


      FCLAA'S AND BLM'S
      REGULATIONS AND INSTRUCTION
      MEMORANDUM DO NOT SUPPORT
      BLM'S DETERMINATION
-------------------------------------------------------- Chapter 2:1.2

We believe that Kerr-McGee is not qualified to obtain federal mineral
leases under section 2(a)(2)(A) because it has not produced coal in
commercial quantities from the LMU since the LMU was formed and has
not produced any coal at all from the LMU since 1988.  The language
of this section is clear that a holder of a pre-FCLAA coal lease who
has held this lease for 10 years only qualifies to obtain any
additional MLA leases if the holder is presently producing coal under
the lease in commercial quantities.  For the purposes of this
determination, under the act, actual coal production anywhere in an
LMU is attributed to all leases in the LMU and could be used to
satisfy section 2(a)(2)(A)'s present production requirement. 
However, in this case, Kerr-McGee has never produced coal from the
two federal leases in the LMU and has not mined coal anywhere else in
the LMU since 1988.  Additionally, while coal was produced from the
LMU prior to 1988, coal was not produced in commercial quantities. 

We disagree with Interior's Associate Solicitor's interpretation that
FCLAA permits BLM to use the 10-year LMU diligent development period
to satisfy the commercial production requirements that holders of
pre-FCLAA leases must meet to remain eligible under section
2(a)(2)(A).  FCLAA's legislative history indicates a congressional
awareness that the term "diligent development" refers to a period of
time distinctly preceding "producing in commercial quantities."\3 The
Congress chose to employ only the latter phrase in section 2(a)(2)
(A).  Where the Congress wished to make a lessee subject to "diligent
development," as in section 7(b) of FCLAA, it specifically used this
term. 

Also, both section 2(d) of FCLAA, which authorizes the formation of
LMUs, as well as the LMU stipulations distinguish between "diligent
development" and coal "production." Furthermore, the Associate
Solicitor's interpretation is at odds with a previous Solicitor's
opinion that concluded that equating diligent development with the
production of commercial quantities "would empty the section [2(a)
(2) (A)] of any meaning."\4 It would permit the lessee to extend its
eligibility under section 2(a)(2)(A) for the length of the LMU's
diligent development period, thereby defeating the antispeculative
purpose of this provision.\5

We also disagree with the assertion of Kerr-McGee's attorneys that
the company is not disqualified by section 2(a)(2)(A) from receiving
new leases because it has been producing coal from its LMU since 1988
in accordance with standard industry practice.  BLM's regulations and
guidance make clear that a lessee still would be considered as
producing coal in accordance with standard industry practice, even
though production is interrupted for short periods (i.e., days to
months).  While the repair of equipment and weather conditions are
examples of such short-term interruptions, the cessation of
production because of market conditions is not listed as an
exception.  In fact, BLM Instruction Memorandum No.  87-525 clearly
states that market conditions do not justify the suspension of
production. 

We believe that Kerr McGee's interpretation of "standard industry
practice" conflicts with the congressional policy behind FCLAA--to
spur coal production from federal leases--which remains as valid now
as when enacted in 1976.  In passing FCLAA, the Congress wished not
merely to increase the nation's supply of coal but also to increase
the federal contribution to that supply.  There is no evidence to
suggest that during periods of low coal demand, the Congress intended
federal coal leases to remain idle while state and private leases
with more stringent terms provided such coal as the market required. 
Indeed, the idea that operators could treat their federal coal
reserves as surplus to be called on only in periods of peak demand
appears to contradict squarely FCLAA's goals of encouraging current
production and discouraging the speculative holding of federal coal. 

Section 2(a)(2)(A) does not require coal production in a depressed
market.  Rather, a lessee wishing to qualify for new leases may sell
or relinquish the leases that are causing disqualification.  Such
transfers will either allow the leases to be obtained by an operator
who will produce coal from them or will allow Interior to re-lease
the tracts in question. 


--------------------
\3 H.R.  Rep.  No.  681 at 13; 122 Cong.  Rec.  488 (1976). 

\4 92 I.D.  at 548-51 (1985).  The Associate Solicitor's opinion is
also at odds with an Office of Technology Assessment report on
section 2(a)(2)(A).  "Potential Effects of Section 3 of the Federal
Coal Leasing Amendments Act of 1976-A Special Report," OTA-ITE-300,
Mar.  1986, p.  84. 

\5 We also note that according to the Solicitor's April 11, 1994,
opinion, even if a lessee's LMU failed to produce coal in commercial
quantities during the LMU's diligent development period, the lessee
would not be considered as retroactively ineligible to receive the
leases issued during this period.  We disagree.  Such leases would
have been issued in violation of the statutory requirement of section
2(a)(2)(A), i.e., a lessee is ineligible to receive new mineral
leases when not producing coal in commercial quantities on a
pre-FCLAA lease. 


   LESSEE ALLOWED TO FORM AN LMU
   TO KEEP A NONPRODUCING FEDERAL
   LEASE FROM BEING TERMINATED
---------------------------------------------------------- Chapter 2:2

FCLAA provides that LMUs be used to foster the maximum economic
recovery and the efficient, economical, and orderly development of
federal coal.  However, BLM allowed the act's LMU provision to be
used when the primary purpose was to extend the life of a soon-to-be-
terminated nonproducing federal lease by combining it with a much
smaller, newly acquired lease.  This action raises concerns about
fairness, precedent, and compensation to the government for 89 other
federal coal leases that are within 5 years of being terminated for
lack of production.  In July 1994, Interior officials advised us that
they are developing criteria to prevent lessees from using the LMU
provision principally to extend the life of nonproducing federal coal
leases. 


      HISTORY OF WYOMING LMU
-------------------------------------------------------- Chapter 2:2.1

The Northwestern Resources Company (NWR) LMU is different from other
existing LMUs in the areas covered by our review in that a
nonproducing federal lease that otherwise would have been terminated
was combined with a much smaller, newly acquired federal lease
primarily to extend the life of the nonproducing lease.  BLM's
Wyoming state office noted that the small lease, acquired under the
LBA process, was the only LBA lease that the office was aware of that
would require a new mine to start production--all other LBA leases
had been acquired to extend the life of or solve coal quality
problems with existing mines.  In July and September 1992, BLM
officials responsible for the areas included in our review told us
that there were 13 existing LMUs, 12 of which were producing at that
time.  All 13 LMUs had been formed from existing federal coal leases,
none of which was less than 4 years old. 

In the Wyoming portion of the Powder River Basin, a large federal
coal lease known as the Rocky Butte tract, containing an estimated
545 million tons of recoverable coal, was due to terminate in
February 1993 because the lessee--NWR--had not produced coal from the
lease.  NWR acquired the Rocky Butte lease from another company in
late 1990-- less than 3 years before the lease had to meet its
diligence requirement or be terminated.  As part of a subsequent
evaluation, BLM's Northwest Regional Evaluation Team concluded that
the price that NWR paid to acquire the Rocky Butte lease represented
a speculative coal value and the lease had no chance to achieve
production in time to meet its diligence requirement. 

However, before the Rocky Butte tract lease would have terminated,
NWR applied for a federal coal lease on an adjacent tract of land
containing an estimated 55 million tons of recoverable coal with the
intent of forming an LMU.  NWR publicly stated that the primary
purpose of acquiring the smaller tract, known as West Rocky Butte,
was to form an LMU to save the Rocky Butte tract from terminating for
not achieving diligence.  Even before the lease sale was held, BLM
officials in the Casper District Office were reviewing a draft
application and mine plan for the proposed LMU.  By leasing the West
Rocky Butte tract and combining it with the much larger Rocky Butte
tract into an LMU, NWR would extend by 10 years--until 2003--the
diligence period within which it would be required to begin
commercial production and payment of federal royalties. 

On September 24, 1992, before the pending West Rocky Butte lease
sale, we requested that the Director of BLM reconsider the
appropriateness of the sale and the subsequent formation of an LMU. 
(See app.  V.) We were concerned that the effect of allowing NWR to
form this LMU would be to provide the company with an additional 10
years in which to meet FCLAA's diligence provision on the existing
lease and could set a precedent for other nonproducing federal coal
leases that were getting close to termination.  BLM's response to our
inquiry noted that holding the lease sale for the West Rocky Butte
tract was in the public's best interest, but the response did not
explain how the sale and proposed LMU would foster the maximum
economic recovery of the coal deposit any more than reoffering the
lease tract for sale at a later date would.  (See app.  VI.)

NWR submitted a formal application to BLM on January 7, 1993, to
combine the Rocky Butte and West Rocky Butte tracts into an LMU. 
Subsequently, on January 19, 1993, BLM awarded the West Rocky Butte
lease to NWR, the sole bidder.  The lease was made retroactive to
January 1, 1993.  And, on December 10, 1993, BLM approved the LMU,
effective January 19, 1993, thereby extending, by almost 10 years,
the life of the Rocky Butte tract, which otherwise would have
terminated in February 1993.  BLM, however, did not have criteria for
determining that approval of an LMU was consistent with FCLAA's goals
of discouraging speculation and encouraging the development of
federal coal leases. 

Furthermore, BLM approved the formation of the LMU application,
apparently accepting the company's statement that it would begin
production within the new diligent development period, even though
BLM's figures suggested that the LMU could not begin production
within this time frame.  NWR stated in its LMU application that coal
production from the LMU would begin in 1996--well within the time
frame required to meet the act's diligent development provision. 
However, in arriving at a minimum acceptable bid for the West Rocky
Butte tract, which in part was based on the assumption that the tract
would be included in the proposed LMU as well as on BLM's analysis of
the market for Powder River Basin coal, BLM concluded that coal
production from the LMU would not start until 2016.  BLM's projected
production date is 13 years after the proposed LMU's diligence period
terminates. 


      APPROVING NWR'S LMU RAISES
      CONCERNS
-------------------------------------------------------- Chapter 2:2.2

BLM's approval of NWR's LMU raises concerns relating to fairness,
precedent, and compensation to the government.  In order to meet
FCLAA's diligence requirements, other coal lessees have allowed their
leases to terminate or faced having to produce coal under uneconomic
conditions in order to hold them.  In the case of NWR, the company
acquired a small coal tract located next to an existing, much larger,
but soon to be terminated federal lease.  Consequently, it was able
to obtain a 10-year diligence extension through the LMU provision. 

NWR's LMU could set a precedent for other nonproducing federal coal
leases to be formed into LMUs to primarily extend the diligent
development period of the existing lease(s).  In the areas we
reviewed, 16 nonproducing federal leases were in pending LMUs.  For
example, in Utah, there were 9 pending LMU applications to
consolidate 14 nonproducing leases.  Three of the applications, if
approved, would result in LMU tracts with no mine.  A fourth
application included a lease with a mine, but the mine was not
producing.  The remaining three LMUs would each contain at least one
producing lease.  Nationwide, as of September 30, 1992, there were 89
active but nonproducing leases with 5 years or less remaining to meet
their diligent development requirements. 

Approval of LMUs primarily to extend the life of a federal coal lease
may result in a substantial loss of revenue to the federal government
compared with reoffering the tract for lease.  By extending leases
that are about to terminate, the federal government grants lessees
the right to postpone production and related royalty payments without
compensation to the government.  Furthermore, while NWR was the sole
bidder for the West Rocky Butte lease and the federal government
received a $16.5 million bonus bid, allowing the Rocky Butte lease to
terminate and reoffering the two tracts as a single new lease tract
may have generated a larger bonus bid and brought the lease into
production as soon or sooner than BLM estimates that NWR will.  BLM
officials concluded in 1990 that if the Rocky Butte lease terminated,
there would be no impediment to future development of the tract by
the lessee or another entity when the market for Powder River Basin
coal was no longer saturated.  BLM also noted that letting the lease
terminate and then offering the combined Rocky Butte/West Rocky Butte
tract would create a far more competitive leasing situation where
numerous companies could bid on the combined tract, rather than just
NWR.  BLM's Branch of Mining Law and Solid Minerals and the Northwest
Regional Evaluation Team in Wyoming estimated that bonus bids for the
Rocky Butte tract could range from $25 million to $125 million. 
Tracts in the Powder River Coal Basin, somewhat smaller in size than
those in Rocky Butte, have sold for large bonus bids.  For example,
in 1992, the West Black Thunder tract, with an estimated 418 million
tons of coal (compared with the estimated 600 million tons of
recoverable coal in the combined Rocky Butte/West Rocky Butte tract),
sold for $72 million.  And the North Antelope/ Rochelle tract, with
an estimated 394 million tons of coal, sold for $87 million. 


      BLM IS DEVELOPING CRITERIA
      TO ENSURE THAT LMUS MEET
      FCLAA'S GOALS
-------------------------------------------------------- Chapter 2:2.3

FCLAA does not specify, nor does BLM have criteria for determining,
when an LMU is consistent with FCLAA's goals of discouraging
speculation and encouraging the development of federal coal leases. 
However, on December 10, 1993, BLM published in the Federal Register
an advance notice of proposed rulemaking requesting public comments
on all aspects of LMUs, including the issues discussed in this
report.  In July 1994, Interior officials told us that they are
considering proposed regulations that would provide criteria for BLM
to use in determining whether to approve an LMU. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:3

Both we and Interior agree that BLM has taken certain actions that do
not further FCLAA's goals of discouraging speculation and encouraging
the development of federal coal leases.  We continue to believe that
Kerr-McGee is not qualified to obtain federal mineral leases under
section 2(a)(2)(A) because it has not produced coal in commercial
quantities from the LMU since the LMU was formed and indeed has not
produced any coal at all from the LMU since 1988.  Interior's
interpretation of this provision fails to encourage the development
of those federal coal leases as contemplated by the act.  While
Interior concluded that section 2(a)(2)(A) has not prohibited BLM
from issuing leases to Kerr-McGee, the Associate Solicitor
acknowledged that this view was "not entirely free from doubt" and
represented an interpretation that was "a matter of policy formulated
by the previous administration that meets the letter of the law."
Furthermore, the Associate Solicitor conceded that this
interpretation "appears not to be in concert with a major goal of
FCLAA, which was to reduce speculation" and the regulation could be
amended as part of the proposed rulemaking on LMU issues. 

Since March l988, Kerr-McGee has obtained 36 mineral leases covered
by the MLA.  Because BLM has deemed Kerr-McGee to be a qualified
lessee, Kerr-McGee can continue to obtain additional oil, gas, coal,
and other mineral leases, even without producing from existing coal
leases that it has held for over 20 years, until later in the LMU's
diligent development period.  By contrast, BLM has regularly
disqualified other lessees with nonproducing federal coal leases from
obtaining additional mineral leases.  In addition, other companies
that were not qualified to obtain additional mineral leases
reestablished their qualifications by relinquishing nonproducing
leases, assigning leases to unrelated entities, or combining leases
into producing LMUs. 

BLM has also allowed the act's LMU provision to be used when the
primary purpose was to extend the life of a federal coal lease that
was about to be terminated because it had not achieved its diligent
development requirement.  We are concerned that BLM's actions may
encourage other coal lessees to form LMUs for the primary purpose of
extending the diligent development periods of their nonproducing
federal coal leases.  While BLM's actions were taken without criteria
defining when the formation of an LMU would further FCLAA's goal of
discouraging the speculative holding of federal coal leases and
encouraging the development of coal production from federal leases,
Interior is now considering proposed regulations that would provide
such criteria. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:4

We recommend that the Secretary of the Interior cease issuing any
additional MLA leases to unqualified companies and amend existing
regulations to ensure that lessees holding pre- FCLAA leases will not
be issued new mineral leases under the MLA unless they have met the
coal production requirements that FCLAA added to the MLA. 

With respect to the MLA leases already improperly issued to Kerr-
McGee or other companies that were not qualified, we recommend that
the Secretary review these leases for action in accordance with all
applicable statutory and regulatory provisions. 

In addition, we recommend that Interior continue its efforts to
revise its regulations to provide criteria that BLM can use to
determine whether the formation of an LMU is consistent with FCLAA's
goals of discouraging speculation and encouraging the development of
federal coal leases.  We also recommend that for each LMU approved,
BLM document how the approved LMU meets these regulatory criteria. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 2:5

Interior's Solicitor, as well as Kerr-McGee, disagreed with our
conclusion that Kerr-McGee was ineligible to receive new leases under
the MLA because two pre-FCLAA coal leases that Kerr-McGee holds have
not satisfied the production requirements of section 2(a)(2)(A) of
the MLA.  The Solicitor stated that the Secretary of the Interior has
the authority to issue regulations that substitute an LMU's diligent
development requirement for commercial production requirements that
holders of pre-FCLAA leases must meet to remain eligible under
section 2(a)(2)(A) to obtain additional federal mineral leases.  We
believe that the MLA provides no authority for exempting Kerr-McGee's
pre-FCLAA leases from the requirement to produce coal from those
leases in order to continue to be eligible.  In addition, although
Interior's regulations provide for temporary suspensions of mining
operations, we do not believe that Kerr- McGee's production stoppage
for a continuous 6-year period is the kind of temporary suspension
envisioned by Interior's regulations.  Despite the Solicitor's
disagreement, the Solicitor stated that while BLM's interpretation of
and compliance with section 2(a)(2)(A) was the policy of past
administrations and arguably did not well serve a major goal of
FCLAA--to reduce speculation--the regulation could be amended at any
time and may be considered in the proposed rulemaking on LMU issues. 


ENVIRONMENTAL ASSESSMENTS DO NOT
ALWAYS ADDRESS CUMULATIVE IMPACTS
OF COAL MINING
============================================================ Chapter 3

Since decertification of the federal coal regions, most lease sales
have added reserves to existing mines rather than providing the basis
for new mines.  Consequently, BLM and the Forest Service have
generally prepared tract-specific environmental assessments rather
than the more comprehensive regional environmental impact statements
prepared under the regional leasing process.  Federal regulations and
BLM's and the Forest Service's policies require that cumulative
impacts be adequately assessed and that these impacts be documented
in EAs and EISs. 

While EAs can provide an adequate basis for identifying and
addressing cumulative environmental impacts, we found that documents
prepared by BLM and the Forest Service did not always identify and
address the cumulative impacts of coal mining.  Specifically, the EAs
and EISs prepared for coal leasing in three of the four locations
that we reviewed addressed cumulative impacts on most resources,
whereas EAs prepared in Utah addressed cumulative impacts on only a
few resources.  For the purposes of this review, we considered that
the agency had addressed the cumulative impacts if the EA or EIS (1)
contained a brief discussion presenting evidence demonstrating no
significant cumulative impact to the individual resources or (2)
referenced directly to a section in a prior environmental document or
study.  Documentation of impacts in EISs and EAs is important because
it clearly demonstrates that environmental impacts have been
considered.  The failure to consider the potential effects of coal
mining on key resources, such as groundwater and wildlife, could have
serious adverse consequences. 


   COAL MINING CAN GREATLY AFFECT
   THE SURROUNDING ENVIRONMENT
---------------------------------------------------------- Chapter 3:1

Both the surface and underground mining of coal can greatly affect
the surrounding environment.  Surface mining disturbs the overlying
topsoil and vegetation, while underground mining can fracture the
overlying rock strata and cause it to subside.  Also, water draining
from mined areas can pollute surface water, and groundwater aquifers
can be destroyed, depleted, or degraded.  Coal mining can also
adversely affect fish and wildlife habitat and can degrade the human
environment by putting additional strain on a nearby community's
infrastructure.  For example, a large influx of new workers at a coal
mine can put an additional burden on existing transportation,
housing, schools, health care, law enforcement, water, and sewage
facilities.  When the potential impacts of coal mining are identified
in EAs or EISs, these impacts can often be mitigated, and the land
can be reclaimed and restored, to some degree, to its original
appearance.  In some instances, wildlife habitat can actually be
improved.  Coal mining can also have positive impacts.  The creation
of new jobs in an economically depressed area is generally welcomed
by the community.  Associated increases in state and local taxes can
be used to improve the community's infrastructure. 


   NEPA AND FCLAA REQUIRE THAT
   ENVIRONMENTAL IMPACTS FROM
   LEASING COAL ON PUBLIC LANDS BE
   ASSESSED
---------------------------------------------------------- Chapter 3:2

Beginning in the 1960s, the Congress passed legislation to protect
the environment from the effects of various activities including coal
mining.  The National Environmental Policy Act directs the
responsible federal agency to prepare a detailed statement on the
environmental impact of major federal actions that significantly
affect the quality of the human environment.  FCLAA specifically
directs the Secretary of the Interior, before issuing a coal lease,
to consider the effects that mining may have on the environment, the
economy, agriculture, and public services. 

Under regulations implementing NEPA, federal agencies are required to
analyze and document environmental impacts in either an EA or an EIS. 
An EA is intended to be a concise public document that briefly
provides sufficient evidence and analysis for determining whether any
significant impacts exist.  If upon completing an EA, the agency does
not identify significant impacts, it prepares a finding of no
significant impact; this completes the environmental analysis. 
However, if significant impacts are found after preparing an EA or
significant impacts are expected initially, the agency must prepare a
more-detailed and formal EIS.  NEPA's regulations list extensive
requirements for the format and content of EISs but are not as
specific for EAs. 

NEPA's regulations allow individual agencies to identify specific
actions for which an EIS must be prepared and other actions for which
a less-detailed EA is adequate.  In implementing FCLAA, BLM has
promulgated its own regulations, which outline how BLM is to assess
the environmental impacts of coal leasing and how to determine
whether an EIS or an EA is needed.  When leasing federal coal under
regional leasing procedures, BLM's regulations require that the
Bureau prepare an EIS on the combinations of tracts that are to be
offered for lease.  When leasing under the LBA process, the
surface-managing agency may prepare either an EA or an EIS, depending
on the significance of anticipated impacts.  Of the 11 environmental
documents that we examined, the surface- managing agency prepared an
EA for 10.  BLM prepared an EIS for the West Rocky Butte Tract in
Wyoming's Powder River Basin because the lease application was for a
new mine start, which could significantly affect the environment. 

The preparation of environmental documents can be a collaborative
effort of the affected federal agencies.  For example, in Wyoming,
Interior's Office of Surface Mining contributed to the preparation of
all four EAs and EISs that we reviewed, even though BLM was the lead
agency.  The Forest Service also contributed to the EA prepared by
BLM for the West Black Thunder Tract in Wyoming because some federal
lands within the lease boundary are managed by the Forest Service. 
In the Wasatch Plateau of central Utah, the Forest Service takes the
lead in preparing environmental documents, and BLM is a contributing
agency.  BLM was the sole agency involved in preparing the EAs that
we examined in Alabama and Kentucky. 


      BLM AND THE FOREST SERVICE
      MUST DOCUMENT CUMULATIVE
      IMPACTS ON INDIVIDUAL
      RESOURCES
-------------------------------------------------------- Chapter 3:2.1

In addition to NEPA's regulations that require agencies to evaluate
cumulative impacts, BLM's and the Forest Service's handbooks for
NEPA's implementation contain policy stating that the results of
agencies' analysis must be documented in EAs and EISs.  A cumulative
impact is the impact on the environment that results from the
incremental impact of a single action when added to other past,
present, and reasonably foreseeable future actions.  For example,
when a federal agency evaluates the impact of water draining from a
mine on a nearby stream's trout fishery, it must determine this
impact together with drainage from nearby mines and from new mines
from which water is planned to be discharged into the stream in the
future.  It is important to consider actions collectively because a
certain action that individually may seem to have a minor impact may
have a significant impact when added to other actions. 


   SOME ENVIRONMENTAL ASSESSMENTS
   ADDRESS CUMULATIVE IMPACTS ON
   ONLY FEW RESOURCES
---------------------------------------------------------- Chapter 3:3

Environmental documents prepared for coal lease applications in Utah
addressed few of the cumulative impacts from coal mining, whereas
environmental documents that we examined in Kentucky and Wyoming
addressed cumulative impacts on most resources.  BLM and Forest
Service officials in Utah reported that they did not address
cumulative impacts in EAs because these impacts were already
discussed in previously prepared EISs that they used in their
analyses.  They added that documentation of cumulative impacts on
many of the resources was unnecessary because no issues concerning
these resources were raised during scoping meetings.  However, this
determination was not made part of the EA.  In Wyoming and Kentucky,
where environmental documents more completely documented cumulative
impacts, we found that the public was more involved in the
environmental evaluation process. 

In the four areas we visited, BLM and Forest Service
interdisciplinary teams prepare EAs and EISs.  These
interdisciplinary teams generally consist of individuals with
occupations appropriate to the scope and issues to be discussed in
the environmental document.  For coal leasing, these individuals
include geologists, biologists, mining engineers, and economists. 
BLM's and the Forest Service's handbooks contain lengthy lists of
resources that should be analyzed when preparing environmental
analyses.  However, not all resources are affected by coal mining. 
BLM and Forest Service officials said that when evaluating coal
leasing, it is important to evaluate cumulative impacts on air
quality, surface water quality and quantity, groundwater quality and
quantity, fisheries, game species, threatened and endangered species,
socioeconomic resources, transportation facilities, visual resources,
and recreation.  In addition to these resources, BLM officials
responsible for EAs in Alabama and Kentucky also evaluate cumulative
impacts on wetlands and floodplains and on vegetation. 

We examined EAs and EISs prepared for 11 leases-by-application filed
for tracts in the Wasatch Plateau-Book Cliffs of central Utah, the
Powder River Basin in Wyoming, the Warrior Basin in Alabama, and the
Appalachian Basin in Kentucky.  We determined whether cumulative
impacts to the above resources were addressed in each EA and EIS and
the level of detail contained in each document.  Our criteria for
considering the cumulative impact to be addressed was that the
environmental document (1) contain a brief discussion of the evidence
demonstrating no significant cumulative impact on the individual
resource or (2) reference directly to a section in a prior
environmental document or study.  Some agency officials said that
they considered cumulative impacts but did not document the results
in EAs or EISs.  For the purposes of our analysis, we did not
consider this to meet the agencies' regulatory requirement that
cumulative impacts be assessed and documented in EAs and EISs. 
However, we do not intend our analysis to be a review of NEPA's
compliance.  Our results are summarized in figure 3.1. 

   Figure 3.1:  Cumulative Impacts
   on Individual Resources
   Addressed in Environmental
   Documents

   (See figure in printed
   edition.)

Source:  Trail Mountain, Quitchupah, and Castle Valley EAs were
prepared by the Forest Service.  All other documents were prepared by
BLM. 


      ENVIRONMENTAL ASSESSMENTS IN
      UTAH DO NOT SPECIFICALLY
      ADDRESS CUMULATIVE IMPACTS
      ON MOST RESOURCES
-------------------------------------------------------- Chapter 3:3.1

Upon reviewing EAs and EISs prepared by BLM and the Forest Service
for the 11 lease applications, we found that 2 of the 11 documents
specifically addressed cumulative impacts on all relevant resources. 
Four EAs, all of which were prepared in Utah, addressed cumulative
impacts on less than half of the resources, while three EAs and one
EIS prepared in Wyoming and one prepared in Kentucky addressed
cumulative impacts on 90 percent or more of the relevant resources. 
Resources most frequently absent in discussions on cumulative impacts
included fisheries, recreation, and game species.  On the other hand,
all documents addressed cumulative impacts on socioeconomic
resources, and only one document failed to address threatened and
endangered species. 

The number of resources absent from discussions on cumulative impacts
varied according to where the environmental documents were prepared. 
BLM's Wyoming Office addressed cumulative impacts, on average, on 87
percent of the relevant resources per document.  On the other hand,
BLM and the Forest Service in Utah only addressed cumulative impacts
on an average of 22 percent of the relevant resources per document. 
The Eastern States BLM Office, which is responsible for EAs prepared
for Alabama and Kentucky, addressed cumulative impacts on an average
of 81 percent of the relevant resources. 


      REASONS FOR NOT ADDRESSING
      IMPACTS
-------------------------------------------------------- Chapter 3:3.2

Although BLM and Forest Service officials in Utah stated that they
evaluated cumulative impacts on all the resources, they did not
address or document all of their results in EAs.  They told us that
it was unnecessary to document much of the cumulative impact analysis
because these impacts had already been documented in the previously
prepared EISs for the Round II Regional Sale (Round II EIS) and for
the Manti-LaSal National Forest EIS (Manti-LaSal EIS).  They said
that the EAs they prepared simply updated these cumulative impacts. 

This process of referring to a previously prepared environmental
document is called tiering, and its use may eliminate repetitive
discussions.  Agencies may incorporate by reference general
discussions and concentrate solely on the issues specific to the
statement being prepared.  We believe that neither BLM nor the Forest
Service in Utah clearly tiered their EAs to previously prepared EISs. 
None of their attempts to tier specifically state that cumulative
impact analyses from the previously prepared EISs were used to
prepare the current EAs.  Also, none of these attempts summarized
cumulative impact discussions contained in these EISs.  For example,
BLM's only reference to the Round II EIS in the Centennial Tract is a
statement explaining that this tract is part of two proposed tracts
previously recommended for leasing.  The only statement in the Forest
Service's EAs linking them to the Manti-LaSal EIS is a sentence
stating that cumulative impacts are expected to be within threshold
limits established in the Manti-LaSal EIS.  Although the Forest
Service documents that it used the Round II EIS in deciding to lease,
this statement makes no reference to cumulative impact analyses and
only appears in the findings of no significant impact, a two- to
three-page document issued separately from EAs.  BLM and Forest
Service interdisciplinary team leaders stated that their links to
cumulative impact discussions in previous EISs could have been
clearer. 

BLM and Forest Service officials also told us that cumulative impacts
on many of the resources were not documented because they were not
raised as issues during scoping.  Scoping is a process employed early
in the environmental evaluation by which agencies, together with
interested and affected parties, identify the significant issues to
be analyzed in depth and eliminate from detailed study the issues
that are not significant.  Although we acknowledge that scoping can
be effective in focusing the analysis on important issues, we were
unable to verify that the agencies had evaluated the cumulative
impacts on all the resources because of the lack of documentation in
EAs. 


      THE EXTENT TO WHICH
      CUMULATIVE IMPACTS WERE
      ADDRESSED IS ASSOCIATED WITH
      THE EXTENT OF PUBLIC
      INVOLVEMENT
-------------------------------------------------------- Chapter 3:3.3

Cumulative impacts were more completely addressed when the public
chose to be more involved.  BLM officials in Wyoming told us that
because of concerns expressed by environmental groups and local
citizens, they addressed environmental impacts in more detail than
would be expected in most EAs.  In addition, they added that when the
public expressed concern over impacts on a specific resource, they
discussed impacts on this resource in greater detail in subsequent
environmental documents.  Attendance at public meetings on
environmental impacts in Wyoming was high, and an environmental group
was also active in commenting on EAs prepared for tracts in Kentucky. 

On the other hand, BLM and Forest Service officials in Utah told us
that there was a lack of public concern over coal leasing in central
Utah.  At meetings to identify the possible scope of environmental
impacts, attendance was low, generally consisting of coal company
representatives and BLM and Forest Service personnel.  In addition,
Forest Service officials noted that they received few public comments
on the three EAs that the Forest Service prepared.  Members of one
Utah environmental group told us that because of their limited
resources, they are not concerned with coal mining in Utah's Wasatch
Plateau and Book Cliffs but, instead, concentrate on their higher
priorities in the Canyonlands and Kaparowitz Plateau.  We also noted
that there was little public involvement in environmental review in
Alabama, where the Yellow Creek EA addressed cumulative impacts on 62
percent of the resources. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

Since decertification of the federal coal regions, surface-managing
agencies, for the most part, have prepared tract-specific EAs rather
than the more-detailed EISs prepared under the regional leasing
process.  While these documents can provide an adequate basis for
identifying and addressing the cumulative impacts of coal mining,
they did not always do that.  NEPA requires that cumulative impacts
be adequately assessed, and federal regulations and BLM's and the
Forest Service's handbooks require that these impacts be documented
in EAs or EISs.  The environmental documents prepared by BLM in
Wyoming and the eastern states addressed cumulative impacts on most
resources, whereas EAs prepared by BLM and the Forest Service in Utah
addressed cumulative impacts on an average of only 22 percent of the
resources.  In Kentucky and Wyoming, where EAs and EISs more
completely addressed cumulative impacts, the public chose to be more
involved in the environmental evaluation process.  In Alabama, there
was little public involvement in the environmental review process. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:5

Both Interior and Agriculture accepted our proposal to reemphasize to
field personnel the importance of complying with requirements for
identifying and addressing cumulative environmental impacts from coal
leasing and development.  As a result, we are no longer making a
recommendation.  On March 17, 1994, in response to a draft of this
report, BLM issued an instruction memorandum to its field offices
directing that each environmental document either directly address
cumulative impacts or incorporate, by reference, other environmental
documents that address cumulative impacts. 


PROJECTING DEMAND FOR COAL IS NOT
NECESSARY TO MEET FCLAA'S
OBJECTIVES
============================================================ Chapter 4

BLM initially used projected demand for coal in its regional leasing
program to help it determine the amount of coal to lease.  Although
FCLAA did not require BLM to consider the demand for coal when making
leasing decisions, BLM chose to consider demand under its regional
leasing process to set leasing targets and meet objectives that it
had set for the coal program.  However, difficulties in accurately
projecting demand led BLM to quickly reduce its reliance on demand in
determining the amount of coal to lease.  Under the lease-by-
application process, BLM does not set the amount of coal to be leased
and thus does not use projections of the demand for coal for that
purpose.  Not using the demand for coal in BLM's LBA process should
not adversely affect FCLAA's objectives, provided that provisions in
FCLAA such as those dealing with diligence and fair market value are
enforced.  These provisions, for example, help ensure that leased
coal will be developed in a timely manner and that the government
receives a fair price. 


   PROJECTED COAL DEMAND WAS
   CONSIDERED IN SETTING REGIONAL
   COAL SALE TARGETS
---------------------------------------------------------- Chapter 4:1

In 1979, Interior issued regulations for a coal-leasing program
designed in response to an anticipated large demand for federal coal. 
The regulations established procedures for determining future coal-
leasing targets, in part, on the basis of the projected demand for
coal.\1 Although consideration of the projected demand for coal was
not required by FCLAA, BLM chose to use projected demand along with
other factors to meet the coal program's objectives.  These
objectives include (1) meeting national energy objectives, (2)
promoting more desirable methods of developing coal, and (3)
increasing competition in the coal industry. 

Under regional leasing, BLM initially tried to lease enough coal to
exactly meet the demand and production estimates derived from the
Department of Energy's (DOE's) projections.  BLM estimated the amount
of coal production expected in each coal region in the absence of new
federal leasing, and if this estimate fell short of DOE's regional
coal production goal, BLM would initiate new federal coal leasing to
compensate for the shortfall. 

However, the procedures for setting leasing targets provoked
considerable controversy over the feasibility of precisely predicting
coal's supply and demand.  It is very difficult to accurately predict
the demand for coal, and the further into the future the forecasts
are extended, the more unreliable the predictions become.  For
example, DOE's medium 1978 coal demand projections for 1990 were 70
percent higher than what actually occurred.  Difficulties in
projecting demand stem from the inherent uncertainties in projecting
electrical consumption, the use of alternative fuels, improvements in
technology, and the ultimate effects of the Clean Air Act.  As a
result, Interior de-emphasized the use of projected demand as a
determinant of the amount of coal to be offered for lease and instead
used projected demand as only one of many factors in deciding the
amount of coal to be offered. 


--------------------
\1 Interior's July 1982 regulations changed the process for
determining future coal demand from one that sets leasing targets to
one that sets leasing levels to account for the uncertainty in
forecasting the future demand for coal. 


   PROJECTED DEMAND DOES NOT
   DETERMINE THE AMOUNT OF COAL TO
   BE LEASED IN THE LBA PROCESS
---------------------------------------------------------- Chapter 4:2

Under the current LBA process, projected demand does not determine
the amount of coal that BLM offers for lease.  BLM's coal regions
changed to the LBA process because companies had excess production
capacity from their existing leases and the demand for additional
coal leases was low.  Although BLM regulations require that projected
demand be considered in the regional sale process, they do not
require BLM to use such projections in the LBA process. 
Consequently, BLM does not base its decision to offer a specific
tract for lease on projected demand for federal coal.  Instead, a
company's application to lease a specific coal tract initiates the
leasing process.  Collectively, industry's expressions of demand for
leases largely decide the amount of coal offered.  BLM also exercises
some discretion about the amount of coal offered by reconfiguring
lease tracts to ensure maximum economic recovery\2 or delaying
processing applications in response to changes in the coal market. 

According to a BLM official, companies generally have a good
understanding of the coal market, and if they are willing to pay the
fair market value for a tract, then they are demonstrating the demand
for coal.  Also, this official stated that FCLAA's diligent
development requirement discourages companies from leasing tracts
that they do not intend to mine in a timely manner.  As mentioned
earlier, FCLAA's requirements that leases be terminated if they are
not producing commercial quantities of coal within 10 years of a
lease's issuance were intended to discourage the speculative holding
of coal leases. 


--------------------
\2 Maximum economic recovery means that, on the basis of industry's
standard operating practices, all profitable portions of a leased
federal coal deposit must be mined. 


   FCLAA'S OBJECTIVES CAN BE MET
   WITHOUT TYING LEASING LEVELS TO
   PROJECTED DEMAND
---------------------------------------------------------- Chapter 4:3

FCLAA addresses major congressional concerns with the federal coal-
leasing program--speculation, concentration of holdings, fair return
to the public, maximum economic recovery of the resource,
environmental protection, and planning and public participation.  It
addresses these concerns by requiring that companies diligently
develop their leases, the Justice Department review the concentration
of the market, the federal government receive fair market value, and
potential lease tracts be configured to maximize the recovery of
coal.  If these provisions are enforced, FCLAA's objectives can be
met without trying to match leasing levels to projected demand.  For
example, enforcing the diligent development provision discourages
companies from leasing tracts that they do not intend to mine in a
timely manner, thereby discouraging the speculative holding of leases
and encouraging the production of leased coal. 

FCLAA does not require that leasing levels be tied to projected
demand as a means of achieving the act's objectives.  However, under
the regional leasing process, BLM tried to tie leasing levels to
projected demand.  Although some of Congress's concerns could be
partially addressed by leasing exactly the amount of federal coal
needed to meet projected demand, this proved very hard to do and the
effort was discontinued.  (See app.  II for a discussion of the
demand for coal and the problems involved in forecasting those
levels). 

Proponents of using projected demand, however, argue that demand
projections are important because they influence the government's
return from lease sales and should, therefore, influence whether and
when BLM offers leases.  For example, they argue that leasing would
be curtailed in weak markets where leases would obtain a lower fair
market value and increased in strong markets where lease values would
be higher.  However, we do not believe Interior could count on
receiving a higher value for leases if it adjusted leasing levels to
meet projected demand.  Even if projected demand and coal prices are
low when a lease tract is sold, there is no guarantee that they will
be higher in the future or that the net present value of the resource
will increase with a delay of the sale.  Furthermore, FCLAA requires
the receipt of fair market value, not maximization of federal
revenues.  BLM ensures that it obtains fair market value by
independently assessing the market value of each coal tract and using
the assessed value as the minimum bid it will accept for a proposed
sale. 


   BLM CONTINUES TO MONITOR DEMAND
---------------------------------------------------------- Chapter 4:4

While BLM's leasing decisions are no longer tied to projected demand,
BLM officials prepare coal market analyses and, together with the
regional coal teams, continue to monitor the national coal market and
review regional market information.  BLM officials do not use this
information to establish a particular level of leasing but, rather,
to discern market trends and to estimate future coal prices for their
fair market valuations.  In addition, BLM officials in Utah use their
regional market analyses to determine the priority for processing
lease applications.  If the officials believe that the demand for a
particular tract will be high, they give higher priority to
processing that lease application. 

BLM officials and the regional coal teams also use information from
the coal market in deciding whether to recertify the regions. 
According to BLM officials, if the demand for coal increases
significantly, such that it leads to an increased number of lease
applications, then they may find it appropriate to revert to a
regional leasing process.  At certain leasing levels, the regional
leasing process offers administrative efficiencies and economies of
scale, such as conducting a regional EIS rather than tract-by-tract
EAs.  However, the levels of increase (both in demand and in the
number of applications) that would precipitate a return to the
regional leasing process have not been specified by BLM or the
regional coal teams. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 4:5

Although some of FCLAA's objectives could be partially addressed by
leasing exactly the amount of federal coal needed to meet projected
demand, accurately estimating future demand is difficult. 
Furthermore, it is not necessary because the act has definite
requirements, which if enforced, allow its objectives to be met.  For
example, by enforcing FCLAA's diligence requirements, BLM can
discourage speculation and encourage the development of coal leases,
and by ensuring that it properly calculates a lease's fair market
value, BLM can ensure that it obtains fair market value for leases. 

According to BLM officials, if the demand for federal coal increases
significantly, it may be appropriate to revert to a regional leasing
process, whereby projected demand is used as a factor in setting
leasing levels.  This regional leasing process offers certain
administrative efficiencies and economies for a large-scale leasing
operation. 


GEOGRAPHIC AREAS OF COAL'S
PRODUCTION THAT ARE INCLUDED IN
THIS REPORT
=========================================================== Appendix I

This appendix describes the four geographic areas we selected for
study.  The descriptions of each area contain information on the
areas' topography, economy, geology, and coal-mining activities.  The
environmental impacts associated with coal mining are also
summarized. 


   POWDER RIVER BASIN, WYOMING
--------------------------------------------------------- Appendix I:1

The coal-producing trend in the Wyoming portion of the Powder River
Basin lies largely in eastern Campbell County.  Minable coal also
occurs in Converse, Johnson, and Sheridan counties.\1 The landscape
in this portion of the Powder River Basin is dominated by plains and
low- lying hills interrupted by stream valleys, ridges, and isolated
buttes.  Elevations range from about 3,600 feet in the valley floors
to 5,000 feet in the upland areas.  The average annual precipitation
of less than 20 inches is only sufficient to support a mixture of
grasses and shrubs, but cottonwood trees commonly grow within the
stream's drainage. 

Campbell County is predominantly rural and had a population of about
33,000 in 1990.  Gillette and Wright are the largest communities in
the area.  Most of the land in the area is used for grazing cattle
and sheep.  Other uses include the farming of hay and grain, oil and
gas development, and coal mining. 

The Powder River Basin contains almost 24 billion tons of coal
reserves, of which about 7.5 billion tons, or about 32 percent, is
under existing federal leases.  The major coal bed mined in the area
is the Wyodak Coal.  This bed occurs at the top of the Paleocene Fort
Union Formation and is generally thick and widespread.  The coal is
subbituminous,\2 contains little sulfur, and can exceed 80 feet in
thickness.  Coal in the eastern Powder River Basin is mined by
surface-mining techniques that include removal and storage of the
overburden for later reclamation.  The industry's trend is to develop
large-scale, efficient operations, and many mines produce over 10
million tons per year.  The volume of production compensates for the
small profit margin per ton on this low-priced coal. 

Groundwater resources should be considered in environmental
assessments because they could be affected by coal mining in the
eastern Powder River Basin.  Discontinuous aquifers\3 in the
overlying Eocene Wasatch Formation are completely disturbed when this
overburden is removed and stockpiled for reclamation.  The main coal
seam, the Wyodak Coal, is a regional aquifer, and it is removed
during mining.  The undisturbed coal aquifer adjacent to the mined
areas can also experience a lowering of its water level.  In
addition, aquifers in the reclaimed areas that are backfilled with
debris from mining experience a decrease in the quality of
groundwater. 

Wildlife can also be affected by coal mining.  Local populations of
mule deer and pronghorn antelope can be temporarily displaced.  The
removal of sagebrush during mining and failure to replace it during
reclamation can adversely affect the habitat of antelope and sage
grouse. 


--------------------
\1 We did not include in our study those other counties in the Powder
River Basin that do not have federal coal production. 

\2 As increased overburden increases temperature and pressure, the
coal cycle progresses through six stages--peat, lignite,
subbituminous, bituminous, anthracite, and graphite.  As overburden
increases, water and gases are pressed out of the carbon.  The
greater the coal's carbon content, the higher the coal's ranking as
fuel. 

\3 An aquifer is a water-bearing rock formation that is permeable
enough to yield water in sufficient quantities to supply wells and
springs. 


   WASATCH PLATEAU AND BOOK
   CLIFFS, UTAH
--------------------------------------------------------- Appendix I:2

The Wasatch Plateau and Book Cliffs consist of portions of Emery,
Carbon, Sevier, and Sanpete counties in central Utah.  The Wasatch
Plateau is a series of north-south trending mountains dissected by
steep canyons, while the Book Cliffs are steep, south-facing cliffs
capped by broad, gently sloping mountain tops.  Elevations in the
areas range from about 6,000 to over 11,000 feet.  Desert shrubs,
sagebrush, and pinion-juniper woodlands dominate the warmer, drier
low elevations, while conifers and aspen dominate the cooler, wetter
high elevations. 

The Wasatch Plateau and Book Cliffs are predominantly rural.  The
four- county area had an estimated 1990 population of about 62,000,
and Price and Richfield are the largest communities in the area. 
Much of the federal and state land is used for grazing and
recreation, but timber and minerals are also produced.  Much of the
private land is agricultural.  Coal mining, trade, services, and
government account for the majority of the employment in the area. 

The Wasatch Plateau and Book Cliffs contain about 9 billion tons of
coal reserves, and the state of Utah estimates that about 2.6 billion
tons of this amount is recoverable.  Less than 10 percent of the
total reserves are under federal lease.  Coal primarily occurs in the
Cretaceous Blackhawk Formation, a thick sequence of sandstone and
shale with several coal beds from 4 to 28 feet in thickness.  Coal is
mined exclusively by underground methods in this area.  Mines
generally access the coal seams where they crop out along cliff
faces.  The industry's trend is to expand existing mines through the
use of long-wall mining technology. 

Major environmental effects from coal mining include impacts on the
area's water resources.  The mining of underground coal has resulted
in subsidence that has affected springs and shallow aquifers
overlying the mined areas.  Coal mining can also disrupt the flow of
groundwater in the mined area and can lead to local dewatering of the
regional Starpoint- Blackhawk aquifer.  Water discharged from mines
can increase the flow of streams, and some of the receiving streams
have been found to contain higher concentrations of trace elements
such as lead, selenium, and chromium and to be more mineralized than
naturally occurring runoff.  The construction of access roads and
surface facilities can increase suspended sediments in nearby streams
and can disrupt the migration of wildlife.  In addition, raptor nests
along cliff faces can be adversely affected by subsidence. 


   WARRIOR BASIN, ALABAMA
--------------------------------------------------------- Appendix I:3

The Warrior Coal Basin consists of Walker, Tuscaloosa, Fayette,
Lamar, Pickens, and small parts of Jefferson and other adjacent
counties in northwestern Alabama.  The area is a plateau of low
relief dissected by narrow valleys.  Elevations range from 500 to
1,000 feet.  A moist temperate climate with an average annual
precipitation of about 54 inches per year supports a forest of
southern pines and upland hardwoods that cover much of the area. 

The Warrior Basin is predominantly rural and had a 1990 population of
about 924,000.  Major urban areas include the cities of Tuscaloosa
and Birmingham.  Much of the land consists of unmanaged forest;
forestry is a major industry.  Secondary land uses include
agriculture and coal mining. 

Most of the mineral ownership of the approximately 21 billion tons of
coal reserves in the Warrior Basin is private.  Less than 1 percent
of the reserves are under federal lease.  Mineral rights to federal
coal consist of small, isolated tracts whose surface is generally
privately owned.  Bituminous coal in the Warrior Basin occurs at the
tops of repeating mudstone and sandstone cycles in the Pennsylvanian
Pottsville Formation.  Mining is by both surface and underground
methods. 

Water resources in the area can be significantly affected by coal
mining.  Both subsurface and surface mining can degrade the quality
of groundwater and can locally disrupt the flow of groundwater. 
Groundwater moving through mined areas becomes more mineralized. 
Aquifers over surface-mined areas are removed, and aquifers adjacent
to surface and underground mines can experience local drawdown. 
Mineralized or acid drainage from underground mines can pollute
receiving streams, killing aquatic life and adversely affecting the
water for recreational, domestic, and industrial use. 

The clear-cutting of forests over large areas during surface mining
increases erosion and subsequently increases the deposition of
sediment in streams and reservoirs.  Clear-cutting also degrades
visual quality, and the associated increase in runoff can result in
local flooding.  With the removal of vegetation, wildlife's habitat
is temporarily lost and can be permanently altered depending on how
the land is reclaimed. 


   APPALACHIAN BASIN, EASTERN
   KENTUCKY
--------------------------------------------------------- Appendix I:4

The easternmost portion of Kentucky lies within the Appalachian
Basin; active federal coal leases lie in Bell and Whitley counties. 
Landforms consist of broad plateaus, narrow ridges and valleys, and
rugged hills.  Elevations range up to 3,000 feet.  An average annual
precipitation of over 45 inches per year supports a forest consisting
primarily of upland hardwoods. 

This portion of Kentucky is rural and contains no major cities.  The
1990 population of the 35 counties comprising this area was about
836,000.  The principal land use is forest, and subordinate uses of
land include pasture and cropland.  Coal mining is a major industry
in the area. 

The Kentucky Department of Mines and Minerals has estimated that this
portion of the state contains over 55 billion tons of coal reserves. 
Most federal coal is located on small isolated tracts, and less than
1 percent of the state's reserves are under federal lease.  Most of
the minable coal occurs in the Pennsylvanian Breathitt Formation--a
sequence of siltstone, sandstone, shale, and coal.  Coal is mined by
both surface and underground methods. 

Environmental impacts associated with coal mining in the Kentucky
portion of the Appalachian Basin are generally similar to those we
described in Alabama.  However, acid-mine drainage in this part of
Kentucky is seldom troublesome as it is quickly neutralized by
calcareous minerals in the surrounding rock. 


ACCURATELY ESTIMATING FUTURE
DEMAND FOR COAL LEASES IS
DIFFICULT
========================================================== Appendix II

In relation to the Bureau of Land Management's (BLM) coal- leasing
program, there are two types of demand:  the market demand for coal
and individual companies' demand for coal leases.\1 The market demand
for coal is the total of all demand from companies that use coal.  In
other words, it is the number of coal purchases that companies are
willing and able to make, given the price of coal and its
availability.  Similarly, the demand for coal leases is the number of
coal leases that individual companies are willing and able to lease,
given the price and availability of those leases. 


--------------------
\1 In economic terms, "demand" refers to the purchases (e.g., of
goods) that people are willing and able to make, given the prices and
choices available to them.  Demand, in this general sense, is
determined by a variety of factors, including:  a good's own price,
related goods' prices and availability, the size of the population,
people's level of income, and people's expectations. 


   ACCURATELY PREDICTING FUTURE
   DEMAND FOR COAL LEASES IS
   DIFFICULT
-------------------------------------------------------- Appendix II:1

It can be extremely difficult to accurately predict the demand for
coal, and the further into the future the forecasts are extended, the
more unreliable the predictions become.  For example, the Department
of Energy's (DOE) 1978 medium coal demand projection for 1985 was 36
percent higher than what actually occurred, and its projection for
1990 was 70 percent higher.  The demand for coal is reflected in the
amount of coal consumed.  Figure II.1 illustrates the difference
between DOE's projection for consumption and actual consumption.  As
a result, if BLM sets coal-leasing levels strictly on the basis of
the projected future demand for coal, it risks offering and
evaluating more (or fewer) leases than the number that will sell. 

   Figure II.1:  Comparison
   Between DOE's Forecasted Coal
   Consumption and Actual
   Consumption

   (See figure in printed
   edition.)

Source:  Forecasted consumption--1978 Regional Coal Production
Forecasts, DOE.  Actual consumption--1992 Annual Energy Review, DOE. 

This difficulty in accurately projecting the demand for coal and coal
leases arises primarily from the large number of factors that
influence the demand for coal and the uncertainties surrounding those
factors.  Some of the significant factors that influence the demand
for coal and coal leases include:  the demand for electricity, coal
prices (including the cost of transporting the coal from the mine to
the buyer (primarily public utilities), the quality of coal
(including Btu\2 --a measure of heating value--and sulfur content),
the price and availability of other energy sources (e.g.,
hydroelectric, nuclear power, and energy conservation), the number of
coal users, government policies (e.g., the ultimate effects of the
Clean Air Act amendments) and expectations about the availability of
future energy sources.  For example, the expectation in the late
1970s and early 1980s of energy shortages resulted in an increased
demand for coal, higher coal prices, and consequently a higher demand
for coal leases. 

Accurately estimating the demand for coal leases is also difficult
because of the lag time between when the demand for coal is estimated
and when the leases are sold and developed.  During regional leasing,
for example, market conditions changed significantly after leasing
levels were set.  As a result, BLM selected and evaluated many tracts
that were not leased. 


--------------------
\2 British thermal unit. 


   COAL PRICES HAVE DECLINED SINCE
   1975
-------------------------------------------------------- Appendix II:2

Conditions in the coal market have been depressed for several years
and continue so today.  Slow growth in demand by public utilities,
chronic overcapacity in the coal industry, and improved production
technology have forced coal prices down since the early 1980s.  The
average price of coal sold in the United States increased nominally
through 1975 but has steadily decreased through 1991.  (See fig.  II. 
2.)

   Figure II.2:  Average U.S. 
   Coal Prices, 1959 Through 1991

   (See figure in printed
   edition.)

Source:  1992 Annual Energy Review, DOE. 

We found general agreement among BLM officials that the decline in
coal prices can be attributed to the increasing amounts of
less-expensive coal produced from Powder River Basin mines.  In
economic terms, the decline in coal prices is primarily the result of
a "shift," or increase in the supply of coal, rather than a change in
demand.  This increase in supply is a consequence of coal suppliers'
bringing more coal to the market at each price level.  This is
possible because of changes in technology (such as the "long-wall
miner"--a machine used in underground mining operations) and larger
surface operations in the West (thus, taking advantage of economies
of scale in coal mining).  As a result, supply has increased, and the
price of coal has dropped--even though demand may not have
changed--and the quantity of coal has increased. 

Primarily as a result of supply increases and price decreases, the
quantity of coal demanded--as measured by the consumption of
coal--has steadily risen over time.\3 Figure II.3 shows the
consumption of U.S.  coal from 1949 through 1991. 

   Figure II.3:  U.S.  Coal
   Consumption, 1949 Through 1991

   (See figure in printed
   edition.)

Source:  1992 Annual Energy Review, DOE. 

Even though the consumption of coal has risen (albeit recently, at a
decreasing rate), the demand for federal coal leases has not
similarly increased.  Figure II.4 shows the number of federal coal
leases issued from 1978 through 1992.  The demand for federal coal
leases remains far below the high level of demand experienced in the
early 1980s.  The demand for leases peaked in 1982, when 40 federal
coal leases were issued.  In comparison, three federal coal leases
were issued during 1992.  Thus, even without a large number of
federal coal leases being issued, the consumption of coal increased. 

   Figure II.4:  Federal Coal
   Leases Issued, 1978 Through
   1992

   (See figure in printed
   edition.)

Source:  Federal Coal Management Report, fiscal year 1991, the
Department of the Interior. 

According to a BLM official, the slight increase in demand for coal
leases in 1990 and 1991 reflected a "pent-up demand." That is,
applicants frustrated by the delays inherent in BLM's regional coal
sale process were eager to submit applications under the
lease-by-application process.  In the near future, BLM officials do
not anticipate an increase in the number of coal lease applications. 



(See figure in printed edition.)Appendix III

--------------------
\3 The growth rate of consumption, however, has decreased since 1988. 


LETTER TO THE ACTING SOLICITOR,
DEPARTMENT OF THE INTERIOR
========================================================== Appendix II



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(See figure in printed edition.)Appendix IV
LETTER FROM THE ASSOCIATE
SOLICITOR FOR ENERGY AND
RESOURCES, DEPARTMENT OF THE
INTERIOR
========================================================== Appendix II



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(See figure in printed edition.)Appendix V
LETTER TO THE DIRECTOR, BUREAU OF
LAND MANAGEMENT, DEPARTMENT OF THE
INTERIOR
========================================================== Appendix II



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(See figure in printed edition.)Appendix VI
LETTER FROM THE DEPUTY DIRECTOR,
BUREAU OF LAND MANAGEMENT,
DEPARTMENT OF THE INTERIOR
========================================================== Appendix II



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(See figure in printed edition.)Appendix VII
COMMENTS FROM THE DEPARTMENT OF
THE INTERIOR
========================================================== Appendix II



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See app X. 



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See comment 1. 

See comment 1. 

See comment 2. 

See comment 3. 

See comment 2. 



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See comment 4. 

See comment 2. 

See comment 4. 

See comment 4. 

See comment 2. 



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See comment 5. 

See comment 2. 

See comment 2. 

See comment 6. 



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See comment 7. 

See comment 8. 

See comment 9. 



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See comment 10. 

See comment 2. 

See comment 11. 

See comment 8. 

See comment 12. 



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See comment 2. 

See comment 13. 

See comment 14. 

See comment 2. 



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See comment 15. 

See comment 2. 

See comment 15. 



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See comment 2. 

See comment 16. 



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See comment 2. 

See comment 4. 

See comment 4. 

See comment 17. 



(See figure in printed edition.)


The following are GAO's comments on the Department of the Interior's
letter dated April 12, 1994. 


   GAO COMMENTS
-------------------------------------------------------- Appendix II:3

1. The report has been updated to reflect new information provided by
Interior in April 1994. 

2. Clarifications have been made to the text of the report. 

3. The history of coal demand as we present it is taken from the 1985
Final Environmental Impact Statement Supplement for Interior's
Federal Coal Management Program, page 22.  We believe that
presentation is accurate, appropriate, and fair, and thus we have
made no change. 

4. We made no change in response to this comment.  The presentation
in the text is correct, and the suggested change adds additional
detail that is not necessary for an understanding of the federal
coal-leasing program. 

5. See our detailed response to the office of the Solicitor's
comments in appendix X. 

6. We agree with Interior that extending the life of leases within a
logical mining unit (LMU) and furthering the economic development of
the coal within the LMU are not mutually exclusive.  However, we
believe that the LMU provision should be used in a manner consistent
with the goals of the act, that is, encouraging the development of
coal production on federal leases and discouraging the speculative
holding of leases.  We believe that the exemption granted by the LMU
provision should not be used primarily to extend the diligence period
and that rejecting the formation of an LMU would not be inconsistent
with fostering the development of the coal, conservation of the
resource, and maximum economic recovery.  We are pleased to see that
Interior is considering proposed regulations that would provide
criteria that BLM can use to determine whether to approve an LMU. 

7. When BLM sells a lease, it exchanges the rights to produce and
sell coal in exchange for a bonus bid, rental payments, and royalty
payments.  The royalty payments would start within 10 years on the
basis of the mine's production of commercial quantities within that
time and its continued production of commercial quantities
thereafter.  If a lease is extended beyond its 10-year term without
production, the lessee is obtaining the right to extend the time it
is allowed to achieve commercial production without compensating the
government. 

We are not advocating a holding fee in lieu of production.  We are
pointing out that when BLM approves an LMU whose primary purpose is
to extend the diligence period, BLM is providing something of value
for which it has not been compensated. 

8. Although Interior notes that the sale price per ton of the
55-million-ton West Rocky Butte lease (about 30 cents per ton) was
high, we believe the price was high because the sale and subsequent
formation of an LMU allowed the lessee to keep the much larger Rocky
Butte lease.  In establishing the value for the West Rocky Butte
lease, BLM used, as its basis, the combined tonnage of both leases. 
Had the Rocky Butte lease terminated and a combined Rocky Butte and
West Rocky Butte tract been offered and sold for the price that
Northwestern Resources Company paid for the West Rocky Butte tract,
the bid price of coal acquired would be 2.75 cents per ton.  While
Interior points out that rentals are due on the two leases, the
amount of rent--approximately $16,000 annually--is very small
relative to the value of the coal contained in the LMU. 

9. The Chief of BLM's Solid Mineral Operations Division concluded in
an October 1990 evaluation that if the Rocky Butte lease terminated,
there would be no impediment to future development of the tract by
the lessee or another entity when the market for Powder River Basin
coal is no longer saturated.  In addition, BLM's Branch of Mining Law
and Solid Minerals and Northwest Regional Evaluation Team in Wyoming
concluded that if the Rocky Butte lease terminated, the government
would have a strategically placed block of coal ready for sale in the
future when coal prices increase.  They estimated that the bonus bid
could range from $25 million to $125 million and that the sale might
elicit true competition. 

10. From the potential future sale price that BLM Wyoming officials
cite for the Rocky Butte lease--$25 million to $125 million--it
appears that BLM believes the potential future selling price would
far exceed the cost of the sale. 

11. Allowing the Rocky Butte lease to terminate would not promote
piecemeal development.  To the contrary, the Chief of BLM's Solid
Mineral Operations Division concluded in an October 1990 evaluation
that if the Rocky Butte lease terminated, there would be no
impediment to future development of the tract by the lessee or
another entity when the market for Powder River Basin coal is no
longer saturated. 

12. The discussion of the two Alabama leases and the associated LMU
has been deleted from the final version of this report. 

13. The discussion of the loss to the government from delaying
royalty payments has been deleted from the final version of this
report. 

14. The discussion of the findings of our August 1992 report has not
been repeated in the final version of this report. 

15. Our report recognizes that "tiering" is an acceptable practice to
avoid redoing assessments.  However, when an assessment does not show
direct links to prior studies, tiering cannot be assumed.  In our
reading of the Utah assessments, we could not determine that these
assessments had been tiered to prior studies.  After discussions with
the preparers, we were told that the assessments were tiered. 

16. Our report notes the lack of public concern over coal leasing in
central Utah. 

17. We have revised the text to more clearly convey that mining in
eastern Powder River Basin areas containing aquifers clearly has the
potential to effect those aquifers and that those impacts need to be
considered in the environmental assessments.  These impacts are
discussed in the U.S.  Geological Survey Water Resources
Investigations Report 88-4046. 




(See figure in printed edition.)Appendix VIII
COMMENTS FROM THE DEPARTMENT OF
THE INTERIOR'S OFFICE OF THE
SOLICITOR
========================================================== Appendix II

supplementing those in the
report text appear in
appendix X. 



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(See figure in printed edition.)Appendix IX
COMMENTS FROM KERR-MCGEE
CORPORATION
========================================================== Appendix II

the report text appear at the end of this appendix and in appendix X. 



(See figure in printed edition.)



(See figure in printed edition.)

See comment 1. 



(See figure in printed edition.)


The following are GAO's comments on Kerr-McGee Corporation's letter
dated February 22, 1994.  GAO's detailed evaluation of Kerr-McGee's
comments and the comments of the Department of the Interior's Office
of the Solicitor appear in appendix X. 

1. In its comments, Kerr-McGee correctly noted that when the
production requirements of section 2(a)(2)(A) of the Mineral Leasing
Act (MLA) are not met, the section prohibits only the issuance of
leases by the Secretary of the Interior.  It has no application to
the acquisition of existing leases by assignment.  Thus, we revised,
to 35, the number of oil and gas leases that the Secretary issued to
Kerr- McGee between March 1988 and November 1992. 


EVALUATION OF THE OFFICE OF THE
SOLICITOR'S AND KERR-MCGEE
CORPORATION'S COMMENTS
=========================================================== Appendix X

The Department of the Interior's Office of the Solicitor and Kerr-
McGee Corporation provided us with written comments on a portion of a
draft of this report.\1 They disagreed with our conclusion that
Kerr-McGee was ineligible to receive new leases under the Mineral
Leasing Act of 1920 (MLA) because two of its coal leases obtained
before the Federal Coal Leasing Amendments Act of 1976 (FCLAA) was
passed have not satisfied the production requirements of section
2(a)(2)(A) of the MLA.  However, the Solicitor indicated that the
regulation on which Interior relied concerning logical mining units
was the policy of past presidential administrations and arguably was
not consistent with FCLAA's goal of reducing coal speculation. 
Consequently, he noted that the regulation could be amended at any
time.  In this connection, he pointed out that, on December 10, 1993,
BLM requested public comments about changes that should be made in
the regulations governing LMUs.  58 Fed.  Reg.  64919, Decemember 10,
1993. 

After carefully evaluating the Solicitor's and Kerr-McGee's comments,
we continue to believe that BLM should not have issued mineral leases
to Kerr-McGee.  In summary, the MLA provides no authority for
exempting Kerr-McGee's pre-FCLAA coal leases contained in an LMU from
the commercial quantities production requirement of section
2(a)(2)(A).  Accordingly, Interior cannot transform the "present
production" requirement of section 2(a)(2)(A) into a "future
production" requirement, that is, diligent development.  Furthermore,
Kerr-McGee is not presently "producing" coal under section 2(a)(2)(A)
and the regulations which define this term. 


--------------------
\1 Comments from the Department of the Interior's Office of the
Solicitor (dated Apr.  11, 1994) are provided in app.  VIII. 
Kerr-McGee Corporation's comments (dated Feb.  22, 1994) are provided
in app.  IX. 


   INTERIOR LACKS AUTHORITY TO
   EQUATE DILIGENT DEVELOPMENT
   WITH CURRENT PRODUCTION
--------------------------------------------------------- Appendix X:1

Both Interior and Kerr-McGee argue that by including the two
pre-FCLAA leases in an LMU, Kerr-McGee need only produce "coal in
commercial quantities" by the end of the LMU's 10-year diligent
development period in order to remain qualified to obtain new mineral
leases.  We disagree.  Nothing in section 2(a)(2)(A), section 2(d),
or any other provision of the MLA authorizes the Interior to exempt
pre-FCLAA leases contained in an LMU from the current production
requirement of section 2(a)(2)(A).  After a 10-year holding period,
section 2(a)(2)(A) imposes a present, rather than prospective
("diligence"), production requirement in order for a lessee to
qualify to receive new mineral leases.  While section 2(d) does give
the Secretary discretion to attribute production from one lease
within an LMU to all leases within the LMU, nothing in the language
of this provision suggests that diligent development on one lease may
be considered to be production on the others.\2 In fact, Interior
acknowledged in the discussion accompanying the publication of its
final rulemaking for section 2(a) (2)(A) that this provision is not a
"diligence" provision but a lease "qualification" provision.  51 Fed. 
Reg.  43911 (Dec.  5, 1986).\3

FCLAA's legislative history as well as Interior's LMU regulations
indicates that "diligent development" refers to a period preceding
production in commercial quantities and embodies a commitment to
produce coal in commercial quantities at some future date rather than
at the present time.  H.R.  Rep.  No.  681 at 13; 122 Cong.  Rec. 
488, January 21, 1976; 43 C.F.R.  3480.0-5 (12) and (13).  Also,
FCLAA's legislative history does not support the Solicitor's view
that section 2(d) transformed the section 2(a)(2)(A) "production in
commercial quantities" requirement into a "diligence requirement." As
support for its position, the Solicitor's letter relies on a
statement by Chairwoman Patsy Mink on the House floor that refers to
section (2)(d) as "an enormous exemption" to the due diligence
provisions otherwise imposed by FCLAA.  However, the floor debate
from which this phrase was extracted does not address the interplay
between section 2(d) and section 2(a)(2)(A).  Rather, the comment was
made in the context of opposition to a proposal to remove from the
House version of FCLAA a requirement for a public hearing before the
formation of an LMU.  122 Cong.  Rec.  507-508 (Jan.  21, 1976).  92
I.D.  at 554 (1985). 

Under these circumstances, Chairwoman Mink's statement provides
little support for the transformation of the section 2(a)(2)(A)
"producing in commercial quantities" requirement into a "diligence
requirement." A more appropriate interpretation of Chairwoman Mink's
reference, in keeping with the actual language of section 2(d), is
that the attribution to all leases in an LMU of diligent development
on any of the leases is the "enormous exemption." This view is
consistent with the discussion of the effect of including a section
2(a)(2)(A) lease in an LMU in the Solicitor's 1985 memo on this
provision.\4


--------------------
\2 Also, we do not find support for the Solicitor's position in
section 2(d)(5) of the MLA, which states that pre-FCLAA leases may be
included within an LMU and, if so included, shall be subject to the
provisions of section 2(d).  All that this means is that the
pre-FCLAA leases will be subject to the diligent development,
continuous operation, and production requirements of the LMU.  This
provision does not transform section 2(a)(2)(A)'s "production in
commercial quantities" requirement into a "diligence" requirement. 

\3 Given the fact that both section 2(a)(2)(A) and section 2(d) were
enacted as part of the same law, we believe it significant that the
Congress did not specifically exempt pre-FCLAA leases contained in an
LMU from the production in commercial quantities requirement of
section 2(a)(2)(A).  The Congress had every opportunity to consider
doing so, but it did not. 

\4 In an effort to find support for the issuance of these leases to
Kerr- McGee, both the Solicitor and Kerr-McGee have cited an Interior
coal management regulation.  This regulation, 43 C.F.R. 
3472.1.2(e)(6)(ii) (E), provides that a lessee is not disqualified
under section 2(a)(2)(A) if a pre-FCLAA lease is contained in an LMU
that is producing in accordance with the LMU's stipulations of
approval.  The Solicitor and Kerr-McGee argue that this regulation
transforms section 2(a)(2)(A) into a diligence requirement because
the stipulations of approval for Kerr- McGee's LMU provide that the
company must produce coal in commercial quantities within a 10-year
diligent development period.  As made clear by Interior's comments to
the final regulations implementing section 2(a)(2)(A), this
regulation means something different:  although it gives a pre-FCLAA
lessee 10 years to achieve production of coal in commercial
quantities, it requires that at the time of qualification for a new
MLA lease, the lessee must be producing coal.  51 Fed.  Reg.  43914
(Dec.  5, 1986). 


   KERR-MCGEE IS NOT PRESENTLY
   PRODUCING COAL
--------------------------------------------------------- Appendix X:2

Both the Solicitor and Kerr-McGee also argue that Kerr-McGee's leases
are presently producing coal in accordance with Interior regulations. 
As stated in our report, 43 C.F.R.  3400.0-5(rr) defines "producing"
for the purposes of section 2(a)(2)(A) as "actually severing coal, or
operating an ongoing mining operation in accordance with standard
industry operation practices." Under this regulation, a lease is
considered to be "producing," even though the severing of coal is
temporarily suspended for "reasons beyond the reasonable control of
the lessee." These reasons include, but are not limited to, equipment
breakdown and repair, vacations and holidays, orders of governmental
authorities, sale from stockpiles, and a power plant's cessation of
purchases for a "limited duration of time."

Kerr-McGee asserts that the cessation of production of the LMU is in
keeping with operating an ongoing mine in accordance with industry's
standard operating practice.  Kerr-McGee alleges that it is not
engaged in a speculative holding of coal because it has invested
about $50 million--$27 million in mining and equipment alone.\5 Also,
the Solicitor's letter points out that even though Kerr-McGee has
suspended its operation for some time, BLM found that its suspension
was consistent with industry's standard operating practice and thus
allowable under this regulation. 

As stated in our report, Kerr-McGee is not producing coal in
accordance with Interior's regulatory definition of "producing."
Kerr-McGee's suspension of coal production is not the kind of
suspension envisioned by the regulation.  Such suspensions are of
short duration and do not include long-term multiyear cessation of
production because of market conditions.  To define, as Kerr-McGee
and the Solicitor do, standard industry operating practice to include
a continuous 6-year, 1988-94 stoppage of production because of market
conditions would defeat the purpose of section 2(a)(2)(A), that is,
to obtain production from the pre-FCLAA leases and thereby to limit
the speculative holding of federal coal.\6



(See figure in printed edition.)Appendix XI

--------------------
\5 Kerr-McGee's investment in mining and equipment has been primarily
associated with the production of coal from the nonfederal lease in
the LMU.  This lease had been in production since 1979--6 years
before the formation of the LMU.  Coal mined from this lease before
the formation of the LMU totaled 16.2 million tons, representing
about 81 percent of the coal mined from the leases in the LMU to
date. 

\6 The Solicitor's letter also disagrees with the draft report's
statement that Interior's present position is at odds with a previous
1985 Solicitor's memorandum and a 1986 Office of Technology
Assessment report on section 2(a)(2)(A).  We continue to believe that
Interior's present position is contrary to the views contained in
both of these documents. 


COMMENTS FROM THE DEPARTMENT OF
AGRICULTURE
=========================================================== Appendix X


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix XII


   NATURAL RESOURCES MANAGEMENT
   ISSUES
------------------------------------------------------- Appendix XII:1

Robert W.  Wilson, Assistant Director
Robert E.  Cronin, Assignment Manager
Hector Rojas, Mining Engineer
David E.  Flores, Evaluator-in-Charge
Ronald Belak, Site Senior
Janet L.  Peace, Staff Evaluator
Stanley G.  Feinstein, Senior Attorney
Richard P.  Johnson, Attorney-Adviser
