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 ************************************************************************** * This file contains an ASCII representation of the text of a GAO * * report. 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We are unable to accept electronic orders * * for printed documents at this time. * ************************************************************************** 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 (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.)Appendix IV LETTER FROM THE ASSOCIATE SOLICITOR FOR ENERGY AND RESOURCES, DEPARTMENT OF THE INTERIOR ========================================================== Appendix II (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.)Appendix V LETTER TO THE DIRECTOR, BUREAU OF LAND MANAGEMENT, DEPARTMENT OF THE INTERIOR ========================================================== Appendix II (See figure in printed edition.) (See figure in printed edition.)Appendix VI LETTER FROM THE DEPUTY DIRECTOR, BUREAU OF LAND MANAGEMENT, DEPARTMENT OF THE INTERIOR ========================================================== Appendix II (See figure in printed edition.) (See figure in printed edition.)Appendix VII COMMENTS FROM THE DEPARTMENT OF THE INTERIOR ========================================================== Appendix II (See figure in printed edition.) See app X. (See figure in printed edition.) (See figure in printed edition.) See comment 1. See comment 1. See comment 2. See comment 3. See comment 2. (See figure in printed edition.) See comment 4. See comment 2. See comment 4. See comment 4. See comment 2. (See figure in printed edition.) See comment 5. See comment 2. See comment 2. See comment 6. (See figure in printed edition.) See comment 7. See comment 8. See comment 9. (See figure in printed edition.) See comment 10. See comment 2. See comment 11. See comment 8. See comment 12. (See figure in printed edition.) See comment 2. See comment 13. See comment 14. See comment 2. (See figure in printed edition.) See comment 15. See comment 2. See comment 15. (See figure in printed edition.) See comment 2. See comment 16. (See figure in printed edition.) 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. (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (See figure in printed edition.) (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