[Federal Register Volume 76, Number 103 (Friday, May 27, 2011)]
[Proposed Rules]
[Pages 30881-30884]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-13284]


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DEPARTMENT OF THE INTERIOR

Office of Natural Resources Revenue

30 CFR Parts 1202 and 1206

[Docket No. ONRR-2011-0004]
RIN 1012-AA00


Federal and Indian Coal Valuation

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

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Office of Natural Resources Revenue (ONRR) requests 
comments and suggestions from affected parties and the interested 
public before proposing changes to the existing regulations governing 
the valuation of coal produced from Federal and Indian leases, for 
royalty purposes. The existing Federal and Indian coal valuation 
regulations have been in effect since March 1, 1989, with minor 
subsequent amendments relating primarily to the Federal Black Lung 
Excise Taxes, abandoned mine lands (AML) fees, state and local 
severance taxes, and washing and transportation allowances provisions. 
These existing coal valuation regulations also have not kept pace with 
significant changes that have occurred in the domestic coal market 
during the last 20-plus years. This notice is intended to solicit 
comments and suggestions on possible new methodologies to establish the 
royalty value of coal produced from Federal and Indian leases. The ONRR 
also plans to hold public workshops to discuss changes to the coal 
valuation regulations after the written comment period closes, and ONRR 
has had a reasonable time to review and analyze the comments. The ONRR 
will announce any public workshops in a future Federal Register notice.
    Getting feedback upfront and involving all affected stakeholders in 
the rulemaking process are the hallmarks of good government and smart 
business practice. The intention of this rulemaking process is to 
provide regulations that would offer greater simplicity, certainty, 
clarity, and consistency in production valuation for mineral lessees 
and mineral revenue recipients; be easy to understand; decrease 
industry's cost of compliance; and provide early certainty to industry 
and ONRR that companies have paid every dollar due. The ONRR intends 
that the final regulations will be revenue neutral.

DATES: You must submit your comments by July 26, 2011.

ADDRESSES: You may submit comments on this advance notice by any of the 
following methods. Please use the Regulation Identifier Number (RIN) 
1012-AA00 as an identifier in your message.
     Federal eRulemaking Portal: http://www.regulations.gov. In 
the entry titled ``Enter Keyword or ID,'' enter ONRR-2011-0004, then 
click search. Follow the instructions to submit public comments and 
view supporting and related materials available for this advanced 
notice of proposed rulemaking. The ONRR will post all comments.
     Mail comments to Hyla Hurst, Regulatory Specialist, Office 
of Natural Resources Revenue, P.O. Box 25165, MS 61013C, Denver, 
Colorado 80225.
     Hand-carry comments or use an overnight courier service. 
Our courier address is Building 85, Room A-614, Denver Federal Center, 
West 6th Ave. and Kipling St., Denver, Colorado 80225.

FOR FURTHER INFORMATION CONTACT: For questions on procedural issues, 
contact Hyla Hurst, Regulatory Specialist, ONRR, telephone (303) 231-
3495. For questions on technical issues, contact

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Richard Adamski, Asset Valuation, ONRR, telephone (303) 231-3410.

SUPPLEMENTARY INFORMATION:

I. Background

    The Secretary of the Interior's authority to establish the value of 
coal production through regulations is contained in the Indian Mineral 
Leasing Act of 1938, the Mineral Leasing Act, and the Mineral Leasing 
Act for Acquired Lands (25 U.S.C. 396d; 30 U.S.C. 189 and 359). In 
addition, virtually all Federal and Indian coal leases expressly 
reserve to the Secretary the authority to establish the reasonable 
value of coal production or provide that the royalty value of coal be 
set by regulation.
    In 2007, the Royalty Policy Committee (RPC) Subcommittee on Royalty 
Management issued a report titled ``Mineral Revenue Collection from 
Federal and Indian Lands and the Outer Continental Shelf.'' The 
Subcommittee's report recommended ``revis(ing) and implement(ing) the 
regulations and guidance for calculating prices used in checking 
royalty compliance for solid minerals, with particular attention to 
non-arm's-length transactions.''
    The existing Federal and Indian coal regulations have been in 
effect since 1989, with minor amendments to Federal Black Lung Excise 
Taxes, AML fees, state and local severance taxes (55 FR 35427, August 
30, 1990), and washing and transportation allowances provisions (61 FR 
5448, February 12, 1996). In 1996, the royalty valuation regulations 
for Indian leases were separated from the regulations for Federal 
leases because of amendments to the latter removing certain form-filing 
requirements for the coal washing and transportation allowances that 
were retained for Indian leases. The ONRR continues to evaluate the 
effectiveness and efficiency of its regulations, particularly with 
regard to non-arm's-length valuation and ramifications spurred by 
changes in the coal mining industry, including increasing vertical 
integration of mining and power production and increasing production by 
coal cooperatives. Further, ONRR's experience in enforcing the 
regulations indicates that they can be cumbersome because, to properly 
determine the value for royalty purposes, ONRR must analyze literally 
thousands of sales, transportation, and processing transactions each 
month. Performing this analysis is costly and burdensome for both the 
Federal Government and the regulated industry and can lead to disputes 
regarding valuation methodologies.
    The 1989 coal valuation regulations were written to establish value 
based on transactions between independent, non-affiliated parties with 
opposing economic interests. The Department of the Interior has long 
held the view that the sales prices agreed to in arm's-length 
transactions are the best indication of market value. The 1989 
regulations reflect that view. Under the regulations at 30 CFR part 
1206, subparts F and J, the value of most Federal and Indian coal is 
based on the gross proceeds accruing to the lessee under the lessee's 
arm's-length sales contracts. See 30 CFR 1206.257(b) (for Federal 
leases) and 1206.456(b) (for Indian leases).
    If the lessee disposes of coal under a non-arm's-length 
arrangement, the regulations prescribe an ordered series of 
``benchmarks'' that look to outside indicia of market value. The value 
of the coal is based on the first applicable benchmark. Under the first 
of those benchmarks, the gross proceeds accruing to the lessee under 
its non-arm's-length contract will be accepted as value, if they are 
within the range of the gross proceeds derived from, or paid under, 
comparable arm's-length contracts for the sale or purchase of like-
quality coal produced in the area, between buyers and sellers neither 
of whom is affiliated with the lessee. The regulations also prescribe 
criteria for determining comparability. Regulations at 30 CFR 
1206.257(c)(2)(i) (for Federal leases) and 1206.456(c)(2)(i) (for 
Indian leases) prescribe identical criteria for determining 
comparability as follows: ``In evaluating the comparability of arm's-
length contracts for the purposes of these regulations, the following 
factors shall be considered: Price, time of execution, duration, market 
or markets served, terms, quality of coal, quantity, and such other 
factors as may be appropriate to reflect the value of the coal * * *'' 
If the first benchmark does not apply, the next benchmark establishes 
value based on ``[p]rices reported for that coal to a public utility 
commission'' (30 CFR 1206.257(c)(2)(ii) and 1206.456(c)(2)(ii)). If the 
second benchmark does not apply, value would be established based on 
``[p]rices reported for that coal to the Energy Information 
Administration of the Department of Energy'' (30 CFR 
1206.257(c)(2)(iii) and 1206.456(c)(2)(iii)). If the third benchmark 
does not apply, then value is based on ``other relevant matters,'' 
which include, but are not limited to, ``published or publicly 
available spot market prices'' or ``information submitted by the lessee 
concerning circumstances unique to a particular lease operation or the 
saleability of certain types of coal'' (30 CFR 1206.257(c)(2)(iv) and 
1206.456(c)(2)(iv)). If none of the four preceding benchmarks apply, 
then ``a net-back method or any other reasonable method shall be used 
to determine value'' (30 CFR 1206.257(c)(2)(v) and 1206.456(c)(2)(v)).
    Under both arm's-length and non-arm's-length sales arrangements, 
the lessee may deduct applicable transportation and coal washing 
allowances. See 30 CFR 1206.257(a), 1206.258 through 1206.259, and 
1206.261 through 1206.262 (for Federal leases); 30 CFR 1206.456(a), 
1206.457 through 1206.458, and 1206.460 through 1206.461 (for Indian 
leases).

II. Public Comment Procedures

    The ONRR may not be able to consider comments that we receive after 
the close of the comment period for this advance notice of proposed 
rulemaking, or comments that are delivered to an address other than 
those listed in the ADDRESSES section of this notice. After the comment 
period for this advance notice closes and ONRR has considered the 
comments, we plan to open a second public comment period, which we will 
announce in the Federal Register. The notice will focus on issues 
identified in the first public comment period and will include 
information about the public workshops.

A. Written Comment Guidelines

    We are particularly interested in receiving comments and 
suggestions about the topics identified in section III, Description of 
Information Requested. Your written comments should: (1) Be specific; 
(2) explain the reason for your comments and suggestions; (3) address 
the issues outlined in this notice; and (4), where possible, refer to 
the specific provision, section, or paragraph of statutory law, case 
law, lease term, or existing regulations that you are addressing.
    The comments and recommendations that are most useful and have 
greater likelihood of influencing decisions on the content of a 
possible future proposed rule are: (1) Comments and recommendations 
supported by quantitative information or studies; and (2) comments that 
include citations to, and analyses of, the applicable laws, lease 
terms, and regulations.

B. Public Comment Policy

    Executive Order (EO) 13175 requires Federal agencies to consult 
with Indian tribes during the development of regulatory proposals. 
Section 5a of EO 13175 states that each agency shall have

[[Page 30883]]

an accountable process to ensure meaningful and timely input by tribal 
officials in the development of regulatory policies that have tribal 
implications. Changes to the valuation of Indian coal for royalty 
purposes have tribal implications.
    The ONRR has sent an invitation to the revenue receiving tribes and 
mineral owner associations inviting them to attend one of three 
consultation meetings. The schedule is:
    1. May 15, 2011, in Albuquerque, NM, starting at 1 p.m. mountain 
time.
    2. May 26, 2011, in Denver, CO, starting at 1 p.m. mountain time.
    3. June 9, 2011, in Oklahoma City, OK, starting at 9 a.m. central 
time.
    We will discuss ONRR's plan to amend the Federal and Indian coal 
product valuation regulations. The ONRR mailed invitation letters for 
the tribal consultations on April 21st, and ONRR believes these 
meetings comply with the EO 13175 consultation requirement.
    Our practice is to make comments, including names and addresses of 
respondents, available at http://www.regulations.gov. Individual 
respondents may request that we withhold their individual address from 
the rulemaking record, which we will honor to the extent allowable by 
law. There also may be circumstances in which we would withhold from 
the rulemaking record a respondent's identity, as allowable by law. If 
you wish us to withhold your name or address, you must state this 
prominently at the beginning of your comments. However, we will not 
consider anonymous comments. We will make all submissions from 
organizations or businesses, and from individuals identifying 
themselves as representatives or officials of organizations or 
businesses, available for public inspection in their entirety.

III. Description of Information Requested

    We are interested in submission of proposals that will lead to 
improved efficiencies for both lessees and ONRR auditors, including 
state and tribal auditors under delegated audit agreements with ONRR. 
In considering potential proposed changes to the existing Federal and 
Indian coal royalty valuation regulations, we have three goals in mind, 
as follows:
     Provide clear regulations that are easy to understand and 
that are consistent with fulfilling both the Secretary's responsibility 
to ensure fair value for the public's resources and the Secretary's 
trust responsibility to Indian mineral owners.
     Provide methodologies that are as efficient as possible 
for lessees to use.
     Provide early certainty that correct payment has been 
made.
    Accordingly, ONRR is seeking public comment and recommendations on 
the following specific issues:

A. Alternative Valuation Methods

    In the existing regulations as discussed above, value is generally 
based on the lessee's arm's-length gross proceeds. The gross proceeds 
are the total monies and other consideration accruing to the lessee for 
the production and disposition of the coal produced (30 CFR 1206.251 
and 1206.451). As noted previously, allowable washing and 
transportation costs may be deducted from gross proceeds in determining 
royalty value. Accounting for washing and transportation costs places 
some accounting burden on reporters and makes the audit process more 
lengthy and complex. In an effort to simplify the valuation and 
auditing process, ONRR is considering whether there are valuation 
methods that would (1) Be more efficient than the current method of 
calculating value on gross proceeds (minus actual costs); (2) require 
less accounting and auditing work; and (3) still establish a value that 
reflects, or very closely approximates, actual market conditions. We 
seek input on the following questions:
     What alternatives to gross proceeds would you recommend?
     Would a dollars-per-energy content unit (e.g., dollars-
per-million British thermal units ($/MMBtu)) or dollars-per-weight unit 
(e.g., $/ton) valuation method be reasonable? If so, how should such a 
value be established?
     Should such ``fixed'' royalty values be revised from time 
to time? If so, on what basis, and at what time or on what occasions?
     Are there published index prices that accurately reflect 
the actual market value of coal? If so, what are those index prices and 
to what areas of the country or to what types of coal do they apply?
     Does the concentration of Federal or Indian production in 
some areas of the country create any potential problems with relying on 
index prices in those areas, now or in the future?

B. Non-Arm's-Length or No-Contract Situations

    The benchmarks applicable to value coal in non-arm's-length or no-
sale situations have proven difficult to use in practice. In addition, 
the first benchmark does not allow the use of comparable arm's-length 
sales by the lessee or its affiliates, exacerbating the challenging 
process of obtaining and comparing relevant arm's-length sales 
contracts to value non-arm's-length sales. Furthermore, disputes arise 
over which sales are comparable, particularly because of the inherent 
ambiguity in applying the comparability factors.
    The ONRR is soliciting comments on how to simplify and improve the 
valuation of coal disposed of in non-arm's-length transactions and no-
sale situations. We seek input on the following questions:
     Should the current non-arm's-length benchmarks and their 
current sequential priority be retained? If not, what other 
methodologies might ONRR use to determine the royalty value of coal not 
sold at arm's length?
     Should the factors for determining the comparability of 
arm's-length contracts to non-arm's-length contracts, at 30 CFR 
1206.257 (c)(2)(i), be amended, clarified, or removed?
     Should the royalty value of coal initially sold under non-
arm's-length conditions be based on the gross proceeds received from 
the first arm's-length sale of that coal in situations where there is a 
subsequent arm's-length sale? (A variant of this approach would be to 
change the definition of the term ``lessee'' to include the lessee and 
its affiliates, partners, marketing agents, and trade and export 
associations, and establish royalty value based on the first sale to a 
buyer who is not included in the definition of ``lessee.'')
     Should the royalty value of coal sold under non-arm's-
length conditions be based on a published index price? If so, which 
index and why?
     Should the royalty value be determined by calculating the 
cost to produce the coal plus a return on capital investment, if the 
particular coal is never sold at arm's length, or if sold by a coal 
cooperative of which the lessee is a member? If so, how should the 
return on capital investment be calculated?
     Are there any other appropriate methods for determining 
the royalty value of coal consumed without sale or without an arm's-
length sale?

C. Transportation and Washing Allowances

    The ONRR is exploring potential proposed changes to washing and 
transportation allowances that would streamline industry reporting and 
ONRR auditing processes. In particular, calculating actual 
transportation or washing costs under non-arm's-length transportation 
or washing arrangements can place a significant accounting burden on 
lessees and make the audit process lengthy and complex. We seek input 
on the following questions:

[[Page 30884]]

     Can the process of determining appropriate transportation 
and washing deductions or allowances be simplified? If so, how?
     Should ONRR allow bundled charges for coal transportation 
or washing?
     Should ONRR set standard cents per ton allowance amounts 
for washing and transportation in lieu of calculating actual costs? If 
so, how should such fixed allowances be determined; and when, and under 
what circumstances, should they be changed?
     Is coal washing an operation necessary to put coal into 
marketable condition for which no allowance should be permitted?
     Should transportation allowances be based on yearly 
averages from one region to another?
     Should the coal transportation and washing allowances be 
limited to a maximum percentage in a manner similar to gas 
transportation and processing allowances? Current coal valuation 
regulations provide that under no circumstances will the authorized 
washing allowance and transportation allowance reduce the value for 
royalty purposes to zero (30 CFR 1206.261(b) and 1206.460(b)). Gas 
transportation allowances may not exceed 50 percent of the value of the 
unprocessed gas, residue gas, or gas plant product, without prior 
written approval from ONRR (30 CFR 1206.156(c) and 1206.177(c)). The 
gas processing allowance deduction on the basis of an individual 
product may not exceed 66\2/3\ percent of the value of each gas plant 
product, reduced first for any transportation allowances related to 
post-processing transportation (30 CFR 1206.158(c)(2) and 1206.179(c)). 
If coal washing and transportation allowances should be limited to a 
maximum percentage of the initial value, what would be an appropriate 
percentage?

D. Coal Cooperatives

    Coal cooperatives are a small but growing part of the coal 
industry. A coal cooperative is owned by its member power companies, 
and either mines coal itself or through a subsidiary. A cooperative 
provides its members with a secure source of coal at below-market 
prices that generally exclude a profit component. Current valuation 
regulations are not well suited to determining the royalty value of 
coal sold by cooperatives. We seek input on the following questions:
     Should the royalty value of coal sold by these 
cooperatives be determined based on a different method than is used for 
coal not sold by or through cooperatives due to the unique aspects of 
these cooperatives? If so, what method(s) would you propose?
     Please comment on the use of production cost and return on 
investment as a possible valuation method.

E. Other Issues

    The existing ONRR regulations contain only general provisions that 
address in situ or surface gasification or liquefaction (30 CFR 
1206.264 and 1206.463). Under these provisions, a lessee must propose a 
value, and ONRR will issue a value determination. We seek input on the 
following questions:
     Are there general valuation methods that would be 
appropriate for most or all in situ or surface gasification or 
liquefaction operations? If so, please describe them.
     What other new production methods is industry developing 
that are likely to be economically viable and used in the near- to 
medium-term future?
     Are there any new marketing methods for coal of which ONRR 
should be aware?
    In the interest of possible simplification, ONRR is interested in 
receiving comments regarding the continued separation of Federal and 
Indian coal valuation regulations. We seek input on the following 
questions:
     Should the Federal and Indian regulations be combined?
     Should the Indian coal valuation regulations be modified 
to eliminate the approval and form-filing requirements for washing and 
transportation allowances in the current regulations at 30 CFR 
1206.458(a) and 1206.461(a)?
    The ONRR is also interested in receiving comments on any other 
alternative coal valuation methodologies. If you propose a methodology 
different from those discussed above, please use our example criteria 
and explain why you believe your methodology is the best alternative. 
In addition, ONRR requests input on how the various methodologies would 
affect industry business practices, bookkeeping, etc.

    Dated: May 23, 2011.
Rhea Suh,
Assistant Secretary for Policy, Management and Budget.
[FR Doc. 2011-13284 Filed 5-26-11; 8:45 am]
BILLING CODE 4310-MR-P