[Federal Register Volume 76, Number 103 (Friday, May 27, 2011)]
[Proposed Rules]
[Pages 30881-30884]
From the Federal Register Online via the Government Publishing 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
[[Page 30882]]
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