REGULATORY: Natural Resources Regulatory: Department of the Interior Proposes Rule Changes Applicable to All Federal Solid Minerals Leases

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The U.S. Department of the Interior's Office of Natural Resources Revenue (ONRR) recently proposed significant changes to federal royalty reporting requirements covering all solid minerals, including coal. The proposed rule, promulgated under the mantle of "clarifying" ONRR's authority under the 2005 Energy Policy Act (EPAct), would impose new procedures governing the valuation of Federal Coal (the coal mineral estate owned by the Federal Government) for advance royalty purposes.

Perhaps more significantly, ONRR tacked-on requirements outlining a uniform "Solid Minerals Sales Summary" applicable to all Federal and Indian solid mineral leases, including not only coal but also phosphate, sodium, potassium, and reportable by-products from metals leases. The proposed information collection platform is geared toward "ensuring that the Federal Government … receive[s] fair market value" as well as "determining a company's compliance with applicable laws, rules, and regulations."

Current Regulations regarding Coal Advance Royalties

An "advance royalty" is a royalty paid in lieu of continued operation (akin to a rent under certain leases), after diligent development is achieved, at any time during the life of the lease. The Mineral Leasing Act of 1920 prescribes a methodology to compute coal advance royalties based upon a fixed reserve-to-production ratio that is no less than the production royalty that lessees would otherwise pay. Prior to the passage of the EPAct, Interior's Bureau of Land Management (BLM) was responsible for administering the advance royalty requirements for Federal Coal leases and the value for coal advance royalty purposes currently resides under BLM's regulations.

Per a pair of 1997 memoranda of understanding (the MOUs), ONRR and BLM agreed to standardize procedures and share responsibilities in determining coal advance royalties: BLM continues to determine the volume of coal but ONRR determines the value for the coal advance royalty due. Upon determining the coal advance royalty due, ONRR issues an Order to Pay Advance Royalty to the applicant.

ONRR has been issuing Orders to Pay Advance Royalty since the MOUs went into effect. However, coal lessees have challenged ONRR's authority to determine coal advance royalties through appeals of Orders to Pay Advance Royalty. Indeed, in BTU Empire Corp., 172 IBLA 206, 221 (2007), the Interior Board of Land Appeals set aside an ONRR Director's Decision and remanded the decision to ONRR and BLM to "… clari[fy] in a subsequent decision … the issue of the governing authority that establishes who is the final decisionmaker on the topic of advance royalty calculations."

ONRR and BLM now seem to agree that the authority and responsibility for determining value for coal advance royalty purposes should reside in ONRR's regulations. The proposed rule would move the portion of the BLM regulations regarding valuation of federal coal reserves for advance royalty purposes from its present location to ONRR regulations.

Published Coal Spot Market Prices Found to be Unreliable

Section 434 of the EPAct requires the determination of coal advance royalty using spot market prices of comparable coal in the applicable region. As part of the rulemaking process, ONRR's Royalty Policy Committee Coal Subcommittee interviewed two primary publishers of coal spot market prices. Both publishers indicated to ONRR that published coal spot market prices "do not truly represent actual spot market prices because published coal spot market prices are merely an average of surveyed prices from a portion of the coal industry and include other considerations, such as coal futures speculation." The proposed rulemaking would allow ONRR to determine its own average spot market price by using actual spot market prices that operators of mines with federal coal leases submit on a new form, as opposed to published coal spot market prices.

Federal Information Gathering to Determine Valuation and Regulatory Compliance

ONRR proposes a new form, Form ONRR– 4440, Solid Minerals Sales Summary (the Form 4440), to replace the current Sales Summaries, which are not uniform since companies are permitted to submit internally-generated documents. ONRR believes Form 4440 data would be instrumental in making valuation determinations and ensuring that the Federal Government and Indian lessors receive fair market value for coal.

ONRR proposes to use the collected information to identify spot market sales of comparable coal from the same region and to determine an average price for Federal coal advance royalty purposes. Form 4440 would also be used by ONRR to collect information "in order to determine a company's compliance with applicable laws, rules, and regulations." In fact, ONRR is developing an updated automated system that would receive and store Form 4440 data, a move likely to assist regulators to audit royalty payments and more easily detect discrepancies.

Form 4440 to Apply to ALL Federal Solid Minerals Leases

ONRR also proposes to apply Form 4440 information collection requirements across all Federal and Indian solid minerals leases, regardless of whether all of the form's data elements apply. ONRR attempts to justify the regulatory burden by stating that standardized forms would help eliminate the need for ONRR to call lessees or operators with questions concerning internally-generated documents.

Introduction of Real-Time Sales Monitoring

Another proposed change to the manner in which lessees and operators submit sales summary data relates to adjustments to reported data. At present, reporters submit a single monthly Sales Summary. In order to advance ONRR's royalty and compliance efforts, the proposed rule would require reporters to revise and submit Solid Minerals Sales Summaries as often as they revise Solid Minerals Production and Royalty Reports (e.g., daily, weekly). ONRR views this change in particular as "the key to implementing ONRR's and BLM's proposed coal advance royalty rules."

Furthermore, the submission of "up-to-date" sales summaries would "enable ONRR to monitor lessees' sales contract performance and continuity," an item that is described as "important for ONRR's royalty compliance efforts."

Conclusion

ONRR's proposed changes to federal royalty reporting requirements represent a bid to conform to the EPAct and to enhance its royalty compliance capabilities, particularly with regard to monitoring lessees' royalty adjustments and sales contract performance and continuity.

ONRR is accepting public comment on the proposed rule. Comments must be submitted on or before October 11, 2013. The proposed rules are available at: www.federalregister.gov/articles/2013/08/12/2013-19199/valuation-of-federal-coal-for-advance-royalty-purposes-and-information-collection-applicable-to-all.