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Coal sales investigated by feds; no violations yet

BILLINGS, Mont. (AP) — The U.S. Department of Interior is investigating whether mining companies are skirting royalty rules as they increase exports of coal to Asia, federal officials disclosed Friday.

No violations have yet been issued, but a newly released report to two U.S. senators says audits of overseas sales have just begun for years when coal export volumes from federal lands grew substantially.

The investigation is focused on companies' use of affiliates or brokers to sell coal from mines in the Western U.S. to customers in Asia. The parent company pays government royalties based on the mine price, then the affiliate ships the fuel overseas where it's sold for many times the original price.

Interior Secretary Ken Salazar said he has asked the agency's Office of the Inspector General to look into whether such actions violated federal law.

He said one federal coal lessee is under investigation for possible criminal violations. Details weren't offered, and his office declined to say if that involved coal shipped overseas.

The administration was responding to concerns raised by Sen. Ron Wyden, D-Ore., and Sen. Lisa Murkowski, R-Alaska. They've warned that as coal exports grow, taxpayers could lose many millions of dollars annually if royalties are unfairly calculated.

Coal royalties nationwide totaled $876 million last year, from 460 million tons of coal mined from federal lands.

Salazar said a special task force of state and federal officials plans to review coal sales and contracts in Montana and Wyoming from 2009 and 2011, and later expand the inquiry to others states for sales dating to 2001.

Government agencies typically audit coal sales several years after they have taken place.

In a joint statement, Murkowski and Wyden said they were "pleased with the formation of a task force to ensure coal companies have paid their fair share when coal is mined on public lands and sold overseas."

Salazar said the issue underscores the need for reforms in how royalties are calculated, which was last updated in 1989, before the recent spike in coal exports. He said his agency is pursuing changes that would make the process more transparent.

Murkowski's office said she was open to changing royalty rules if needed but was waiting for the issue to further unfold.

"It doesn't appear there were any knowing or willful violations of the royalty law. That doesn't mean they might not find violations," spokesman Robert Dillon said.

Companies defend their use of affiliates for export sales, arguing that the higher price their fuel fetches in Asia reflects additional shipping costs. That should be counted as a different line of business than mining, they contend.

But the chief of the Montana Department of Revenue's business tax division, Lee Baerlocher, said the industry's practices have the attention of government auditors.

"It's an audit red flag, meaning we've got to look into it, but it doesn't necessarily mean that's not a fair price," Baerlocher said.

Half of royalties go to the federal government and half to the states. Strip mines that account for the bulk of coal from public lands have a 12 percent royalty rate.

U.S. coal exports hit record levels last year — an estimated 124 million tons. That includes increasing quantities of steam coal used in power plants shipped to Asia by companies including Arch Coal Inc., Peabody Energy Corp., Cloud Peak Energy Inc., and Signal Peak Energy.

Asian markets have given the industry some sorely needed relief in the face of declining domestic demand.

Proposals to export even more coal, through new and expanded West Coast ports, faces concerted opposition from environmentalists and some public officials.

Most of the exported coal from the West comes from Montana, with coal also exported from mines in Wyoming, Colorado and Utah. In 2011, the most recent year for which state-by-state figures were available, those states shipped about 22 million tons for export.

The special royalties task force, established in December, includes auditors from the federal government, Montana and Wyoming.

A spokesman for Wyoming Gov. Matt Mead said no problems have yet been found.

Securities filings by Cloud Peak Energy show Asian exports accounted for 23 percent of the company's revenues but only 5 percent of its coal production through the third quarter of 2012.

In a letter to Salazar, Cloud Peak CEO Colin Marshall said the company considers transportation logistics work as "fundamentally different than our business of selling coal at the mine."

He said the company plans to list mining and logistics as separate businesses in its upcoming annual report.

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