CHAPTER 19 COAL VALUATION REGULATIONS REVIEW PANEL

• Jurisdiction: United States

Federal Royalty Revolution--Coal
(Nov 1986)
CHAPTER 19
COAL VALUATION REGULATIONS REVIEW PANEL

CHARGE

The Coal Valuation Regulations Review Panel is charged with evaluating the reasonableness of the draft coal valuation and transportation allowance regulations and making recommendations as to any clarifications and revisions that are needed. The Panel should offer specific detailed comments and/or suggestions for regulatory language.

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CONTENTS

SYNOPSIS

Pages

I. Recommendations Page

A. Transportation Allowance Regulations Page

B. Preamble to Valuation Regulations Page

C. Definitions Page

D. Coal Valuation Regulation Page

II. Unresolved Issues Page

A. Take-or-Pay Payments Page

1. "Industry" Position Page

2. "State/Tribe" Position Page

B. Reimbursements for taxes, royalties and fees Page

1. "Industry" Position Page

2. "State/Tribe" Position Page

C. Navajo Tribe Comment on Gross Proceeds Page

D. Coal Washing Allowance Page

1. "Industry" Position Page

2. "State/Tribe" Position Page

III. Related Issues Page

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I. Recommendations

A. Transportation Allowance Regulations

1. The 50% limit on transportation costs should not apply to coal. Actual transportation costs should be allowed up to 100% of actual transportation costs, given the requirements for arms-length contracts, reasonable and necessary charges, etc.. Indian leases, of course, may provide otherwise.

2. The transportation regulations should clarify that the transportation allowance applies only to off-site transportation, including transportation to an off-site coal washing facility. "In-mine" transportation costs would not be included in the transportation allowance.

3. 206.31(b)(4)(iii) — Change as follows:

"Overhead directly attributable and allocable to the operation and maintenance system is an allowable expense. MMS will not challenge a lessee's method of overhead allocation if such allocation is made on a basis consistent with allocations to other mines or facilities owned or operated by lessee and such method has a reasonable basis. State and federal income taxes are not allowable expenses."

4. The MMS should consider drafting separate

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transportation regulations for coal. At a minimum, certain language such as "line losses" should be changed to "transportation losses."

B. Preamble to Regulations

1. Page 7, first sentence, add after "Federal lands," "except as otherwise provided in a lease, statute or treaty." Leave second sentence as is. Eliminate remainder of paragraph. (Basically, Indians are not willing to have Indian leases treated the same as federal leases in all cases, but feel that valuation for federal coal leases should represent a minimum valuation for purposes of Indian leases.)

C. Definitions (206.5)

(n) Contract — add after "agreement," the following: "including amendments, revisions or clarifications,"

(r) Gross proceeds — Line 14, add "or Indian owner" after Federal Government.

(mm) Processing — Definition should include any form of coal beneficiation other than coal washing (which is defined separately in (k)). Beneficiation means any treatment that increases the value of the coal beyond the point at which the first marketable product is produced.

(nn) Prudent operator — Eliminate definition but retain concept in regulations. (The panel felt the definition of prudent operator should remain flexible as defined by the courts in case law.)

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(rr) Take-or-pay payment — 5th line, change "usually has" to "may have."

D. Regulations

1. 206.7(b) — Eliminate. (Unnecessary)

2. 206.7(c) — Eliminate all wording following "inventory." (Unnecessary and ambiguous)

3. 206.250(b) — In line 1, add "statutes or treaties" after "any coal lease."

4. 206.251(c) — Omit phrase "or if a market becomes available to sell the waste products containing coal,"

5. 206.252 — For arms-length contracts, coal quality data should not be submitted routinely, but only as requested by MMS.

6. 206.253(b) and 206.254(b) — add "or BIA" after "BLM" regarding bond release.

7. 206.255(e) — At beginning of third sentence, insert "Absent contract revision, amendment, or clarification." In third sentence, change "legal action" to "reasonable measures." Regulations should state that such contract revisions, amendments, or clarifications must be in writing and signed by both parties to an arms-length contract, and may be retroactive.

8. 206.255(f) — Second sentence: If "take or pay" payments are included in gross proceeds, regulations should clarify that no additional royalty will be due on makeup deliveries that represent recoupment of take-or-pay payments. However, if the coal price under

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the contract is higher for make-up deliveries, royalty would be paid on the difference.

9. 206.259 (Also affects 206.6(d) and 206.7(e).) Revise provisions on contract submission to reflect the following:

(1) Contracts and related documents will not be routinely submitted to MMS.

(2) Contracts and related documents will be available to appropriate MMS personnel for audit purposes and for purposes of contract price validation.

(3) All copies of contracts and related documents will be returned when no longer needed for these purposes.

(4) Contracts and related documents must be treated as confidential to the full extent permitted by federal law.

(5) Responsible persons must certify that to their knowledge no other copies were distributed to others or other agencies.

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II. Unresolved Issues

The panel was unable to agree on several issues, including:

a) the proposed definition of gross proceeds, i.e., whether the definition should include take or pay payments or contract reimbursements for severance taxes, royalty increases, SMCRA fees and Black Lung fees; and

b) the coal washing allowance, i.e., whether the allowance or deduction should be continued as proposed in the draft regulations.

Since the panel was evenly divided on these issues (Chairman abstaining), we agreed to develop position statements representing the "industry" view and the "state/tribe" view.

A. Take-or-Pay Payments

1. "Industry" Position: Take-or-Pay Payments should be excluded from gross proceeds definition.

Take-or-Pay payments under a lease are essentially liquidated damages under most supply contracts, and do not necessarily represent payment for coal purchased unless credit for makeup deliveries is allowed and makeup deliveries are taken. A typical coal contract between producer (seller) and customer (buyer) is for a fixed term of years and provides for the purchase by buyer of a specific number of tons on an annual basis. Seller and buyer include a provision in the contract that if buyer does not take delivery of the specified tonnage in a given year buyer will pay seller "something". The "something"

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buyer pays seller varies from contract to contract for a variety of different reasons. Following is a list of some of the different "somethings" buyers agree to pay sellers. No doubt there are others.

(1) The difference between the tonnage buyer contracted to take and the tonnage actually taken in a given year is the "shortfall". Once the shortfall is determined, the shortfall is multiplied by "some" dollar amount.

(a) Sometimes the dollar amount is the same amount as if the coal had actually been taken.

(b) Sometimes the dollar amount is only a portion of the actual amount the buyer would have paid had the buyer taken the "shortfall" tonnage. Where this is the case, the portion to be used may reflect the fact that if coal was not produced the federal and state "fees" based on a unit of production (black lung, orphan land, and severance) are not applicable and such amounts are therefore deducted from the "pay" amount.

(c) Sometimes, in addition to deducting "fees", deductions are made for other variable costs such as labor. Usually, these types of deductions (which cannot be specifically tied to X/unit of production) are "factors" in a formula (labor may be a component of the formula for determining a base or a contract price, e.g., manning table with wage rates for job classifications, plus applicable escalation.)

(d) Sometimes the amount to be paid per ton of shortfall is arrived at by identifying specific deductions from current

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base price, and sometimes by specifying the items which will be "added up" to determine the amount/ton to be multiplied by the shortfall tonnage.

(e) Sometimes actual costs of specified items are used. Sometimes there is a denominator and if tonnage produced falls below a certain actual tonnage (the denominator), costs are estimated or based on previous costs.

(f) Sometimes the items of cost to be used are grouped into components of the sales...