How Federal Giveaways to Big Coal Leave Ranchers and Taxpayers Out in the Cold

This story was also published on WyoFile.

On the morning after the autumn’s first snow, L.J. Turner looked out over a creek near his house that reliably watered his family’s livestock for more than 70 years. A third-generation Wyoming rancher, Turner remembered hunting rabbits there amid lush marsh grasses and high cottonwood trees when he was a boy in the 1950s.

Then the nation’s three largest coal mines began to dig in downhill from his 10,000-acre ranch. To get to the coal, they blasted through and drained the region’s aquifers. The marsh grasses vanished. The creek began to recede and eventually ran dry, as did a well Turner dug to feed a livestock watering trough.

As the mines grew and oil and gas wells came, Turner lost not only his ranch’s abundant water, but also 6,000 acres he once leased as grazing land—scraped away to reach the coal. Now his cattle herd is half what it was, calves near the coal mines die at alarming rates, and he has had to spend thousands of dollars drilling deeper and deeper wells, eating into an already reduced income.

“You can’t really do a whole lot about this as an individual, and there’s not a reason or a lot of benefit to sitting there and beating your head against the wall,” said Turner, who sued the state unsuccessfully over the loss of water. “It’s just, you have to change.”

Over the last 40 years, Turner and some of his neighbors have paid a heavy price for the development of energy resources beneath the sagebrush-studded high plains where he lives in the Powder River Basin, a West Virginia-sized swath straddling Montana and Wyoming. The wave of fossil fuel extraction brought jobs and money. It also depleted aquifers that allowed people to live and ranch here for generations, devoured thousands of rural acres, and worsened air quality.

American taxpayers everywhere have paid heavily, too. The federal government owns most of the coal, oil and gas in the ground here. And it has fostered mining and drilling through a host of subsidies, including tax breaks, cheap leases and low royalties that permit fossil fuel corporations to privatize the benefits while socializing many of the costs. Corporations have been able to lease federal coal at $1 a ton or less, use loopholes to halve official royalty rates, and take risks that could push the costs of land reclamation onto taxpayers.

Direct fossil fuel subsidies by the federal government amount to about $10 billion annually in tax breaks and deductions, according to a conservative estimate by Taxpayers for Common Sense, a watchdog group. Oil and gas companies, for instance, can deduct the bulk of a well’s drilling costs in the year they are incurred, as opposed to writing off the capital expenditures over many years as other industries do. That deduction cost taxpayers almost $1.5 billion in fiscal year 2015, and “distorts markets by encouraging more investment in the oil and natural gas industry,” according to the Treasury Department.

Tallies of direct subsidies don’t include the hundreds of millions of dollars in lost tax revenues from undervalued leases and royalty rates. They also don’t account for billions taxpayers shell out to clean up after fossil fuel extraction or the resulting damage to human health and the environment from climate change.

After calculating all the effects, the International Monetary Fund estimated that governments worldwide pay more than $5.3 trillion annually to support the burning of fossil fuels. The United States is the second-most prolific fossil fuel subsidizer, behind China, according to the 2017 study.

“We’re a century and a half into coal and oil. These are not fledgling industries,” said Dan Bucks, former director of the Montana Department of Revenue and a consultant on tax and conservation issues. “We’re subsidizing fuels with enormous environmental costs especially climate change, and it can’t be justified when we know we can supply our energy needs by other means.

“The subsidies slow the natural transition to a more competitive and environmentally sound energy future,” Bucks added.

Industry spends considerable amounts to hold on to this taxpayer support, part of a multi-pronged strategy it deploys across courtrooms, legislatures, news media and in Congress to preserve its bottom line. During the 2016 federal election cycle, fossil fuel companies laid out $354 million in campaign donations and lobbying, according to a report by the climate watchdog group Oil Change International. Over the same period, the industry enjoyed $29.4 billion in direct and indirect federal and state subsidies, the group estimated.

Many fossil fuel projects would likely have gone ahead even without the tax and royalty breaks. But reducing the number and forcing companies to pay for the impact on air, water, land and the climate would shrink fossil fuel extraction markedly, analysts said.

If coal mining in the Powder River Basin had gone slower or been less widespread, things could have ended up differently for the Turners.

“There are significant external costs that companies don’t pay for, and if they had to pay for them, we would have a lot less coal production” in the Powder River Basin, said Mark Squillace, director of the Natural Resources Law Center at the University of Colorado Law School. “And there’s no doubt that if you had less coal development there, you would have less aquifer depletion.”

The government has long subsidized industries to foster their growth. Renewable energy gets tax breaks—but their cost to taxpayers to date is smaller than for fossil fuels and they’re written to sunset in the future. Fossil fuel supports have lasted for decades, with two oil subsidies about a century old.

In 2009, President Barack Obama pledged to phase out fossil fuel subsidies by 2020, citing a need to keep more fossil fuels in the ground and avoid the worst damage from climate change. The Republican-led Congress took no action on Obama’s budget requests to end them. In his last year in office, the Interior Department suspended new federal coal leases in order to overhaul the program so it better reflects environmental costs and boosts revenue.

The Trump administration reversed those efforts, part of the president’s deregulatory agenda aimed at maximizing production of coal, oil and natural gas while backing away from climate policy. The tax bill signed by Trump this month preserves the subsidies enjoyed by industry. “We’ve ended the war on beautiful, clean coal,” Trump declared recently.

Free Land in Coal Country but With a Catch

After fighting in World War I, L.J. Turner’s father sold the family farm in Missouri and moved a thousand miles to become a rancher in Wyoming. There he got a subsidy of his own. The federal government gave the Turner family land for free under the Homestead Act, passed during the Civil War to encourage westward expansion. When the family was picking acreage, locals advised them, “Be sure you get the big spring there, ‘cause it’s absolutely foolproof water” for livestock, L.J. Turner said, recalling the stories he was told.

But there was a catch: A few years before the Turners arrived, Congress changed the terms of the Homestead Act so that the federal government would retain ownership of minerals beneath the land it was deeding to settlers. It was a move that would come to benefit today’s corporations immensely.

Mining federal coal in the Mountain West began in spurts in the 19th century to feed the railroads, but coal leasing accelerated in the 1970s to meet demands of utilities that needed more fuel to support booming manufacturing. The 1973 Arab oil embargo added urgency.

At the time, environmental activists, empowered by the Federal Lands and Management Policy Act of 1976, were pushing for opening more public lands to uses other than resource extraction and for better planning. Even supporters of resource extraction wanted competitive bids and better royalty rates so that taxpayers would be paid a fair price for the fossil fuels they own.

But “the urgency to mine coal ended up winning out,” said Bucks, who served on a U.S. Commerce Department commission in the 1970s that studied the consequences of coal mining in Wyoming and Montana. “Land management was complex, the science evolving. That’s a long-term endeavor, while the energy need was immediate.”

The rush to mine had its biggest impact on the Powder River Basin. In 1977, the Black Thunder mine opened about 20 miles east of the Turners’ home. Five years later came the Antelope Mine, now owned by Cloud Peak Energy, about 15 miles to the southeast. Eventually, between those two projects, Peabody Energy built the largest surface coal mine in the world, the North Antelope Rochelle mine.

By 2002, the Powder River Basin had become the country’s largest coal-producing region. Today it produces 40 percent of all the coal burned in the United States and accounts for more than 10 percent of the country’s annual greenhouse gas emissions.

The coal boom employed 7,000 people in Wyoming at its employment peak in 2011. By 2016, that number had fallen to fewer than 5,700, as demand for coal slowed considerably under competitive pressure from cheaper natural gas and renewable sources and the weight of federal regulations.

Even with the industry in decline, the government continues to support the coal companies in the Powder River Basin and elsewhere by offering short cuts, subsidies and tax breaks at nearly every step of the mining process.

Taxpayer Coal for Sale at $1 a Ton—or Less

Since coal mining took off there 40 years ago, investigations by federal agencies and independent analysts have repeatedly shown that the leasing process shortchanges taxpayers. The first two coal leases sold in 1982 “were legally suspect and publicly criticized for not receiving fair market value,” leading to a major Congressional inquiry, Squillace wrote in a 2013 law journal article.

In 1990, the Interior Department under Pres. George H.W. Bush rescinded the Powder River Basin’s status as a federal coal-producing region for reasons that remain unclear. The move loosened coal leasing restrictions. Rather than Interior deciding where, when and how much coal should be mined, those decisions fell to industry.

One enduring effect of this has been to make noncompetitive lease sales the norm. A corporation will pick a tract of coal to expand an existing mine and petition Interior to lease it. These parcels are too small to be standalone mines that would otherwise invite competitors, Squillace said. So when the coal lease is put up for sale, there’s usually only a single bidder, the nonpartisan Government Accountability Office (GAO) reported in 2013.

In a survey of 107 leased parcels, 96 of them, or 90 percent, went to a sole bidder, almost always a company seeking to expand an existing mine, the report found.

This lack of competition means rock-bottom rates and sparse returns to taxpayers. Over the years, the federal government has sold leases in the Powder River Basin for about $1.00 per ton of coal or less. The market price of Powder River Basin coal is about $12.00 a ton, according to the Energy Information Administration.

Besides the lack of competition, leases are so cheap because the Interior Department itself sets the initial price for a coal tract at far below market value. The process for calculating a lease’s value is confidential, but separate studies by the Interior Department’s Inspector General and the GAO determined the process is flawed. It fails to account for growing overseas demand and other market forces, and deprives taxpayers of millions of dollars annually.

The government collects royalties on the sale of the coal. But the way royalties are calculated also benefits coal companies at the expense of taxpayers. The official royalty rate is 8 percent on sales of coal from underground mines, and 12.5 percent for strip-mined coal like in the Powder River Basin. But corporations often convince federal officials to reduce those rates if the companies are facing financial hardship, or if the coal is expensive to mine for technological reasons, according to Pamela Eaton, senior adviser for the energy and climate program at the Wilderness Society, a conservation group.

For instance, in September, the Interior Department signed off on an expansion of Arch Coal’s underground West Elk Mine in Colorado—despite warnings about high greenhouse emissions—and cut the royalty to 5 percent because Arch said the coal was especially difficult to mine.

Between 1982 and 2011, taxpayers lost around $28.9 billion from undervalued lease sales and royalty payments, or about $1 billion a year, according to an analysis by the Institute for Energy Economics & Financial Analysis, a think tank working to encourage a transition away from fossil fuels.

Among the Biggest Subsidies, Captive Transactions

The biggest royalty losses to the Treasury occur once coal has been mined and is sold. By law, royalties are assessed on the first sale after the coal has come out of the ground.

Companies have succeeded in minimizing payments to the government by setting up networks of subsidiaries, to which they make the first sale at low prices. The coal then gets sold, and resold at higher and higher prices, until a power plant buys it.

Taxpayers get a royalty payment only on that first, captive transaction.

In 2004, only 4 percent of Wyoming coal was sold through captive transactions between a corporate parent and a subsidiary. By 2012, that figure rose to 42 percent, according to a review of federal data by the Center for American Progress, a liberal think tank. In a 2013 Securities and Exchange Commission filing, Cloud Peak Energy, one the biggest companies in the Powder River Basin, disclosed that if the federal government changed captive transactions in the coal sector, “our profitability and cash flows would be materially adversely affected.”

An investigation by Reuters estimated that industry used the loophole created by captive transactions to pay at least $40 million less in royalties in 2011 alone. Even the Wyoming state auditor recommended stricter federal control over captive transactions among affiliates of a single mining corporation because it had determined that such sales “are highly susceptible to manipulation.”

Luke Popovich, spokesman for the National Mining Association, did not answer questions about criticisms of the federal leasing programs, calling the queries “tendentious.” He said that coal corporations paid fees “actually above market rates,” and that Obama’s Interior secretary “concluded no major reform” of the federal coal leasing program was warranted.

In fact, after years of reports critical of federal coal leasing, including by the Interior Department’s Inspector General, the Obama administration undertook a sweeping review of the program. In January 2016, the Interior Department under Secretary Sally Jewell paused the sale of new coal leases during this review. In mid-2016, the administration reformed the royalty rule to close the captive transaction loophole, requiring that royalties be assessed on the first sale to an unaffiliated entity.

Just before Trump took office in January 2017, Jewell released the results of the coal leasing review. “Based on the thoughtful input we received through this extensive review, there is a need to modernize the federal coal program,” she stated. “We have a responsibility to ensure the public…get a fair return from the sale of America’s coal, operate the program efficiently and in a way that meets the needs of our neighbors in coal communities, and minimize the impact coal production has on the planet that our children and grandchildren will inherit.”

Jewell’s successor, Ryan Zinke, reversed those steps: The results from the review of coal leasing were discarded, the moratorium lifted and the proposed royalty rule rescinded, tilting the system back once more to industry.

Heather Swift, an Interior Department spokeswoman, declined to answer questions about why Zinke overturned Obama-era steps to reform coal leasing. She pointed out that in making its decision the Interior had revived the dormant Royalty Policy Committee to advise Zinke. Nearly all the committee members are from fossil fuel extraction states and industries. There are no local environmentalists, consumer advocates or tax specialists among the representatives.

Cleaning Up After Fossil Fuels

Fossil fuel extraction tears up the land, even when there are no spills or accidents. Forests and prairie get peeled away for mines, well pads, roads and more. Once corporations are finished, they are supposed to restore what they disrupted to a semblance of its previous state. And they are required to post bonds with state and federal authorities, as a form of insurance to pay for restoration—even if they go bankrupt.

The country’s largest coal companies often use the option of self-bonding, which allows them to operate without posting any actual cash or collateral, essentially offering their promise that they will pay fully to restore an area once the mine has closed.

Self-bonding rests on the assumption that the corporations are too big and stable to go bankrupt. Yet by 2016, $2.4 billion of the $3.86 billion in outstanding self-bonding obligations nationwide were held by companies that had filed for bankruptcy in recent years, including Alpha Natural Resources, Arch Coal and Peabody. Critics are concerned that taxpayers could be on the hook for reclaiming their old mines if coal sales continue to decline.

Wyoming state regulators proposed rules last month that will tighten self-bonding requirements. Companies will be able to self-bond only up to 70 percent of cleanup costs. Whether they’re allowed to self-bond will be based on current credit ratings, rather than older audited financial statements. The rules will no longer allow self-bonding by subsidiary companies, instead forcing the parent mining company to pledge its assets.

Under Jewell, the Interior Department also moved to shore up reclamation, beginning a review of self-bonding to see if it adequately protected taxpayers. Several federal agencies under Obama, including the Justice Department, successfully argued in federal court in 2016 that Alpha Natural Resources should be required to replace self-bonding with outside insurance before exiting bankruptcy.

Now, the Trump Interior Department plans to loosen reclamation insurance standards by permitting routine use of self-bonding once more.

Charlene Murdock, a spokeswoman for Peabody, owner of the North Antelope Rochelle mine near the Turner Ranch, said in an email that the mine “maintains a strong record of environmental stewardship, and our monitoring shows standards to protect air and water quality are being achieved. Peabody works in partnership with neighboring landowners who successfully graze their livestock on the ample forage of reclaimed mine lands.”

She added: “In 2016, Peabody’s successful land stewardship achieved 1.8 acres of reclamation for every acre disturbed in mining activities. Over the past decade, Peabody has spent $185 million to restore approximately 48,000 acres of land.”

Even when coal companies reclaim the land they’ve stripped away, it’s unclear whether the water will return to ranchers such as the Turners who watched it dry up.

“We don’t know yet as there has not been a surface mine that has achieved full and final reclamation, including hydrologic reclamation, in Wyoming,” said Jeremy Nichols, climate and energy program director at Wild Earth Guardians, an environmental law nonprofit. “We question whether full hydrologic reclamation can be accomplished in the arid Powder River Basin. The coal companies obviously claim they can. We haven’t seen anything empirical that suggests this is the case.”

For the Turners, Digging Deeper to Find Water

For L.J. and Karen Turner, the effects of fossil fuel extraction have rippled through their property like waves of an earthquake. “It’s negatively affected our quality of life—air quality, water quality and our bottom line,” Karen Turner said.

They used to graze cattle on large stretches of federal land.  After coal mining began, L.J. Turner lost access to 6,000 acres his family had leased for generations near the North Antelope Rochelle mine. It costs about $2 per cow per month to run cattle on public lands. The privately owned pastures the Turners now must use charge about $25 per cow per month, one of the reasons the couple has reduced their herd from 400 head to 200. The Turners have noticed that calves on the remaining piece of grazing land they lease beside a mine are dying at higher rates than those farther away.

When the Turners married in 1969, the water was only about four feet below ground level near their house, Karen recalled. After the first wave of mining in the 1980s, even more water was drained in the 1990s for the extraction of shallow methane, or natural gas known as coalbed methane.

Government scientists once predicted that the drawdown of water because of mining would extend no more than five miles from coal mines. But billions of gallons have been lost across the basin. For many years, state geologists have documented falling underground water levels—up to 582 feet at one well last year, which is deeper than the Washington Monument is tall. Across the wells checked, the average decline was 82 feet last year.

In Gillette, the largest town in the Powder River Basin, population growth fueled by mining made great demands on the region’s limited water supplies. In 2007, the city scrambled to come up with the more than $200 million it cost to run water lines about 45 miles to the next county. State taxpayers funded most of the project, which is not yet complete.

The Turners have paid many thousands of dollars to have their wells redrilled to greater depths and have had to install thousands of yards of pipe to supply the family and their livestock.

But the Turners themselves find the deeper well water undrinkable. “It smells like rotten eggs,” Karen Turner said. “It doesn’t taste too bad if you hold your nose, which is why we buy bottled water.” The well water also sometimes forms a gelatinous sludge in toilet tanks, she said.

Environmental rules do little to protect local residents from the loss of their water due to fossil fuel extraction. In 2007, with a neighboring ranching family, the Turners sued the state, saying officials had failed to settle “questions regarding management of Wyoming’s most valuable and finite resource: water.”

“This is a matter of great public importance, impacting the social and economic realities of the present-day organization of Wyoming’s society,” the suit said.

The Wyoming Supreme Court rejected the argument, ruling that even though the state conceded that “the administration of water is unquestionably a matter of great importance in Wyoming’s arid environment,” the ranchers had failed to pursue administrative remedies and “it is not the function of the judicial branch to pass judgment on the general performance of other branches of government.”

Standing next to the now-trickling creek where he hunted rabbits and his daughter was married in the 1990s, Turner said he knows he cannot prove in the courts that the coal mines were responsible for the loss of water.

But he knows this: “There was willows and rose bushes and all this kind of brush along here. We’d have beaver, mink, different things like that, sometimes some pheasants. Now it’s just, it ain’t there no more.

“And whenever we had the water in the creek, frogs were absolutely thick, and now I don’t know that we have a frog on the place.”