LPDD Model Law: Coal Fair Market Value Act

This model law amends the definition of “Fair Market Value” (FMV) under which the federal government may lease land for coal projects, forcing the winning bidder to account for more potential revenues and social costs.

The Bureau of Land Management (BLM) is responsible for leasing federal lands for coal mining, which constitutes about 570 million acres of land with development potential. The current regulatory framework for this leasing includes numerous gaps which create room for industry exploitation. The Federal Coal Leasing Act prohibits the BLM from accepting a bid for less than the FMV of the proposed lease. The Act, however, provides no definition for FMV, leaving that determination entirely to the Secretary of the Interior; it also specifically states that the Secretary will not be required to make public their determination of FMV or any comments on the FMV submitted by the public.

In many cases, this regulatory gap has allowed industry to profit significantly, arguably at the expense of the federal government. The Secretary does not consider a number of factors which are relevant to the actual value of the land to be leased, contributing to a flawed bidding process. For example, the export value of the coal, which is important as the sale of coal to Asian markets grows in scope, is not considered. Likewise, the Secretary does not weigh the option value of not mining the coal and preserving the land as a public asset. Perhaps most significant, no measure of the social cost of coal mining – pollution and carbon emissions, among others – is used in calculating the appropriate price for private industry to pay to the federal government in exchange for leasing the land for coal mining. All in all, the existing legislative scheme allows private industry to reap great profits at the expense of the public because the Secretary is not required to do an appropriate cost-benefit analysis; the result is that government funds are flowing disproportionately towards coal companies.

The proposed Bill seeks to ameliorate these issues by providing a more robust definition of FMV. The proposed Bill would help incentivize a transition away from coal and end the private exploitation of the federal government by filling three gaps in the current law: (1) provide a definition of “fair market value” which considers all of the relevant factors, including the social costs and export value of coal mining; (2) provide a requirement that the leasing program does not create an imbalance of benefits between the federal government and the lessee or purchaser; and (3) provide an oversight mechanism which requires the Secretary to publish their calculations and subject them to public scrutiny.

To the first end, the Bill amends the current law to limit the discretion that the Secretary has in defining FMV. The Secretary must account for the export potential of the coal to be extracted in determining the FMV, must rely on information from lease sales conducted within the past five years of the proposed lease sale, and must consider the domestic coal reserves. Additionally, the Secretary may not accept a bid that is less than the FMV, even if the bid is above the minimum bid requirement.

Second, the Bill specifically requires the Secretary to ensure as much as possible that the lease does not create an imbalance of benefits. This provision codifies the intention of the Bill to end a regime of exploitation by private industry of the American public. To this end, the Bill requires that the Secretary maximize the financial return per ton of coal for the government, and conduct sale-leases in a manner that considers human health impacts and environmental impacts, including the harm to other impacted resources. The Bill also requires that the Secretary ensure that the timing and location of exploration and mining development is based on consideration of the region, environmental risks, and the interests of the local community, and that exploration and mining development are balanced against potential environmental damages, including the impact on climate change.

Finally, the Bill requires the Secretary to publish their calculation of the FMV of the land to be leased. These calculations must be submitted in a formal, documented appraisal report that is accessible via the BLM’s website, and the report must include the FMV determination. This requirement provides much needed oversight, and is in line with the way other federal agencies in similar positions conduct their business.

This model law and accompanying memorandum were drafted by a team at Allen & Overy LLP, led by Nick Ognibene, supervised by Ken Rivlin, and including Felise Cooper, Jake Ely, Rebecca Dresner and Will Jackson.  Peer reviewing was provided by Sam Kalen, Associate Dean and Director of the Center for Law and Energy Resources in the Rockies, University of Wyoming Law School.