Coal Leasing: BLM Could Enhance Appraisal Process, More Explicitly Consider Coal Exports, and Provide More Public Information
Released: 2014-02-04T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: In fiscal year 2012, about 42 percent of the 1.05 billion tons of coal produced in the United States came from coal tracts leased under the federal coal leasing program. Interior's BLM is responsible for managing this program, including estimating the fair market value of the coal to be leased. GAO was asked to examine this program. (Representative Markey originally made this request as Ranking Member of the House Committee on Natural Resources. He is now a member of the United States Senate.) This report examines (1) the number of tracts leased, along with the trends in associated coal production and revenues generated since 1990; (2) BLM's implementation of the process to estimate fair market value for coal leases; (3) the extent to which BLM considers coal exports and domestic coal reserve estimates when estimating fair market value; and (4) the extent to which BLM communicates information on federal coal lease sales to the public. GAO analyzed data on coal leasing activity, examined regulations and case files for coal lease sales, and interviewed BLM and other officials.

section_title: What GAO Found
paragraphs: Since January 1990, the Bureau of Land Management (BLM) has leased 107 coal tracts, and associated coal production and revenues have grown. Most lease sales have had a single bidder and were leased the first time offered. The amount of coal produced from federal leases and associated revenues have increased since 1990, although production has leveled off since 2002. Revenues from federal coal leases have generated about $1 billion annually in recent years. Royalties paid when coal is sold and bonus bids paid for the right to mine a federal coal tract account for nearly all of these revenues.

BLM's guidance offers flexibility in how to estimate fair market value, and BLM state offices vary in the approaches they used to develop an estimate of fair market value. In estimating fair market value, some BLM state offices used both the comparable sales approach--where bonus bids received for past sales are used to value the tract being appraised--and the income approach--which uses estimates of the future net revenue streams from the sale of coal from the appraised tract. However, some offices relied solely on the comparable sales approach and may not be fully considering future market conditions as a result. In addition, GAO found that BLM did not consistently document the rationale for accepting bids that were initially below the fair market value presale estimate. Furthermore, some state offices were not following guidance for review of appraisal reports, and no independent review of these reports was taking place. Adequate review of the fair market value process is critical to ensure that its results are sound and key decisions are fully documented. In addition, BLM is not currently taking advantage of a potential independent third-party reviewer with appraisal expertise within the Department of the Interior (Interior), specifically, the Office of Valuation Services.

BLM considers exports to a limited extent when estimating fair market value and generally does not explicitly consider estimates of the amount of coal that can be mined economically, known as domestic reserve estimates. As a result, BLM may not be factoring specific export information into appraisals or may not be fully considering the export potential of a lease tract's coal as called for in agency guidance. The Wyoming and Montana BLM state offices considered exports, but they generally included only generic statements about exports in the reports they prepared. In the other seven states with leasing activity, exports were generally not considered during the appraisal process. According to BLM officials, domestic reserve estimates, which vary based on market conditions and the costs to extract the coal, are not considered due to their variable nature.

BLM generally provides limited information on federal coal lease sales to the public because of the sensitive and proprietary nature of some of this information. The Wyoming BLM state office posts information on its website, including information on past lease sales, but most state office websites provide only general information. BLM's guidance states that redacted public versions of its appraisal reports should be prepared, but no BLM state office has prepared such reports. BLM supplied redacted versions of fair market value documents in response to a recent public information request only after being advised to do so by Interior's Solicitor's office.

section_title: What GAO Recommends
paragraphs: GAO recommends, among other things, that BLM require state offices to use more than one approach to estimate fair market value where practicable, develop a mechanism to ensure that reviews of appraisal reports take place, and take steps to release additional summary information on its websites, including past lease sales. Interior concurred with these recommendations.

section_title: Letter
paragraphs: Coal is an important domestic energy source, and in 2011, coal-fueled  electric power plants supplied about 42 percent of the nation’s electricity.  The Department of the Interior’s Bureau of Land Management (BLM) is  responsible for managing the coal resources on about 570 million acres  of federal, private, and state land under the federal coal leasing program.  Under this program, BLM leases out federal coal tracts to mining  companies who extract the coal from both surface and underground  mines. In fiscal year 2012, about 42 percent of the 1.05 billion tons of  coal produced in the United States came from federal coal lease tracts.  The coal leasing program also generates significant revenue for federal  and state governments; in fiscal year 2012, about $1.2 billion was  generated from coal leasing. These revenues come primarily from  royalties paid on the coal when it is sold and payments made by  companies to obtain the rights to mine on a federal lease tract, known as  bonus bids.

Since 1990, all federal coal leasing has taken place through a lease-by- application process where coal companies propose tracts of land to be  put up for sale by BLM. At these sales, known as lease sales, companies  can bid for the rights to lease tracts of land that contain federal coal for a  set period of time; during the lease period, they can mine and sell coal  from these tracts. In most cases, these lease tracts are adjacent to  companies’ existing coal mines, and the additional coal would allow these  operations to continue. In preparation for a lease sale, BLM develops a  confidential estimate of fair market value, which can generally be defined  as the amount that a knowledgeable seller would obtain from a  knowledgeable buyer for the coal deposit. This estimate of fair market  value is documented in an appraisal report prepared by BLM. When  conducting the lease sale, BLM leases the tract to the highest qualified  bidder, as long as its bonus bid meets or exceeds BLM’s estimate of fair  market value. In response to a lease application, BLM will also determine  the amount of the coal that can be extracted from the lease tract and the  environmental impacts of the proposed mining activity.

EIA is a statistical agency within the Department of Energy that collects, analyzes, and  disseminates independent information on energy issues. where coal prices are generally higher than U.S. domestic prices. In  2012, the United States exported about 126 million tons of coal—an  increase of 54 percent over 2010 levels. This recent increase in coal  exports has raised questions about whether BLM’s process for estimating  fair market value is taking these changes into account, and whether the  agency considers the total amount of coal that can be mined in the United  States economically, known as domestic reserve estimates. In addition,  some stakeholders, particularly environmental groups, have raised  concerns about the amount of publicly available information on the federal  coal leasing program and, specifically, documents BLM prepares as part  of estimating fair market value. Interior’s Inspector General also recently  issued a report examining aspects of the federal coal leasing program,  including the process for estimating fair market value and the coal lease  inspection and enforcement program.

You asked us to examine the federal coal leasing program. (This request  was originally made by Representative Edward J. Markey as Ranking  Member of the Committee on Natural Resources, House of  Representatives. Mr. Markey is now a member of the United States  Senate.) Our objectives for this report were to examine: (1) federal coal  leasing, including the number of tracts leased, along with the trends in  associated coal production and revenues generated since 1990; (2)  BLM’s implementation of the process to develop an estimate of fair  market value for coal leases; (3) the extent to which BLM considers coal  exports and domestic coal reserve estimates when developing an  estimate of fair market value; and (4) the extent to which BLM  communicates information on federal coal lease sales to the public.

To provide information on trends in federal coal leasing, we analyzed data  from BLM’s LR2000 database—which BLM uses to track federal land and  mineral resources, including coal—and summarized federal coal lease  sale activity and bonus bids accepted since 1990. We also analyzed data  on coal production and revenues generated from federal coal leases from  1990 to 2012 from the Department of the Interior’s Office of Natural  Resources Revenue (ONRR), which is responsible for collecting and  distributing revenues associated with federal mineral leases including  federal coal leases. To assess the reliability of these data, we conducted  interviews with BLM and ONRR officials regarding these data and  reviewed documentation on their data systems, and we determined the  data we used to be sufficiently reliable for our purposes, unless otherwise  indicated.

To examine BLM’s implementation of the process to develop an estimate  of fair market value, we reviewed applicable regulations and BLM’s  guidance for the coal leasing program and interviewed BLM officials in  both headquarters and state offices on how they implement these  regulations and guidance. In addition, we reviewed appraisal standards  developed by appraisal organizations in the United States and in other  countries and spoke with officials from some of these groups. We also  selected and reviewed a nonrandom sample of case files prepared by  BLM officials as part of 31 coal lease sales using a data collection  instrument we developed. Specifically, we focused on recent lease sales  and examined case files for lease sales that generally took place from   For those states that did not oversee  January 1, 2007, to July 31, 2012.a lease sale during this time frame, we examined files from their two most  recent sales.

To determine the extent to which BLM considers coal exports when  developing an estimate of fair market value, we used the results of our  case file review to examine what types of information BLM included on  exports. We interviewed BLM officials to learn about the information they  consult in estimating fair market value and also spoke with  knowledgeable stakeholders, such as academics, about future projections  for coal exports. To determine the extent to which BLM considers  domestic coal reserve estimates, we interviewed various BLM officials at  headquarters and all of the BLM state offices where there are coal leases.  In addition, we examined available export and domestic coal reserve  information from government sources and coal mining companies.

To examine the extent to which BLM provides information to the public on  coal lease sales, we analyzed BLM’s policies for making information  publicly available, reviewed BLM websites related to federal coal leasing,  and reviewed a sample of documents that are made publicly available  during the coal leasing process. We also interviewed BLM officials,  representatives from industry, and environmental groups to get their  perspectives on the information made publicly available on federal coal  leases.

We conducted this performance audit from June 2012 to December 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. A more detailed description of  our objectives, scope and methodology is presented in appendix I.
subsections: section_title: Background
paragraphs: Coal is an important domestic energy source, and BLM is responsible for  managing coal resources on about 570 million acres of federal, state, and  private land. Since 1990, all federal coal leasing has taken place through  a lease-by-application process where companies propose lease tracts to  be put up for sale by BLM. In fiscal year 2012, about 1.05 billion tons of  coal was produced in the United States, including production from federal  coal leases, and the biggest coal production area for federal coal was the  Powder River Basin in northeast Wyoming and southeast Montana. Coal  is also an important fuel source worldwide and consumption of coal  continues to increase. To meet this growing demand, there has been an  increase in global trade of coal, including exports from the United States.
subsections: section_title: Coal Leasing Program and the Transition from Regional Leasing to Lease-by-Application
paragraphs: The Federal Coal Leasing Amendments Act (FCLAA) of 1976 amended  the Mineral Leasing Act of 1920 to generally require that all federal coal  leases be offered competitively. Competitive leasing provides an  opportunity for any interested party to competitively bid for a federal coal  lease. There are two procedures that can be used for competitive leasing:  (1) regional leasing, where the Secretary of the Interior selects tracts  within a region for competitive sale based on, among other things,  expected demand for coal resources and potential economic impacts and  (2) lease-by-application, where companies submit an application to  nominate lease tracts that they are interested in leasing. Under both of  these methods, BLM examines the potential environmental impact that  could result from coal leasing.

In April 1982, the first regional coal lease sale was held for 13 lease tracts  containing 1.6 billion tons of coal located in the Powder River Basin in  Montana and Wyoming, and a follow-up sale was held in October 1982  for 2 lease tracts. Controversy surrounded the 1982 sale. Specifically,  there were allegations that confidential appraisal information was  disclosed to coal companies prior to the lease sale and that appraisal and  sale procedures failed to assure that the public received fair market value  for the leased coal tracts. These allegations led to an investigation by the  House Appropriations Committee and a report that we issued in May  1983. Later that year, Congress directed the Secretary of the Interior to  establish a commission to review the coal leasing procedures to ensure  the receipt of fair market value, known as the Commission on Fair Market  Value Policy for Federal Coal Leasing or the Linowes Commission.  Congress imposed a moratorium on lease sales until after the  commission’s final report was issued in 1984. Among its key findings on  the fair market value process, the Linowes Commission found that Interior  used appraisal methods that were widely accepted by industry and  government, but that Interior needed to, among other things, enhance its  capacity to perform appraisals and seek independent reviews of its  appraisals and, more broadly, of the federal coal leasing program. From  March 1984 through February 1987, coal leases were subject to another  moratorium to enable development and implementation of revised coal  leasing procedures based on the commission’s recommendations.

Two other coal regions were decertified in 1981 and 1982. mines or new mines could begin operations. Under the lease-by- application process, companies may submit applications to BLM state  offices to nominate lease tracts to be put up for sale.the regional leasing process where Interior would decide which lease  tracts would be put up for sale.

Tracts nominated under the lease-by-application process, commonly  referred to as maintenance tracts, are generally adjacent to existing  mining operations and are nominated by companies that own these  operations. The BLM state office where the tract is located will review the  application to determine whether it is consistent with applicable  regulations, or if leasing the proposed property would be contrary to the  public interest. For example, a lease application may be rejected if BLM  determines that the land is unsuitable for coal mining or if a qualified   During this review  surface owner does not consent to surface mining. process, BLM may also choose to redraw the lease tract boundaries in  the public interest, a process known as tract modification. Reasons for  tract modification include ensuring that economically recoverable coal  adjacent to the original lease tract not be bypassed, or enticing another  mining company to bid on a lease tract by making the boundaries of the  proposed tract adjacent to more than one potential bidder, according to  BLM officials. Once BLM accepts an application, it will begin either an  environmental assessment or an environmental impact statement in  accordance with the National Environmental Policy Act (NEPA).

In preparing for a lease sale, BLM will also develop a presale estimate of  fair market value of the lease tract’s coal, which is generally expressed in  cents per ton of coal that is recoverable from the lease tract.  “Recoverable” refers to an estimate of the amount of coal that can be  commercially mined from the tract and excludes coal that is not mined,  such as top and bottom sections of a coal seam, which are typically   There are also instances when fair  mixed with less valuable rock.market value is expressed on a per acre basis.

The presale estimate of fair market value is generally documented in an  appraisal report prepared by the BLM state office overseeing the lease  sale. Other reports, such as geologic, engineering, and economic  reports, may also be prepared during the appraisal process by either the  relevant BLM state office or an associated BLM district or field office in  the state. The geologic report contains a legal description of the tract,  along with an estimate of the amount of coal that can be recovered on the  lease tract along with the characteristics of the coal, including its heating  content. An engineering report generally contains a mining plan, along  with estimates of the costs to extract the coal based on the number of  employees and capital equipment necessary to carry out this plan, among  other costs. An economic report provides information on future coal  market conditions, including price and demand levels for the lease tract’s  coal.

Prior to a lease sale, BLM is required to publicly announce in the Federal  Register and a local newspaper when and where a lease sale will be held  and the bidding procedures. Any company is free to bid on the lease  using a sealed bid process. The amount that a company will pay to lease  the tract—known as a bonus bid—is a function of the cents per ton they  are willing to pay multiplied by the estimated recoverable tons of coal  from a lease tract. These bonus bids are then reviewed by a BLM sales  panel, which includes officials from the relevant BLM state office and BLM  headquarters. Bids are accepted or rejected based on whether they meet  the estimate of fair market value, and the lease is awarded to the highest  qualified bidder that meets or exceeds this estimate of fair market value.This successful bidder must either pay the total bonus bid in full at the  time of lease sale or pay 20 percent of the bonus bid at the lease sale  followed by four equal payments on the first four anniversary dates of the  lease. The minimum bid that BLM can accept for a lease tract is  $100/acre. If a lease sale does not receive a qualified bid at or above the  estimate of fair market value, the lease tract can be renominated again  through the lease-by-application process by the company that originally  nominated the tract or by another interested company. If there is no  interest in the lease tract, the application is closed by BLM.

In addition to paying a bonus bid for the rights to mine the coal on a lease  tract, companies also pay rents and royalties on the coal they extract.

Rent amounts are at least $3 an acre and royalties are 8 percent of the  sale price for coal produced from underground mines and at least 12.5  percent of the sale price for coal produced from surface mines. These  royalties are paid on the price of the coal received at the first point of sale  after it is removed from the ground. Tracts are leased out for an initial 20- year period, so long as the lessee produces coal in commercial quantities  within a 10-year period and meets the condition of continued operations.

Lease terms can be extended if a company is actively producing coal on  the lease tract.

section_title: U.S. Coal Production
paragraphs: According to EIA data, about 1.1 billion tons of coal was produced in the  United States in 2011 from 1,325 mines, which employed over 91,000  people. Coal is produced from three major regions––Appalachia, the  interior United States, and the western United States (see fig. 1). More  than half of U.S. coal came from the western region, which includes the  Powder River Basin in northeast Wyoming and southeast Montana. The  Powder River Basin is the largest coal-producing region in the United  States, and all 10 of the top-producing U.S. coal mines are in the Powder  River Basin, with 9 of these located in the Wyoming portion of the basin,  according to EIA data. Coal in the Powder River Basin has less sulfur  than eastern coals, making it attractive to utilities for meeting Clean Air   Close to 100 percent of federal coal is produced from  Act requirements.leases located in the western region and, in fiscal year 2012, federal coal  accounted for nearly 80 percent of the western region coal production  totals. Production from the western region is expected to continue to be  the largest source of coal production in the future—in 2040, an estimated  56 percent of total U.S. coal production will come from western mines  according to our analysis of EIA data. ) and nitrogen oxides (NO),  which have been linked to respiratory illnesses and acid rain. The Clean Air Act requires  EPA to establish national ambient air quality standards for six pollutants, including sulfur  oxides and nitrogen oxides, which states are primarily responsible for attaining. States  attain these standards, in part, by regulating emissions of these pollutants from certain  stationary sources, such as electricity generating units  In addition, the Clean Air Act  Amendments of 1990 established a national cap-and-trade program to reduce SO  emissions limitations for coal-fueled electric power plants. In response to these Clean Air  Act requirements, many utilities installed scrubbers and switched to burning low-sulfur  coal such as that from the Powder River Basin to reduce SO emissions.

section_title: Market for Coal and Coal Prices
paragraphs: Domestically, coal continues to be an important energy source and fuels  a large portion of the electric power sector in the United States, according  to EIA data. In 2011, coal-fueled electric power plants supplied about 42  percent of the nation’s total electricity and, within the past decade, coal  has provided as much as 50 percent of electricity in the United States.  More than 90 percent of the coal consumed in the United States is used  by the electric power sector. According to EIA, for this reason, coal  production trends are strongly influenced by coal demand in the electric  power sector, which is sensitive to both changes in the overall demand for  electricity generation and changes in the mix of fuel sources. Recently,  there has been a general decline in the amount of coal used to generate  electricity in the United States due to a combination of factors including a  decline in overall electricity demand and shifts in the relative prices of  other fuels.

Coal used in electricity generation is referred to as steam coal, as the  coal is burned to produce steam which turns turbines that generate  electricity. Most of the coal that is leased out through the federal leasing  program is steam coal, according to BLM officials. In addition to its use in  the generation of electricity, coal can also be used for a variety of  industrial uses. For example, metallurgical coal is baked at high  temperatures to make coke, which is used as fuel to make steel.  Metallurgical coal has low sulfur and ash content, among other properties  needed for making coke.

The amount of coal produced and consumed worldwide continues to  increase. The International Energy Agency (IEA) reported that worldwide  coal production increased by 6.6 percent in 2011, the twelfth straight year  of growth.primary energy consumption worldwide and is the second primary energy  source behind oil. China continues to drive much of the world coal  markets as its consumption and production of coal accounted for about  45 percent of both global consumption and production totals in 2011  according to IEA data. To respond to this growing international demand,  there has been an increase in coal exports with global coal trade  increasing 7 percent in 2011 according to IEA.

In addition, as of 2011, coal supports 28 percent of the total  The United States exports a small but increasing amount of coal primarily  to Europe and Asia and, in 2011, the United States ranked fourth globally  in coal exports behind Indonesia, Australia, and Russia. According to EIA  data, total U.S. coal exports more than tripled from 2002 to 2012, as  shown in figure 2 below. In 2012 about 126 million tons of coal was  exported––about 12 percent of the total coal produced in the United  States. The majority of this coal is exported to Europe and Asia.  Metallurgical coal, which is generally not mined on federal coal leases,  has historically made up the majority of U.S. coal exports. Nonetheless,  there has been growth in exports the last few years of steam coal––the  primary type of coal mined on federal coal leases. Specifically, from 2010  to 2012, steam coal exports from the United States more than doubled,  rising from 25.6 million tons to 55.9 million tons. Based on EIA data,  exports from Wyoming and Montana, the two largest states in terms of  production from federal leases, accounted for less than 2 percent of total  U.S. coal production in 2011. In addition, coal companies have  announced plans to further increase steam coal exports in the future, and  there are several coal export facilities that are being proposed on the  West Coast to transport coal to growing Asian markets.

The price for coal varies widely across the United States. Among the four  states with the most production from federal coal leases—Colorado,  Montana, Utah, and Wyoming—the average prices for coal originating in  these states in 2011 were $39.88/ton in Colorado, $16.02/ton in Montana,  $33.80/ton in Utah, and $13.56/ton in Wyoming, according to EIA’s 2011  Annual Coal Report. This large difference in price is tied to coal quality,  which is referred to as coal rank.determined by the amount of carbon that the coal contains and the  amount of heat energy it can produce, with higher rank coal having more   Among other factors, coal rank is  energy content. The total amount of coal that an electric utility will need to  fuel a power plant is tied to the heat content of coal. For example, a utility  will need to buy more tons of coal with lower energy content to achieve  the same output of energy that could be attained using less coal with a  higher energy content. Other factors that affect a coal’s quality are sulfur,  moisture, and ash content. The sulfur content of the coal affects the sulfur  dioxide emissions that result when coal is burned, and using coal with  less sulfur content can help electric utilities meet air quality requirements.  Coal with higher moisture and ash content is lower rank because both of  these impact the amount of energy obtained from burning the coal. For  example, coal with lower moisture content has greater energy content.

section_title: Since 1990, Over 100 Coal Tracts Have Been Leased, and Coal Production and Associated Revenues Have Generally Grown
paragraphs: Since January 1990, BLM has leased 107 coal tracts under the lease-by- application process, and both coal production and the associated  revenues have grown. Most lease sales had a single bidder, and the  successful bid amounts––typically expressed in cents per ton––have  varied by state, with the greatest increases over time observed in  Wyoming. The amount of coal produced from federal leases and  associated revenues increased from fiscal year 1990 to fiscal year  2002. Since fiscal year 2002, coal production from federal leases has  remained relatively steady, but revenues continued to grow. In total,  revenues from federal coal leases have generated about $1 billion  annually in recent years.
subsections: section_title: Of the 107 Tracts Leased Since 1990, About 90 Percent Had a Single Bidder, and Most Were Leased the First Time Offered
paragraphs: In 1990, BLM began using the lease-by-application process as the  primary method to lease out coal, and since then BLM has leased 107  coal tracts, 31 of which were in Wyoming. (See app. II for a complete list  of lease sales held since 1990.) The coal from the Wyoming lease tracts  comprise approximately 8 of the 9 billion tons, or about 88 percent, of the  coal available from federal tracts leased since 1990, as shown in table 1.

Of the 107 leased tracts, sales for 96 (about 90 percent) involved a single  bidder (see fig. 3), which was generally the company that submitted the  lease application. More than 90 percent of the lease applications BLM  received were for maintenance tracts used to extend the life of an existing  mine or to expand that mine’s annual production.

According to BLM officials and coal industry representatives, there is  limited competition for coal leases because of the significant capital  investment and time required to establish new supporting infrastructure to  start a new mine or to extend operations of an existing mine to a tract that  is not directly adjacent to it. For these reasons, there have not been many  new mines established on federal leases recently. For example,  according to BLM officials the last new mine started on a federal lease in  the Powder River Basin in Wyoming was the North Rochelle mine, which  began operations in 1982. Officials from coal companies told us they  typically submit new applications for federal coal leases to maintain a 10- year coal supply at their existing mining operations. In 1983, we noted a  similar lack of competition for federal coal leases following the 1982  regional coal lease sale in the Powder River Basin and concluded that the  market for coal leasing was largely noncompetitive because lease tracts   According to BLM  sold “appear captive to adjacent mining operations.”officials, this same issue remains relevant today, and it is difficult to  attract multiple bidders on a lease tract if it is not adjacent to multiple  mining operations. For example, as shown in figure 4, tracts submitted for  lease-by-application that are north and west of the Black Thunder mine  are less likely to be bid on by the operators of the North Antelope  Rochelle or Antelope mines. This is because it would be too costly and  take significant time for these mine operators to move their heavy  equipment to extract coal from these lease tracts, which are not directly  adjacent to their existing operations. In contrast, the lease tracts that are  located between two mines are more likely to be bid on by multiple mine  operators, according to BLM officials.

BLM officials told us that, where possible, BLM uses the tract modification  process to encourage competition for lease sales. For example, Wyoming  BLM officials told us that they recently divided an applicant’s proposed  tract into two distinct tracts to be sold in two separate coal lease sales  upon realizing that one segment may potentially interest another mining  company. Colorado BLM officials told us that they altered boundaries of  one coal lease application to allow for multiple entry points to the coal for  underground mining to make the tract attractive to other companies. In  our review of case files related to 31 recent lease sales, we found that  BLM modified boundaries for seven tracts (23 percent) to enhance  competition. Six of these tracts were located in Wyoming and comprised  more than half of the 11 Wyoming lease sales we reviewed; 1 was  located in Utah. None of these leases, however, received multiple bids  when sold.

Of the 107 leased tracts, 89 (about 83 percent) were leased the first time  they were offered for sale. According to representatives of appraisal  organizations we spoke with, this high acceptance rate of initial bids may  reflect the reliance of existing mines on federal coal leases to maintain  their operations and a willingness of mine owners to submit slightly higher  bids to ensure they win federal coal leases. The remaining 18 tracts were  leased after being reoffered for sale one or more times because the initial   Of the 18  bonus bid offered was below the estimate of fair market value. tracts that were reoffered for sale, 8 were in Wyoming and 5 were in  Colorado.

Fifteen tracts were leased after a second sale; two tracts leased after a third sale; and  one tract was leased after a fourth sale.

section_title: Amount of Coal Produced from Federal Leases Gradually Increased in the 1990s Before Leveling Off in Fiscal Year 2002, with Most Production Taking Place in Wyoming
paragraphs: The total amount of coal produced from federal leases has nearly doubled  since fiscal year 1990. Growth in coal production from federal coal leases  was largest from fiscal years 1992 to 2002, when it grew from 239 million  tons to 444 million tons. The proportion of coal produced from federal  leases relative to the total amount of U.S. coal production also grew over  this same period from about 24 percent in fiscal year 1992 to about 40  percent in fiscal year 2002 (see fig. 5). During this period there was an  increase in U.S. western coal production, where a majority of federal coal  is located, and a corresponding decline in production from eastern coal  regions. In particular, BLM officials told us that Powder River Basin coal  grew in demand over eastern coal because it enabled utilities to meet the  stricter emissions limits due to its low sulfur content. Powder River Basin  coal was also attractive to utilities because of its low production costs and  access to transportation networks, both of which help to decrease the  market price that a utility must pay for the coal. A United States  Geological Survey (USGS) study reported that this shift reflected the fact  that western mines, which typically rely on surface mining, can extract  coal more cheaply than eastern mines, where coal is generally mined  using underground methods.

Since fiscal year 2002, coal production from federal leases remained  relatively steady, averaging near 450 million tons annually, or about 41  percent of total U.S. production. Production peaked in fiscal year 2008 at  483 million tons and has since declined by 8 percent to 442 million tons in  fiscal year 2012. In October 2012, we reported the amount of electricity  generated using coal has decreased recently due to a decline in overall  electricity demand and growth in the use of natural gas to fuel power  plants.

In fiscal year 2012, 85 percent of the coal produced from federal leases  came from Wyoming. As shown in figure 6, Wyoming and three other  western states—Montana, Colorado, and Utah—accounted for 97 percent  of coal produced from federal leases. The remaining 3 percent of coal  (about 12 million tons) was produced from federal leases in five other  states—Alabama, Kentucky, New Mexico, North Dakota, and Oklahoma.

The total revenue generated from federal coal leases has nearly doubled  from $682 million in fiscal year 2003 to $1.2 billion generated in fiscal  year 2008 and again in fiscal year 2012. Total revenues from federal  coal leases have remained relatively steady since fiscal year 2005  averaging about $1.0 billion per year according to our analysis of ONRR  data. There are three sources of revenue from federal coal leases–– royalties, bonus bids, and rents––but royalties and bonus bids account for  nearly 100 percent of the revenues from the federal coal leasing program.

Royalties. Royalties comprised the majority of the revenue from federal  coal leases—nearly two-thirds of the total revenue over the period from  fiscal years 2003 to 2012. Royalty rates for coal depend on the mine  type and are generally calculated based on a proportion of sales value,  less allowable deductions, such as transportation and processing  allowances. BLM generally sets royalty rates at 12.5 percent for surface  mines, the required minimum royalty rate, and 8 percent for underground  mines, the rate prescribed by regulation. In total, royalties generated  from federal coal leases have more than doubled since fiscal year 1990,  from $392 million to $796 million in fiscal year 2012 (see fig. 7). In  addition, as with coal production from federal leases, royalties generated  from the sale of coal from federal leases in Wyoming comprise an  increasing proportion of the royalty stream ranging from 50 percent of  total royalties in 1990 to 80 percent in 2012 (see fig. 6).

Coal prices have been a major driver of the increases in royalty revenues.  For instance, from fiscal years 1990 to 2000, royalty revenues remained  relatively steady even though production of federal coal increased over  this period related to a decline in coal prices. Since then, coal royalty  revenues have steadily increased, even with a recent decline in  production. Specifically, from fiscal years 2008 to 2012 the amount of coal  produced from federal leases declined by about 41 million tons of coal (or  8 percent); however the reported sales value of this coal increased 15  percent from $6.7 billion to $7.7 billion, reflecting growth in coal prices.

The effective royalty rate—the rate actually paid by lessees after  processing and transportation allowances have been factored in along  with any royalty rate reductions––generated from coal produced from  federal leases has remained on average at about 11 percent since fiscal  year 1990. Royalty rate reductions may be approved by BLM in cases  where a reduction is needed to promote mining development. For  example, BLM officials told us they may approve royalty rate reductions to  enable continued operations in cases where mining conditions may be  particularly challenging and costly, or to enable expanded recovery of  federal coal. The effective royalty rate varies by state due to differences in  mine type and other factors. For example, the effective royalty rate is  higher in Wyoming and Montana where most coal is extracted using  surface mining. In fiscal year 2012, the effective royalty rates for the top  federal coal producing states were: Wyoming (12.2 percent), Montana  (11.6 percent), Utah (6.9 percent), and Colorado (5.6 percent).

Bonus bids. Bonus bids are generally expressed in cents per ton of coal  that is recoverable from the lease tract. The total bonus bid paid is the  cents per ton multiplied by the estimated recoverable tons of coal from  the lease tract. According to BLM officials, typically an initial payment of  20 percent of the total bonus bid is provided with the sealed bid, and the  remaining 80 percent is paid in four equal annual installments over a 4- year period, but it may also be paid in full by the lessee at the time of a  lease sale. ONRR revenue data from fiscal years 2003 to 2012 show total  bonus bids received from all federal coal leases averaged $335 million  annually, or about one-third of the total revenues from federal coal leases,  as shown in figure 8. Since fiscal year 2003, revenue from bonus bids has  fluctuated from year to year related to lease sale activity. For example,  since fiscal year 2003, revenue from bonus bids has fluctuated from a  peak of about $521 million in fiscal year 2005, when bonus bids made up  49 percent of the total revenue generated from coal leases, to a low of  $116 million in fiscal year 2010, when bonuses comprised 13 percent of  total revenue.

Based on our analysis of BLM data on coal lease sales, BLM accepted  $6.4 billion in total bonus revenue for the 107 tracts leased since 1990,  with total bids ranging from $5,000 to more than $800 million for a lease  tract. In addition, successful bonus bid amounts for coal leases varied  across states, with bonus bids received in Wyoming showing the greatest  increase since 1990 when compared with the other seven states with  active federal coal leases. Successful bonus bids for lease sale tracts in  Wyoming ranged from $0.04 to $1.37 per ton of coal, after adjusting for  inflation, and generally increased from 1990 to 2012. In comparison,  successful bonus bids in Colorado bids ranged from $0.02 to $0.55 per  ton and slightly increased from 1990 to 2012, and in North Dakota all  successful bonus bids were $100 per acre in nominal dollars, the  minimum bid BLM can accept for a lease tract and did not vary  meaningfully over time when measured on a per ton scale. In other  states, trends in bonus bids were not discernable due to variation in the  successful bids over time or there being too few sales in these states.  According to officials from coal companies we spoke with, bonus bids for  federal coal leases depend on many factors, including coal quality, mine  type (e.g., underground or surface mining), and the price of coal at the  time of the sale.

Even when coal quality, mine type, and price are similar, successful  bonus bids can vary greatly because of other factors. For example,  mining conditions in Colorado and Utah are similar in several respects— most mines are underground, the energy content of the coal being mined  generally exceeds 11,500 BTUs per pound of coal, and coal prices were  in a similar range from 1990 to 2011. Yet, the total bonus bids accepted  by Colorado since 1990 have been about $22 million less after adjusting  for inflation than those accepted by Utah despite the fact that Colorado  has leased out almost 76 million tons more coal than Utah. When asked  about the differences in total bonus bids, BLM officials reiterated that  differences in conditions affecting coal marketability across these states,  such as access to transportation options and proximity of customer base,  make direct comparison of bonus bid values across these states difficult.  Specifically, BLM officials told us that most of the coal produced in Utah is  consumed locally by power plants in state; this proximity to the customer  could be considered an advantage. In contrast, much of the coal  produced in Colorado needs to be transported out of state.

Rents. Rents, which are set at $3 per acre, are also collected annually  from federal coal leasing tracts but comprise an insignificant amount of  the revenue stream. generated from federal coal leases, composing 0.1 percent of the annual  revenue related to coal.

43 C.F.R. § 3473.3-1(a).

section_title: BLM’s Implementation of the Fair Market Value Process Lacks Sufficient Rigor and Oversight
paragraphs: BLM’s guidance offers flexibility in how to estimate fair market value, and  BLM state offices vary in the approaches they use to develop an estimate  of fair market value. Some state offices use both the comparable sales  and income approaches in their appraisals while others rely solely on the  comparable sales approach and may not be fully considering future  market conditions as a result. In addition, we found that BLM did not  consistently document the rationale for accepting bids that were initially  below the fair market value presale estimate, and some state offices were  not following guidance for review of appraisal reports. Furthermore, no  independent review of appraisals is taking place, as is recommended by  commonly used appraisal standards, despite Interior having expertise that  could be leveraged to do so.
subsections: section_title: BLM’s Guidance Offers Flexibility in How to Estimate Fair Market Value
paragraphs: According to BLM guidance, the goal of BLM’s appraisal process is “to  provide a well-supported estimate of property value that reflects all factors  that influence the value of the appraised property,” and it gives state  offices flexibility in how they do so. BLM’s guidance lays out two  approaches to develop an estimate of fair market value—comparable  sales and income—but does not say that both approaches must be  used. Under the comparable sales approach, bonus bids received for  past sales are used to value the tract being appraised. Adjustments may  be made to these comparable sales based on how the characteristics of  these past lease tract sales compare with the lease tract being appraised.  For example, if a past lease sale involved coal that had lower heating  content than the lease tract being appraised, BLM might conclude that the  current tract should have a higher fair market value than the bonus bid  received for this past sale. In contrast, under the income approach, the  revenues received from selling the coal and costs to extract it are  projected into the future, and this net revenue stream is discounted back  to the present. The resulting net present value of this revenue stream  becomes an estimate of the fair market value for the lease tract. See  table 2 for a summary of methods used and information needed for the  comparable sales and income approaches.

BLM’s guidance states that the comparable sales approach is preferred to  the income approach when similar comparable sales are available  because it is assumed that this method will provide the best indication of  value. When comparable sales are not available, the guidance states that  the income approach is a viable alternative, but the guidance highlights  the uncertainty associated with using the income approach. This  uncertainty stems from its reliance on projections of future market  conditions, such as demand for coal, coal prices, and the costs to extract  the coal. The guidance also provides examples for how the results of the  comparable sales and income approaches can be used together. For  example, information from comparable sales can be used as a  comparison point for results from the income approach. In addition,  results from the income approach can be used to adjust past comparable  sales. Specifically, if the net present value of the tract being appraised is  less than the net present value of a past lease sale, a conclusion can be  made that the tract being appraised is less valuable than the past lease,  and a numeric adjustment can be made to the actual sales prices of the  past lease sale to account for this difference.

section_title: BLM State Offices Differ in Their Appraisal Approaches, and Some Offices May Not Be Fully Considering Future Market Conditions as a Result
paragraphs: During our interviews with BLM officials, we found that BLM state offices  use different approaches to develop an estimate of fair market value of  coal leases, and we confirmed this during our case file review. For  example, for lease sales in Wyoming, Montana, and New Mexico,BLM state offices use both the comparable sales and income  approaches, based on our review of case files. Moreover, the BLM  Wyoming state office goes a step further to numerically adjust its  comparable sales using the results of the income approach. In contrast,  for lease sales in Colorado, North Dakota, Oklahoma, and Utah, the BLM  state offices have generally used just the comparable sales approach in  recent years. For the two lease sales we reviewed in both Alabama and  Kentucky, one of the sales used both approaches, while the other used  just the comparable sales approach. When using the comparable sales  approach, BLM state offices generally only used sales information for coal  sales that occurred in their state. (See app. III for specific information on  the approaches used for the lease sales that we reviewed.)   the  BLM officials in some state offices said that they did not have the  resources to perform appraisals using the income approach. In particular,  the income approach may require the help of an economist, and some  BLM state offices do not have an economist on staff. For example,  officials in both the Utah and Colorado state offices said they did not have  economists on staff. For this reason, the Utah BLM office recently  contracted with a firm to help them perform the income approach for a  lease under consideration. However, BLM headquarters officials told us  that the income approach did not require an economist and that some  mining engineers in state offices could perform appraisals using this  method. Officials in other state offices said they could not justify using the  income approach due to the market for coal in their states. For example,  they said that most coal mining in Oklahoma involves privately held coal,  and a bonus bid is not required to obtain the rights to mine the coal, while  in North Dakota, bonus bids offered as part of private sales have  generally been less than or equal to the $100/acre minimum required for  federal coal leases. When using these private sales as comparable sales,  BLM officials in these states concluded that the minimum bonus bid of  $100/acre should be the estimate of fair market value. BLM officials told  us that if they did not set fair market value at this level, the coal on the  federal lease tracts would be bypassed and never mined.

The reliance solely on the comparable sales approach among certain  BLM state offices contrasts with the recommendations of officials from  appraisal organizations we spoke with, who generally supported using  both the comparable sales and income approaches when conducting  mineral valuations. Representatives from three U.S. appraisal  organizations told us that the income approach can provide helpful  information and should be used along with the comparable sales   Specifically, the income approach can serve as a check on  approach.the results of the comparable sales approach. In addition, we reviewed  general appraisal standards in the United States and industry-developed  standards for mineral valuation in Canada and Australia, as identified by  appraisal organizations we spoke with, and we found that mineral  valuation standards in Canada were the most prescriptive in terms of  using multiple appraisal methods. Specifically, the Canadian standards  require that more than one appraisal approach be used unless  justification is provided, and these standards recommend use of both the  income and comparable sales approaches. All of the standards we  reviewed stated that appraisal reports should include a discussion of the  rationale for the appraisal approaches used, as well as the rationale for  any approaches not used. Similarly, representatives from one of the  appraisal groups we interviewed said that if only a single approach is  employed, the reasons for doing so should be documented and justified.  According to BLM’s guidance, officials must document the rationale for  choosing a certain appraisal approach in the appraisal report but, during  our review of case files, we generally did not find this rationale  documented in states where one approach was used. In contrast,  appraisal reports prepared for lease sales in New Mexico, North Dakota,  Montana, and Wyoming contained explanations for the appraisal  approaches they chose to use.

Because the income approach examines estimates of future market  conditions while the comparable sales approach focuses on past coal  lease sales, BLM state offices that rely solely on the comparable sales  approach may not be fully considering current or new trends in coal  markets when estimating fair market value. This is particularly true if a  state office is using comparable sales from a time during which market  conditions were different. During our case file review, we found there  were several comparable sales used that were over 5 years old. One  official from an appraisal organization told us that he would hesitate to  use comparable sales that were older than 5 years because of changes in  market conditions. BLM officials noted that the usefulness of sales over 5  years old would depend on the extent to which the market has changed.

section_title: BLM Did Not Always Document the Rationale for Accepting Bids and Inconsistently Prepared Appraisal Reports
paragraphs: During our case file review of 31 selected lease sales, we found four  lease tracts in three states where the bonus bid offered was below the fair  market value presale estimate, but BLM accepted these bids after  additional consideration was given to them. In total, the accepted bonus  bid amounts related to all four tracts was more than $2 million below the  presale estimate of fair market value. Three of these sales occurred in the  1990s, and one occurred in 2007. As outlined in BLM’s guidance, bonus  bids below the presale estimate of fair market value may be considered  as long as the bid is above the minimum bonus bid requirement of $100  per acre, among other factors. Furthermore, BLM’s guidance allows for  additional information to be considered or additional analysis to be  completed as part of a postsale review process to address technical  errors or in cases where appraisal standards are not met. BLM’s  guidance states that postsale analysis be documented and any revised  fair market value be reviewed, but it does not clearly describe what  postsale documentation is needed. According to BLM headquarters  officials, this postsale analysis must be documented and a new estimate  of fair market value needs to be completed and reviewed. We did not,  however, find this documentation in the case files we reviewed for these  four sales. Specifically, we found no documented evidence of a single,  revised fair market value estimate against which to compare the bids. The  files contained general statements about additional information that was  considered during the postsale review process, such as changes in  mining plans or changes in coal prices. In each of the four cases, BLM  found that the respective bids fell within an “acceptable range of values”  close to the initial presale fair market value estimate and, as a result, BLM  determined in each of these cases that the bid should be accepted.  Without better documentation of these decisions, including specifying the  revised fair market value estimate and clear justification for the revision,  BLM has not demonstrated that the accepted bids met or exceeded the  fair market value estimate as required under the Mineral Leasing Act.

We also found inconsistencies in the appraisal reports prepared as part of  coal lease sales. In particular, some states consistently updated past  comparable sales for inflation while others did not. For example, we found  instances where the Montana/Dakotas and New Mexico state BLM offices  used comparable sales that were more than 5 years old, but did not  adjust them for inflation. In contrast, the Colorado, Utah, and Wyoming  BLM state offices generally updated sales that were more than 5 years  old for inflation. BLM headquarters officials told us that past comparable  sales should be adjusted for differences in market conditions over time.  State offices also varied in the number of comparable sales they  consulted when using the comparable sales approach. For the 31 lease  sales we reviewed, the number of comparables used in the appraisal  ranged from a low of 2 to a high of 10 comparable sales.

In addition, we found instances where BLM did not fully document its  estimate of fair market value. Specifically, we found three related lease  sales in Oklahoma where a formal appraisal report was not prepared to  justify using the minimum bid amount of $100/acre as the estimate of fair  market value. In the case file, there was discussion of the general market  for coal in Oklahoma, including the fact that private coal sales did not  involve up-front payments, such as bonus bids, but there was no  description of the methods used to develop an estimate of fair market  value. A BLM official said that he believed comparable sales were  reviewed to determine that the fair market value estimate would be below  the minimum bid value for these leases, but this was not documented in a  formal appraisal report.

section_title: Some State Offices Did Not Follow BLM’s Guidance for Reviewing Appraisal Reports and Currently There Is No Independent Review of Appraisals
paragraphs: From our review of 31 case files, we found differences in the appraisal  review process used by different state offices and, in some cases, states  had not followed BLM guidance. According to BLM guidance, appraisal  reports must be signed by three BLM officials—the chief of the regional  evaluation team, a qualified mineral reviewer, and the deputy state  director—to ensure technical accuracy of the fair market value estimate  and conformance with BLM’s appraisal guidance. The chief of the  regional evaluation team is an outdated position that no longer exists  because BLM no longer leases coal on a regional basis, but the guidance  has not been updated to reflect this. BLM headquarters officials said they  expected that the mineral appraiser’s signature would take this official’s  place. However, we found that appraisal reports were not consistently  signed by the three officials, and there was no mechanism in place to  ensure that this review was taking place. While appraisal reports in  Wyoming were signed by three officials—the mineral appraiser, mineral  reviewer, and deputy state director—other state offices had appraisal  reports that were reviewed and signed by a single official. For example,  two appraisal reports in Colorado were signed only by the branch chief of  solid minerals, while in Alabama, one appraisal report was just signed by  an economist. Of the two appraisals we reviewed for lease sales in  Kentucky, one was signed by only an economist, and one was not signed  at all. Without clear guidance on who is supposed to be reviewing reports  and consistent reviews by these officials, BLM does not have assurance  that proper oversight is taking place in all state offices responsible for coal  leasing.

Currently, review of appraisal reports takes place primarily at the state  office level, and there is no review by an independent third party outside  of BLM state offices. In its review of the coal leasing procedures in 1984,  the Linowes Commission concluded that periodic independent review of  coal activities by a group with clear independence from the coal leasing  program was desirable. Furthermore, both the Uniform Standards of  Professional Appraisal Practice and the Uniform Appraisal Standards for  Federal Land Acquisition note that independent appraisal review is an  important tool for ensuring that the valuation estimate is credible. BLM  headquarters officials currently have a very limited role in reviewing  appraisal reports prior to a lease sale, and they told us that headquarters  officials receive copies of between 5 and 10 percent of appraisal reports  prior to a lease sale occurring. These officials told us that they are  provided with these appraisal reports so that they can participate in sale  panel meetings where BLM considers whether to accept bids for lease  tracts. BLM headquarters officials do not sign off on these reports or  provide comments to the state officials during the period when the  appraisal reports are being developed. As a result of not regularly  reviewing all appraisals, BLM headquarters officials were unaware of  some of the differences in appraisal practices and documentation issues  that we found across BLM state offices.

In addition, BLM is not currently taking advantage of a potential  independent third-party reviewer with appraisal expertise within Interior,  specifically, the Office of Valuation Services. The Office of Valuation  Services, established by secretarial order in May 2010 and reorganized in  Interior’s Departmental Manual in June 2011, is responsible for providing  real estate valuation services to the department’s bureaus and offices,  including “appraisals, appraisal reviews, consultation services, and  mineral evaluation products for Department and client agencies.” Within  the Office of Valuation Services, the Office of Mineral Evaluation is  responsible for providing mineral evaluations for Interior’s bureaus and  offices, according to the Departmental Manual. Because the Office of  Mineral Evaluation is a small office with about six staff, it is not feasible  for this office to take over the mineral valuation function for the entire coal  leasing program, according to officials in this office, and it would not be  practical given the knowledge and expertise that state and field BLM staff  have regarding coal in their respective regions. Rather, officials in this  office said they were amenable to helping BLM in other ways by, for  example, providing independent third-party review of appraisal reports,  which is critical for ensuring the integrity of the appraisal process. Without  additional oversight of the appraisal process by an independent reviewer,  BLM is unable to ensure that its results are sound, key decisions are fully  documented, and that differences we noted across state offices are  warranted.

section_title: BLM Considers Coal Exports to Limited Extent When Estimating Fair Market Value and Does Not Consider Domestic Reserve Estimates Because of Their Variable Nature
paragraphs: BLM considers coal exports to a limited extent when developing an  estimate of fair market value and generally does not explicitly consider  estimates of the total amount of coal in the United States that can be  mined economically, known as domestic reserve estimates. In the few  state offices that did consider exports, we generally found the same  generic statements in appraisal and economic reports that stated in  general terms the possibility of future growth in coal exports, and there  was limited tracking of exports from specific mines. As a result, BLM may  not be factoring specific export information into appraisals or keeping up- to-date with emerging trends. Domestic reserve estimates are not  considered due to the variable nature of these estimates according to  BLM officials.
subsections: section_title: BLM Considers Coal Exports for Some Lease Sales in Certain States, but Associated Reports Provide Little Information on Current or Future Export Activity
paragraphs: BLM’s guidance states that appraisal reports should consider specific  markets for the coal being leased, and that “export potential” may be  considered as part of the appraisal process. The export potential for coal  from a particular mine can be influenced by several factors, including the  quality of the coal and whether there is a transportation system nearby  that can ship the large volume and weight of coal to a port for export.  Some coal mines, such as those in Wyoming’s Powder River Basin, are  part of a national coal market and, in 2011, Wyoming mines shipped coal  to 34 states in the United States according to EIA data.supply coal only to neighboring power plants, known as mine mouth  operations, meaning that their export potential is limited, and exports  would not factor into the fair market value estimation, according to BLM  officials.

In our review of BLM case files for 31 coal lease sales, we found that coal  exports were generally mentioned in appraisal and economic reports for  the 13 federal lease sales held in Montana and Wyoming. Mines in these  states exported 17.7 million tons of coal in 2011, according to EIA data, or  about three-quarters of the total amount of coal exported from western  states. Exports from these states represented less than 2 percent of  total U.S. coal production and about 17 percent of total U.S. exports of  coal in 2011. Of the 13 Montana and Wyoming case files we reviewed,  one provided specific export information for the mine that was adjacent to  the lease tract being appraised. This appraisal report, which was  prepared for a lease tract in Montana, provided detailed information from  IHS Global Insight and Wood Mackenzie, two private providers of  information on coal.reports in Wyoming typically contained generic boilerplate statements   In addition, we found that economic and appraisal  about the possibility of coal exports in the future and the uncertainty  surrounding them, rather than specific information on actual or predicted  coal exports––even for proposed lease tracts that were adjacent to mines  on federal leases that are currently exporting coal. Wyoming BLM officials  told us that coal exports made up such a small portion of total production  from Wyoming that they did not believe it was necessary to provide  specific information on exports in their economic or appraisal reports.  Wyoming BLM officials told us that future appraisal reports may provide  more specific export information if exports became a more significant  issue, but they did not identify a threshold for including it.

We generally did not find mention of coal exports in the other states with  federal coal leasing activity: Alabama, Colorado, Kentucky, New Mexico,   State BLM officials in these states  North Dakota, Oklahoma, or Utah.told us they did not consider exports when estimating fair market value  because there were few or no coal exports from their state. However, we  found an example in Utah where the lease tract was adjacent to a mine  that, according to EIA data, was exporting coal, but the appraisal report  did not mention coal exports. EIA officials told us that they began  collecting mine-level information on coal exports in 2008 and received a  request from one BLM state office for these data. BLM state and  headquarters officials generally told us they were not aware that EIA  collects these data. Similarly, Wood Mackenzie has mine-level data on  coal exports, but not all state BLM officials were aware that this  information was available to them through a BLM subscription. By not  tracking and considering all available export information, BLM may not be  factoring specific export information into appraisals for lease tracts that  are adjacent to mines currently exporting coal or keeping abreast of  emerging trends in this area.

BLM officials said that they examine projections of future coal prices  during the appraisal process, and these projections would account for  exports. However, only the income approach for appraisals explicitly  considers future prices, so the state offices that use only the comparable  sales approach would not explicitly factor export potential into their fair  market value assessments. Two states in particular—Colorado and  Utah—have coal exports from mines on federal leases, but they generally  use the comparable sales approach to estimate fair market value,  therefore their fair market values would not explicitly reflect the potential  impact of coal exports.

BLM officials told us that they are aware that some coal companies plan  to export more coal in the future but voiced some concern about  weighting these plans too heavily in estimating fair market value because  major port infrastructure upgrades are needed on the West Coast to  handle increased coal exports. Several stakeholders with expertise in  coal markets that we interviewed shared this view. In addition, IEA said it  is difficult to predict future coal exports from Wyoming’s Powder River  Basin to countries such as China because of a lack of infrastructure in  place to handle exports and the uncertainty of market conditions.

section_title: BLM Generally Does Not Consider Domestic Coal Reserve Estimates Because of Their Variable Nature
paragraphs: BLM officials told us that BLM does not consider domestic coal reserve  estimates during the fair market value process. One reason they gave  was these estimates can vary greatly depending on market conditions.  Domestic coal reserve estimates reflect the amount of coal that can be  economically recovered at a given point in time; as a result, these  estimates can change as coal prices fluctuate and mining technologies  advance. For example, USGS estimated reserves of 10.1 billion tons in  the Gillette coal field of the Powder River Basin at a sales price of $10.47  per ton in 2007, but it changed this estimate to 18.5 billion tons when  prices rose to $14.00 per ton in March 2008.assessment estimated that there was 25 billion tons of coal that can be   A more recent USGS  economically recovered in the entire Powder River Basin at the time of  study, but notes that “mining costs and coal prices are not static as both  tend to increase over time.” The report goes on to state that “if market  prices exceed mining costs, the reserve base will grow (the converse is  also true).”

Some BLM officials told us they do not consider domestic reserve  estimates when estimating fair market value because the United States  has ample coal supplies to meet demand over the next 20 years, the time  horizon that BLM uses when evaluating coal lease-by-applications. For  example, EIA estimated that the United States has over 190 years of coal  reserves, at the time of its most recent Annual Energy Outlook in April  2013. BLM state offices that prepare an economic report as part of estimating  fair market value examine future demand and price projections for coal,  which impact reserve estimates as mentioned previously.

section_title: BLM Provides Limited Information on Federal Coal Lease Sales to the Public
paragraphs: BLM generally provides limited information on federal coal lease sales to  the public. Environmental documents produced as part of the NEPA  process and required coal lease sale announcements are the primary  source of detailed written information made available on coal lease sales.  The amount and type of information provided on websites vary by state  office, with the most comprehensive information of the websites we  reviewed provided by the Wyoming BLM state office. In addition, BLM  does not typically make documents used to estimate fair market value  publicly available due to the sensitive and proprietary information they  contain, although its guidance states that a public version of the appraisal  document should be prepared.

EIA projects that U.S. coal production will increase at about 0.2 percent per year for the  period from 2011 to 2040. If that growth rate continues into the future, estimated  recoverable coal reserves would be exhausted in about 194 years if no new reserves are  added.
subsections: section_title: BLM Provides Some Information through Environmental Documents and Coal Lease Sale Announcements
paragraphs: BLM provides some information on coal lease sales in environmental  documents developed to meet NEPA requirements and in lease sale  announcements. BLM is required to share these documents with the  public, and these documents are made available for review in public  reading rooms in relevant BLM state and field offices and are also  typically available on BLM’s websites during the period of leasing activity.  These environmental documents include environmental assessments and  environmental impact statements, which evaluate the likely  environmental effects of leasing and mining the proposed lease tract.  These documents generally include information on the lease applicant,  mining methods at the existing operation, alternatives considered, and  anticipated environmental effects. For example, an environmental  assessment for a recent coal lease in Montana included an overview of  the mine’s history, the mining methods used at the site, the mine’s layout,  and information on potential effects of alternatives considered. In addition  to environmental documents, a decision document summarizing the  results of the process and the agency decision regarding the lease sale is  also issued.

BLM is also required to announce forthcoming coal lease sales in the  Federal Register and a newspaper in the area of the lease tract. These  announcements typically include general characteristics of the lease tract  up for sale, such as the size of the tract, and the amount and quality of  the coal being offered, including its estimated heating value, ash and  moisture content, and the thickness of the coal beds. In addition, the  announcements list the applicant and potential use of the tract, such as  whether it will be used to extend existing mining operations or the tract’s  location adjacent to more than one existing mine. The announcement  also notes where interested stakeholders can view lease sale details  including bidding instructions, terms and conditions of the proposed coal  lease, and case file documents, typically available for review at the  relevant BLM state office.

section_title: BLM State Offices Vary in the Amount and Type of Coal Lease Information on Their Websites
paragraphs: BLM websites are another way that public information is released on the  leasing program, but we found that it was difficult to locate this  information on some of BLM’s websites that we reviewed and the amount  and type of information shared across the websites that we accessed in  May 2013 varied (see table 3). For example, BLM headquarters’ website  contains general information on the federal coal leasing program, but it  does not include information on past or upcoming federal coal lease sales  or link to relevant BLM state or field office websites. BLM officials told us  that they attempted to provide general information on past lease sales on  the headquarters website in 2010, but they were unable to obtain state  BLM offices’ verification of the data, which stalled the effort. Five of the  six state offices do not maintain information on past lease sales on their  websites, although officials in BLM headquarters and two state offices  also told us they have provided this information upon request. All six state  offices that manage lease sales, at a minimum, publish lease sale  announcements in the Federal Register, which is searchable via the  Internet, and based on our review of BLM websites and interviews with  BLM officials, all but one of the state offices issue press releases with  lease sale results that are highlighted for limited periods. In addition,  during our review of BLM websites, we found that five of the six state  offices keep environmental documents related to lease sales on their  websites during the time of lease sale activity.

Of the six state office websites we reviewed, the Wyoming state office  provided the most comprehensive information on the federal coal leasing  program, including results for all coal lease sales in the Powder River  Basin since 1990. For each lease sale, this website had information on  successful bid amounts, associated coal volume and coal quality, and  links to environmental documents. Wyoming BLM officials told us that  they had this information on their website because they receive regular  inquiries from the press and public on coal leasing in the Powder River  Basin. In contrast, the New Mexico state office had no coal leasing  information on its website. New Mexico BLM officials told us that there is  not much public interest in coal lease sales in the states of New Mexico  and Oklahoma, which they oversee, and requests for this type of  information are limited to inquiries from mining companies.

Making electronic information available to the public is a position  supported by the Office of Management and Budget (OMB) and has been  demonstrated by other agencies. Specifically, OMB guidance directs  federal agencies to use electronic media to make government information  more easily accessible and useful to the public. In addition, we have  previously reported on the importance of federal programs allowing users  to easily access and use information on websites. BLM’s federal oil and  gas onshore leasing program maintains a list of planned lease sale  auction dates on the headquarters level website, along with summary  results from recent lease sales by state. Without standard information on  BLM websites, federal coal leasing activity is difficult to track by the  public, and access to publicly available documents may be hampered.

section_title: BLM Does Not Make Reports Related to Its Estimation of Fair Market Value Publicly Available, Which Is Inconsistent with Some Parts of Its Guidance
paragraphs: BLM’s guidance states that a public version of the appraisal report that  deletes all proprietary material should be prepared for each lease sale,  but BLM has not been following this guidance. According to officials  from BLM state offices, a public version of appraisal reports is not  prepared as a standard practice in the six BLM offices managing the coal  lease sale process. According to some BLM officials, they do not prepare  this public version because they are concerned about the potential  release of proprietary and sensitive information these reports contain and  the impact this could have on the bidding process.

BLM, H-3070-1 Economic Evaluation of Coal Properties, V-5. whether to release these reports in a redacted format. For two Freedom  of Information Act (FOIA) requests received in 2011 for reports used to  determine fair market value of coal leases, BLM initially withheld all fair  market value documents until Interior’s Office of the Solicitor advised BLM  to provide redacted documents in response to an appeal filed in one of  these cases. In its response to this FOIA appeal, Interior’s Office of the  Solicitor agreed that BLM has discretionary authority to disclose this  information and noted that BLM’s guidance “does not require the BLM to  release ‘fair market value appraisals and estimates’ to the public and,  instead, merely notes that it ‘can’ do so.” In the end, BLM provided  redacted appraisal reports to this FOIA request, which we reviewed.  These documents included a description of the approaches BLM used to  estimate fair market value, the number of comparable sales that were  considered, and background information on the mining operation, but the  fair market value estimate was redacted along with the supporting  analysis behind this number. As of June 2013, BLM was in the process of  responding to another request for fair market value documents received  in 2012.

BLM headquarters and state office officials consistently told us that it is  critical that the sensitive information in lease sale documents not be  released publicly so that the integrity of the sealed bid process can be  maintained. For example, if companies were to obtain the specific  comparable sales used for a past lease sale, this information could lead  them to reduce their bid for a future lease sale so that it is closer to the  fair market value estimate, according to BLM officials. But there are  differing views within the agency on the extent of information that should  and could be shared. For instance, BLM headquarters officials told us that  they are open to releasing additional information on federal coal leasing,  including making redacted appraisal reports available. In contrast,  Wyoming BLM officials told us they were not comfortable making any  additional information on the fair market value process available such as  redacted appraisal reports. They told us that, in their opinion,  considerable information is already available in documents that must be  prepared as part of the process, such as environmental impact  statements, public notices, and detailed statements on how to bid. They  also told us most people are interested primarily in lease sale results,  which Wyoming BLM makes available on its website. Wyoming BLM  officials also said they are concerned that, by making additional  information available, including redacted appraisal reports, some  important information might be shared that would result in reduced bids  on future coal lease sales. The Wyoming BLM officials’ point of view  stands in conflict with BLM’s guidance that additional information in the  form of public versions of the appraisal report should be prepared and the  Office of the Solicitor’s determination that FOIA does not allow BLM to  withhold entire documents relating to the estimate of fair market value in  response to FOIA requests when portions of these documents contain  information that is not protected from disclosure and should be released.

section_title: Conclusions
paragraphs: With about 40 percent of the nation’s coal produced from federal coal  lease tracts in recent years, the federal coal leasing program plays an  important role in the nation’s energy portfolio. In managing the leasing  program, BLM is required to obtain fair market value for coal leases.  Because there is typically little competition for federal leases, BLM plays  a critical role in ensuring that the public receives fair market value for the  coal that is leased. However, we found differences across BLM state  offices in the approaches they use to estimate fair market value and the  rigor of these reports. Moreover, BLM state offices are not documenting  the rationale for choosing their approaches for the appraisal process.

Adequate oversight of the fair market value process is critical to ensuring  that its results are sound and properly reviewed. However, BLM’s  guidance on the valuation of coal properties is out of date, and officials  are not reviewing and signing appraisal reports in accordance with BLM’s  guidance. Without a mechanism to ensure consistent reviews by three  officials, as specified in the guidance, and independent third-party  reviews, appraisal reports may not be receiving the scrutiny they deserve.

BLM’s guidance allows for additional information and analyses to be  considered as part of the postsale review process, which could result in a  lower revised fair market value estimate and acceptance of bids below  the presale fair market value estimate but above the revised estimate.  The guidance calls for such decisions to be fully justified and that a  revised fair market value be clearly documented and reviewed. However,  we found instances where BLM’s justification to accept such bids was not  adequately documented. Without proper documentation of these  decisions, adequate oversight cannot take place, and BLM does not have  assurance that accepted bids were in compliance with the Minerals  Leasing Act.

Coal exports make up a small but growing proportion of total U.S. coal  production, yet BLM state offices were generally not tracking the export  activity for mines on federal leases and were including only generic  statements about exports in their appraisal reports, and some state  offices were not routinely including export information in appraisal reports.  Moreover, BLM officials were largely unaware of the various sources of  mine-level information about exports, such as the information that EIA  collects and the information collected by private companies. By not  tracking and considering all available export information, BLM may not be  factoring specific export information into appraisals for lease tracts that  are adjacent to mines currently exporting coal or keeping abreast of  emerging trends in this area.

BLM state offices are not following agency guidance because they have  not prepared public versions of appraisal reports, and there is a lack of  agreement within the agency on the extent and type of information related  to the estimation of fair market value to be shared in response to public  requests. Without updated guidance and a consensus, there may  continue to be a disconnect between BLM’s guidance and its standard  practice of not releasing this information publicly. Finally, BLM provides  little summary information on its websites on past lease sales or links to  sale-related documents. Having additional information online could  increase the transparency of federal coal leasing program.

section_title: Recommendations for Executive Action
paragraphs: We are recommending that the Secretary of the Interior direct the Director  of the Bureau of Land Management to take the following eight actions:  To ensure that appraisal reports reflect future trends in coal markets, BLM  should revise its guidance to have state offices use both comparable  sales and income approaches to estimate fair market value where  practicable. Where it is not practicable to do so, the rationale should be  documented in the appraisal report.

To ensure that appraisal reports receive the scrutiny they deserve and  are reviewed by specified officials, BLM should take the following actions: update its guidance so that it reflects the current titles of officials who  should review appraisal reports; develop a mechanism to ensure that state offices are reviewing and  signing appraisal reports consistent with the guidance; develop a process for independent review of appraisal reports and  work with the Office of Valuation Service to determine its role, if any,  in this process.

To ensure that all accepted bids comply with the Minerals Leasing Act by  meeting or exceeding BLM’s estimate of fair market value, BLM should  update its guidance to specify the documentation needed for postsale  analyses in instances where a decision is made to revise the fair market  value estimate and accept a bonus bid that was below the presale  estimate of fair market value but above the revised estimate. Such  documentation for postsale analyses should include the revised estimate  of fair market value, the rationale for this revision, and review of this  decision by appropriate officials.

To ensure that appraisal reports reflect the current state of export activity  for mines on federal leases, BLM headquarters should develop guidance  on how to consider exports as part of the appraisal process and identify  potential sources of information on coal exports that state offices should  use when conducting appraisals.

To eliminate the disconnect between its guidance and BLM state offices’  practice of not releasing appraisal documents to the public, BLM  headquarters, state office officials, and Interior’s Office of the Solicitor  should come to agreement on the extent and type of information related  to the estimation of fair market value that should be shared in response to  public requests for this information and make sure that its guidance  reflects this consensus.

To make electronic information on the coal leasing program more  accessible to the public, BLM should provide summary information on its  websites on results of past lease sales (e.g., amount of coal offered, coal  quality, bonus bids received ) and status of any upcoming coal lease  sales along with links to sale-related documents.

section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of the Interior, the  Department of Agriculture, and the Department of Energy for review and  comment. The Department of the Interior concurred with our  recommendations and also noted it has begun to address some of these  recommendations.  Specifically, BLM has signed a memorandum of  understanding with the Office of Valuation Services to enhance the review  of fair market values.  In addition, BLM stated it will soon publish  additional information on lease sales on its national and state websites.   The Departments of the Interior, Agriculture, and Energy also provided us  with technical comments, which we have incorporated as appropriate.   See appendixes IV and V for agency comment letters from the  Department of the Interior and the Department of Agriculture.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of the Interior, the  Secretary of Agriculture, the Secretary of Energy, and other interested  parties. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact  me at (202) 512-3841 or fennella@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix VI.

section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: Our objectives were to examine (1) federal coal leasing, including the  number of tracts leased, along with the trends in associated coal  production and revenues generated since 1990; (2) Bureau of Land  Management’s (BLM) implementation of the process to develop an  estimate of fair market value for coal leases; (3) the extent to which BLM  considers coal exports and domestic coal reserve estimates when  developing an estimate of fair market value; and (4) the extent to which  BLM communicates information on federal coal lease sales to the public.

To provide information on trends in federal coal leasing under the first  objective, we analyzed data from BLM’s LR2000 database—used by BLM  to track federal land and mineral resources including coal—and  summarized federal coal lease sale activity and bonus bids accepted from  January 1, 1990 to December 31, 2012. For each lease sale where a bid  was accepted and the tract leased, we analyzed data including: lease  sale date, tract acreage, the amount of offered coal, number of bids  received, and winning bid amounts. We also analyzed data on coal  production and revenues generated from federal coal leases from fiscal  years 1990 to 2012 from the Department of the Interior’s Office of Natural  Resources and Revenue (ONRR), which is responsible for collecting and  distributing revenues associated with federal mineral leases including  federal coal leases. We used ONRR sales year revenue data, which  includes current fiscal year data and adjusted or corrected transactions  for sales that took place in previous years. According to ONRR officials,  adjustments to sales year data are made on an ongoing basis in real  time, such that the data varies daily. We used sales year data because  this type of data was identified by ONRR as the best for trending  purposes. To complete our analysis, we adjusted both BLM bonus bid  data and ONRR revenue data to 2013 dollars using the gross domestic  product price index.

We conducted interviews with BLM and ONRR officials regarding these  data and reviewed documentation on their data systems. We found that  some of the revenue data initially provided by ONRR prior to 2003, in  particular the bonus, rent, and other income data, had gaps resulting from  a data system conversion the agency underwent and was not reliable for  use in our analysis. ONRR ultimately provided updated bonus data for  this period, but it did so late in our review process, and we were unable to  determine its reliability. We determined that all other ONRR data including  royalty and production data from 1990 to 2012, as well as BLM federal  coal leasing data, were sufficiently reliable for describing trends in the  federal coal leasing program.

To examine how BLM implements the process to develop an estimate of  fair market value, we reviewed applicable regulations and BLM’s  guidance for the coal leasing program, including BLM’s H-3070-1  handbook, titled Economic Evaluation of Coal Properties. We also  interviewed BLM officials in headquarters and state offices on how they  implement these regulations and guidance. Specifically, we interviewed  officials in the following BLM state offices because they are the only state  offices involved in federal coal leasing at BLM: Colorado, Eastern States,  Montana/Dakotas, New Mexico, Utah, and Wyoming. We also spoke  with officials in the Casper Field Office who are directly involved in coal  leasing activity in the Powder River Basin. In addition, we reviewed other  appraisal standards developed by appraisal organizations in the United  States and appraisal standards used in other countries. These standards  included the Uniform Standards of Professional Appraisal Practice  prepared by the Appraisal Standards Board in the United States; the  Uniform Appraisal Standards for Federal Lands Acquisitions prepared by  the Interagency Land Acquisition Conference in the United States;  Standards and Guidelines for Valuation of Mineral Properties prepared by  the Canadian Institute of Mining, Metallurgy and Petroleum; and the Code  for Technical Assessment and Valuation of Mineral and Petroleum Assets  and Securities for Independent Expert Reports prepared by several  groups, including the Australasian Institute of Mining and Metallurgy. We  examined these standards to see what they said about certain aspects of  an appraisal including required documentation and review processes. To  learn about appraisal practices for mineral properties, we also spoke with  appraisal officials, including officials from the Appraisal Institute, the  Appraisal Foundation, the American Institute of Mineral Appraisers, and  an official involved in the development of the Canadian standards for  mineral valuation mentioned above. In addition, we spoke with officials  from Interior’s Office of Valuation Services, which is responsible for  providing real estate evaluation services to the Department of the  Interior’s bureaus and offices.

We selected and reviewed a nonrandom sample of case files prepared by  BLM officials as part of 31 recent coal lease sales using a data collection  instrument we developed. The sample included all reports for lease sales  that generally took place from January 1, 2007, to July 31, 2012. This  nonrandom sample cannot be generalized to all coal lease sales held but  rather has a focus on recently prepared files. However, the results of this  sample provide illustrative examples of the coal leasing process used and  the documentation prepared. We requested the following documentation  from BLM for these lease sales if they had been prepared: appraisal  report, economic report, engineering report, geologic report, and tract  modification report. As part of our review, we examined 147 documents  that were prepared for these 31 lease sales. For those states that did not  oversee two lease sales from January 1, 2007, to July 31, 2012— Alabama, Kentucky, New Mexico, North Dakota, and Oklahoma—we  examined their two most recent lease sales. To ensure that  our data collection instrument was filled out correctly, two GAO staff  members reviewed the provided documents: one filled out the data  collection instrument the first time, and the other verified this work. We  conducted follow-up interviews with BLM state offices to discuss both  general questions our review raised about the processes used to estimate  fair market value in each of the BLM states and details related to specific  cases we reviewed.

We reviewed three pre-2007 files for both Oklahoma and New Mexico because these  sales involved multiple lease tracts that were held on the same date.

National Mining Association, International Energy Agency, and other  officials from academia and industry.

To determine the extent to which BLM considers reserve estimates, we  interviewed a variety of BLM officials at the headquarters and state office  level to determine if reserves were considered. In addition, we examined  available reserve information from the United States Geological Survey  (USGS) and spoke with USGS officials involved in making these  estimates. We also obtained perspectives from stakeholders from  academia, industry, and environmental organizations.

To examine the extent to which BLM provides information to the public on  coal lease sales, we analyzed BLM’s policies for making information  publicly available, including BLM’s H-3070-1 handbook. We also reviewed  BLM websites related to federal coal leasing, and we reviewed a sample  of environmental documents that are made publicly available during the  coal leasing process. We obtained data from BLM on Freedom of  Information Act (FOIA) requests made for fair market value information  prepared for federal coal lease sales. We also reviewed copies of request  letters and BLM’s response to these requests, including redacted  versions of fair market value documents made available in response to  the only FOIA request where BLM supplied these documents. We  interviewed BLM staff, industry representatives, as well as conservation  and environmental groups to get their perspectives on the information  made publicly available on federal coal leases.

Finally, we conducted site visits to Colorado and Wyoming. During these  visits, we met with officials in BLM state offices in Colorado and  Wyoming, and we also met with officials in the Casper Field Office in  Wyoming. In addition, we met with a coal mining company and toured a  large surface mine in Wyoming and met with a professor of economics at  the University of Wyoming’s School of Energy Resources. We selected  these states because they have different types of mining that take  place—generally surface mining in Wyoming and underground mining in  Colorado. In addition, we selected Wyoming because of the large amount  of federal coal leasing activity in the state.

We conducted this performance audit from June 2012 to December 2013  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

section_title: Appendix II: Federal Coal Lease Sales, January 1990 through December 2012
paragraphs: This appendix presents data on all federal coal lease sales by state that  were conducted from January 1, 1990, through December 31, 2012.  Table 4 provides information on the lease tract characteristics (acreage,  type of mine, and amount of coal) along with the lease sale results  (number of bids received, bonus bid accepted, and name of successful  bidder).

section_title: Appendix III: Summary Information from File Reviews of Selected Federal Coal Lease Sales
paragraphs: This appendix provides information on the 31 federal coal lease sales we  reviewed that generally took place from January 1, 2007, to July 31,  2012. For those BLM state offices that did not conduct 2 lease sales  during this time, we reviewed their 2 most recent lease sales.

Reports that are relevant to the determination of fair market value include  the following: geologic reports, which contain an estimate of the amount of coal that  can be recovered on the lease tract along with the characteristics of  the coal, including its heating content; engineering reports, which generally contain estimates of the costs to  extract the coal based on the number of employees and capital  equipment necessary to carry out mining activities; economic reports, which establish price and demand levels for the  lease tract’s coal; and appraisal reports, which document the fair market value for the lease  tract, along with an explanation of the methods used to develop this  number.

BLM’s guidance does not direct that all of these reports to be prepared as  part of a lease sale. For example, it is unlikely that an economic report  would be prepared if the income approach was not used to determine fair  market value. However, BLM guidance requires that appraisal reports be  signed by three officials.

For the files we reviewed, table 5 provides information by lease tract on  the amount of coal involved in the sale, types of reports prepared as part  of the sale, fair market value approaches used, and compliance with  appraisal report review requirements.

section_title: Appendix IV: Comments from Department of the Interior

section_title: Appendix V: Comments from Department of Agriculture

section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Elizabeth Erdmann (Assistant  Director), Antoinette Capaccio, Scott Heacock, Rich Johnson, Mehrzad  Nadji, Alison O’Neill, Dan Royer, Rebecca Shea, Jeanette M. Soares, Jeff  Tessin, and Swati Sheladia Thomas made key contributions to this report.


Question-summary annotations: questions: question: What has BLM leased since 1990?
answer: Since January 1990, the Bureau of Land Management (BLM) has leased 107 coal tracts, and associated coal production and revenues have grown.
child_questions: question: In what ways are most lease sales similar to each other?
answer: Most lease sales have had a single bidder and were leased the first time offered.

question: How has coal production and associated revenue changed since 1990?
answer: The amount of coal produced from federal leases and associated revenues have increased since 1990, although production has leveled off since 2002.
child_questions: question: Recently, about what do the revenues from federal coal leases generate annually?
answer: Revenues from federal coal leases have generated about $1 billion annually in recent years.

question: How is this revenue generated?
answer: Royalties paid when coal is sold and bonus bids paid for the right to mine a federal coal tract account for nearly all of these revenues.

questions: question: Why might BLM state offices vary their approach to estimate fair market value?
answer: BLM's guidance offers flexibility in how to estimate fair market value, and BLM state offices vary in the approaches they used to develop an estimate of fair market value.
child_questions: question: What are some ways in which BLM offices do estimate fair market value?
answer: In estimating fair market value, some BLM state offices used both the comparable sales approach--where bonus bids received for past sales are used to value the tract being appraised--and the income approach--which uses estimates of the future net revenue streams from the sale of coal from the appraised tract. However, some offices relied solely on the comparable sales approach and may not be fully considering future market conditions as a result.

question: What inconsistent documentation did the GAO find regarding accepting bids below market value?
answer: In addition, GAO found that BLM did not consistently document the rationale for accepting bids that were initially below the fair market value presale estimate.

question: In what ways did BLM not follow or take advantage of reviewing protocols?
answer: Furthermore, some state offices were not following guidance for review of appraisal reports, and no independent review of these reports was taking place. In addition, BLM is not currently taking advantage of a potential independent third-party reviewer with appraisal expertise within the Department of the Interior (Interior), specifically, the Office of Valuation Services.
child_questions: question: Why is adequate review of the fair market process critical?
answer: Adequate review of the fair market value process is critical to ensure that its results are sound and key decisions are fully documented.

questions: question: What does BLM minimally consider - or not consider at all - when estimating a fair market value?
answer: BLM considers exports to a limited extent when estimating fair market value and generally does not explicitly consider estimates of the amount of coal that can be mined economically, known as domestic reserve estimates.
child_questions: question: As such, what may be missing and not considered from BLM appraisals?
answer: As a result, BLM may not be factoring specific export information into appraisals or may not be fully considering the export potential of a lease tract's coal as called for in agency guidance. In the other seven states with leasing activity, exports were generally not considered during the appraisal process. According to BLM officials, domestic reserve estimates, which vary based on market conditions and the costs to extract the coal, are not considered due to their variable nature.
child_questions: question: Even though the Wyoming and Montana BLM state offices considered exports, why was this information only minimally helpful?
answer: The Wyoming and Montana BLM state offices considered exports, but they generally included only generic statements about exports in the reports they prepared.

questions: question: In what ways is the information the BLM provides limited or nonexistent?
answer: BLM generally provides limited information on federal coal lease sales to the public because of the sensitive and proprietary nature of some of this information. BLM's guidance states that redacted public versions of its appraisal reports should be prepared, but no BLM state office has prepared such reports.
child_questions: question: How does the Wyoming BLM differ from other states?
answer: The Wyoming BLM state office posts information on its website, including information on past lease sales, but most state office websites provide only general information.

question: How did BLM respond to a request to release public information?
answer: BLM supplied redacted versions of fair market value documents in response to a recent public information request only after being advised to do so by Interior's Solicitor's office.

questions: question: What percentage of coal came from leased coal tracts in 2012?
answer: In fiscal year 2012, about 42 percent of the 1.05 billion tons of coal produced in the United States came from coal tracts leased under the federal coal leasing program.
child_questions: question: What is included in BLM's management of this program?
answer: Interior's BLM is responsible for managing this program, including estimating the fair market value of the coal to be leased.

question: What are four elements the program examined?
answer: This report examines (1) the number of tracts leased, along with the trends in associated coal production and revenues generated since 1990; (2) BLM's implementation of the process to estimate fair market value for coal leases; (3) the extent to which BLM considers coal exports and domestic coal reserve estimates when estimating fair market value; and (4) the extent to which BLM communicates information on federal coal lease sales to the public.
child_questions: question: What professional change has happened to the member who requested to examine the program?
answer: (Representative Markey originally made this request as Ranking Member of the House Committee on Natural Resources. He is now a member of the United States Senate.)

question: How was the GAO involved in the examination process of this program?
answer: GAO was asked to examine this program. GAO analyzed data on coal leasing activity, examined regulations and case files for coal lease sales, and interviewed BLM and other officials.