Coal Leasing:

BLM Could Enhance Appraisal Process, More Explicitly Consider Coal Exports, and Provide More Public Information

GAO-14-140: Published: Dec 18, 2013. Publicly Released: Feb 4, 2014.

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What GAO Found

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.

Why GAO Did This Study

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.

What GAO Recommends

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.

For more information, contact Anne-Marie Fennell at (202) 512-3841 or fennella@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In October 2014, BLM updated its guidance in BLM Handbook H-3073-1. Specifically, in chapter 5 of the Handbook, it states that the analysis used to determine fair market value be well-documented and that it include a description of the valuation approaches used and not used in the analysis. Similarly, section 4.1 of the Handbook states that the team that is valuing the coal must include in the valuation report "a complete explanation that summarizes the reasons that it relied on one or both methods to estimate the pre-sale fair market value for the subject property."

    Recommendation: To ensure that appraisal reports reflect future trends in coal markets, the Secretary of the Interior should direct the Director of the BLM to 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.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: In October 2014, BLM updated its guidance in BLM Handbook H-3073-1. Specifically, section 5.2.3 of the Handbook specifies the officials that should sign the appraisal report as being the mineral valuation expert that prepared the report, the appointed external agency reviewer, and the deputy state director.

    Recommendation: To ensure that appraisal reports receive the scrutiny they deserve and are reviewed by specified officials, the Secretary of the Interiors should direct the Director of the BLM to update its guidance so that it reflects the current titles of officials who should review appraisal reports.

    Agency Affected: Department of the Interior

  3. Status: Closed - Implemented

    Comments: In October 2014, BLM updated its guidance in BLM Handbook H-3073-1. Specifically, section 5.2.3 of the Handbook specifies the officials that should sign the appraisal report as being the mineral valuation expert that prepared the report, the appointed external agency reviewer from the Department of the Interior's Office of Valuation Services, and the deputy state director. In addition, in chapter 6, there is a diagram that shows the review and signature process for appraisal reports. By revising the list of officials who need to review and sign appraisal reports and establishing a clear review process and mechanism, in the form of the diagram depicting the process that needs to be followed, the agency has greater assurance that the reports will receive the scrutiny they deserve.

    Recommendation: To ensure that appraisal reports receive the scrutiny they deserve and are reviewed by specified officials, the Secretary of the Interior should direct the Director of the BLM to develop a mechanism to ensure that state offices are reviewing and signing appraisal reports consistent with the guidance.

    Agency Affected: Department of the Interior

  4. Status: Closed - Implemented

    Comments: In October 2014, BLM updated its guidance in BLM Manual MS-3073 and BLM Handbook H-3073-1. Specifically, section 1.6(F) of the Manual states that the Office of Valuation Services is the designated third party reviewing agency for coal valuations and that it is BLM's policy to have each fair market value estimate reviewed the Office of Valuation Services. In addition, section 6.1 of the Manual says that the appraisal report and all supporting reports and documentation must be reviewed by the Office of Valuation Services, and section 6.1 of the Handbook states that the third party reviewer ensures conformance with valuation procedures.

    Recommendation: To ensure that appraisal reports receive the scrutiny they deserve and are reviewed by specified officials, the Secretary of the Interior should direct the Director of the BLM to 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.

    Agency Affected: Department of the Interior

  5. Status: Closed - Implemented

    Comments: In October 2014, BLM updated its guidance in BLM Handbook H-3073-1. Specifically, section 7.4 of the Handbook requires that the Sale Panel--which generally includes the Deputy State Director for Mineral Resources, a minerals appraiser or economist, geologist, and mining engineer--develop a post-sale report to document the post-sale analysis. This includes documenting all the factors that were considered by the Sale Panel in its decision to recommend that the bid be accepted or rejected. Also, as part of its analysis, the Sale Panel may review the procedures used in developing the pre-sale analysis and may request reconsideration of the pre-sale analysis if, for example, the property value appears unreasonably derived, unsound, or inadequately explained. The Handbook also calls for any issues discovered during the post-sale analysis to be documented in the post-sale valuation report along with their resolution. The post-sale report is to be reviewed by the Division of Mineral Evaluation and the Deputy State Director for its conformance to the coal valuation guidance.

    Recommendation: To ensure that all accepted bids comply with the Minerals Leasing Act by meeting or exceeding BLM's estimate of fair market value, the Secretary of the Interior should direct the Director of the BLM to 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.

    Agency Affected: Department of the Interior

  6. Status: Closed - Implemented

    Comments: In October 2014, BLM updated its guidance in BLM Handbook H-3073-1. Specifically, section 3.8 of the Handbook states that the evaluation team should obtain information on exports, including the quantity of coal exports from the mine in the last five years and the applicant's plans to internationally market the coal from the mine. In addition, section 3.9 provides potential sources of information to use during the valuation process, including coal export data from the Department of Commerce.

    Recommendation: To ensure that appraisal reports reflect the current state of export activity for mines on federal leases, the Secretary of the Interior should direct the Director of the BLM headquarters to 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.

    Agency Affected: Department of the Interior

  7. Status: Closed - Implemented

    Comments: BLM issued guidance through an Instruction Memorandum dated September 26, 2014, titled "Guidance on Release of Fair Market Value Information to the Public." This guidance document clarified that BLM will post public versions of non-sensitive and non-proprietary coal lease sale FMV-related documents on publicly available websites after a successful lease sale, consistent with law and regulation. BLM's guidance also states that these public versions may be redacted versions of the various documents prepared to support the presale estimate of fair market value (including geologic, engineering, economic, and valuation reports) that do not contain sensitive or proprietary information.

    Recommendation: To eliminate the disconnect between its guidance and BLM state offices' practice of not releasing appraisal documents to the public, the Secretary of the Interior should direct the Director of the BLM headquarters, state office officials, and Interior's Office of the Solicitor to 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.

    Agency Affected: Department of the Interior

  8. Status: Closed - Implemented

    Comments: In response to our recommendation, BLM issued guidance through an Instruction Memorandum dated September 30, 2014, titled "Publically Accessible Bureau of Land Management Websites for Coal Leasing Information." This guidance requires BLM state offices to maintain accurate information on past coal lease sales on their websites and to update this information within five days of future lease sales being completed. It also requires that a national summary of coal lease sales be maintained online and that this information be updated annually. In addition, the guidance requires that information on pending lease sales be maintained online. As of December 2014, such information was being maintained on BLM state office websites, as well as a national summary on the main BLM website for coal leasing.

    Recommendation: To make electronic information on the coal leasing program more accessible to the public, the Secretary of the Interior should direct the Director of the BLM to 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.

    Agency Affected: Department of the Interior

 

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