Analysis of the Powder River Basin Federal Coal Lease Sale:

Economic Valuation Improvements and Legislative Changes Needed

RCED-83-119: Published: May 11, 1983. Publicly Released: May 11, 1983.

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In response to a congressional request, GAO evaluated many sensitive and controversial issues surrounding the April 28, 1982, sale of coal leases in the Powder River Basin Federal Coal Region and its implications for the overall success of the Federal Coal Management Program.

GAO found that the Department of the Interior did not investigate the possibility of the disclosure of proprietary data or its potential impact on the sale. However, GAO could not verify the details related to this alleged disclosure. Interior did make two major changes in its coal lease sale bidding systems to permit the determination of fair market value after the sale rather than before. GAO found that Interior's new entry-level system and minimum bidding concept resulted in the receipt of low bids because of minimal bidder participation. The combined accepted bids on two sales were $3.5 million less than Interior's original minimum acceptable bid estimates. GAO believed that the approach used by the evaluation team, although imperfect and in need of some adjustment, was reasonable under the circumstances and provided a technically sound basis for estimating the fair market value of the tracts. However, GAO found that the lease value estimates undervalued the tracts by $95 million. GAO also noted weaknesses in the fair market value determination procedures, since the procedures were overly dependent on data derived from the sale itself. GAO found that Powder River coal sold at roughly $100 million less than the GAO estimates of fair market value at the April and October sales. A GAO analysis of maintenance leases showed that none of the tracts sold at fair market value.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: In revamping the Federal Coal Management Program, Interior considered proposing legislation to negotiate the sale of captive or maintenance-type bases. The idea was abandoned because it felt that the negotiations would be too difficult to administer. GAO disagreed because its analysis shows negotiated sales to be the most effective means of obtaining fair market value for captive lease tracts.

    Matter: Congress should amend the Mineral Lands Leasing Act of 1920, as amended, to: (1) authorize Interior to negotiate captive or maintenance-type leases; and (2) require Interior to publish for public comment information derived at sequential phases in the lease negotiation process. To ensure public and industry awareness of the lease negotiation process, and to provide ample opportunity for affected parties to influence the process, Interior should be required to publish its: (1) intent to negotiate a proposed maintenance lease; (2) decision to negotiate the lease as proposed and its evaluation of public comments; (3) intent to sell the lease and the proposed sale terms; and (4) decision to sell the lease as proposed, or under modified terms, and its evaluation of public comments. To facilitate future evaluations of the negotiation process, Congress should amend the Mineral Lands Leasing Act of 1920 to require that detailed records be kept of the negotiations, including evidence presented by government and industry representatives, and of its disposition.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Interior complied with this recommendation and corrected deficiencies identified in the reports by GAO, the Commission on Fair Market Value Policy for Federal Coal Leasing, and the Office of Technology Assessment. No further follow-up is warranted.

    Recommendation: The Secretary of the Interior should postpone scheduled regional coal lease sales until Interior has had an opportunity to correct deficiencies in its valuation, leasing, and fair market value determination procedures.

    Agency Affected: Department of the Interior

  2. Status: Closed - Not Implemented

    Comments: As a result of this report, a special commission was established to review the fair market value policies for federal coal leasing. Interior has made programmatic changes in response to the Commission's recommendations. No further follow-up is warranted.

    Recommendation: The Secretary of the Interior should not resume coal leasing until Interior has developed: (1) a detailed analysis of the economic and geologic variables affecting the value of a federal coal lease; (2) new internal procedures for conducting coal lease valuations; (3) new guidelines for using untried or experimental bidding systems, such as entry level and interact bidding, at regional coal lease sales; (4) minimum regulatory selling prices for coal leases in each federal coal region on a cents per ton basis; and (5) revised fair market value determination procedures that include specific quantitative tests which are applicable whether or not adequate bidding competition is present and place greater reliance on prior comparable sales and recent arm's length sales in the absence of bidding competition at the actual sale.

    Agency Affected: Department of the Interior

  3. Status: Closed - Implemented

    Comments: Interior complied with this recommendation immediately after the report was issued. No further follow-up is warranted.

    Recommendation: The Secretary of the Interior should direct the Bureau of Land Management to establish written, bureauwide, internal procedures for safeguarding coal lease pricing, economic valuation, and other proprietary data.

    Agency Affected: Department of the Interior


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