WASHINGTON (Reuters) - U.S. states should force coal companies to set aside collateral to pay for future mine cleanups and protect taxpayers as the industry braces for further declines, a leading federal regulator said on Tuesday.

A view of the Eagle Butte Mine, operated by Alpha Natural Resources, as seen from a public access overlook platform near Gillette, Wyoming, U.S. May 31, 2016. REUTERS/Kristina Barker - RTSJFSN

Three of the largest U.S. coal producers, Peabody Energy Corp, Arch Coal Inc and Alpha Natural Resources, have filed for bankruptcy in the past year in an industry shaken by cheap natural gas and falling demand from China.

With coal production outstripping demand, the market is not likely to recover until at least 2021, Joe Pizarchik, who heads the Office of Surface Mining and Reclamation Enforcement, told Reuters.

Pizarchik’s forecast is based on recent data from the U.S. Energy Information Administration that shows continued declines in capacity for coal-fired power plants for the next five years.

This has raised concerns because the three bankrupt coal producers have not set aside cash to pay for roughly $2 billion in projected mine cleanups. Instead, they used a federal subsidy known as “self-bonding,” which essentially exempts healthy companies from posting bonds or other securities to cover the cost of returning mined land to its natural setting.

“We’re moving as quickly as we can to help the states do their best to protect the taxpayers,” Pizarchik said. “We want to give them the tools to ensure that mined land is reclaimed.”

Regulators in states with self-bonds should immediately assess whether companies still qualify for the program, he said, noting that those in bankruptcy do not meet the requirement of financial solvency and continuous operations.

Last month Alpha Natural agreed to replace its self-bonds in Wyoming with other guarantees as part of a complex deal to exit Chapter 11, although it will continue to cover reclamation at former mine sites in West Virginia with self-bonds.

Peabody and Arch Coal hope to exit Chapter 11 in the next six months, and it has been unclear whether self-bonds would form part of their reorganization plans. Peabody alone has $1.14 billion of self-bonds for mine cleanups in four states.

Coal-producing states have discretion in accepting self-bonds. Any change to the law, which dates back to 1977, would need congressional approval, a process that could take years.

Pizarchik said he would issue a policy advisory with new self-bonding guidance as soon as Tuesday. His agency will also examine agreements between coal companies and states, some of which have already transitioned away from self-bonding, he said.

Nineteen states allow self-bonds, while five prohibit them.

As of July, there were self-bonds worth $3.6 billion across about 10 U.S. states, Pizarchik’s agency said. It recently concluded a 30-day period to hear public concerns about the practice and received some 117,000 comments.

Pizarchik said self-bonds could be “appropriate” once production is more in line with demand and states are sure to assess both the current and long-term status of companies’ finances.