Coal Companies Dodging Royalty Payments + Manipulating Government Subsidy Programs By Selling Coal To Themselves, Report Says

January 13th, 2015 by James Ayre

It’s now common practice in the US coal industry for companies to sell a significant portion of the coal that they mine back to themselves (through the use of subsidiaries) as a means of dodging federal + state royalty payments and maximizing the amount of taxpayer-funded subsidies that they receive, according to a new report from the Center for American Progress.

To give you an idea of what “a significant portion” means, it should be noted that roughly 40% of the coal currently being “produced” in Wyoming is now being funnelled through subsidiaries owned by the same company that mined the coal — rather than being sold directly to utilities, power companies, etc. This represents a roughly 17-fold increase in the use of this practice in the state since just 2004.

This funnelling activity — often referred to as “captive transactions” — allows the companies to notably increase the amount of taxpayer money that they receive via the US Department of the Interior, as well as dodge tax payments. Hmmm…

The new report makes note of the fact that, altogether, five of the biggest coal companies operating in that area have created over 556 subsidiary companies to market/sell the coal that they mine. Almost humorously (might as well laugh about this), Peabody Energy actually owns ~242 such subsidiaries — some of which possess very distinctive names, such as “Coal Sales II, LLC”.

Climate Progress explains the convulted system that allows this to happen:

Under current regulations, coal companies pay royalties on the first sale to another company after mining coal on federal land. The coal then can be bought and sold multiple times until it reaches a final destination and is sold to an end-user, such as a power plant where it is burned for electricity. By building up hundreds of subsidiaries, coal companies have been able to sell to their own companies and partners, allegedly paying royalties based on an artificially low sale price. The CAP analysis presents evidence that captive transactions are common practice in the coal industry and regularly exploited to evade royalty payments and maximize subsidies.

In recent years, members of Congress and the state of Wyoming, along with many others, have called on the Department of the Interior to reform how it assesses royalties for captive transactions. Taking initial steps to close this gaping loophole, the Department of the Interior released a proposed rule yesterday attempting to halt the practice of coal companies intentionally dodging royalty payments through captive transactions.





“Increasingly, the major coal companies are selling Powder River Basin coal not on an open market, but to an elaborate network of shell companies that they own and control,” stated Matt Lee-Ashley, a Senior Fellow and Director of the Public Lands Project at CAP. “This gaming of the system is costing federal and state governments millions of dollars in lost royalty payments and giving the Powder River Basin an unfair advantage over other US coal producing regions.”

You can’t argue with that. Considering the large profits that the industry receives, as well as its maturity, you’d think that subsidies could be rolled back completely. But then, if so, perhaps in a few years we’d simply end up with something similar to the banking and auto-industry bailouts, wouldn’t we? Is it really too much to ask for the largest industries in the country to stand on their own feet?

Image Credits: Mounds of Coal via Shutterstock









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