By Bobby McEnaney, Natural Resources Defense Council
Another court has denied the Trump administration’s ongoing efforts to adopt flawed regulatory policies that run contrary to federal law. This time, a federal court on Friday issued a judgment blocking an attempt by the Department of Interior (DOI) to adopt a series of regulations that were fundamentally designed to enrich fossil fuel companies at the expense of taxpayers and our nation’s public lands.
In a decision issued by U.S. District Judge Saundra Brown Armstrong, the court found that the DOI’s Office of Natural Resources Revenue failed to justify their actions to null and void a series of critical financial reforms that were finalized in July 2016 concerning the collection of royalties paid by fossil fuel producers that operate on federal lands.
The 2016 reforms, known as the “Valuation Rule,” were developed over years of deliberation and were designed to stop oil and gas producers and coal companies from gaming the system and avoiding paying millions of dollars owed to federal taxpayers and state governments. In August 2017, the Trump administration repealed the Valuation Rule, with practically no logical explanation or tangible justification other than claiming that the Rule was “burdensome” to the fossil fuel industry. The States of New Mexico and California filed suit given that both state governments were being shortchanged millions of dollars owed to them via federal fossil fuel production occurring within their respective states. NRDC also filed as intervenors in coordination with our partners the Northern Plains Resource Council, The Wilderness Society, and Western Organization of Resource Councils.
My NRDC colleague Theo Spencer detailed at length in 2017 the nature of how fossil fuel producers were manipulating the system:
Companies were avoiding paying proper royalties on the sale of goods owned by you and me by essentially laundering the sales through affiliates. Let’s take coal as an example.
Companies are required to pay a 12.5% royalty on sales of coal they take from surface mining on public lands. The royalty is intended to apply to the sale of the coal from the mining company to the open market (often a power plant). Royalty revenues are split 50/50 with the states where the mining or drilling takes place. In New Mexico, all of that money goes to public education.
But as a Reuters investigation found, big coal companies were gaming the system by first selling the coal to an affiliate or subsidiary for much less than fair market prices. The royalty was charged on that low-ball sale, and then the company would turn around and sell the coal on the open market for many multiples of that original sale. To put it another way, companies were paying a royalty rate on a $1 sale when they should have been paying it on the open market price, which was anywhere from $10 to over $100 a ton.
The lengths that companies went to manipulate the system were remarkable. A Center for American Progress analysis established that just five of the biggest coal companies created over 400 subsidiaries and affiliates as part of an elaborate process to avoid paying their fair share of royalties. But then again, this kind of complicated effort was well worth their investment given that these companies were keeping millions of dollars for themselves as a result.
By repealing the 2017 Valuation Rule, the Ryan Zinke and David Bernhardt led Interior Department were essentially sanctioning this corporate manipulation. Thankfully the court determined that while the political leaders at DOI are entitled to their opinion, they are not entitled to ignore the facts. In her order, Judge Armstrong concluded that in its attempt to quickly rescind the Rule, DOI had engaged in the process of “…disregarding facts and circumstances that underlay or were engendered by the prior policy.” Judge Armstrong also noted that DOI’s decision only took months, in contrast to the nearly decade-long effort that originated during the Bush administration which resulted in the issuance of the Valuation Rule. In addition, Judge Armstrong also took issue with the administration’s decision to ignore and short circuit federal public participation requirements.
Unfortunately, the administration’s efforts to sanction what are some very questionable business practices favored by the fossil fuel industry illustrates once again the fact that as a nation, the fossil fuel industry enjoys a suite of inherent advantages. That in this particular instance, in attempting to suppress industry’s obligation to pay their fair share, the administration can adopt policies that grossly incentivize fossil fuel extraction, and by result, pervert energy markets by artificially manipulating the true costs of fossil fuel extraction. This issue matters given that political manipulations like the attempt to eliminate the Valuation Rule could possibly impede the necessary transition to cleaner and cheaper energy sources. Without significant structural change on how the Interior Department manages energy resources, we will continue to witness bad outcomes for U.S. taxpayers, for our nation’s public lands, and maybe most vitally of all, the opportunity to meaningfully curb the impacts of climate change. Thankfully in this case, the court rejected DOI’s arbitrary and unlawful actions, halting this gross overreach by the Trump administration to shamelessly advance the financial interests of the fossil fuel industry at the public’s expense.