Judge deals blow to Obama fossil fuel royalty rule

By James Marshall, Pamela King | 09/09/2021 06:27 AM EST

Interior Department headquarters is pictured in Washington, D.C. Francis Chung/E&E News

A federal judge yesterday struck down Obama-era regulations on royalty valuations for coal mined from public lands but kept parts of the rule related to oil and gas payments.

The 2016 rule by the Interior Department’s Office of Natural Resources Revenue aimed to rein in mining companies’ practice of selling coal at a discounted rate to their own subsidiaries, deflating the royalty fees owed to taxpayers for developing publicly owned fossil fuels.

The rule placed the royalty valuation on the first "arm’s length" sale of coal, or when the mining company sells it to an unaffiliated organization.

Sometimes companies or cooperatives both produce the coal and sell it to an affiliate that burns it at a power plant — meaning arm’s-length transactions don’t exist.

In those cases, the Obama rule proposed basing the value of the coal on the sale of electricity. Chief Judge Scott Skavdahl of the U.S. District Court for the District of Wyoming disagreed with that methodology.

“Trying to value coal based on the sale of electricity is akin to valuing wheat based on the sale of a cake; there may be a relationship between the two, but it is weak and several other factors potentially play a much larger role in determining the sales price of the end product," Skavdahl wrote in his opinion yesterday.

Parts of the rule dealing with ONRR’s method for valuing oil and gas, however, were “sufficiently supported,” Skavdahl wrote.

The judge, an Obama appointee, upheld the oil and gas provisions of the 2016 rule, including the discontinuation of a “Deep Water Policy” that defined the movement of oil and gas from the seafloor to an offshore platform as deductible “transportation,” instead of nondeductible “gathering" when calculating royalty fees.

“ONRR explained why it decided it was better to cancel the Deep Water Policy,” Skavdahl wrote. “ONRR concluded the policy has largely served its original purpose of incentivizing deepwater leasing and development.”

Ashley Burke, spokesperson for the National Mining Association industry group, applauded the decision. “Returning to the pre-2016 rule valuation restores much-needed clarity and business certainty,” she said in an email.

Lawyers for environmental groups involved in the litigation were not immediately available for comment. Interior did not respond to a request for comment.

The Obama-era valuation rule has been the subject of litigation since it was finalized in 2016. But lawsuits challenging the initial rule were voluntarily dismissed after the Trump administration gutted the regulation.

In 2019, the U.S. District Court for the Northern District of California struck down the Trump-era repeal on the grounds that ONRR had violated the Administrative Procedure Act, which governs federal rulemaking. Oil, gas and coal companies and energy-rich states quickly revived their challenges to the Obama rule.

The Trump administration went on to propose its own fossil fuel royalty valuation rule. But President Biden’s Interior axed the measure in June (Greenwire, June 10).