Will taxpayers foot the cleanup bill for bankrupt coal companies?

Coal’s share of the U.S. energy market is rapidly plunging. Low-cost fracking-generated natural gas has overtaken the use of coal at America’s power plants. Impending implementation of the Obama administration’s proposed Clean Power Plan, which would place stringent regulations on coal-fired power plant emissions, has also helped to drive coal production to its lowest level in decades. Government sources predict further decline.

Fifty U.S. coal companies have filed for bankruptcy since 2012. Competition and more stringent environmental regulations played a role in this decline. But, just before coal prices collapsed, speculating top producers borrowed billions to finance unwise acquisitions. Now, unable to pay loan interest and principal, they have sought bankruptcy protection to restructure US$30 billion in debt. The bankrupt companies include Arch Coal, Alpha Natural Resources, Patriot Coal and Jim Walter Resources.

Last month Peabody Energy Corp., the world’s biggest private-sector coal producer, followed suit. Peabody seeks to restructure $8.4 billion in debt. Its capitalization has fallen from $20 billion in 2011 to $38 million at the time of bankruptcy.

Amid this turmoil, many observers fear that bankrupt coal companies will be able to shift their huge liabilities for reclamation, or restoring land that has been mined, to taxpayers.

Congress passed the Surface Mining Control & Reclamation Act, or SMCRA, in 1977 to prevent such a scenario. But, in my view, state and federal coal regulators have failed to ensure that coal companies have enforceable financial guarantees in place, as the law requires.

I have interacted with the coal industry for 40 years, first as a government enforcement lawyer and then litigating issues relating to coal mine reclamation cases on behalf of conservation organizations and coalfield communities. I believe that if the unfunded liabilities of bankrupt coal companies are not covered by new guarantees and additional companies seek bankruptcy protection, there is a real chance that taxpayer-funded billion-dollar bailouts will be necessary to cover their cleanup costs.

Planning for reclamation

SMCRA was designed to prevent bankrupt coal companies from foisting onto taxpayers the costs of restoring thousands of acres of mined land and treating millions of gallons of polluted mine water.

When Congress enacted the law, it identified many of the adverse impacts when mined land was not reclaimed:

…mined lands burden and adversely affect commerce and the public welfare by destroying or diminishing the utility of land for commercial, industrial, residential, recreational, agricultural, and forestry purposes, by causing erosion and landslides, contributing to floods, polluting the water, destroying fish and wildlife habitats, impairing natural beauty, damaging the property of citizens, creating hazards dangerous to life and property, degrading the quality of life in local communities, and by counteracting governmental programs and efforts to conserve soil, water, and other natural resources.

In the decades preceding SMCRA’s enactment, thousands of bankrupt companies abandoned mines without reclaiming them. Many of these sites remain untreated today. According to the U.S. Geological Survey, restoring streams and watersheds across Pennsylvania that were damaged by acidic drainage from mines abandoned before 1977 would cost $5 billion to $15 billion. Similarly, reclaiming mining lands abandoned in West Virginia before SMCRA will cost an estimated $1.3 billion or more.

SMCRA is designed to force a coal company to address and incorporate the cost of reclamation in its business planning. The law mandates that when state or federal regulators issue mining permits, coal companies must provide bonds or other financial guarantees to ensure that if they fail to fully reclaim mines, the state will have money available to do the job.

Most coalfield states administer the federal law through state-law-based regulatory programs overseen by the Department of the Interior. SMCRA offers states several options. They include requiring companies to provide financial guarantees in the form of corporate surety bonds, collateral bonds or self-bonds.

When companies use site-specific surety or collateral bonds, SMCRA requires states to calculate the cost of reclamation before any mining can begin. These studies must consider each mine site’s topography, geology, water resources and revegetation potential.

States may also set up an “alternate” to a bonding system that achieves the objectives and purposes of a bonding program. This option has been described by a court as a “collective risk-spreading system that … allows a State to discount the amount of the required site-specific bond to … less than the full cost needed to complete reclamation of the site in the event of forfeiture.”

Surety bonds and collateral bonds are backed by cash, real property assets and financial guarantees from banks and surety companies. If a coal company goes bankrupt, regulators can collect on these bonds and use the money to fully reclaim abandoned mined land. However, state-approved “alternative” reclamation funding systems and self-bonding by coal companies do not provide the same certainty.

For example, both Pennsylvania and West Virginia approved systems in which coal operators paid nonrefundable fees into state funds that would be used to reclaim any bankrupt coal company sites. But neither required site-specific calculations of what reclamation would actually cost. Pennsylvania imposed a per-acre permit fee, and West Virginia required a few cents per-mined-ton reclamation fee.

Regulators in these states – enabled by lax federal oversight – failed to ensure that companies set aside enough funds. As a result, these agencies have exposed taxpayers to potentially enormous reclamation liability.

Reclamation IOUs

In 2001 a federal district court found that West Virginia’s federally approved state “alternate” bonding fund was hugely underfunded and could not guarantee reclamation of mines abandoned by bankrupt coal companies as required by SMCRA. The court held that state and federal regulators’ decade-long failure to institute a fully funded bonding system had created

[A] climate of lawlessness, which creates a pervasive impression that continued disregard for federal law and statutory requirements goes unpunished, or possibly unnoticed. Agency warnings have no more effect than a wink and a nod … Financial benefits accrue to the owners and operators who were not required to incur the statutory burden and costs attendant to surface mining …

SMCRA also allows companies to self-bond, if they meet rigorous asset requirements. But a self-bonding corporation’s promise to reclaim is little more than an IOU backed by company assets.

In 2014 federal regulators began, in the Interior Department’s words, “exploring concerns related to the efficacy of self-bonding practices and procedure” used by states. Instead of taking action, they opted to study the issue despite strong indications of financial collapse on the horizon. Now enormous western surface mines and mountaintop removal strip mines in central Appalachia are covered by $3.6 billion in self-bonding obligations, of which $2.4 billion is held by bankrupt Peabody, Arch and Alpha.

Companies reorganizing under federal bankruptcy laws will continue to mine and market coal, hoping to shed mountains of debt and eventually emerge from bankruptcy. It remains to be seen whether they will be able to obtain conventional surety bonds after they reorganize, or whether bankruptcy courts will direct the companies to use their remaining assets to partially fulfill their self-bonding obligations.

One thing is clear, however. Against the backdrop of a century of coal company bankruptcies and attendant environmental damage, regulators ignored a looming coal market collapse with a wink and a nod. Properly administered, SMCRA’s reclamation bonding requirements should have required secure financial guarantees collectible upon bankruptcy.

Unfortunately, coal regulators viewed America’s leading coal companies like Wall Street’s mismanaged banks – too big to fail. As a result, American taxpayers may have to pick up an enormous reclamation tab for coal producers.

Patrick McGinley, Professor of Law , West Virginia University

This article was originally published on The Conversation. Read the original article.