Coal Mine Reclamation: Federal and State Agencies Face Challenges in Managing Billions in Financial Assurances

Coal accounts for 17 percent of domestic energy production. SMCRA requires coal mine operators to reclaim lands that were disturbed during mining and to submit a financial assurance in an amount sufficient to ensure that adequate funds will be available to complete reclamation if the operator does not do so. Recent coal company bankruptcies have drawn attention to whether financial assurances obtained by OSMRE and state agencies will be adequate to reclaim land once coal mining operations have ceased.

GAO was asked to review management of financial assurances for coal mine reclamation. This report describes, among other things, the amounts and types of financial assurances held for coal mine reclamation in 2017 and the challenges that OSMRE and state agencies face in managing these financial assurances. GAO collected and analyzed data from OSMRE and 23 state agencies; reviewed federal laws, regulations, and directives; and interviewed OSMRE and state agency officials and representatives from organizations associated with the mining and financial assurance industries and environmental organizations.

State agencies and the Department of the Interior's Office of Surface Mining Reclamation and Enforcement (OSMRE) reported holding approximately $10.2 billion in surety bonds (guaranteed by a third party), collateral bonds (guaranteed by a tangible asset, such as a certificate of deposit), and self-bonds (guaranteed on the basis of a coal operator's own finances) as financial assurances for coal mine reclamation.

OSMRE and state agencies face several challenges in managing financial assurances, according to the stakeholders GAO interviewed. Specifically,

Obtaining additional financial assurances from operators for unanticipated reclamation costs, such as long-term treatment for water pollution, can be difficult.

Determining the financial stability of surety companies has been challenging in certain instances.

Self-bonding presents a risk to the government because it is difficult to (1) ascertain the financial health of an operator, (2) determine whether the operator qualifies for self-bonding, and (3) obtain a replacement for existing self-bonds when an operator no longer qualifies. In addition, some stakeholders said that the risk from self-bonding is greater now than when the practice was first authorized under the Surface Mining Control and Reclamation Act (SMCRA).

GAO's previous work examining environmental cleanup found that the financial risk to government and the amount of oversight needed for self-bonds are relatively high compared to other forms of financial assurances. GAO also previously reviewed federal financial assurance requirements for various energy and mineral extraction sectors and found that coal mining is the only one where self-bonding was allowed. However, because SMCRA explicitly allows states to decide whether to accept self-bonds, eliminating the risk that self-bonds pose to the federal government and states would require SMCRA be amended.

GAO recommends that Congress consider amending SMCRA to eliminate self-bonding. Interior neither agreed nor disagreed with GAO's recommendation.

Coal accounted for approximately 17 percent of domestic energy  production in 2016, and extracting this resource requires disturbing the  land, potentially affecting vegetation, wildlife, and water quality, among  other things. Under the Surface Mining Control and Reclamation Act  (SMCRA), operators of coal mines on federal and nonfederal lands in the  United States are required to reclaim mined lands—for example, by  regrading and replanting the area. To help ensure that reclamation  occurs, SMCRA requires an operator to submit a financial assurance  (e.g., a bond) in an amount sufficient to ensure that adequate funds will  be available for the regulatory authority—either the Department of the  Interior’s Office of Surface Mining Reclamation and Enforcement  (OSMRE) or an approved state regulatory authority—to complete  required reclamation if the operator does not do so. If specific conditions  are met, SMCRA allows states to let an operator guarantee the cost for  reclaiming a mine on the basis of its own finances, a practice known as  self-bonding, rather than by securing a bond through another company or  providing collateral, such as cash, letters of credit, or real property.

Three of the largest coal mining companies in the United States filed for  bankruptcy in 2015 and 2016. This drew attention to whether financial  assurances obtained by OSMRE and approved state regulatory  authorities will be adequate to reclaim land once coal mining operations  have ceased, particularly in cases where operators had used self-bonds  as their financial assurance. In August 2016, citing the recent  bankruptcies, lower market demand for coal, and the potential for more  market downturn, OSMRE issued a policy advisory to states suggesting,  among other things, that states take steps to assess whether operators  currently using self-bonds continue to qualify to do so and that states not  accept new self-bonds. Moreover, in September 2016, in response to a  petition seeking revisions to its self-bonding regulations, OSMRE stated  that it planned to examine changes to its bonding regulations that would,  among other things, help ensure the completion of the reclamation plan if  the regulatory authority has to perform the work in the event the operator  does not do so.

You asked us to review OSMRE’s oversight of financial assurances for  coal mine reclamation. This report examines (1) the amounts and types of  financial assurances held for coal mine reclamation, (2) the extent to  which financial assurances to reclaim coal mines were forfeited from July  2007 through June 2016, (3) how OSMRE oversees financial assurances  for coal mine reclamation, and (4) any challenges that OSMRE and  approved state regulatory authorities face in managing financial  assurances for coal mine reclamation.

To determine (1) the amounts and types of financial assurances held for  coal mine reclamation and (2) the extent to which financial assurances to  reclaim coal mines have been forfeited, we developed a data collection  instrument and sent it to the relevant state regulatory authority for the  23 primacy states that OSMRE identified as having active coal mining in  2017. We also sent it to OSMRE to request data for the 2 states and four  Indian tribes with active coal mining where it directly manages the coal  program. In developing the instrument, we discussed available data with  OSMRE and state regulatory authority officials and with a representative  of the Interstate Mining Compact Commission, a multistate governmental  agency representing state mining regulatory authorities. All 23 states we  contacted and OSMRE responded to our data collection instrument. For  financial assurances forfeited, the data reported includes forfeitures that  occurred from July 2007 through June 2016. We discussed with state  and OSMRE officials how the data were collected and maintained and  determined that the data were sufficiently reliable for our purposes.

To determine how OSMRE oversees financial assurances for coal mine  reclamation, we analyzed SMCRA, federal regulations, and OSMRE  directives. Specifically, we reviewed directives pertaining to OSMRE’s  oversight of state and tribal programs, its inspections of mines in both  primacy and nonprimacy states, and a handbook on the calculation of the  amount of financial assurance that OSMRE and primacy states obtain.  We also reviewed agency documents, including the 2010 National Priority  Review that examined how financial assurance amounts were calculated,  and interviewed OSMRE officials from its headquarters and its three  regional offices. We selected a nonprobability sample of 7 states— Illinois, Kentucky, Montana, Pennsylvania, Tennessee, West Virginia, and  Wyoming—to examine OSMRE’s oversight activities in more detail. We  generally selected states that produced the most coal in 2015 (the most  recent data at the time we began our review), according to the U.S.  Energy Information Administration. We also selected states to achieve  some variation in factors such as geographic location, the dominant type  of coal mining conducted (e.g., surface or underground mining), whether  the state had primacy, and whether the state allowed self-bonding (see  app. I). Because this is a nonprobability sample, the oversight activities in  the 7 states are not generalizable to all 25 primacy and nonprimacy states  with active coal mining but provide illustrative examples. For each of the  7 states, we reviewed agency documents, including OSMRE’s annual  evaluation of the state’s program, agreements between OSMRE and the  state regulatory authority specifying oversight steps OSMRE would take,  and in some cases OSMRE and state documents related to OSMRE’s  determination that a state was not implementing its primacy program as  required. We also interviewed OSMRE field office officials responsible for  these 7 states and, for primacy states, officials from the state regulatory  authority.

To obtain additional perspectives on OSMRE’s oversight of financial  assurances, we interviewed the following parties: officials from the  Interstate Mining Compact Commission, officials from the National  Association of Insurance Commissioners, and representatives from two  organizations associated with the mining and financial assurances  industries (the National Mining Association and The Surety and Fidelity  Association of America) and from two environmental nongovernmental  organizations (the Natural Resources Defense Council and the Western  Organization of Resource Councils) actively involved with these issues.  These organizations were identified through our research as well as by  other stakeholders as potentially having relevant perspectives and  information to share with regard to financial assurances for coal mine  reclamation.

To identify any challenges that OSMRE and approved state regulatory  authorities face in managing financial assurances for coal mine  reclamation, we interviewed the federal and state officials and industry  and environmental nongovernmental organization representatives  identified above. Interview questions were designed to elicit officials’ and  representatives’ views on any challenges facing OSMRE and state  regulatory authorities and potential actions to address those challenges.  We also asked about any actions OSMRE has taken or could take to  address the challenges identified. We included those challenges that  were identified by at least 4 of the 13 parties we interviewed. Not all  parties we interviewed commented on every challenge identified.

We conducted this performance audit from January 2017 to March 2018  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Coal accounted for 17 percent of energy production (30 percent of  electricity production) in the United States in 2016. To generate this  energy, approximately 730 million tons of coal were mined domestically in  2016, according to the U.S. Energy Information Administration,  approximately 40 percent of which was produced on federal lands. As of  2016, state regulatory authorities and OSMRE had received financial  assurances associated with coal mines that had been permitted to disturb  approximately 2.3 million acres, according to OSMRE data.

Coal is mined in two different ways: surface mining and underground  mining. In surface coal mining, before the underlying coal can be  extracted, the land is cleared of forests and other vegetation and topsoil is  removed and stored for later use. Explosives or other techniques are then  used to break up the overlying solid rock, creating dislodged earth, rock,  and other materials known as spoil. Surface coal mines can cover an  area of many square miles. In underground coal mining, tunnels are dug  to access coal that is too deep for surface mining methods. In some  cases, underground coal mines are designed to leave sufficient coal in  the mine to support the overlying surface, and in other cases, they are  designed to extract higher quantities of coal that results in subsidence of  the overlying surface as mining progresses.

In addition to disturbing the land surface, coal mining can affect water  quality, according to the Environmental Protection Agency, the National  Academies, and others. For example, mining can increase sediments in  rivers or streams, which may negatively affect aquatic species. Moreover,  mining can expose minerals and heavy metals to air and water, leading to  a condition known as acid mine drainage, which can lead to long-term  water pollution and harm some fish and wildlife species. Mining can also  lower the water table or change surface drainage patterns.

The surface effects of coal mining in the United States are regulated  under SMCRA, which also created OSMRE to administer the act. SMCRA  allows an individual state or Indian tribe to develop its own program to  implement the act if the Secretary of the Interior finds that the program is  in accordance with federal law. A state with an approved program is  said to have “primacy” for that program. To obtain primacy, a state or  Indian tribe submits to the Secretary of the Interior for approval a program  that demonstrates that the state or tribe has the capability of carrying out  the requirements of SMCRA. The program must demonstrate that the  state or Indian tribe has, among other things, a law that provides for the  regulation of the surface effects of coal mining and reclamation in  accordance with the requirements of SMCRA, and a regulatory authority  with sufficient personnel and funding to do so. Of the 25 states and four  Indian tribes that OSMRE identified as having active coal mining in 2017,  23 states had primacy, and OSMRE manages the coal program in  2 states and for the four Indian tribes.

SMCRA requires a mine operator to obtain a permit before starting to  mine. The permit process requires operators to submit plans describing  the extent of proposed mining operations and how and on what timeline  the mine sites will be reclaimed. In general, an operator must reclaim the  land to a use it was capable of supporting before mining or to an  alternative postmining land use that OSMRE or the state regulatory  authority deems higher or better than the premining land use. In  reclaiming the mine site, operators must comply with regulatory standards  that govern, among other things, how the reclaimed area is regraded,  replanting of the site, and the quality of water flowing from the site.  Specifically:

Operators are generally required to return mine sites to their  approximate original contour unless the operator receives a variance  from the regulatory authority. To return to this contour, the surface  configuration achieved by backfilling and grading of the mined area  must closely resemble the general surface configuration of the land  before mining and blend into and complement the drainage pattern of  the surrounding terrain, with all highwalls and spoil piles eliminated.

Operators are required to demonstrate successful revegetation of the  mine site for 5 years (in locations that receive more than 26 inches of  rain annually) or 10 years (in drier areas). States have requirements  for what vegetation may be planted depending on the approved  postmining land use. For example, West Virginia’s regulations call for  sites with a postmining land use of forest land to be planted with at  least 500 woody plants per acre. The state specifies that at least five  species of trees be used, including at least three of the species being  higher value hardwoods, such as oak, ash, or maple.

SMCRA requires that financial assurances be sufficient to ensure  reclamation compliant with water quality standards, including those  established by the Environmental Protection Agency or the states  under the Clean Water Act. SMCRA’s implementing regulations also  contain additional water protection requirements. For example, the  regulations require that all surface mining and reclamation activities  be conducted to minimize disturbance of the hydrologic balance within  the permit and adjacent areas and to prevent material damage to the  hydrologic balance outside the permit area.

The federal government also enacted SMCRA, in part, to implement an  abandoned mine land program to promote the reclamation of mined areas  left without adequate reclamation prior to 1977, when SMCRA was  enacted, and that continue to substantially degrade the quality of the  environment, prevent or damage the beneficial use of land or water  resources, or endanger the health or safety of the public. Specifically, Congress found that a substantial number of acres of land throughout the  United States had been disturbed by surface and underground coal  mining on which little or no reclamation was conducted. Further, it found  that the impacts from these unreclaimed lands imposed social and  economic costs on residents in nearby areas as well as impaired  environmental quality. Since the abandoned mine land program was  created, approximately $3.9 billion has been spent to reclaim abandoned  mine lands, and there is at least $10.2 billion in remaining reclamation  costs for coal mines abandoned prior to 1977, as of September 30, 2017,  according to OSMRE.

SMCRA generally requires operators to submit a financial assurance in  an amount sufficient to ensure that adequate funds will be available for  OSMRE or the state regulatory authority to complete the reclamation if  the operator does not do so. The amount of financial assurance required  is determined by the regulatory authority—OSMRE or the state—and is  based on its calculation of the estimated cost to complete the reclamation  plan it approved as part of the mining permit. Financial assurance  amounts can be adjusted as the size of the permit area or the projected  cost of reclamation changes.

SMCRA also authorizes states to enact an OSMRE-approved alternative  bonding system as long as the alternative achieves the same objectives.  One kind of alternative bonding system is known as a bond pool. Under  this type of system, the operator may post a financial assurance for an  amount determined by multiplying the number of acres in the permit area  by a per-acre assessment. The per-acre assessment may vary depending  on the site-specific characteristics of the planned mining operation and  the operator’s history of compliance with state regulations. However, the  per-acre bond amount may be less than the estimated cost of  reclamation. To supplement the per-acre bond, the operator generally  must pay a fee for each ton of mined coal and may also be required to  pay other types of fees. These funds are pooled and can be used to  reclaim sites that participants in the alternative bonding system do not  reclaim. Under OSMRE regulations, all alternative bonding systems must  provide a substantial economic incentive for the operator to comply with  reclamation requirements and must ensure that the regulatory authority  has adequate resources to complete the reclamation plan for any sites  that may be in default at any time.

OSMRE regulations implementing SMCRA recognize three major types of  financial assurances: surety bonds, collateral bonds, and self-bonds.

A surety bond is a bond in which the operator pays a surety company  to guarantee the operator’s obligation to reclaim the mine site. If the  operator does not reclaim the site, the surety company must pay the  bond amount to the regulatory authority, or the regulatory authority  may allow the surety company to perform the reclamation instead of  paying the bond amount.

Collateral bonds include cash; certificates of deposit; liens on real  estate; letters of credit; federal, state, or municipal bonds; and  investment-grade rated securities deposited directly with the  regulatory authority.

A self-bond is a bond in which the operator promises to pay  reclamation costs itself. Self-bonds are available only to operators  with a history of financial solvency and continuous operation. To  remain qualified for self-bonding, operators must, among other  requirements, do one of the following: have an “A” or higher bond  rating, maintain a net worth of at least $10 million, or possess fixed  assets in the United States of at least $20 million. In addition, the total  amount of self-bonds any single operator can provide shall not exceed  25 percent of its tangible net worth in the United States. Primacy  states have the discretion on whether to accept self-bonds.

State Regulatory Authorities and OSMRE Reported Holding $10.2 Billion in Various Types of Financial Assurances

State regulatory authorities and OSMRE reported holding a total of  approximately $10.2 billion in surety bonds, collateral bonds, and self- bonds as financial assurances for coal mine reclamation in 2017. Of the  total amount of financial assurances, approximately 76 percent  ($7.8 billion) were in the form of surety bonds, 12 percent ($1.2 billion) in  collateral bonds, and 12 percent ($1.2 billion) in self-bonds (see fig. 1).

Twenty-four states reported holding surety bonds, 20 states reported  holding collateral bonds, and 8 states reported holding self-bonds (see  table 1). In addition, OSMRE officials identified 6 states—Indiana,  Kentucky, Maryland, Ohio, Virginia, and West Virginia—that have also  established alternative bonding systems, such as bond pools. In a state  with a bond pool, the operator may generally post a financial assurance  for less than the full estimated cost of reclamation; in addition, the  operator must pay into a bond pool. The pooled funds can be used to  supplement forfeited financial assurances to reclaim sites that operators  participating in the bond pool do not reclaim.

About Half of the States Reported at Least One Forfeited Financial Assurance

States and OSMRE reported that operators forfeited more than  450 financial assurances for reclaiming coal mines between July 2007  and June 2016, with 13 of the 25 states reporting at least one  forfeiture. States and OSMRE reported that the amount of financial  assurance forfeited was sufficient to cover the cost of required  reclamation in about 52 percent of the cases and did not cover the cost of  required reclamation in about 22 percent of the cases. In the remainder  of the cases (26 percent), the state or OSMRE reported that it had not yet  determined if the financial assurance amount covered the reclamation  costs that it was intended to cover. State and OSMRE officials said that it  can take many years to fully reclaim a site and that it may take time for  them to identify the extent of reclamation needed and to determine if the  amount of financial assurance forfeited was sufficient to cover  reclamation costs.

State and OSMRE officials said there were several reasons why the  amount of financial assurance obtained might not be sufficient to cover  reclamation costs. For example, officials said the amount of financial  assurance might not be sufficient if an operator mined in a manner  inconsistent with the approved mining plan upon which the amount of  financial assurance was calculated or if mining activity resulted in water  pollution that was not considered when the amount of financial assurance  was calculated. In cases where the amount of financial assurance does  not cover the cost of reclamation, the operator remains responsible for reclaiming the mine site. However, OSMRE officials said that in those  cases where the operator may be experiencing financial difficulties, it  might be difficult for the states or OSMRE to compel the operator to  complete the reclamation or provide additional funds to do so without  having the operator go out of business or into bankruptcy. If the operator  does not reclaim the site, the regulatory authority must use the forfeited  financial assurance to do so. If the forfeited funds are not adequate, the  site may not be fully reclaimed unless the regulatory authority either  successfully sues the operator for more funds or provides any additional  funds needed for reclamation. One other source of funds states can use  to reclaim forfeited mines is civil penalties that the United States  government collects from operators that violate conditions of their mining  permits. OSMRE obligated approximately $2.8 million in civil penalties  from fiscal years 2012 through 2017 for states to use to perform  reclamation in cases where the financial assurance was not sufficient,  according to agency officials.

OSMRE Has Taken a Variety of Steps Related to Oversight of Financial Assurances

OSMRE has taken steps—including periodically reviewing financial  assurance amounts, inspecting mine sites, and reviewing state programs  that implement SMCRA—to oversee financial assurances and aspects of  the mining and reclamation process that can affect whether the amount of  financial assurances obtained will cover the cost of required reclamation.

OSMRE and State Regulators Periodically Review Financial Assurance Amounts

SMCRA requires OSMRE or the primacy state regulatory authority to  calculate the amount of financial assurance required for each mine and to  adjust the amount when the area requiring bond coverage increases or  decreases or when the cost of future reclamation changes. OSMRE  officials and state regulatory authority officials from four of the six states  we interviewed said they generally review the amount of financial  assurance at least every 2 1/2 years or when the mining plan has been  modified in a way that may affect the amount of financial assurance  required. Such periodic reviews are in part to help ensure that OSMRE  and state regulatory authorities continue to hold an amount sufficient to  complete required reclamation as conditions change. These reviews can  lead to OSMRE or the state regulatory authority changing the amount of  financial assurance required for a mine. For example:

A state regulatory authority official in Utah said that the regulatory  authority reviewed an existing mine permit in 2014, which led to it  recalculating the estimated cost of reclamation on the basis of current  costs. The state regulatory authority requested that the operator  provide a financial assurance to cover the difference (approximately  $195,000), in addition to the $445,000 financial assurance already in  place. However, the official said that the operator—which had stopped  mining the site in 2012 and filed for bankruptcy in 2013—did not  provide the additional financial assurance amount. As a result, in 2017  the state regulatory authority collected the financial assurance that  was in place (i.e., the operator forfeited its assurance). The official  said in December 2017 that the state regulatory authority is  determining the steps it will take to reclaim the site and expects that  the forfeited amount will be sufficient to cover reclamation costs.

OSMRE officials said that the agency reviewed a permit for a mine on  Navajo tribal lands and determined that it needed to ask the operator  to provide an additional financial assurance in the amount of  $5.7 million. The increase was due to inflation and to include certain  costs, such as the cost of mobilizing equipment needed for  reclamation, that had inadvertently been excluded from the earlier  calculation of the financial assurance required. The officials said that  the operator provided the additional financial assurance amount.

State regulatory authority officials in Wyoming said they review  financial assurance amounts annually, and in 2017 they reduced the  financial assurance for one mine by almost $35 million because of a  substantial decline in fuel costs and the mine’s ability to share the cost  of needed reclamation equipment with a neighboring mine.

SMCRA requires OSMRE to make an average of at least one complete  inspection per calendar quarter and one partial inspection per month for  each active permit for which it is the regulatory authority to ensure that  mines are in compliance with SMCRA and federal regulations.  Complete inspections cover all inspection elements in OSMRE’s directive,  while partial inspections may instead focus on issues that most frequently  result in violations or a specific topic identified for oversight, according to  OSMRE officials. In addition, OSMRE’s directive instructs the agency to  inspect a sample of mines annually in states that have primacy to monitor  and evaluate approved state programs’ compliance with SMCRA. The  total number of inspections OSMRE is directed to conduct in primacy  states is based on the number of inspectable units in each state.  Complete inspections are to be done on 33 percent of those sites  selected for inspection. Overall, OSMRE completed more inspections in  primacy states than directed each year for evaluation years 2013 through  2016, according to agency data. For example, in evaluation year 2016,  OSMRE’s directive called for it to conduct 1,225 inspections and OSMRE  completed 1,388.

As part of a complete inspection, OSMRE confirms that the operator is  following the mining and reclamation plans to assure that the amount of  financial assurance in place is adequate, according to OSMRE officials. If a violation is identified during an inspection, SMCRA requires OSMRE to  issue a ten-day notice to the state regulatory authority or an immediate  cessation order to the operator. If the violation increases the estimated  cost of reclamation (e.g., if the operator disturbed more land than it was  approved for) or an adequate financial assurance had not been collected,  OSMRE or the state regulatory authority can request that the operator  provide an additional financial assurance. For example:

OSMRE issued a ten-day notice to the Pennsylvania regulatory  authority in 2015 because a water treatment system for a mine in that  state did not have a financial assurance. According to OSMRE  officials, the state regulatory authority took appropriate action to  resolve the situation by issuing an order for the operator to post a  financial assurance within 7 days.

During an inspection of a mine in Tennessee, a nonprimacy state,  OSMRE determined that the operator had not correctly reclaimed a  portion of the mine because the slope of the regraded area was too  steep, according to an OSMRE official. For the reclamation work that  would be needed to regrade that area, OSMRE determined that the  operator needed to provide an additional financial assurance of  $272,000.

Under SMCRA, OSMRE is required to evaluate each primacy state’s coal  program annually to ensure that it complies with SMCRA. SMCRA  includes a requirement that the regulatory authority secure necessary  financial assurances to assure the reclamation of each permitted mine  site. While OSMRE’s directive on oversight of state and tribal regulatory  programs does not instruct the agency to review state regulatory authority  calculations of financial assurance amounts, it instructs OSMRE to focus  on the state programs’ success in achieving the overall purposes of  SMCRA. For example, OSMRE, in conducting its oversight, is to evaluate  the states’ effectiveness in successfully reclaiming lands affected by  mining and in avoiding negative effects outside of areas authorized for  mining activities. If OSMRE’s review of a state program identifies an  issue that could result in the state not effectively implementing,  administering, enforcing, or maintaining all or any portion of its approved  coal program, OSMRE can work with the state regulatory authority to  develop an action plan to correct the issue. If a state regulatory authority  does not take the necessary corrective action, OSMRE may begin the  process of withdrawing approval for a part or all of the state’s primacy.

In addition to annually evaluating state programs, OSMRE can conduct  national or regional reviews on specific topics. For example, OSMRE  conducted a national review in 2010 that examined how state regulatory  authorities calculated the required amount of financial assurances for coal  mine reclamation. The review examined financial assurance practices in  23 states and reported that on the basis of the sample of mining permits  reviewed, OSMRE was unable to determine if the amount of financial  assurances was adequate for at least one of the permits it reviewed in  10 of the 23 states. Among the potential issues OSMRE identified were  errors in the methods state regulatory authorities used to calculate  financial assurance amounts and insufficient information in the  reclamation plan upon which to calculate reclamation costs.

OSMRE has worked with the 10 state regulatory authorities to address  the financial assurance issues identified in the 2010 review. For example,  OSMRE’s review found that the regulatory authority in Pennsylvania did  not secure sufficient financial assurances to complete reclamation plans,  in part because amounts were not calculated based on the actual sizes of  the areas excavated for mining. In August 2014, OSMRE and  Pennsylvania’s regulatory authority agreed to an action plan to ensure  that the financial assurances for all active and new permits would be  calculated using the actual sizes of the excavated areas. According to an  OSMRE official, as of February 2017, the state regulatory authority had  recalculated the financial assurance amount for all mines and had  secured the additional financial assurances needed from operators of all  but two of the mines. State officials said in October 2017 that they were  continuing to work to obtain the assurances required for the two mines.

OSMRE’s 2010 review also found that financial assurances in Kentucky  were not always sufficient to cover required reclamation costs, in part  because the method Kentucky’s regulatory authority used to calculate  financial assurance amounts did not factor in all costs, such as the cost of  moving equipment to and from the reclamation site. In February 2011,  OSMRE and Kentucky’s regulatory authority signed an action plan  identifying steps needed to address the issues OSMRE had identified.  However, in May 2012, OSMRE determined that the state regulatory  authority’s proposed changes to its method for calculating financial  assurance amounts was an improvement but would not result in the  authority obtaining sufficient funds to cover required reclamation. As a  result, OSMRE initiated the process of revoking Kentucky’s primacy for  this aspect of its program. In response, Kentucky implemented  regulations to increase the minimum financial assurance required. The  regulations also required the state regulatory authority to evaluate  financial assurance amounts every 2 years to determine whether they  need to be increased, among other things. The state regulatory authority  sent a set of program amendments to OSMRE designed to address the  identified deficiencies, some of which OSMRE is currently reviewing.

OSMRE and State Regulatory Authorities Face a Number of Challenges in Managing Financial Assurances

OSMRE and state regulatory authorities face a number of challenges in  managing financial assurances for coal mine reclamation—including  those related to self-bonding, unanticipated reclamation costs, and the  financial stability of surety companies—according to federal and selected  state regulatory authority officials, representatives from organizations  associated with the mining and financial assurance industries, and  representatives from environmental nongovernmental organizations  whom we interviewed.

Regulatory Authorities Face Several Challenges Associated with Self- Bonding

Challenges facing OSMRE and state regulatory authorities related to self- bonding include the following:

Not knowing the complete financial health of an operator. The  information federal regulations require operators to provide to  regulatory authorities may provide an incomplete picture of the  financial health of an operator, according to some parties we  interviewed. For example, the financial information that operators  provide reflects their past financial health, which may not reflect the  operators’ current financial position, according to OSMRE’s response  to the 2016 petition seeking revisions to its self-bonding regulations.  In addition, if an operator applying for a self-bond is a subsidiary of  another company, the operator is not required by regulation to submit  information on the financial health of its parent company. While the  operator applying may have sufficient financial assets to qualify for  self-bonding, if its parent company experiences financial difficulties,  the operator’s assets may be drawn on to meet the parent’s  obligations, which could worsen the financial health of the self-bonded  operator. In addition, according to OSMRE officials, even if OSMRE or  a state regulatory authority were to become aware that an operator’s  parent company was at financial risk, it would be difficult for the  agency to deny the operator’s request for a self-bond because  eligibility is specific to the entity applying for the self-bond, according  to regulations.

OSMRE could change its self-bonding regulations to require more  information, according to OSMRE officials. However, the financial  relationships between parent and subsidiary companies have become  increasingly complex, making it difficult to ascertain an operator’s  financial health on the basis of information reported in company  financial and accounting documents, according to officials. When  OSMRE first approved its self-bonding regulations in 1983, it noted  that it was attempting to provide rules that would allow self-bonding  without necessitating regulatory authorities to employ financial experts  to determine which companies should be allowed to self-bond.  However, according to OSMRE officials, financial expertise is now  often needed to evaluate the current complex financial structures of  large coal companies, which was not envisioned when the regulations  were developed.

Difficulty in determining whether an operator qualifies for self- bonding. The regulatory authority in a given state may not be aware  that an operator had self-bonded in other states, making it difficult for  the agency to determine whether the operator qualifies for self- bonding, according to some parties we interviewed. Operators are  only allowed to self-bond for up to 25 percent of their net worth in the  United States, according to regulations. Regulatory authority  decisions on accepting self-bonds generally focus on assessing  activities occurring in a specific state, not nationwide, according to the  Interstate Mining Compact Commission. As a result, the state  regulatory authority or OSMRE may know whether an operator has  applied for self-bonds in other states that if approved would exceed  25 percent of its net worth in total.

Difficulty in replacing existing self-bonds with other assurances  if needed. OSMRE and state regulatory authorities may find it difficult  to get operators to replace existing self-bonds with another type of  financial assurance when needed, according to some parties we  interviewed. If an operator no longer qualifies for self-bonding (e.g., if  it has declared bankruptcy), federal regulations require it to either  replace self-bonds with other types of financial assurances or stop  mining and reclaim the site. In either case, however, some parties  noted that such actions could lead to a worsening of the operator’s  financial condition, which could make it less likely that the operator will  successfully reclaim the site.

Some parties we interviewed have noted that regulatory authorities  may be reluctant to direct the operator to replace a self-bond with  another type of financial assurance and may instead allow the  operator to keep mining so that any generated revenue could help the  operator reclaim the site. For example, in 2015 the Wyoming  regulatory authority determined that an operator no longer qualified for  self-bonding and ordered it to replace a $411 million self-bond.  However, the operator entered into bankruptcy without having  replaced the self-bond. In this case, the state regulatory authority  determined that reclamation was more likely to occur if the operator  continued mining and allowed the operator to do so without a valid  financial assurance. The operator replaced its self-bond as a part of  its bankruptcy settlement approximately 17 months after the state  regulatory authority’s order to replace the self-bond, according to  OSMRE officials. However, if a self-bonded operator were to enter  bankruptcy and did not secure a financial assurance to replace the  self-bond or complete the required reclamation, the state regulatory  authority would have to work through the bankruptcy proceedings to  obtain funds for reclamation, according to OSMRE’s preamble to its  1983 self-bonding regulations. As a result, the state may recover  only some, or possibly none, of the funds promised through the self- bond, and the cost of reclamation could fall on taxpayers.

Difficulty in managing the risk associated with self-bonding. The  risk associated with self-bonding is greater now than when the  practice was first authorized under SMCRA, according to some  parties we interviewed. According to SMCRA, the purpose of financial  assurances is to ensure that regulatory authorities have sufficient  funds to complete required reclamation if the operator does not do so.  While SMCRA allows self-bonding in certain circumstances, when  OSMRE first approved its self-bonding regulations, the agency did so  noting that at the time there were companies financially sound enough  that the probability of bankruptcy was small. Furthermore, the  regulations stated that the intent was to avoid, to the extent  reasonably possible, the acceptance of a self-bond from a company  that would enter bankruptcy. However, as previously mentioned,  three of the largest coal companies in the United States declared  bankruptcy in 2015 and 2016, and these companies held  approximately $2 billion in self-bonds at the time, according to an  OSMRE August 2016 policy advisory, making it a very different risk  landscape than originally envisioned.

Following these bankruptcies—and recognizing that the coal industry was  likely to continue to face economic challenges for several more years— OSMRE initiated steps in 2016 to reexamine the role of self-bonding for  coal mine reclamation. Specifically, as previously mentioned, OSMRE  issued a policy advisory in August 2016 noting that given these  circumstances, state regulatory authorities should exercise their  discretion under SMCRA and not accept new or additional self-bonds for  any permit until coal production and consumption market conditions reach  equilibrium. OSMRE has reported that it is not likely for that to occur until  at least 2021. OSMRE also announced in September 2016 that the  agency planned to examine changes to its bonding regulations that  would, among other things, help ensure that reclamation is completed if a  self-bonded operator does not do so. However, following a review of  department actions that could affect domestic energy production, Interior  announced in October 2017 that it was reconsidering the need for and  scope of potential changes to its bonding regulations. OSMRE officials  said that they did not have a timeline for finalizing a decision on potential  changes in its bonding regulations. In addition, OSMRE rescinded its  August 2016 policy advisory that states take steps to assess whether  operators currently using self-bonds can still quality to do so and that  states not accept any new self-bonds.

Similar issues involving bankruptcies of hardrock mining operators led the  Bureau of Land Management to implement regulations in 2001  eliminating the use of self-bonding for hardrock mining. In doing so, the  Bureau of Land Management determined that a self-bond is less secure  than other types of financial assurances, especially in cases where  commodity prices fluctuate. The agency also noted that operators that  would otherwise be eligible to self-bond should not have a significant  problem obtaining another type of financial assurance. In our previous  work examining other types of environmental cleanup, we found that the  financial risk to the government and the amount of oversight needed for  self-bonds are relatively high compared to other forms of financial  assurances. Furthermore, we also previously reviewed federal financial  assurance requirements for coal mining, hardrock mining, onshore oil and  gas extraction, and wind and solar energy production and found that of  these activities coal mining is the only one where self-bonding was  allowed. Because SMCRA explicitly allows states to decide whether to  accept self-bonds, eliminating the risk that self-bonding poses to the  federal government and states would require that SMCRA be amended.

Obtaining Additional Financial Assurances for Unanticipated Reclamation Can Be Difficult

Unanticipated reclamation costs, such as those related to long-term  treatment for water pollution, may arise late in a mine’s projected lifespan,  and the operator may not have the financial means to cover the additional  costs, according to OSMRE officials. Under SMCRA, OSMRE and state  regulatory authorities are not to approve a permit for a coal mine if the  regulatory authority expects the mine to result in long-term water  pollution. As a result, since long-term water pollution is not anticipated to  occur, the cost of addressing it would not be included in the initial  financial assurance that the operator provides. If the regulatory authority  later determines that long-term water treatment is needed, the regulatory  authority must adjust the amount of financial assurance that the operator  is required to provide.

Some parties we interviewed have also noted that the costs and duration  of long-term water treatment are not well defined and that surety bonds  are not well-suited to provide assurance for such indefinite long-term  costs. For example, according to the Interstate Mining Compact  Commission, surety bonds are designed for shorter-term, defined  obligations that have a high certainty for bond release following the  completion of reclamation. To help address this challenge, some states  have established, or allowed operators to establish, trust funds to help  cover such unanticipated reclamation costs. For example, West Virginia  established a fund, primarily supported through a tax on the amount of  coal mined, to operate water treatment systems on forfeited sites. West  Virginia’s regulatory authority is also working to evaluate permits for sites  with water pollution to estimate water treatment costs within the state  more precisely. Similarly, Pennsylvania allows operators to establish trust  funds that are maintained by foundations and monitored by the state  regulatory authority and are intended to ensure that there are sufficient  funds to cover the costs of long-term water treatment, according to state  regulatory authority officials. In addition, the OSMRE-run coal program in  Tennessee allows trust funds for water treatment, in part because an  assurance system that provides an income stream may be better suited  to ensuring the treatment of long-term water pollution than conventional  financial assurances, according to an OSMRE notice in the Federal  Register.

Determining the Financial Stability of Surety Companies Has Been Challenging in Certain Instances

The utility of surety bonds in providing a financial assurance depends on  the surety company’s ability to pay the amount pledged if the operator  forfeits. OSMRE regulations require that a surety company be licensed to  do business in the state where a mine is located. Some parties we  interviewed noted that surety companies have declared bankruptcy or  experienced financial difficulties in the past and could experience similar  difficulties in the future. In addition, two states reported recent issues  related to surety companies. For example, state regulatory authority  officials in Alabama said that a surety company that had provided surety  bonds totaling $760,000 for four mines in that state had gone bankrupt or  was insolvent. As of May 2017, the state had collected only $127,000.  Similarly, state regulatory authority officials in Alaska said that as of  August 2017, the state had not collected any part of a forfeited $150,000  surety bond because the surety company had gone bankrupt. In our  previous work examining other types of environmental cleanup, we have  found that the financial risk to the government and the amount of  oversight needed for surety bonds are relatively low to moderate  compared to other forms of financial assurances.

Billions have been spent to reclaim mines abandoned prior to the financial  assurance requirements SMCRA put in place, and billions more remain.  Under SMCRA, self-bonding is allowed for coal mine operators with a  history of financial solvency and continuous operation—the only type of  energy production or mineral extraction activity we have reviewed for  which this is allowed. Bankruptcies of coal mine operators in 2015 and  2016 have highlighted risks that OSMRE and state regulatory authorities  face in managing self-bonding—a risk that may be greater today than  when self-bonding was first authorized under SMCRA. If a self-bonded  operator were to enter bankruptcy and does not provide a different type of  financial assurance or complete the required reclamation, the regulatory  authority and the taxpayer potentially assume the risk of paying for the  reclamation. Although OSMRE said it would examine changes to its self- bonding regulations following recent bankruptcies, Interior recently said  that it is reconsidering the need to do so. Because SMCRA explicitly  allows states to decide whether to accept self-bonds, eliminating the risk  that self-bonding poses would require amending SMCRA. Until such a  change is made, the government will remain potentially at financial risk for  future reclamation costs resulting from coal mines with unsecured  financial assurances.

Congress should consider amending SMCRA to eliminate the use of self- bonding as a type of financial assurance for coal mine reclamation.  (Matter for Consideration 1)

We provided a draft of this report to the Department of the Interior for  review and comment. Interior did not provide written comments on our  findings and matter for congressional consideration. OSMRE provided  technical comments in an e-mail, which we incorporated as appropriate.

As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of the Interior, the Acting  Director of OSMRE, and other interested parties. In addition, the report  will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions, please contact Anne-Marie  Fennell at (202) 512-3841 or fennella@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Major contributors to this report are listed in  appendix II.

Appendix I: Characteristics of States GAO Selected for Review to Obtain Additional Information regarding OSMRE Oversight

We selected a nonprobability sample of states to examine the Office of  Surface Mining Reclamation and Enforcement’s (OSMRE) oversight  activities in more detail. We generally selected states that produced the  most coal in 2015 but also selected states in order to achieve some  variation in factors such as geographic location, the dominant type of coal  mining conducted (e.g., surface or underground mining), whether the  state had primacy, and whether the state allowed self-bonding (see  table 2).

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Elizabeth Erdmann (Assistant  Director), Antoinette Capaccio, Jonathan Dent, Cynthia Grant, Marya  Link, Anne Rhodes-Kline, Sheryl Stein, Guiovany Venegas, and Jack  Wang made key contributions to this report.

After mining, a coal company is required to restore the land it disturbed, e.g., by regrading or replanting. The federal government requires coal companies to get bonds to assure their payment for these activities.

Federal law permits coal mine operators in some cases to guarantee these costs on the basis of their own finances, a practice known as self-bonding, rather than by securing a bond through another company or providing collateral.

Some stakeholders told us that self-bonds are riskier now than before, citing industry bankruptcies and lower coal demand.

We recommended that Congress consider amending the law to eliminate self-bonding.