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Coal sales spark audits, fed scrutiny; no violations

– The U.S. Department of Interior is investigating whether mining companies are skirting royalty rules as they increase exports of coal to Asia, but no violations have been issued, federal officials disclosed Friday.

The investigation is focused on companies that use affiliates or brokers to sell coal from mines in the western U.S. to customers in Asia.

That’s when the parent company pays government royalties based on the mine price, then the affiliate ships the fuel overseas where it’s sold at many times the original price.

Interior Secretary Ken Salazar said in a letter to two U.S. senators released Friday that he’s asked the agency’s Office of Inspector General to look into whether such actions have violated federal law.

Salazar wrote that one federal coal lessee is under investigation for possible criminal violations. But no specifics were offered and it was uncertain whether that involved coal shipped overseas.

Salazar was responding to concerns raised by Oregon Sen. Ron Wyden and Alaska Sen. Lisa Murkowski. They’ve warned that as coal exports grow, taxpayers could lose many millions of dollars annually if royalties are unfairly calculated.

Last month, the senators jointly called for Salazar to look into whether the industry’s practices violate federal royalty rules.

Audits of coal sales are ongoing, Salazar said, and a special task force of state and federal officials is reviewing coal sales and contracts from 2009 and 2011. Typically, the agency audits coal sales three years after they have taken place.

In a joint statement, Murkowski and Wyden said they were “pleased with the formation of a task force to ensure coal companies have paid their fair share when coal is mined on public lands and sold overseas.”

Salazar said the issue underscores the need for changes in how royalties are calculated, and said his agency is pursuing changes that would make the process more transparent.

Companies defend their use of affiliates for export sales, arguing that the higher price their fuel fetches in Asia reflects additional shipping costs. That should be counted as a different line of business than mining, they contend.

But the chief of the Montana Department of Revenue’s business tax division, Lee Baerlocher, said the industry’s practices have the attention of government auditors.

“It’s an audit red flag, meaning we’ve got to look into it, but it doesn’t necessarily mean that’s not a fair price,” Baerlocher said.

Half of royalties go to the federal government and half to the states.

U.S. coal exports hit an estimated 124 million tons in 2012, a record level that gave the industry some sorely needed relief in the face of declining domestic demand for the fuel.

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