Apocalypse Coal: Why it May Be Necessary to Amend Title IV of the SMCRA

Blog Post | 110 KY. L. J. ONLINE | August 24, 2021

Apocalypse Coal: Why it May Be Necessary to Amend Title IV of the SMCRA

By: Mitchell Potter, Senior Staff Editor Vol. 110

Coal’s reign in the energy domain may be at its twilight hour,[1] but it still remains to be an important mineral: Coal accounted for 23% of U.S. electricity production[2] in 2019 and it also provides the primary source of funding for ongoing mine site reclamation. Usually, income from mining operations fund reclamation efforts directly as operators pay to restore mined land after extracting permitted coal reserves. However, income from operations may also indirectly fund reclamation considering that premiums paid on surety performance bonds create the economic incentive for insurance companies to guarantee reclamation in the event of a default.[3] As a result of this reclamation system, returning mined land back to its original state depends, to some degree, upon the continued success and survival of the coal industry.

The recent, widespread insolvency of coal companies has jeopardized reclamation efforts and revealed several issues with the current performance bonding system,[4] implemented under the Surface Mining Policy, Control and Reclamation Act of 1977[5] (SMCRA) as a means to insure reclamation. First, a GAO report found that 22% of a large sample of bond forfeitures contained inadequate financial assurances.[6] Second, the SMCRA allows states to accept self-bonds and less than full-cost assurances.[7] Third, the SMCRA only allows the Abandoned Mine Land (AML) fund to be used to fund reclamation at mines abandoned before 1977 or at mines with insurers that became insolvent before 1990.[8] These issues, in connection with the widespread insolvency of coal companies, may result in significant environmental obligations being left behind for state taxpayers to deal with.

Along these same lines, some state taxpayers may ultimately be left with these environmental burdens as it is becoming more apparent that Kentucky and West Virginia’s state bond pools, which are designed to deal with excess costs in the event of a default of a surety bond’s obligations, will be unable to remain solvent.[9] This blog post suggests that the best solution may include amending Title IV of the SMCRA to allow for the overfunded AML to be used to provide liquidity for these anemic state bond pools.[10] Another solution may require that states rely on an exception under Section 409, which allows AML funds to be allocated to states when a recently abandoned mine constitutes a “hazardous condition.”[11]

This blog post will first provide an overview of the SMCRA and the current performance bonding system. Then, this blog post will discuss why amending Section 402(g) to broaden the availability of AML funds for states with bond pools facing impending insolvency, may be a prime solution for the current environmental and industrial issues facing coal producing states.

The Surface Mining Policy, Control and Reclamation Act of 1977 (SMCRA)

The Surface Mining Policy, Control and Reclamation Act of 1977 (SMCRA) created the Office of Surface Mining Reclamation and Enforcement (OSMRE) and a federal body of law to regulate surface coal mining.[12] The goal of the SMCRA is to “[A]ssure that the coal supply essential to the Nation’s energy requirements, and to its economic and social well-being is provided and strike a balance between protection of the environment and agricultural productivity and the Nation’s need for coal as an essential source of energy.”[13] The SMCRA executes this goal by operating as a mechanism of cooperative federalism.[14] More specifically, the SMCRA formulates standards for obtaining mining permits, requires financial guaranties for completing reclamation and outlines a general process for being released from such guaranties post-performance.[15]

After a tract of land has been mined, the SMCRA generally requires that the mine site be returned to “approximate original contour.”[16] More specifically, applicants are required to:

“[R]estore the land affected to a condition capable of supporting the uses which it was capable of supporting prior to any mining, or higher or better uses of which there is reasonable likelihood, so long as such use or uses do not present any actual or probable hazard to public health or safety or pose any actual or probable threat of water diminution or pollution….”[17]

The broad language regarding the ability of the land to support “better uses” and the “reasonable likelihood” of such uses not presenting a public health issue may leave much discretion to regulators in determining when a reclamation plan’s obligations have been satisfied.[18] 

Financial Assurances

In order to insure that reclamation will be completed, SMCRA requires that applicants seeking mining permits submit financial assurances in the form of performance bonds.[19] These financial assurance may be inadequate sometimes due to, amongst other reasons, the fact that some state programs allow guaranties for less than the total cost of reclamation.[20] To boot, the SMCRA specifically allows states to accept assurances for less than the total cost.[21] The rationale behind this may be that states want to lower bonding costs and premiums in order to attract industry and relieve operators of some of the financial burdens that environmental obligations entail. As a corollary, lower bonding costs may be necessary for sustaining the long-term reclamation efforts and survival of the coal industry. However, the repercussions of this system is that abandoned mines sometimes leave forfeited bonds with insufficient funds to cover reclamation costs, and this may be detrimental to the public health.[22]

States like Kentucky and West Virginia have responded to these issues by implementing bond pools that cover excess costs provided that the operator paid into a state fund a fixed fee on each ton of coal produced.[23] However, these systems inherently depend upon the continued survival and success of the coal industry.[24] The recent widespread downturn has created systemic risks of insolvency for these bond pools as more cash is now being paid out than is coming in.[25]

Amending Title IV of the SMCRA or Broadly Interpreting Section 409

It is becoming clearer that a solution to the funding problem is needed as pooled state reclamation funds are beginning to crumble under the widespread forfeiture of performance bonds.[26] One solution may consist of using AML funds to reinsure the rapidly dissolving liquidity of state bond pools.[27] By doing this, insurers and landowners may also be provided with more confidence that environmental liabilities will not rest solely upon their shoulders. This in turn may lower costs on some coal producers and facilitate more assignments of mineral leases.

However, the problem with this approach is that the SMCRA reserves AML funds only for those mines abandoned before 1977, or those mines with insurers that became insolvent before 1990.[28] However, as time goes on, the number of mines that fit this criteria may be shrinking considering AML funds continue to trickle in while states reconcile problems on these older mine sites.[29] This may help explain why a great deal of AML funds currently remain unappropriated.[30] All the while, a potential disaster is looming amongst the largest coal-producing states in regard to recently abandoned mines.

If states become more confident that the AML will be used to reinsure state bond pools, then they may be able to provide insurers and landowners, whom may for example fear liability under CERCLA, with more confidence regarding potential environmental liabilities. Such confidence may then lead to lower bonding and transaction costs while at the same time aiding environmental reclamation efforts.[31] Whatever the case may be, putting the burden of funding reclamation of recently abandoned mines on collapsing state funds or on current operators, by levying a higher fixed fee per ton, may not be the right answer. After all, the AML itself was funded by operators paying in a fixed fee on each ton of coal produced. Also, the AML is intended to be used to reclaim abandoned mines.[32] The only thing that separates it from the problems some states currently face is the timeliness of the abandonment.[33] Therefore, expanding the availability of AML funds appears to be the prime candidate for resolving these environmental and industrial issues that coal-country is currently faced with.

[1] See, e.g., James Murray, Charting a Decade of US Coal Company Bankruptcies and Plant Retirements, NS Energy (May 26, 2020), https://www.nsenergybusiness.com/news/us-coal-company-bankruptcies/. James Murray, regulators are relrs being unsure of what efforts will be required to obtain a release.from the regulators are rel

[2] See U.S. Energy Information Administration, Electricity Explained (March 20, 2020), https://www.eia.gov/energyexplained/electricity/electricity-in-the-us.php

[3] See Lance N. Larson, Cong. Research Serv., R46610, Reclamation of Coal Mining Operations: Select Issues and Legislation (2020).

[4] See Mike Tony, Appalachian Coal Mine Reclamation Bonding Issues Highlighted in New Report, Charleston Gazette-Mail (Jan. 14, 2021), https://www.wvgazettemail.com/news/energy_and_environment/appalachian-coal-mine-reclamation-bonding-issues-highlighted-in-new-report/article_8c4e607f-ccbc-5788-8b85-3769b116c1cb.html (“Blackjewel’s 2019 bankruptcy declaration and a Kentucky Energy and Environment Cabinet finding that the reclamation costs stemming from permits mainly in Kentucky but also in West Virginia and other states would exceed available bonds by $38 million. That’s just $8 million less than the funding the Kentucky Reclamation Guaranty Fund has in its funding pool, according to the report.”)

[5] 30 U.S.C. § 1259.

[6] Government Accountability Office, Coal Mine Reclamation, Federal and State Agencies Face Challenges in Managing Billions in Financial Assurances, GAO-18-305, March 2018.

[7] See Ryan Yonk, Josh T. Smith, & Arthur Wardle, Exploring the Policy Implication of the Surface Mining Control and Reclamation Act, MDPI (Jan. 25, 2019), https://www.mdpi.com/2079-9276/8/1/25/htm at 13.

[8] 30 U.S.C. § 1231.

[9] See Larson, supra note 4.

[10] 30 U.S.C. § 1232(g).

[11] 30 U.S.C. § 1239(a).

[12] 30 U.S.C. § 1211.

[13] 30 U.S.C. § 1202(f).

[14] See Yonk, supra note 11, at 2-4.

[15] 30 U.S.C §§ 1257-59 & 1269.

[16] 30 U.S.C. § 1265.

[17] 30 U.S.C. § 1265(b)(2)

[18] See Yonk, supra note 18, at 13.

[19] 30 U.S.C. § 1259.

[20] See Yonk, supra note 25, at 8-10.

[21] 30 U.S.C. § 1253.

[22] See id.

[23] The Alliance for Appalachia: Federal Strategy Team, Central Appalachia: Coal Mining Reclamation Bonding Policy Recommendations, (2016), https://theallianceforappalachia.org/wp-content/uploads/2018/04/Bonding-policy-recommendations-in-appalachia.pdf.

[25] See Mason Adams & Dustin Bleizeffer, Reckoning in Coal Country: How Lax Fiscal Policy Has Left States Flat-Footed as Mining Declines, Energy News Network (Aug. 11, 2020), https://energynews.us/2020/08/11/reckoning-in-coal-country-how-lax-fiscal-policy-has-left-states-flat-footed-as-mining-declines/.

[26] Sarah Vogelsong, With coal in crisis, will Virginia be saddled with millions in mine cleanup costs?, Virginia Mercury (July 24, 2020), https://www.virginiamercury.com/2020/07/24/coal-is-in-crisis-can-virginias-pool-bond-system-handle-the-collapse/.

[27] See, e.g., Revitalizing the Economy of Coal Communities by Leveraging Local Activities and Investing More (RECLAIM) Act (H.R.2156) (proposing to aggressively expand the availability of AML funds to include everything from reclaiming recently abandoned mines to various economic development plans).

[28] 30 U.S.C. § 1232(g)(4)(B)(i)-(ii).

[29] See id.

[30] Another problem is that although the AML contains $2.3 billion in unappropriated funds, this may not be enough to solve the solvency issues: a GAO report from 2018 stated that there were approximately $1.2 billion in self-bonds and $10.1 billion in total financial assurances outstanding. Government Accountability Office, Coal Mine Reclamation, Federal and State Agencies Face Challenges in Managing Billions in Financial Assurances, GAO-18-305, March 2018.

[31] See Yonk, supra note 36, at 14.

[32] See 30 U.S.C. § 1232(g)(4)(B)(i)-(ii).

[33] See id.