Self-insurance as a means for mining companies to show regulators that funds will be available to remediate damage to the environment caused by industrial activities is coming under increasing scrutiny and is not holding up well under the magnifying glass.
In December 2017, EPA’s Office of Inspector General reported that the Agency did not have the ability to determine if a company’s self-insurance is valid and adequate to ensure that the cleanup of waste sites under the Comprehensive Environmental Response, Compensation, and Recovery Act (CERCLA) and the Resource Conservation and Recovery Act (RCRA) could be completed without requiring taxpayer dollars. Now, the U.S. Government Accountability Office (GAO) reports that corporate self-insurance, also called self-bonding, as a tool to assure remediation of surface and underground coal mines carries too many uncertainties and is a financial assurance only in the flimsiest and most unreliable meaning of that term. In this case, self-bonding occurs under the federal Surface Mining Control and Reclamation Act (SMCRA) and is authorized by the Department of the Interior’s (DOI) Office of Surface Mining Reclamation and Enforcement (OSMRE) or states authorized by the OSMRE to run the SMCRA program.
According to the GAO, self-bonding by coal mine operators presents a risk to the federal government and states because it is difficult to ascertain the financial health of an operator, determine whether the operator qualifies for self-bonding, and determine whether a replacement for existing self-bonds can be obtained when an operator no longer self-qualifies. Some stakeholders also told the GAO that the risk from self-bonding is greater now than when the practice was first authorized under the SMCRA. The GAO recommends that Congress consider amending the SMCRA to eliminate self-bonding. The DOI and the OSMRE neither agreed nor disagreed with GAO’s recommendation.
GAO’s report also looked briefly at third-party insurance provided by surety bonds from surety companies. According to the GAO, it has been difficult for the OSMRE and states to determine the financial stability of surety companies. Representatives of several states told the GAO that surety companies had gone bankrupt and were not able to provide surety bonds for four mining sites.
In 2016, coal accounted for approximately 17 percent of domestic energy production. The surface effects of coal mining are regulated under the SMCRA, which also created the OSMRE to administer the act. The SMCRA allows the DOI to grant primacy to an individual state or Indian tribe; that is, the DOI determines that the state or tribe has the resources to implement and enforce the act. Of the 25 states and four Indian tribes that the OSMRE identified as having active coal mining in 2017, 23 states had primacy; the OSMRE manages the coal program in two states and for the four Indian tribes.
Under the SMCRA, mine operators must 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. Specifically, operators must:
- Return mine sites to their approximate original contour unless the operator receives a variance from the regulatory authority.
- 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).
- Possess financial assurance sufficient to ensure reclamation compliant with water quality standards, including those established by the EPA or the states under the Clean Water Act. An alternative to this requirement allows operators to have financial assurance that is less than the amount required for full reclamation provided the operator pays a fee for each ton of coal mined. These funds are pooled and can be used to reclaim sites that participants in the alternative bonding system do not reclaim.
Types of Assurance
OSMRE’s implementing regulations recognize three major types of financial assurance:
- 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.
- With a self-bond, the operator itself promises to pay for reclamation. 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 may not exceed 25 percent of its tangible net worth in the United States. Primacy states have the discretion on whether to accept self-bonds.
SMCRA state regulatory authorities and the 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 this total, 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. States holding the most in self-bonds are Wyoming ($425,947,000), Texas ($249,700,000), North Dakota ($211,230,000), and West Virginia ($140,116,000). States and the 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 1 forfeiture.
Reclamations Costs May Change
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, the 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, the OSMRE officials said that in cases where the operator may be experiencing financial difficulties, it might be difficult for the states or the 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. Three of the largest coal mining companies in the United States filed for bankruptcy in 2015 and 2016.
Challenges facing the OSMRE and state regulatory authorities related to self-bonding include the following:
- Lack of information. Information federal regulations require operators to provide to regulatory authorities may give an incomplete picture of the financial health of an operator. For example, in response to a 2016 petition seeking revisions to its self-bonding regulations, the OSMRE stated that the financial information operators provide reflects their past financial health, which may not reflect the operators’ current financial position. 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 company’s obligations, which could worsen the financial health of the self-bonded operator.
According to OSMRE officials, the OSMRE could change its self-bonding regulations to require more information, said the GAO. However, the financial relationships between parent and subsidiary companies have become increasingly complex, making it difficult to ascertain an operator’s financial health based on information reported in company financial and accounting documents, officials said.
- Multistate 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. Under OSMRE’s regulations, operators are allowed only to self-bond for up to 25 percent of their net worth in the United States. 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.
- Replacing self-bonds. The 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 the GAO 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. But in either case, 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.
- Managing the risk of self-bonding. The risk associated with self-bonding is greater now than when the practice was first authorized under the SMCRA. As noted, 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. If a self-bonded operator were to enter bankruptcy and 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. Following these bankruptcies—and recognizing that the coal industry was likely to continue to face economic challenges for several more years—the OSMRE initiated steps in 2016 to reexamine the role of self-bonding for coal mine reclamation. Specifically, the OSMRE issued a policy advisory in August 2016 noting that given these circumstances, state regulatory authorities should exercise their discretion under the SMCRA and not accept new or additional self-bonds for any permit until coal production and consumption market conditions reach equilibrium. The OSMRE has reported that this is not likely to occur until 2021 at the earliest.
Some parties interviewed by the GAO 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 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.
The GAO concludes its report with a recommendation to Congress, specifically: “Congress should consider amending the SMCRA to eliminate the use of self-bonding as a type of financial assurance for coal mine reclamation.”
GAO’s report is here.