Revision of Valuation Regulations Governing Coal Washing and Transportation Allowances

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC00

Revision of Valuation Regulations Governing Coal Washing and

Transportation Allowances

AGENCY: Minerals Management Service, Interior.

ACTION: Proposed rulemaking.

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SUMMARY: The Minerals Management Service (MMS) proposes to amend its

Royalty Management Program (RMP) valuation regulations governing coal

washing and transportation allowances regarding the timely filing of

required forms.

DATES: Comments must be submitted on or before October 6, 1995.

ADDRESSES: Written comments regarding the proposed rule should be

mailed or delivered to: Minerals Management Service, Royalty Management

Program, Rules and Procedures Staff, Denver Federal Center, Building

85, P.O. Box 25165, Mail Stop 3101, Denver, Colorado, 80225-0165.

FOR FURTHER INFORMATION CONTACT: David Guzy, Chief, Rules and

Procedures Staff, Telephone (303) 231-3432, Fax (303) 231-3194.

SUPPLEMENTARY INFORMATION: The principal author of this proposed

rulemaking is Harry Corley, Valuation and Standards Division, MMS, RMP.

I. Background

On January 13, 1989, MMS published a final rule in the Federal

Register governing the valuation of coal for royalty computation

purposes (54 FR 1492). The rulemaking provided comprehensive procedures

for valuation of minerals produced from Federal and Indian lands,

including regulations governing certain allowances considered in

calculating and reporting royalties. The regulations provided for

certain washing allowances (30 CFR Secs. 206.258 and 206.259) and

transportation allowances (30 CFR Secs. 206.261 and 206.262) for coal.

The rulemaking distinctly changed the historical administrative

practice of MMS and its predecessor agency, the U.S. Geological Survey,

regarding allowances. Prior to the 1988 rule, MMS required royalty

payors to obtain the agency's written approval before taking an

allowance deduction in reporting and paying royalties. With the new

rule, MMS adopted a self-implementing concept for allowances. Instead

of requiring agency preapproval, the regulations provided for the

royalty payor to file timely certain required forms as a condition for

the taking of an allowance on the Report of Sales and Royalty

Remittance (Form MMS-2014).

The allowance forms filing requirements of the current coal

valuation regulations provide for an annual cycle for providing

information to the MMS. Before the beginning of each calendar year, or

during the year but before the taking of an allowance on the Form MMS-

2014, payors must submit the required form for any coal washing and

coal transportation allowances that they expect to take during the

year. The forms ask for information sufficient to identify the payor,

the lease/revenue source/product code/selling arrangement, and an

estimate of the allowance rate per unit that is anticipated for the

year.

By the end of March following the allowance year, the payor must

submit the same forms as before but with additional data fields

completed to indicate the actual costs experienced and the allowances

actually taken on Forms MMS-2014 during the year. Also, several

supplementary schedules representing details of actual costs must be

submitted for non-arm's-length allowances.

The filing of the actual cost forms serves several purposes for MMS

and the payor. The forms provide the actual costs incurred in

transporting and/or processing (washing) production for the allowance

year, together with the actual allowance deductions taken on the Form

MMS-2014. The forms also satisfy the regulatory requirement to have an

estimated cost allowance form on file for the succeeding allowance

year.

The consequences of a payor's noncompliance with the forms filing

requirements of the regulations are monetarily significant. Simply

stated, if a payor takes an allowance deduction against royalty value

on the Form MMS-2014 without a required form on file, the payor is

subject to loss of allowance and to late-payment interest charges. The

concept of the regulations is that a required form must be on file

before the taking of an allowance; if a payor does not meet this

requirement MMS considers the allowance to be lost by the payor.

Consequently, the payor is directed to pay back the allowance and,

after payback, is charged a late payment interest amount associated

with the lost allowance. The current regulations provide for a ``grace

period'' of three months that gives payors a window of time to comply

with the forms filing requirements of the regulations without losing an

allowance. The grace period permits lessees to retain allowances

reported on a Form MMS-2014 for up to three months prior to the month

that a required allowance form is filed with MMS. Although a payor will

not experience a loss of allowance for the grace period, MMS will

assess the payor a late payment interest charge from the date of the

taking of the allowance on Form MMS-2014 to the receipt date of the

filing of the required allowance form. By regulation, MMS may approve a

grace period longer than three months upon a showing of good cause by

the lessee.

[[Page 40121]]

In evaluating the effectiveness of its rules, particularly as they

related to product valuation, MMS published in the June 17, 1992,

Federal Register, a ``Request for Information for Improvements to

Regulations'' (57 FR 27008). MMS' request stated that the rules for

product valuation were substantially modified in 1988 based on an

effort started in January 1985 with the creation of the Royalty

Management Advisory Committee. The request further stated that it had

been several years since most of the regulations in 30 CFR Parts 201

through 243 were published, and public comments were requested to help

MMS assess where improvements to rules could be made. The comment

period closed August 17, 1992.

Many commenters felt that the allowance form filing requirements of

the valuation regulations needed improvement. They expressed concerns

about both the allowance form filing requirements and the regulatory

sanctions for failure to comply with the allowance reporting

requirements. Suggested recommendations ranged from refinements of

existing forms to a wholesale elimination of allowance form filings

because they serve no useful purpose. Regarding sanctions for failure

to timely file required allowance forms, commenters stated that the

existing penalties were unduly harsh and that the ``punishment'' is not

reflective of the ``crime.''

II. Allowance Study Group

Based on public comments and the over four years of experience MMS

gained in administering the allowance requirement of the valuation

regulations, MMS formed a study group in April 1993 to evaluate the

existing regulatory requirements for oil and gas allowances and

formulate recommendations for improvement. The study group was

comprised of participants from the Council of Petroleum Accounting

Societies, the State and Tribal Royalty Audit Committee, and MMS. The

study group's findings, conclusions, recommendations, and alternative

approach for allowances are presented in the preamble to the proposed

rule titled, ``Revision of Valuation Regulations Governing Oil and Gas

Transportation and Processing Allowances.'' This proposed rule is

published separately in the Federal Register.

III. Additional Changes by MMS

The majority of the changes reflected in this proposed rulemaking

are contained in the study group report. Additionally, MMS included

several clarifications and additional changes based on MMS' experiences

in administering allowances.

a. Failure To File Assessment

The study group did not specify in its alternative approach a fixed

percentage assessment for payors' failure to timely file actual cost

forms. For purposes of this rulemaking, MMS included a percentage rate

of 10 percent. MMS specifically requests comments on this rate or an

alternative rate. MMS also requests specific comments on whether or not

an upper limit, or cap, should be established for such assessments, and

how the upper limit should be constructed; e.g., absolute dollar amount

per occurrence, etc.

b. Improper Netting Assessment

Another change involves the introduction of an assessment for the

``improper netting'' of allowances against royalty value when reporting

royalties on Form MMS-2014. ``Improper netting'' is a circumstance

where two arm's-length transactions, one representing a sale and the

other representing transportation, supported by two separate invoices,

are improperly reported on the payor's Form MMS-2014 as a one-line

transaction. The proposed assessment is 20 percent or twice the

assessment (10 percent) that is proposed for failure to timely file

required allowance forms. MMS has determined that improper netting

should carry an increased assessment because the practice represents,

in effect, concealment of information with adverse impacts on MMS'

efforts to monitor the accuracy of royalty payments. MMS specifically

requests comments on the 20 percentage rate proposed and whether an

upper limit or cap should be established and how it should be

constructed.

c. Erroneous Reporting Assessment

MMS also proposes an assessment for reporting erroneous information

on required allowance forms. MMS continues to experience significant

additional workload caused by erroneously reported information on

allowance forms. MMS seeks to establish an erroneous reporting

assessment to encourage more accurate reporting. This proposed

assessment authority currently exists for monthly production and

royalty reports. An assessment has proven to be an effective tool to

improve the accuracy of reported information.

d. Technical Corrections

MMS proposes several technical corrections and clarifications.

IV. Proposed Amendments

Although the study group recommendations addressed oil and gas

allowances, MMS has determined that they also apply to coal because the

regulatory approach to forms filing requirements and sanctions applies

to both categories of minerals.

Therefore, MMS is proposing to amend its valuation regulations to

change the allowance forms filing requirements for coal. Furthermore,

MMS is amending its valuation regulations to change the existing

sanctions for not timely filing required allowance forms. MMS is also

introducing new assessments and sanctions for (1) failure to properly

report allowances as separate lines on Form MMS-2014, a practice

commonly referred by MMS as ``netting''; and (2) reporting erroneous

information on required allowance forms. Lastly, MMS is proposing

several minor technical corrections and clarifications.

a. Coal Washing Allowances

MMS proposes to amend Sec. 206.259 by deleting the third and fourth

sentences of paragraph (a)(1) that state:

However, before any deduction may be taken, the lessee must

submit a completed page one of Form MMS-4292, Coal Washing Allowance

Report, in accordance with paragraph (c)(1) of this section. A

washing allowance may be claimed retroactively for a period of not

more than 3 months prior to the first day of the month that Form

MMS-4292 is filed with MMS, unless MMS approves a longer period upon

a showing of good cause by the lessee.

MMS proposes replacing the deleted sentences with the following two

sentences:

Before any washing allowance deduction may be taken on Form MMS-

2014, Report of Sales and Royalty Remittance, the lessee must file a

Form MMS-4402, Notice of Intent To Take Transportation and Washing

Allowances, in accordance with paragraph (c)(1) of this section.

After the Form MMS-4402 reporting period, the lessee must file a

Form MMS-4292, Coal Washing Allowance Report, in accordance with

paragraph (c)(1) of this section.

By implementing these changes, MMS would be adopting the

recommendations of the study group's report. These changes allow MMS

to: (1) Focus its allowance administration efforts on actual data

reported annually to MMS rather than on estimated allowance rates

reported at the beginning of the allowance year; (2) eliminate the

retroactive three-month

[[Page 40122]]

filing limitation; and (3) simplify allowance reporting procedures by

incorporating the new reporting form for coal washing allowances.

MMS proposes to amend Sec. 206.259(b)(1) by deleting the fourth and

fifth sentences that state:

However, before any estimated or actual deduction may be taken,

the lessee must submit a completed Form MMS-4292 in accordance with

paragraph (c)(2) of this section. A washing allowance may be claimed

retroactively for a period of not more than 3 months prior to the

first day of the month that Form MMS-4292 is filed with MMS, unless

MMS approves a longer period upon a showing of good cause by the

lessee.

MMS proposes replacing the two deleted sentences with the following

two sentences:

Before any washing allowance deduction may be taken on Form MMS-

2014, the lessee must file a Form MMS-4402, Notice of Intent to Take

Coal Transportation and Washing Allowances, in accordance with

paragraph (c)(2) of this section. After the Form MMS-4402 reporting

period, the lessee must file a Form MMS-4292 in accordance with

(c)(2) of this section.

MMS is proposing these changes to keep in line with the

recommendations of the study group. These changes allow MMS to: (1)

Focus its allowance administrative efforts on actual cost data rather

than on estimated cost data; (2) eliminate the three-month filing

limitation for coal washing allowances; and (3) simplify allowance

reporting requirements.

MMS proposes to further amend Sec. 206.259(b)(1) by deleting from

the seventh sentence the phrase ``* * * estimated or * * *'' The

seventh sentence would read:

When necessary or appropriate, MMS may direct a lessee to modify

its actual washing allowance.

MMS is proposing this change to simplify its coal washing allowance

reporting requirements and to comply with the study group's report.

MMS proposes to amend Sec. 206.259 (c)(1) by deleting existing

paragraphs (i), (ii), and (iii) and add new paragraphs (i), (ii), and

(iii) that read:

(i) With the exception of those washing allowances specified in

paragraphs (c)(1)(v) and (vi) of this section, the lessee must file

a Form MMS-4402 for washing allowances for each calendar year. The

lessee must file the Form MMS-4402 by the due date of the first

sales month in which a washing allowance is reported on Form MMS-

2014. A Form MMS-4402 received by the end of the month that Form

MMS-2014 is due will be considered timely received.

(ii) The Form MMS-4402 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

washing allowance and will continue until the end of the calendar

year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file page one of Form MMS-4292 for washing allowances within 3

months after the end of the reporting period, unless MMS approves a

longer period.

MMS proposes these changes to implement the study group's

recommendations. These changes would: (1) Simplify coal washing

allowance reporting procedures; (2) implement a new allowance form to

show the payor's intent to take washing allowances for the current

year; and (3) provide greater administrative focus on actual data

rather than on estimated data submitted by the payor.

MMS proposes to amend Sec. 206.259(c)(2) by deleting existing

paragraphs (i), (ii), (iii), and (iv), and replacing them with new

paragraphs (i), (ii), and (iii), to read as follows:

(i) With the exception of those washing allowances specified in

paragraph (c)(2)(iv) and (vi) of this section, the lessee must file

a Form MMS-4402 for washing allowances for each calendar year. The

lessee must file the Form MMS-4402 by the due date of the first

sales month in which a washing allowance is reported on Form MMS-

2014. A Form MMS-4402 received by the end of the month that Form

MMS-2014 is due will be considered timely received.

(ii) The Form MMS-4402 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

washing allowance and will continue until the end of the calendar

year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file page one and all supporting schedules of Form MMS-4292 for the

actual washing allowance calculated for the reporting period. Form

MMS-4292 is due within 3 months after the end of the reporting

period, unless MMS approves a longer period.

These changes would address the study group's recommendations

concerning MMS' administration of allowances and the need to focus on

actual data reported annually rather than focus on estimated allowance

rates reported at the beginning of each allowance year. Accordingly,

MMS would continue to require the submission on an annual form which

notifies MMS of the payor's intent to take allowance deductions from

the royalty value.

Consistent with this amendment, paragraphs (v), (vi) and (vii),

would be redesignated (iv), (v), and (vi).

MMS is proposing technical corrections to this section as a result

of adopting changes recommended by the study group.

MMS proposes to amend Sec. 206.259(c) by adding paragraph (5) to

read:

A lessee is required to file a new Form MMS-4292 if adjustments

are made to actual non-arm's-length washing allowances on Form MMS-

2014.

MMS is proposing this change to comply with the study group's

report. This change emphasizes MMS' focus on collecting actual data as

opposed to estimated data and allows adjustments to allowance data

previously submitted to MMS.

MMS proposes to amend Sec. 206.259(d) by changing the title to

read:

(d) Interest charges and assessments for incorrect or late reports

and failure to report.

This change would better define and clarify the purpose of this

section.

MMS proposes to amend Sec. 206.259(d) by deleting paragraphs (1),

(2), and (3) and replacing them with the following schedule:

(d) Interest charges and assessments for incorrect or late reports

and failure to report. MMS may levy assessments and interest charges in

accordance with the table below. MMS will determine interest rates in

accordance with 30 CFR 218.202.

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If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4402......... $10 per allowance line

required on Form MMS-4402.

Deducts a washing allowance on Form MMS-2014 An amount equal to 10 percent From the date that Form MMS-

without complying with requirements for actual of the total allowance 4292 was due until the date

cost reporting on Form MMS-4292. amount deducted on Forms MMS- that the form was received.

2014 during the year.

[[Page 40123]]

Takes a washing allowance on Form MMS-2014 by An amount equal to 20 percent From the end of the month in

improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the coal instead of reporting the amount netted on Form MMS- containing the netted

allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a transportation allowance ............................. Payment of interest on the

that results in an underpayment of royalties. amount of the underpayment.

----------------------------------------------------------------------------------------------------------------

These changes would adopt the study group's recommendations

concerning the need for and equity of allowance payback and late-

payment interest charges for failure to file allowance forms. The study

group also determined that the current payback sanction is excessive.

However, MMS' objective is to gather timely and accurate actual cost

information to assess the legitimacy of allowance deductions.

Accordingly, the study group recommended that payors failing to timely

file required forms would be assessed an amount equal to a fixed

percent of the total allowance amount deducted during the year plus an

amount calculated as equal to late-payment interest from the date the

actual cost was due until the date the form was actually received.

b. Coal Transportation Allowances

MMS proposes to amend Sec. 206.262 by deleting the third and fourth

sentences of paragraph (a)(1) that state:

However, before any deduction may be taken, the lessee must

submit a completed page one of Form MMS-4293, Coal Transportation

Allowance Report, in accordance with paragraph (c)(1) of this

section. A transportation allowance may be claimed retroactively for

a period of not more than 3 months prior to the first day of the

month that Form MMS-4293 is filed with MMS, unless MMS approves a

longer period upon a showing of good cause by the lessee.

MMS proposes adding in place of the two deleted sentences the

following two sentences:

Before any transportation allowance deduction may be taken on

Form MMS-2014, Report of Sales and Royalty Remittance, the lessee

must file a Form MMS-4402, Notice of Intent To Take Transportation

and Washing Allowances, in accordance with paragraph (c)(1) of this

section. After the Form MMS-4402 reporting period, the lessee must

file a Form MMS-4293, Coal Transportation Allowance Report, in

accordance with paragraph (c)(1) of this section.

By implementing these changes, MMS would adopt the recommendations

of the study group's report. These changes allow MMS to: (1) Focus its

allowance administration efforts on actual data reported annually to

MMS rather than on estimated allowance rates reported at the beginning

of the allowance year; (2) eliminate the retroactive three-month filing

limitation, and (3) simplify allowance reporting procedures by

incorporating the new reporting form for coal transportation

allowances.

MMS proposes to amend Sec. 206.262(b)(1) by deleting the fourth and

fifth sentences that state:

However, before any estimated or actual deduction may be taken,

the lessee must submit a completed Form MMS-4293 in accordance with

paragraph (c)(2) of this section. A transportation allowance may be

claimed retroactively for a period of not more than three months

prior to the first day of the month that Form MMS-4293 is filed with

MMS, unless MMS approves a longer period upon a showing of good

cause by the lessee.

MMS proposes adding in place of the two deleted sentences the two

following sentences:

Before any transportation allowance deduction may be taken on

Form MMS-2014, Report of Sales and Royalty Remittance, the lessee

must file a Form MMS-4402, Notice of Intent to Take Coal

Transportation and Washing Allowances, in accordance with paragraph

(c)(2) of this section. After the Form MMS-4402 reporting period,

the lessee must file a Form MMS-4293 in accordance with paragraph

(c)(2) of this section.

MMS is proposing these changes to keep in line with the

recommendations of the study group. These changes would allow MMS to:

(1) Focus its allowance administrative efforts on actual cost data

rather than on estimated cost data; (2) eliminate the three-month

filing limitation for coal transportation allowance; and (3) simplify

allowance reporting requirements.

MMS proposes to further amend Sec. 206.262(b)(1) by deleting from

the seventh sentence the phrase ``* * * estimated or * * *'' The

seventh sentence would read:

When necessary or appropriate, MMS may direct a lessee to modify

its actual transportation allowance deduction.

This change would simplify MMS' coal transportation allowance

reporting requirements in accordance with the study group's report.

MMS proposes to amend Sec. 206.262(c)(1) by deleting existing

paragraphs (i), (ii), (iii), and (iv) and replacing them with new

paragraphs (i), (ii), (iii), and (iv) that read:

(i) With the exception of those transportation allowances

specified in paragraph (c)(1)(v) and (vi) of this section, the

lessee must file a Form MMS-4402 for transportation allowances each

calendar year. The lessee must file the Form MMS-4402 by the due

date of the first sales month in which a transportation allowance is

reported on Form MMS-2014. A Form MMS-4402 received by the end of

the month that Form MMS-2014 is due will be considered timely

received.

(ii) The Form MMS-4402 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file page one of Form MMS-4293 for the actual transportation

allowances calculated for the reporting period. Form MMS-4293 is due

within 3 months after the end of the reporting period, unless MMS

approves a longer period.

(iv) MMS may require that a lessee submit arm's-length

transportation contracts and related documents. Documents will be

submitted within a reasonable time, as determined by MMS.

MMS proposes these changes to implement the study group's

recommendations. These changes would: (1) simplify coal transportation

allowance reporting procedures; (2) implement a new allowance form to

show the payor's intent to take transportation allowances for the

current year; and (3) provide greater administrative focus on actual

data rather than on estimated data submitted by the payor.

MMS proposes to amend Sec. 206.262(c)(2) by deleting existing

paragraphs (i), (ii), (iii), and (iv), and replacing them with new

paragraphs (i), (ii), and (iii) that read:

(i) With the exception of those transportation allowances

specified in paragraph (c)(2)(iv) and (vi), of this section, the

lessee must file a Form MMS-4402 for transportation allowance

estimates for each calendar year. The lessee must file the Form MMS-

4402 by the due date of the first sales month in which a

transportation allowance is reported on Form MMS-2014. A Form MMS-

4402 received by the end of the month that Form MMS-2014 is due will

be considered timely received.

(ii) The Form MMS-4402 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct

[[Page 40124]]

a transportation allowance and will continue until the end of the

calendar year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file a page one and all supporting schedules of Form MMS-4293 for

the actual transportation allowance calculated for the reporting

period. The Form MMS-4293 is due within three months after the end

of the reporting period, unless MMS approves a longer period.

These changes would address the study group's recommendations

concerning MMS' administration of allowances and the need to focus on

actual data reported annually rather than the current focus on

estimated allowance rates reported at the beginning of each allowance

year. Accordingly, MMS would continue to require the submission of an

annual form which notifies MMS of the payor's intent to take allowance

deductions from the royalty value.

Consistent with this amendment, paragraph (iv) of

Sec. 206.262(c)(2) would be removed and existing paragraphs (v), (vi),

(vii), and (viii) would be redesignated (c)(2)(iv), (v), (vi), and

(vii).

MMS would also make technical corrections to this section as a

result of adopting changes recommended by the study group.

MMS proposes to amend Sec. 206.262(c) by adding paragraph (5) that

reads:

A lessee is required to file a new Form MMS-4293 if adjustments

are made to actual non-arm's-length transportation allowances on

Form MMS-2014.

MMS is proposing this change to comply with the study group's

report. This change emphasizes MMS' focus on collecting actual data as

opposed to estimated data and allows adjustments to allowance data

previously submitted to MMS.

MMS proposes to amend Sec. 206.262(d) and revise the title that

would read:

(d) Interest charges and assessments for incorrect or late reports

and failure to report

MMS is making corrections to the regulations by adding language

that would further define and clarify the purpose of this section.

MMS proposes to amend Sec. 206.262(d) by deleting paragraphs (1),

(2) and (3) replacing them with the following schedule:

(d) Interest charges and assessments for incorrect or late reports

and failure to report. MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------

If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4402......... $10 per allowance line

required on Form MMS-4402.

Deducts a transportation allowance on Form MMS- An amount equal to 10 percent From the date that Form MMS-

2014 without complying with requirements for of the total allowance 4293 was due until the date

actual cost reporting on Form MMS-4293. amount deducted on Forms MMS- that the form was received.

2014 during the year.

Takes a transportation allowance on Form MMS-2014 An amount equal to 20 percent From the end of the month in

by improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the coal instead of reporting the amount netted on Form MMS- containing the netted

allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a transportation allowance ............................. Payment of interest on the

that results in an underpayment of royalties. amount of the underpayment.

----------------------------------------------------------------------------------------------------------------

These changes would adopt the study group's recommendations

concerning the need for and equity of allowance payback and late-

payment interest charges for failure to file allowance forms. The study

group also determined that the current payback sanction is excessive.

However, MMS' objective is to gather timely and accurate actual cost

information to assess the legitimacy of allowance deductions.

Accordingly, the study group recommended that payors failing to timely

file required forms would be assessed an amount equivalent to a fixed

percent of the total allowance amount deducted during the year plus an

amount calculated as equivalent to late-payment interest from the date

the actual cost information was due until the date the form was

actually received.

The public is invited to participate in this rulemaking action by

submitting data, views, or arguments with respect to this notice. All

comments must be received by 4:00 p.m. of the day specified in the DATE

Section and at the location in the ADDRESSES section of this preamble.

V. Other Matters

Separate regulations concerning valuation of natural gas for

royalty purposes are currently being developed for Federal leases and

for Indian leases through two separate negotiated rulemaking

committees. These committees are addressing both natural gas valuation

and transportation and processing allowance issues.

The committee addressing natural gas valuation for Federal leases

recommended in its March 1995 report that transportation and processing

allowance forms no longer be required. This recommendation is one of

numerous recommendations for broad changes to existing regulations

governing the valuation of natural gas produced from Federal leases.

The future rulemaking to be prepared considering the recommendations of

the Federal negotiated rulemaking committee will include the proposal

for eliminating the requirement for allowance forms.

The amendments to the coal valuation regulations related to

allowances being proposed today mirror changes being proposed by

separate rulemaking to the oil and gas valuation regulations related to

allowances. The changes being proposed to the coal and the oil and gas

allowance rules may ultimately be reconsidered depending on the outcome

of the future gas valuation rulemaking developed from the

recommendations of the Federal negotiated rulemaking committee.

MMS also would like comment on the effective date for the final

rule. One option is to make any final rule effective as of January 1,

1995, the beginning of the current allowance year. Another option is to

make the rule effective as of the date of publication of this proposed

rule since royalty payors are on notice of the possible rule change on

that date. Commenters should address this issue in their comments.

VI. Procedural Matters

The Regulatory Flexibility Act

The Department has determined that this rulemaking will not have a

significant economic effect on a substantial number of small entities

under the Regulatory Flexibility Act (5

[[Page 40125]]

U.S.C. 601 et seq.). The proposed rule will streamline and improve

existing regulatory reporting requirements related to allowances that

are used to calculate royalty payments on coal produced from Federal

and Indian lands.

Executive Order 12630

The Department certifies that the rule does not represent a

governmental action capable of interference with constitutionally

protected property rights. Thus, a Takings Implication Assessment need

not be prepared under Executive Order 12630, ``Government Action and

Interference with Constitutionally Protected Property Rights.''

Executive Order 12778

The Department has certified to the Office of Management and Budget

that these final regulations meet the applicable standards provided in

Sections 2(a) and 2(b)(2) of Executive Order 12778.

Executive Order 12866

This document has been reviewed under Executive Order 12866 and is

not a significant regulatory action.

Paperwork Reduction Act of 1980

The information collection requirements contained in this rule have

been approved by the Office of Management and Budget (OMB) under 44

U.S.C. 3501 et seq. and assigned Clearance Numbers 1010-0022, 1010-

0074, and 1010-0099.

National Environmental Policy Act of 1969

We have determined that this rulemaking is not a major Federal

action significantly affecting the quality of the human environment,

and a detailed statement under section 102(2)(C) of the National

Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)) is not

required.

List of Subjects in 30 CFR Part 206

Coal, Continental shelf, Geothermal energy, Government contracts,

Indian lands, Mineral royalties, Natural gas, Petroleum, Public lands-

mineral resources, Reporting and recordkeeping requirements.

Dated: May 19, 1995.

Bob Armstrong,

Assistant Secretary--Land and Minerals Management.

For the reasons set out in the preamble, 30 CFR part 206 is

proposed to be amended as set forth below:

PART 206--PRODUCT VALUATION

Subpart F--Coal

1. The authority citation for Part 206 is revised to read as

follows:

Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et

seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et

seq., 1701 et seq.; 31 U.S.C. 9701.; 43 U.S.C. 1301 et seq., 1331 et

seq., and 1801 et seq.

2. Section 206.259 is amended by revising paragraphs (a)(1),

(b)(1), (c)(1)(i) through (iii), (c)(2)(i) through (iii), removing

paragraph (c)(2)(iv), redesignating paragraphs (c)(2)(v) through (vii)

as paragraphs (c)(2)(iv) through (vi), revising newly designated

paragraphs (c)(2)(iv) through (vi), adding paragraph (c)(5) and

revising paragraph (d) to read as follows:

Sec. 206.259 Determination of washing allowances.

(a) * * *

(1) For washing costs incurred by a lessee pursuant to an arm's-

length contract, the washing allowance will be the reasonable actual

costs incurred by the lessee for washing the coal under that contract,

subject to monitoring, review, audit, and possible future adjustment.

MMS' prior approval is not required before a lessee may deduct costs

incurred under an arm's-length contract. Before any washing allowance

deduction may be taken on Form MMS-2014, Report of Sales and Royalty

Remittance, the lessee must file a Form MMS-4402, Notice of Intent To

Take Transportation and Washing Allowances, in accordance with

paragraph (c)(1) of this section. After the Form MMS-4402 reporting

period, the lessee must file a Form MMS-4292, Coal Washing Allowance

Report, in accordance with paragraph (c)(1) of this section.

* * * * *

(b) * * *

(1) If a lessee has a non-arm's-length contract or has no contract,

including those situations where the lessee performs washing for

itself, the washing allowance will be based upon the lessee's

reasonable actual costs. All washing allowances deducted under a non-

arm's-length or no contract situation are subject to monitoring,

review, audit, and possible future adjustment. Prior MMS approval of

washing allowances is not required for non-arm's-length or no contract

situations. Before any washing allowance deduction may be taken on Form

MMS-2014, the lessee must file a Form MMS-4402, Notice of Intent to

Take Coal Transportation and Washing Allowances, in accordance with

paragraph (c)(2) of this section. After the Form MMS-4402 reporting

period, the lessee must file a Form MMS-4292 in accordance with (c)(2)

of this section. MMS will monitor the allowance deduction to ensure

that deductions are reasonable and allowable. When necessary or

appropriate, MMS may direct a lessee to modify its actual washing

allowance.

* * * * *

(c) * * *

(1) * * *

(i) With the exception of those washing allowances specified in

paragraphs (c)(1)(v) and (vi) of this section, the lessee must file a

Form MMS-4402 for washing allowances each calendar year. The lessee

must file the Form MMS-4402 by the due date of the first sales month in

which a washing allowance is reported on Form MMS-2014. A Form MMS-4402

received by the end of the month that Form MMS-2014 is due will be

considered timely received.

(ii) The Form MMS-4402 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

washing allowance and will continue until the end of the calendar year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file page one of Form MMS-4292 for washing allowances within 3 months

after the end of the reporting period, unless MMS approves a longer

period.

* * * * *

(2) * * *

(i) With the exception of those washing allowances specified in

paragraph (c)(2)(iv) and (vi) of this section, the lessee must file a

Form MMS-4402 for washing allowances each calendar year. The lessee

must file the Form MMS-4402 by the due date of the first sales month in

which a washing allowance is reported on Form MMS-2014. A Form MMS-4402

received by the end of the month that Form MMS-2014 is due will be

considered timely received.

(ii) The Form MMS-4402 will be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

washing allowance and will continue until the end of the calendar year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file page one and all supporting schedules of Form MMS-4292 for actual

washing allowances calculated for the reporting period. Form MMS-4292

is due within three months after the end of the reporting period,

unless MMS approves a longer period.

[[Page 40126]]

(iv) Washing allowances based on non-arm's-length or no-contract

situations which are in effect at the time these regulations become

effective will be allowed to continue until such allowances terminate.

For the purposes of this section, only those allowances that have been

approved by MMS in writing shall qualify as being in effect at the time

these regulations become effective.

(v) Upon request by MMS, the lessee shall submit all data used by

the lessee to prepare its Forms MMS-4292. The data shall be provided

within a reasonable period of time, as determined by MMS.

(vi) MMS may establish, in appropriate circumstances, reporting

requirements which are different from the requirements of this section.

(3) * * *

(4) * * *

(5) A lessee is required to file a new Form MMS-4292 if adjustments

are made to actual non-arm's-length washing allowances on Form MMS-

2014.

(d) Interest charges and assessments for incorrect or late reports

and failure to report. MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------

If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4402......... $10 per allowance line

required on Form MMS-4402.

Deducts a washing allowance on Form MMS-2014 An amount equal to 10 percent From the date that Form MMS-

without complying with requirements for actual of the total allowance 4292 was due until the date

cost reporting on Form MMS-4292. amount deducted on Forms MMS- that the form was received.

2014 during the year.

Takes a washing allowance on Form MMS-2014 by An amount equal to 20 percent From the end of the month in

improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the coal instead of reporting the amount netted on Form MMS- containing the netted

allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a washing allowance that ............................. On the amount of the

results in an underpayment of royalties. underpayment.

----------------------------------------------------------------------------------------------------------------

* * * * *

3. Section 206.262 is amended by revising paragraphs (a)(1),

(b)(1), (c)(1)(i) through (iv), (c)(2)(i) through (iii), removing

paragraph (iv), redesignating paragraphs (c)(2)(v) through (viii) to

paragraphs (c)(2)(iv) through (vii), revising newly designated

paragraphs (c)(2)(iv) through (vii), adding paragraph (c)(5) and

revising paragraph (d) to read as follows:

Sec. 206.262 Determination of transportation allowances.

(a) * * *

(1) For transportation costs incurred by a lessee pursuant to an

arm's-length contract, the transportation allowance shall be the

reasonable, actual costs incurred by the lessee for transporting the

coal under that contract, subject to monitoring, review, audit, and

possible future adjustment. MMS' prior approval is not required before

a lessee may deduct costs incurred under an arm's-length contract.

Before any transportation allowance deduction may be taken on Form MMS-

2014, Report of Sales and Royalty Remittance, the lessee must file a

Form MMS-4402, Notice of Intent To Take Transportation and Washing

Allowances, in accordance with paragraph (c)(1) of this section. After

the Form MMS-4402 reporting period, the lessee must file a Form MMS-

4293, Coal Transportation Allowance Report, in accordance with

paragraph (c)(1) of this section.

* * * * *

(b) * * *

(1) If a lessee has a non-arm's-length contract or has no contract,

including those situations where the lessee performs transportation

services for itself, the transportation allowance shall be based upon

the lessee's reasonable actual costs. All transportation allowances

deducted under a non-arm's-length or no-contract situation are subject

to monitoring, review, audit, and possible future adjustment. Prior MMS

approval of transportation allowances is not required for non-arm's-

length or no-contract situations. Before any transportation allowance

deduction may be taken on Form MMS-2014, Report of Sales and Royalty

Remittance, the lessee must file a Form MMS-4402, Notice of Intent to

Take Coal Transportation and Washing Allowances, in accordance with

paragraph (c)(2) of this section. After the Form MMS-4402 reporting

period, the lessee must file a Form MMS-4293 in accordance with

paragraph (c)(2) of this section. MMS shall monitor the allowance

deductions to ensure that deductions are reasonable and allowable. When

necessary or appropriate, MMS may direct a lessee to modify its actual

transportation allowance deduction.

* * * * *

(c) * * *

(1) * * *

(i) With the exception of those transportation allowances specified

in paragraph (c)(1)(v) and (vi) of this section, the lessee must file a

Form MMS-4402 for transportation allowances each calendar year. The

lessee must file the Form MMS-4402 by the due date of the first sales

month in which a transportation allowance is reported on Form MMS-2014.

A Form MMS-4402 received by the end of the month that Form MMS-2014 is

due shall be considered timely received.

(ii) The Form MMS-4402 shall be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and shall continue until the end of the

calendar year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file page one of Form MMS-4293 for the actual transportation allowances

calculated for the reporting period. Form MMS-4293 is due within 3

months after the end of the reporting period, unless MMS approves a

longer period.

(iv) MMS may require that a lessee submit arm's-length

transportation contracts and related documents. Documents shall be

submitted within a reasonable time, as determined by MMS.

* * * * *

(2) * * *

(i) With the exception of those transportation allowances specified

in paragraph (c)(2)(iv) and (vi) of this section, the lessee must file

a Form MMS-4402 for transportation allowances each calendar year. The

lessee must file the Form MMS-4402 by the due date of the first sales

month in

[[Page 40127]]

which a transportation allowance is reported on Form MMS-2014. A Form

MMS-4402 received by the end of the month that Form MMS-2014 is due

shall be considered timely received.

(ii) The Form MMS-4402 shall be effective for a reporting period

beginning the month that the lessee is first authorized to deduct a

transportation allowance and shall continue until the end of the

calendar year.

(iii) After the Form MMS-4402 reporting period, the lessee must

file a page one and all supporting schedules of Form MMS-4293 for the

actual transportation allowance calculated for the reporting period.

The Form MMS-4293 is due within 3 months after the end of the reporting

period, unless MMS approves a longer period.

(iv) Non-arm's-length contract or no-contract-based transportation

allowances that are in effect at the time these regulations become

effective shall be allowed to continue until such allowances terminate.

For purposes of this section, only those allowances that have been

approved by MMS in writing shall qualify as being in effect at the time

these regulations become effective.

(v) Upon request by MMS, the lessee must submit all data used to

prepare its Form MMS-4293. The lessee must provide requested data

within a reasonable period of time, as determined by MMS.

(vi) MMS may establish, in appropriate circumstances, reporting

requirements that are different from the requirements of this section.

(vii) If the lessee is authorized to use its Federal or State

agency-approved rate as its transportation cost in accordance with

paragraph (b)(3) of this section, it shall follow the reporting

requirements of paragraph (c)(1) of this section.

(5) A lessee is required to file a new Form MMS-4293 if adjustments

are made to actual non-arm's-length transportation allowances on Form

MMS-2014.

(d) Interest charges and assessments for incorrect or late reports

and failure to report. MMS shall levy assessments and interest charges

in accordance with the table below. MMS will determine interest rates

in accordance with 30 CFR 218.202.

----------------------------------------------------------------------------------------------------------------

If a lessee * * * The assessment is * * * Plus interest calculated * *

-------------------------------------------------------------------------------------------------*--------------

Files an inaccurate or Late Form MMS-4402......... $10 per allowance line

required on Form MMS-4402.

Deducts a transportation allowance on Form MMS- An amount equal to 10 percent From the date that Form MMS-

2014 without complying with requirements for of the total allowance 4293 was due until the date

actual cost reporting on Form MMS-4293. amount deducted on Forms MMS- that the form was received.

2014 during the year.

Takes a transportation allowance on Form MMS-2014 An amount equal to 20 percent From the end of the month in

by improperly netting the allowance against the of the total allowance which Form MMS-2014

sales value of the coal instead of reporting the amount netted on Form MMS- containing the netted

allowance as a separate line item on Form MMS- 2014. allowance was submitted to

2014 as required by paragraph (c)(4) of this the date MMS discovers the

section. netted amount.

Erroneously reports a transportation allowance ............................. On the amount of the

that results in an underpayment of royalties. underpayment.

----------------------------------------------------------------------------------------------------------------

[FR Doc. 95-19296 Filed 8-4-95; 8:45 am]

BILLING CODE 4310-MR-P