Royalty Computation of Phosphate Production on Western Public Lands

DEPARTMENT OF THE INTERIOR

Minerals Management Service

Royalty Computation of Phosphate Production on Western Public

Lands

AGENCY: Minerals Management Service, Interior.

ACTION: Notice of adoption of method for determining value used to

compute royalty payments on Federal phosphate ore mined on western

public lands.

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SUMMARY: This final notice provides a new method of determining the

value of production used to compute royalties on phosphate ore produced

from Federal leases on western public lands. The new method uses a

weighted composite of two published indices and a price survey that are

more closely related to the phosphate industry. This new method

replaces the current method of valuation, which utilizes the Gross

Domestic Product--Implicit Price Deflator (GDP-IPD) to annually adjust

phosphate value.

DATES: Effective April 26, 1999.

ADDRESSES: Inquiries about this notice should be sent to: David S.

Guzy, Chief, Rules and Publications Staff, Royalty Management Program,

Minerals Management Service, P.O. Box 25165, MS 3021, Denver, Colorado

80225-0165; or e-Mail RMP.[email protected].

FOR FURTHER INFORMATION CONTACT: Herbert B. Wincentsen, Chief, Solid

Minerals Valuation and Reporting Branch, Minerals Management Service,

P.O. Box 25165, MS 3153, Denver, Colorado 80225-0165, telephone (303)

275-7210.

SUPPLEMENTARY INFORMATION: On October 16, 1997, the Secretary of the

Interior approved an April 16, 1997, recommendation from the Royalty

Policy Committee (RPC) to revise the current method of adjusting the

value used to compute royalty payments on Federal phosphate production.

RPC is a committee of the Minerals Management Service Advisory Board

(Board). The Board was created under the authority of the Federal

Advisory Committee Act. The Board's purpose includes, in relevant part,

providing advice to the Secretary, the Director, MMS, and other

Department of the Interior officials on royalty management of Federal

and Indian leases. RPC includes representatives of States which share

in mineral revenues from Federal lands, Indian tribes and allottees

whose mineral revenues MMS collects in trust, oil and gas and solid

minerals producing industries who pay royalties, and the public.

The approved valuation changes based on the RPC recommendations

were the following:

1. Discontinue the current indexing procedure that utilizes the

GDP-IPD to annually adjust the phosphate value for royalty calculation

purposes.

2. Determine phosphate value using a weighted composite index

methodology with the following indices, published by the Bureau of

Labor Statistics (BLS), and weights:

The Chemical and Fertilizer Minerals Mining Index,

Standard Industry Code (SIC) 147, weighted at 50 percent;

The Phosphatic Fertilizers Index (SIC 2874), weighted at

25 percent; and

The Phosphate Rock Index (SIC 1475), weighted at 25

percent.

Lessees would recalculate the phosphate unit value annually, as

under the existing indexing procedure.

3. Continue using the weighted composite index methodology for 5

years, at which time MMS will examine the methodology and the values

determined to assure there is a continued relationship to the

marketplace.

4. Apply the composite index valuation methodology only to Federal

phosphate production; there is no Indian phosphate production. State or

fee phosphate leases are also unaffected unless the parties to a State

or fee lease elect to use the Federal valuation methodology.

[[Page 14752]]

5. The recommended composite index methodology will not be

retroactive. The methodology will become effective April 26, 1999.

Comments on Proposed Methodology

On March 24, 1998, MMS published a notice (63 FR 14131) proposing

to revise the current method used to compute royalty on phosphate

produced from western Federal lands. This notice requested comments on

the revision with the comment period open to April 23, 1998. During the

comment period, MMS received one comment from a phosphate producer who

supported the proposed change in phosphate royalty valuation

procedures. The commentor stated that although there was no perfect

valuation method, the new western phosphate ore royalty valuation

method proposed in the March 24, 1998, Federal Register notice will

more reasonably correlate to general phosphate market changes. The

commentor stated that the value received for their end product

(phosphate based fertilizers) is no higher now than what they were

receiving in 1979, yet the phosphate unit value generated by MMS's

existing index-based method had almost doubled over that same period.

Discontinuance of Producer Price Index for Phosphate Rock

During the proposed notice comment period, we became aware that the

BLS had discontinued the Phosphate Rock Index, SIC 1475. The BLS set

the Phosphate Rock Index based on sales information that included data

of crude phosphate ore, processed phosphate rock, washed or

concentrated phosphate rock, dried phosphate rock, and primary

products. Because there were very limited sales data voluntarily

reported, BLS decided to discontinue publishing the index. The last

Phosphate Rock Index, published in June 1997, was generated from one

sale of phosphate primary products. The BLS stated they will probably

not resume the survey over the next 5 years. Accordingly, we decided to

replace the BLS Phosphate Rock Index for royalty valuation purposes.

We examined several alternatives to the discontinued BLS Phosphate

Rock Index before concluding that the Phosphate Rock Price Index, as

published by the United States Geological Survey (USGS) is a viable

replacement. On August 21, 1998, we sent a letter to the RPC Phosphate

Subcommittee members explaining our analysis. We requested review and

comment on the proposed index replacement. We received one response

from an Idaho phosphate company in favor of our proposal. No other

comments were received.

Adoption of USGS Phosphate Rock Price Data

The USGS annually publishes phosphate rock prices in its ``Minerals

Yearbook.'' This publication was formerly released by the Bureau of

Mines (BOM). However, USGS assumed responsibility for continued

publication when BOM was abolished in 1996. We will use USGS when

referring to published data (both pre- and post-1996) for the remainder

of this notice.

To determine whether USGS's price survey of phosphate rock prices

is comparable to BLS' data collections for phosphate rock, we

researched price data beginning with 1982, the year BLS reset the

Phosphate Rock Index to 100. To test whether USGS price surveys

reasonably track with BLS price data, we used the following

methodology:

We set USGS's published 1982 price for phosphate rock of

$25.50 per ton to 100. Therefore, for 1982, both BLS and USGS began

with a unitless index figure of 100.

We converted the new USGS published price to an index

change using a direct proportion for each year after 1982. For example,

in 1983, USGS published a price of $23.97 per ton. This equates to a

proportioned index of 94 (23.97/25.50).

We statistically compared the year-to-year percent change

of these two indices. The overall index price trends, expressed as a

percentage change of the indices of the BLS Phosphate Rock Index and

the USGS Phosphate Rock Price Index, are similar with a correlation

factor of 0.7928. This suggests that BLS and USGS were receiving and

collecting similar data from the phosphate industry.

To determine how the old unit value (based on BLS' Phosphate Rock

Index) correlates with the new unit value (based on USGS's Phosphate

Rock Price Index), we performed a comparison of the two series of unit

values using a percent difference plot. The unit values, as calculated

by both the new indexed methodology and the existing GDP-IPD

methodology, were equal at $0.5038/unit in 1987, thus 1987 was used as

the base year for comparison.

The percent unit value difference for each series follows the

formula:

[GRAPHIC] [TIFF OMITTED] TN26MR99.001

A plot of the percent unit value differences for the period 1987

through 1997 indicates the two series of unit values are closely

related and comparable, with a statistical correlation coefficient of

0.9837.

Table 1 shows the comparison of the old indexed unit value and the

new indexed unit value as a percent difference based on the formula

described above.

Table 1. Comparisons of Old and New Unit Value

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Percent Percent

Year New unit value difference Old unit value difference

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1987............................................ $0.5038 .............. $0.5038 ..............

1988............................................ 0.5350 6.20 0.5310 5.40

1989............................................ 0.5583 4.35 0.5516 3.88

1990............................................ 0.5574 -0.16 0.5507 -0.16

1991............................................ 0.5644 1.25 0.5621 2.07

1992............................................ 0.5474 -3.00 0.5572 -0.87

1993............................................ 0.5174 -5.48 0.5254 -5.71

1994............................................ 0.5384 4.04 0.5435 3.44

1995............................................ 0.5743 6.68 0.5793 6.59

1996............................................ 0.6096 6.14 0.6112 5.51

[[Page 14753]]

1997............................................ 0.5965 -214 0.5949 -2.67

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Application of USGS Data

Based on the analysis above, Federal phosphate producers must use

the same ``composite index'' methodology as originally proposed in the

March 24, 1998 Federal Register Notice with the exception that the USGS

Phosphate Rock Price Index replaces the now discontinued BLS Phosphate

Rock Index (SIC 1475). As recommended by the RPC, we are adopting for

valuation purposes the composite index from which each year's

adjustment to the phosphate value would be derived and weighted as

follows: 50-percent BLS Chemical and Fertilizer Minerals Mining Index;

25-percent BLS Phosphate Fertilizer Index; and 25-percent USGS

Phosphate Rock Price Index.

Implementation and Annual Revision of New Unit Value

The unit value of phosphate ore using the composite index

methodology is determined with reference to the prior year's composite

index value compared to the base year's composite index value. Table 2

shows the new weighted composite index methodology and the computation

of the index unit value:

For example:

[GRAPHIC] [TIFF OMITTED] TN26MR99.002

[GRAPHIC] [TIFF OMITTED] TN26MR99.003

The new methodology will not be applied retroactively owing to the

revised computation method provided in this notice for phosphate

valuation. Phosphate producers will continue using the existing

methodology until the first day of the first full month following the

effective date of this final notice.

For clarification, we are providing an implementation strategy as

follows:

For 1999 Phosphate Production

1. You must use the 1998 Phosphate Unit Value of $0.6858/Unit, as

computed by MMS and distributed to the phosphate industry in May 1998,

as an estimated value for 1999 production. The phosphate producers must

continue using this value until the updated GDP-IPD index data becomes

available and the 1999 Unit Value, using the existing methodology is

calculated, (March-April 1999).

2. You must retroactively correct the estimated value for 1999

production when MMS notifies you. We will calculate the Unit Value for

1999, when the GDP-IPD index data becomes available, using the existing

methodology and provide that value to phosphate producers. Producers

must continue to use the 1999 Unit Value until the implementation date

of the new methodology Unit Value. This implementation date will be the

first full month following the effective date of this final notice.

Phosphate Unit Value From April 26, 1999

Use the new methodology Unit Value ($0.5965/Unit) for production

occurring on or after April 26, 1999 until August 1, 1999. No

production month will have more than one Unit Value under this

implementation strategy.

Phosphate Value After August 1, 1999

You must use the revised Unit Value from August 1, 1999, through

July 31, 2000. We will revise the phosphate Unit Value and distribute

it by letter to the industry during July of each year with an effective

date of August 1, of that same year. We will use this date because the

annual BLS indices and the annual USGS phosphate rock prices that make

up the composite index are published by June of each year. For example,

MMS will calculate and distribute the 1999 Unit Value to the phosphate

industry by July 1999. It becomes effective for production beginning

August 1, 1999. You must calculate and pay royalties due for August

production, using this 1999 Unit Value, no later than September 30,

1999. The 1999 Unit Value will remain in effect until July 31, 2000,

when MMS will calculate the next unit value revision.

We will examine phosphate value computed under the new methodology

through a market analysis every 5 years to ensure that the new

valuation methodology is, in fact, reflecting changes in the western

phosphate industry. Since the analysis that was part of the Phosphate

Subcommittee's work occurred in 1996, MMS will examine and compare the

values computed for phosphate ore to market data in 2001.

Dated: March 19, 1999.

Lucy Querques Denett,

Associate Director for Royalty Management.

[FR Doc. 99-7394 Filed 3-25-99; 8:45 am]

BILLING CODE 4310-MR-P