DEPARTMENT OF ENVIRONMENTAL PROTECTION

BUREAU OF MINING AND RECLAMATION

BUREAU OF ABANDONED MINE RECLAMATION

REPORT TO

GOVERNOR TOM RIDGE

ALTERNATIVE FINANCING MECHANISMS

for the

PERPETUAL TREATMENT OF POST-MINING DISCHARGES

PURSUANT TO SECTION 4(d.2) OF THE

SURFACE MINING CONSERVATION AND RECLAMATION ACT

September 24, 1993

revised May, 1996

This report was originally submitted to Robert P. Casey in September 1993 as required by amendments to the Pennsylvania Surface Mining Control and Reclamation Act (PASMCRA), Section 4(d.2) which became effective on February 16, 1993. The amendments required the Department of Environmental Resources to "... recommend to the Governor alternative financing mechanisms for the perpetual treatment of post-mining discharges of mine drainage."

This revised report updates the data upon which the financing alternatives were based. The cost data now accounts for the use of passive systems for the treatment of mine drainage.

EXECUTIVE SUMMARY

The issue of perpetual treatment of post-mining discharges has been long-standing and controversial. Following two landmark Pennsylvania Supreme Court decisions, the Department began to require operators to treat post-mining discharges. To support this effort, the Department began withholding the release of reclamation bonds on mine sites which developed post-mining discharges. In 1990, the legislature responded to a concern that post-mining treatment liability and bonding was too expensive for the coal mining industry and passed HB 329 that would have eliminated this perpetual responsibility. The bill was vetoed by Governor Casey. The Act was eventually amended to require the preparation and submission of this report.

The problem of post-mining discharges is primarily a historical one. In the early 1980's, 20 percent of the permits issued resulted in post-mining discharges. By the mid-1980's, substantial advancements in the predictive science had been made and now, only 2 percent of the permits issued result in a post-mining discharge.

THE ENVIRONMENTAL CONCERN

The environmental impact of post-mining discharges could be substantial if the coal operators stopped treating. A Department inventory of existing and potential post-mining discharges from permitted mine sites shows an estimated acid load to be over 1,000,000 pounds per day.

When an untreated discharge enters a clean, unpolluted stream, acidification of the stream occurs which immediately kills micro-organisms, insects, fish and other aquatic life. As the acid water mixes with the alkaline stream, metallic oxides, hydroxides and carbonates form which then precipitate from solution and physically coat the stream channel. The result is partial or complete loss of habitat for aquatic life. The discharge causes elevated levels of dissolved metals (Fe, Mn, Al) and sulfates which can render the stream unsuitable as a source of drinking water for humans, livestock or wildlife. Dissolved aluminum is also directly toxic to fish and other aquatic life.

BACKGROUND OF BONDING AND FINANCIAL GUARANTEES

Since 1945, PASMCRA has required coal mine operators to provide bonds to insure that the operator will "...perform all of the requirements of the act." In 1945, the concern focused on revegetation. As the law was amended over the years, the focus expanded to include returning the mine site to approximate original contour (AOC); revegetating the mine site to prevent erosion; and treating post-mining discharges to meet applicable effluent standards.

The Federal Surface Mining Control and Reclamation Act of 1977 (FEDSMCRA) also requires bonds. Pennsylvania has been granted primary authority to implement the federal law in Pennsylvania. This means that Pennsylvania must meet the requirements of that law and is subject to oversight by the federal Office of Surface Mining Reclamation and Enforcement (OSMRE).

To satisfy a bonding obligation, an operator may provide a surety bond, a collateral bond or a combination of both.

There has been a concern over the years that the Pennsylvania bond program was insufficiently funded to complete the reclamation plan at forfeited mine sites. The Department analyzed the bond program for fiscal years 1989 and 1990 and had an independent actuary evaluate the program in 1993. To address a deficiency in land reclamation, the reclamation fee was increased from $50 per acre to $100 per acre. A deficiency in post-mining discharge was not addressed.

The actuary found, with the $100 per acre reclamation fee, the reclamation of the land surface is financially sound. The actuary also found that the bonding for post- mining treatment is inadequate but indicated that traditional bonding is not an appropriate means for guaranteeing such long-term liability.

This issue, the financing of long-term treatment of post-mining discharges, is the focus of this report.

THE CURRENT BONDING PRACTICE AND THE PROBLEM

When a discharge occurs after a mine or portion of a mine is reclaimed, the Department withholds release of any reclamation bond that is remaining on the site. The bond is held to guarantee the operator will continue the treatment of the discharge. Because the reclamation bond did not include an amount for the treatment of post-mining discharges, the amount of bond held by the Department is usually insufficient to cover the cost of treatment on a long-term basis.

One solution to this problem would be to increase the bond to cover long-term treatment. But, traditional bonding methods create difficulties for all the stakeholders -- the bonding companies, the mine operator, and the public.

Issuing reclamation bonds that also guarantee the treatment of post-mining discharges presents a serious concern to bonding companies because of the uncertain risk. Many bonding companies have withdrawn from the mine bond market in Pennsylvania.

For coal mine operators, the holding of reclamation bonds where post-mining discharges exist, creates a financial problem because the operator must continue to pay the cost of treatment for a mine site that is not producing revenue and must continue to pay for the bond without hope for bond release in the short-term.

The holding of reclamation bonds is becoming a public problem. In recent years, some prominent coal operators have liquidated operations under a Chapter 7 bankruptcy and the reclamation bonds have been forfeited. The forfeited bond moneys are insufficient for long-term treatment and as the moneys run out, the public will be faced with paying for continued treatment or allowing substantial pollution to occur in the absence of such treatment.

ALTERNATIVE MECHANISMS TO ADDRESS LONG-TERM TREATMENT

Any alternatives for providing financing mechanisms for perpetual (long-term) treatment of post-mining discharges must consider the following:

a. Surety bonds will not be available.

b. Collateral bonds are only a short-term solution.

c. Serious stream degradation will occur if discharges are not treated.

d. The public sector will be expected to assume treatment responsibility rather

than allow pollution.

e. A public institution will be needed to insure treatment occurs.

Alternative 1 The Status Quo

This alternative considers that mine operators will continue treating as they now do and the Department will continue to withhold the release of reclamation bonds. The operators will reach a point where they can no longer afford the cost of treatment and forfeiture of the reclamation bonds will occur. The reclamation bonds will not be sufficient for long-term treatment and public moneys eventually will be needed.

The cost to the public for this alternative will begin to accrue in 1996 at between $2.3 million and $3.5 million. In 10 years, the annual cost will be between $31.2 million and $46.5 million. In 25 years (2021), the costs will range from $77 million to $103.6 million and in 50 years (2045), the public cost will range from $128.6 million to $172.1 million per year. Chart 1 and Appendix 1 show the annual costs over a 50 year period.

Alternative 2 Operator Pays the Costs for a Fixed Period

This alternative requires the operator to establish a site specific trust fund dedicated to the mining site to pay for long-term treatment.

The Site Specific Trust Fund is a financial arrangement whereby the mine operator deposits money into an interest bearing account which is controlled by the Department and the operator. A Trustee manages the account but only the Department can authorize withdrawals. The Trust Fund would not serve to guarantee performance of the mining company. Instead, it would provide the funds for treatment. The mining company would be expected to operate the treatment plant, withdrawing money from the "trust" as approved by the Department. If the mining company fails to operate the plant, the "trust" would be forfeited to the Department for use to continue the treatment.

Where the mine operators do establish a site specific trust, there will be a public cost. The following are examples of the public cost for certain site specific trust duration.

Example 1 -- The mine operators establish 10-year treatment trusts

In this example, it was assumed for estimating purposes, that a substantial number of operators will use the site specific trust funds. All of the deep mine and refuse pile operators and 50% of the surface operators will supply a trust. The public cost for the first year ranges from $5.2 million to $10.9 million. By the 50th year, the annual public costs will be between $131 million and $175 million. Chart 2 and Appendix 2 show the cost of treatment as it increases for the 50 years.

Example 2 -- The mine operators establish 25-year treatment trusts

In this example, the operators establish a 25-year trust. There will be many operators, however, who will not establish a Trust because the cost of the Trust will be greater than the existing bond. As treatment costs increase, these operators are likely to allow their existing reclamation bonds to be forfeited. It is estimated that small operators with large discharges and operators who have ceased coal production but are still treating discharges will not establish the 25-year trusts and will eventually forfeit their bonds. For estimating purposes, it was assumed that none of the surface mine operators and only 50% of the deep mine and refuse pile operators will be amenable to establishing a 25-year trust. For those who do not establish a trust, the public will have to pay for treatment. The public costs will begin to accrue beginning in 1996 as enforcement actions and bond forfeitures occur.

The public cost of this alternative for the first year ranges from $26.3 million to $37.6 million. By the 50th year, the annual public costs will be between $132.6 million and $180.3 million. Chart 3 and Appendix 3 show the cost of treatment as it increases for the 50 years.

Example 3 -- The mine operators establish 50-year treatment trusts

In this example, it is assumed that some coal mine operators will establish Site Specific Trusts to finance the cost of treatment on their individual sites. But realistically, many small producers will not have the cash to establish a site specific trust that will require an amount equal to 27 times the current annual operating costs. In some cases, the cost of the Trust will be greater than the existing bond. As treatment costs increase, these operators are likely to allow their existing reclamation bonds to be forfeited. It is estimated that small operators with large discharges and operators who have ceased coal production but are still treating discharges will not establish the 50-year trusts and will eventually forfeit their bonds. For estimating purposes, it was assumed that none of the surface mine operators and only 25% of the deep mine and refuse pile operators will be amenable to establishing a 50-year trust. For those who do not establish a trust, the public will have to pay for treatment. The costs will begin to accrue beginning in 1996 as enforcement actions and bond forfeitures occur.

The public cost the first year ranges from $34.2 million to $45.5 million. By the 50th year, the annual costs will be between $206 million and $253 million. Chart 4 and Appendix 4 show the cost of treatment as it increases for the 50 years.

Alternative 3 Public Funding

In Alternatives 1 and 2, the public will assume some responsibility for treating post-mining discharges by default when forfeitures occur or when the trust funds expire. Since treatment will fall to the public sector at some point in time, an option would be to accept this eventuality and take on the financial and institutional responsibility now.

Chart 5 and Appendix 5 show the public costs for treating all the post-mining discharges beginning in 1996 to range from $42.1 million to $53.4 million. In 50 years, the costs would be in the $200 million per year range.

FINANCING THE PUBLIC SHARE

Each of the above alternatives describe the public cost which will require a source of revenue. Providing the revenue for the treatment of post-mining discharges will be a difficult public policy issue. On one hand, there will be substantial stream quality degradation if the post-mining discharges are not treated. On the other hand, paying for the treatment will require substantial annual revenues.

The annual revenue could be obtained on an annual basis just like most other costs of government (pay-as-you-go). The revenue would need to increase over time due to inflation. The revenue could also be obtained through the establishment of a "Mine Water Treatment Trust Fund" from which the annual costs would be withdrawn. Establishing a Trust Fund would equalize the annual revenue needs over the life of the trust.

Following are some options for obtaining the needed revenue and a comparison between a "pay-as-you-go" option and a "MWT Trust Fund" option.

1. Impose a Mine Water Treatment Fee on Coal Operators Based on Coal Production

The annual production of coal in 1994 was about 60 million tons. This production rate has been in a slow decline for the past twenty years. Surface mine production has declined substantially, while underground production has risen. It is unlikely that coal production will maintain the current production rate for the long-term.

Assuming the "pay-as-you-go" option, the 1996 fee would range from $0.04 per ton for the status quo alternative to $.70 per ton for Alternative 3. By 2015, the fee would increase to $0.96 and $1.48 respectively. If a Trust Fund were established, the fee would range from $0.64 per ton per year to $1.54 ptpy and would provide for treatment until 2045.

2. Impose a Mine Water Treatment Fee on Coal Users.

Normally, the price of a commodity reflects the cost to produce the commodity including the cost of protecting the environment. As production costs including the cost of environmental protection increase, the price of the commodity is adjusted to account for it. The situation is different for coal mining because a post-mining discharge comes from a mine which no longer produces coal. The cost of treatment of a post-mining discharge has not been included in the price of the coal produced from that mine and coal users have benefited from lower cost coal..

The primary use for Pennsylvania coal is in the generation of electric power. Annually, about 102 billion KW of generated electric power comes from coal.

Assuming the "pay-as-you-go" option, the 1996 user fee would range from $0.00002 per KW for the status quo alternative to $0.00041 p KW for Alternative 3. By 2015, the fee would increase to $0.00057 and $0.00087 respectively. If a Trust Fund were established, the fee would range from $0.00071 per KW to $0.00090 per KW and would provide for treatment until 2045.

Recommendations

This report presents three alternative means for providing for "perpetual" treatment. Each alternative recognizes that the public, both institutionally and financially will be forced to deal with the problem at some point in time. The fairest solution to this difficult public policy issue is to share the costs between the operator who caused the post-mining discharge through his mining activities and the user of the coal who obtained the coal at a price lower than the true cost of production.

The recommended alternative, therefore, is alternative 2 -1 with the public share being funded by a Mine Water Treatment Trust fund. In this alternative, mine operators would be required to establish a site specific trust fund for 10 years after which the MWT Trust Fund would assume the costs of treatment. In the analysis of this alternative, it was indicated that most surface mine operators would have the revenues to fund the trust. (In Alternative 2-2, most surface mine operators and in Alternative 2-3, many deep mine operators would not be able to fund the trust and the public costs would be higher for Alternatives 2-2 and 2-3 even though the operator contribution seems to be higher.) In addition, some mechanism such as a multi-year payment plan may be needed to assist operators in providing the site specific trust. In any case, the analysis gives a conservative estimate of the public costs. For the MWT Trust Fund a fee to be imposed on the users would be $0.0005 per Kilowatt of power generated at coal fired generating stations. The existing gross receipts tax on power generation would provide the revenue which would be deposited into the MWT Trust Fund. The department would manage the MWT Trust Fund; operate and maintain and where necessary construct the mine water treatment facilities.

I. INTRODUCTION

Post-mining discharges are groundwater seeps and flows that occur after a mine has been completed and reclaimed. Many of these discharges have become contaminated by contacting acid producing rock in the mine environment. Since the 1965 amendments to the Pennsylvania Clean Streams Law (PACSL), the coal mine operator has been responsible for treating these discharges to meet applicable water quality and effluent standards. That responsibility continues for as long as the discharge violates the standards. The 1965 PACSL also requires the coal mine operator to provide a bond to insure continued treatment of the post-mining discharge.

The issue of perpetual treatment of post-mining discharges has been long-standing and controversial. Following the court decisions, the Department began to require operators to treat post-mining discharges. In the mid-1980's, the Department began withholding the release of reclamation bonds on mine sites which developed post-mining discharges. In 1990, the legislature responded to a concern that post-mining treatment liability and bonding was too expensive for the coal mining industry and passed HB 329 that would have eliminated this perpetual responsibility. The bill was vetoed by Governor Casey with the commitment that the Department of Environmental Resources would prepare legislation to address "... legitimate economic and regulatory concerns in ways that do not create a threat to the environment." The department responded to this direction by drafting legislation that eventually became Act 173 of 1992. The Act included the requirement to prepare and submit this report.

Since 1965, the department has made every effort to prevent post-mining discharges by developing and applying good science. Today, coal mining permits are not issued if a post-mining discharge is predicted. In the late 1970's and early 1980's, the science for predicting the potential for post-mining discharges was imprecise. In those days, 20 percent of the permits issued resulted in post-mining discharges. By the mid 1980's, substantial advancements in the predictive science had been made by the Bureau of Mining and Reclamation and now, less than 2 percent of the permits issued result in a post-mining discharge. New technologies including alkaline addition and special handling of acid producing material are being studied by the Bureau of Mining and Reclamation to help address the remaining 2 percent.

Table 1 shows, by year, the number of surface mining permits issued and the number of those permits that have a post-mining discharge.

YEAR PERMITS PERMITS WITH PERCENT OF
  ISSUED A DISCHARGE PERMITS
       
1977 341 54 16%
1978 265 35 13%
1979 212 50 24%
1980 230 36 16%
1981 245 51 21%
1982 228 37 16%
1983 185 25 14%
1984 300* 7 2%
1985 300* 13 4%
1986 250* 2 1%
1987 250* 4 2%
1988 221 3 1%
       

TABLE - 1

* This is an estimate of the new permits issued. Many more permits were issued during these years involving the reissuance of permits under primacy standards.

Mining has occurred in Pennsylvania for about 200 years. Water discharges have been fully regulated only since 1965. So, there are many abandoned mines which discharge acid mine water. About 2000 miles of Pennsylvania streams have been polluted by these pre-1965 discharges. The pre-1965 discharges are a separate concern and are not addressed by this analysis and report. Act 173 of 1992 focuses on those discharges for which a mine operator has treatment responsibilities under the 1965 PACSL.

II. THE ENVIRONMENTAL CONCERN

The environmental impact of post-mining discharges could be substantial if the coal operators stopped treating. A department inventory of existing and potential post-mining discharges from permitted mine sites shows at least 46 active and recently closed underground mines have or will have a post-mining discharge. Water quality and quantity data is available for 32 of these mines. The other 14 are not yet discharging. Discharge quantity ranges from 72,000 gallons per day (gpd) to 14,400,000 gpd. The acid load in the discharges, before treatment, is on the order of 800,000 pounds per day.

Further, there are more than 900 surface mine discharges which require treatment. Flows range from less than 1,500 gpd to 360,000 gpd. The acid load, before treatment is on the order of 225,000 pounds per day. There are also 50 or so coal refuse disposal areas that are certain to discharge upon completion. The acid load from these discharges is in the order of 16,000 pounds per day.

The total estimated acid load from all these sources is over 1,000,000 pounds per day.

When an untreated discharge enters a clean, unpolluted stream, acidification of the stream occurs which immediately kills micro-organisms, insects, fish and other aquatic life. As the acid water mixes with the alkaline stream, metallic oxides, hydroxides and carbonates form which then precipitate from solution and physically coat the stream channel. The result is partial or complete loss of habitat for aquatic life. The discharge causes elevated levels of dissolved metals (Fe, Mn, Al) and sulfates which can render the stream unsuitable as a source of drinking water for humans, livestock or wildlife. Dissolved aluminum is also directly toxic to fish and other aquatic life.

The magnitude of these impacts depends upon the volume of water flowing in the stream compared with the volume of the discharge (i.e. how much dilution is available) and the extent to which the discharge reacts with any alkalinity or acidity which is already present in the stream.

It should be noted that the above acid loadings are based on one or two chemical analysis and flow measurements. As such, they represent "order of magnitude" values which will vary depending on precipitation. The site specific impact of these discharges, in terms of miles of streams polluted, cannot be precisely assessed because long-term flow and quality data from both the stream and the discharge do not exist. However, some examples of past pollution incidents caused by acid mine drainage will put the problem in perspective

A good example of instream impacts from a deep mine discharge occurred in the Spring of 1993 in the Casselman River in Lower Somerset County. A higher than normal amount of snowmelt and rainfall caused a major increase in untreated acid mine drainage discharge (20,000 pounds per day of acidity) from an abandoned deep mine complex into the river. The instream impact of this incident was felt for 40 miles downstream and resulted in severe degradation of 20 miles of stream. This negated the gradual recovery which had been occurring for many years previously, and it will likely take several more years to regain what has now been lost.

Another earlier example occurred in 1970. Acid mine drainage began discharging into the West Branch of the Susquehanna River at Barnesboro from the closed Lancashire 15 mine . The acid load from the breakout was about 200,000 pounds per day. The discharge affected about 150 miles of the river from Barnesboro to Renovo.

These examples show that acid mine drainage can have a significant adverse impact on Pennsylvania waterways. Most of the 46 deep mine discharges noted above are of the same magnitude as the Casselman River discharge. Surface mine discharges, on the other hand, are much smaller with acid loads of 500 pounds per day or less. Surface mines generally discharge to smaller headwater streams where the stream flow and alkalinity are minimal; so, the effect can be significant.

III. BACKGROUND OF BONDING AND FINANCIAL GUARANTEES

Since 1945, PASMCRA has required coal mine operators to provide bonds to insure that the operator will "... perform all of the requirements of the act." In 1945, the concern focused on revegetation. As the law was amended over the years, the focus expanded to include returning the mine site to approximate original contour (AOC); revegetating the mine site to prevent erosion; and treating post-mining discharges to meet applicable effluent standards.

The Federal Surface Mining Control and Reclamation Act of 1977 (FEDSMCRA) also requires bonds. Pennsylvania has been granted primary authority to implement the federal law in Pennsylvania. This means that Pennsylvania must meet the requirements of that law and is subject to oversight by the federal Office of Surface Mining Reclamation and Enforcement (OSMRE).

Both the state and federal laws require the bonds to be based "... upon the total estimated cost to the commonwealth of completing the approved reclamation plan...". Currently, Pennsylvania mining activities are bonded based on the type of mining activity. For surface mines, there is a per-acre bond based on the height of the highwall and a per-acre reclamation fee. For coal refuse reprocessing operations there is a per-acre bond and a per-acre reclamation fee. The bond is dedicated to the mine site, and in case of forfeiture, must first be used to complete reclamation on the mine site including the treatment of any post-mining discharges. The reclamation fee is deposited in the Reclamation Fund to supplement forfeited bonds where needed. For the other coal mining activities, the bond is based on site specific factors such as surface structure demolition costs, mine sealing costs and discharge treatment costs. Since permits are not issued if a post-mining discharge is anticipated, there is no initial bond amount assessed for the treatment of possible future post-mining discharges.

To satisfy a bonding obligation, an operator may provide a surety bond, a collateral bond or a combination of both. A surety bond is a third-party guarantee that the operator will perform. A collateral bond is cash, a certificate of deposit, an irrevocable letter of credit, or a negotiable security. Bonds are held until the operator fulfills his obligations. Bond releases are made in increments with final release 5 years after revegetation has been completed.

There has been a concern over the years that the bond program was insufficiently funded to complete the reclamation plan at forfeited mine sites. The department analyzed the bond program for fiscal years 1989 and 1990 and determined that a deficiency existed for both land reclamation activities and for post-mining discharge treatment. As a result of the department's report on the deficiency in the bond program, OSMRE, as part of its oversight function, asked the department to address the problem. OSMRE suggested that an independent actuarial study be conducted to confirm the department's findings and provided a grant to hire an actuarial consultant. The actuary was asked to evaluate the financial soundness of the program for reclaiming the land surface and for treating post-mining discharges as separate issues.

Prior to contracting with the actuary, the Department initiated proposed rulemaking with the Environmental Quality Board (EQB) in 1992 to increase the reclamation fee from $50 per acre to $100 per acre. The rulemaking was approved by the EQB and the IRRC and became effective on August 7, 1993. The reclamation fee increase addressed the land reclamation deficiency but not the post-mining treatment deficiency.

The actuary found that the land reclamation funding had a slight deficiency for primacy forfeitures occurring before June 30, 1992, but after that date, the planned increase in the reclamation fee would result in a slight surplus for future forfeitures. In balance, with the $100 per-acre reclamation fee, the reclamation of the land surface is financially sound. The actuary also found that the bonding for post-mining treatment is inadequate but indicated that traditional bonding is not an appropriate means for guaranteeing such long-term liability.

This issue, the financing of long-term treatment of post-mining discharges, is the focus of this report.

IV. THE CURRENT BONDING PRACTICE AND THE PROBLEM

As discussed earlier, the problem is basically historical involving mines that operated from 1965 to about 1987 when the science of post-mining discharge prediction became more certain. There will continue to be a few new discharges each year that can be addressed by the alternatives presented in this report.

When a discharge occurs after a mine or portion of a mine is reclaimed, the department withholds release of any reclamation bond that is remaining on the site. The bond is held to guarantee the operator will continue the treatment of the discharge. Because the reclamation bond did not include an amount for the treatment of post-mining discharges, the amount of bond held by the department is usually insufficient to cover the cost of treatment on a long-term basis.

One solution to this problem would be to increase the bond to cover long-term treatment. But, traditional bonding methods create difficulties for all the stakeholders -- the bonding companies, the mine operator, and the public.

a. The Bonding Company

Bonding companies prefer to issue bonds in situations where there are definitive standards for measuring performance; where the duration of the risk is short; and where liability is fixed for the life of the risk. They will not issue bonds where the risk is uncertain, where it continues for many years or where the liability may change during the life of the bond. Bonding companies generally will issue bonds for land reclamation because the reclamation standards are well defined and the risk is known.

But, because the risk is uncertain, issuing reclamation bonds that also guarantee the treatment of post-mining discharges presents a serious concern to bonding companies. First, they have no means to evaluate the risk at the time of permit issuance. The department's review process provides some assurance that a discharge is unlikely but it is not absolute. This gives the Surety companies a level of uncertainty that they have not been willing to accept. Second, if a post-mining discharge occurs, there is little chance the bond will be released in the short-term. The bonding company keeps the potential liability on their books for a long time. The result of these factors, and the Department's policy of holding bonds where discharges exist, is that bonding companies are reluctant to issue any bonds. Many bonding companies have withdrawn from the mine bond market in Pennsylvania.

b. The Operator

For coal mine operators, the holding of reclamation bonds where post-mining discharges exist creates a financial problem because the operator must continue to pay the cost of treatment for a mine site that is not producing revenue. This cost must be born by the operator's producing operations reducing the profitability and potentially the financial feasibility of these operations. Some operators have more than one mine with post-mining discharges. The annual costs to treat these discharges can be substantial.

In addition, bonding companies frequently require mine operators to assign assets up to 100 percent of the value of the bond to the bonding company. This collateral is not returned to the operator until the bond is released by the department to the bonding company. The assigned collateral cannot be used for other purposes and makes it difficult for the operator to develop new operations or to obtain new bonds and permits. Without new operations, revenues decline. Faced with declining revenues and unusable assets, the operator is eventually forced to cease mining operations and sometimes go bankrupt.

The situation is the same for an operator who uses collateral bonds. When collateral bonds are held by the department, the operator's assets are not available for new operating capital to expand operations or for new bonds. Without the ability to obtain bonds for new permits and to generate new revenue, the operator is forced out of business.

Whichever bonding method is used by the operator, the current means of guaranteeing perpetual treatment forces the coal mine operator into the cessation of operations and sometimes into bond forfeiture. The exception to this trend are companies whose markets are steady and who have large coal reserves. Some underground mine operators and a few surface miners are in this category.

c. The Public

The holding of reclamation bonds is becoming a public problem. In recently years, some prominent coal operators have liquidated operations under a Chapter 7 bankruptcy and the reclamation bonds have been forfeited. Moneys from the forfeited bonds are being used by the department for surface reclamation. A little of the bond money is available for treating pollutional post-mining discharges. But, the forfeited bond moneys are insufficient for long-term treatment and as the moneys run out, the public will be faced with paying for continued treatment or allowing substantial pollution to occur in the absence of such treatment.

This scenario will repeat itself as operator revenues decline and treatment costs continue. Sooner or later, the cost to treat post-mining discharges will become more than the operator can bear and the public will be faced with an increasing financial and environmental liability.

V. ALTERNATIVE MECHANISMS TO ADDRESS LONG-TERM TREATMENT

Before describing alternative financing mechanisms, it is necessary to define long-term treatment and to identify the basis upon which costs will be calculated.

Act 173 calls for an alternative financing mechanism for the perpetual treatment of mine drainage. But there are so many variables in estimating the cost of treatment, any estimates of perpetual costs and financing would be unrealistic. The maximum time frame that can be supported by a financial analysis is about 50 years. So, the alternatives discussed in this report are analyzed for a 50 year period.

The Environmental Concern Section of this report identified the number and pollution potential of the known post-mining discharges. The acid load from the identified sources is over 1 million pounds per day. If the department were faced with treating all these discharges in 1996, the costs for 1996 would range from $42.1 million to $53.4 million. As mentioned earlier, these estimates were calculated on limited quality and quantity data and represent "order of magnitude" values. For subsequent years, the costs will increase due to inflation but will be tempered by the improvement in water quality that occurs naturally. There is good evidence that the chemical reactions that form acid mine water slow down over time and discharge quality improves but the amount of improvement and the time it takes cannot be accurately predicted. Data show that some discharges have improved significantly in less than 20 years. Other discharges have existed for 50 years with little noticeable change. An experienced judgment is that about half of the discharges would improve sufficiently in 25 to 50 years to negate the need for treatment or at least to allow for the use of less expensive passive treatment systems. To account for the expected improvement in water quality, the cost projections in this section have been reduced by 2 percent per year for years 25 through 50.

With the cost projections in mind, the alternatives for providing financing mechanisms for long-term treatment of post-mining discharges must consider the following:

a. Surety bonds will not be available.

b. Collateral bonds are only a short-term solution.

c. Serious stream degradation will occur if discharges are not treated.

d. The public sector will be expected to assume treatment responsibility rather than allow pollution.

e. A public institution will be needed to insure treatment occurs.

Considering the above, three alternatives for addressing the long-term costs are presented below. The charts and tables which support the alternatives can be found in the Appendix.

A. Alternative 1. The Status Quo

This alternative considers that mine operators will continue treating as they now do and the Department will continue to withhold the release of reclamation bonds. As described earlier, the operators will reach a point where they can no longer afford the cost of treatment at which point forfeiture of the reclamation bonds will occur. The reclamation bonds will not be sufficient for long-term treatment and public moneys eventually will be needed. This alternative discusses the public costs

In developing this alternative, it was assumed that all the surface mines with post-mining discharges would forfeit over the next 10 years because; (1) most of the surface operators mine less than 300,000 tons per year limiting their income, (2) the cost of surface mining relative to the price of coal is increasing and (3) the cost of treatment will be increasing. For refuse piles and deep mines it is estimated that these operations will forfeit but it will take about 25 years because these operations in general are more financially stable. These facilities are supported by operators with long-term operations which can provide the funds for treatment. But eventually, forfeiture will occur as discussed previously in this report.

The cost to the public for this alternative will begin to accrue in 1996 at between $2.3 million and $3.5 million. In 10 years, the annual cost will be between $31.2 million and $ 46.5 million. In 25 years (2021), the costs will range from $77 million to $103.6 million and in 50 years (2045) the public cost will range from $128.6 million to $172.1 million per year. Chart 1 and Appendix 1 show the annual costs over a 50 year period.

B. Alternative 2 Operator Pays the Costs for a Fixed Period

This alternative requires the mine operator to pay for the cost of treatment for a fixed period of time. At the end of that period the public will assume the costs. As discussed previously however, traditional bonding will not effectively address the problem of long-term treatment. This alternative ,therefore, presents an option to bonding that would be to require the operator to establish a site specific trust fund dedicated to the mining site to pay for long-term treatment.

The Site Specific Trust Fund is a financial arrangement whereby the mine operator deposits money into an interest bearing account which is controlled by the department and the operator. A Trustee manages the account but only the Department can authorize withdrawals. The Trust Fund would not function as a normal bond in that it would not serve to guarantee performance of the mining company. Instead, it would provide the funds for treatment. The mining company would be expected to operate the treatment plant, withdrawing money from the "trust" as approved by the department. If the mining company fails to operate the plant, the "trust" would be forfeited to the department for use to continue the treatment.

The Site Specific Trust Fund concept is authorized by the Act 173 (1992) amendments to PASMCRA. The law applies the trust to "minimal impact discharges" and specifies the Site Specific Trust shall be for a period of 50 years. Trust funds could also be used for non-minimal impact discharges.

The amount of the Trust Fund would be calculated based on the present worth of the annual cost for treatment including inflation. The duration of the trust, the interest to be earned and the inflation rate are key factors in the present worth calculation.

Selecting an appropriate duration for the Trust Fund is somewhat subjective. There are, however, some things to consider. First, while financial formulae can accommodate the calculation of a perpetual trust, the result will be fallacious because the interest and inflation rates will not be constant in perpetuity. Also, financial institutions are accustomed to managing trusts of a finite duration. Therefore, a perpetual Trust Fund is not realistic. Second, the Trust Fund should create an incentive for the operator to do the treatment and not forfeit it to the Department. Third, the Trust Fund should reflect, as nearly as possible, the total cost to treat the discharge for as long as it requires treatment.

1. Interest and Inflation Rate

History shows that economic factors vary with time. In the actuarial study of the department's bonding program, the actuary looked at the period 1951 through 1991 and found the average inflation rate to be about 4.3 percent and the average 5-year return on government bonds to be 6.5 percent. The actuary points out that absolute rates are not as important to the results as is the difference in the rates.

A trustee should be able to get a return somewhat better than the return on government bonds. So, a rate of return of 7 percent is suggested. A long-term inflation rate of 4 percent also seems reasonable.

2. The Present Worth Calculation

The present worth of annual treatment costs is the amount needed to finance a site specific trust fund. The equation to calculate present worth is:

Present Worth = Present Worth Factor x Annual Treatment Costs

Present Worth Factor = (1+i)[(1- (1+E /1+i)n)/(i-E)]

where i - interest rate

E - inflation rate

n - number of years

Following are present worth factors for a series of Trust duration's.

  INTEREST RATE INFLATION RATE TRUST DURATION PRESENT WORTH FACTOR  
  0.07 0.04 10 8.828  
  0.07 0.04 15 12.385  
  0.07 0.04 20 15.471  
  0.07 0.04 25 18.148  
  0.07 0.04 30 20.470  
  0.07 0.04 35 22.484  
  0.07 0.04 40 24.231  
  0.07 0.04 45 25.747  
  0.07 0.04 50 27.062  

TABLE - 2

The Site Specific Trust should have sufficient moneys to pay for treatment costs for as long as the discharge can cause pollution. Since predicting when a discharge will improve sufficiently is not possible given today's scientific knowledge, a conservative estimate for the duration of the Trust would be 50 years. Act 173 requires the Site Specific Trust for "minimal impact discharges" to be funded for 50 years.

It must be recognized that this alternative can not be implemented for every coal operator with a post-mining discharge. For a 50-year site specific trust as required by the law, few of the surface mine operators and only 25% of the others could afford a trust. These operators undoubtedly will close their business when required to establish a trust.

Even where the mine operators do establish a site specific trust, there will be a public cost. The following are examples of the public cost for certain site specific trust duration's.

Example 1 -- The mine operators establish 10-year treatment trusts

In this example, it was assumed for estimating purposes, that a substantial number of operators will use the site specific trust funds. All of the deep mine and refuse pile operators and 50% of the surface operators will supply a trust. The public cost for the first year ranges from $5.2 million to $10.9 million. By the 50th year, the annual public costs will be between $131 million and $175 million. Chart 2 and Appendix 2 show the cost of treatment as it increases for the 50 years.

Example 2--The mine operators establish 25-year treatment trusts

In this example, the operators establish a 25-year trust. There will be many operators, however, who will not establish a Trust because the cost of the Trust will be greater than the existing bond. As treatment costs increase, these operators are likely to allow their existing reclamation bonds to be forfeited. It is estimated that small operators with large discharges and operators who have ceased coal production but are still treating discharges will not establish the 25-year trusts and will eventually forfeit their bonds. For estimating purposes, it was assumed that none of the surface mine operators and only 50% of the deep mine and refuse pile operators will be amenable to establishing a 25-year trust. For those who do not establish a trust, the public will have to pay for treatment. The public costs will begin to accrue beginning in 1996 as enforcement actions and bond forfeitures occur.

The public cost of this alternative for the first year ranges from $26.3 million to $37.6 million. By the 50th year, the annual public costs will be between $132.6 million and $180.3 million. Chart 3 and Appendix 3 show the cost of treatment as it increases for the 50 years.

Example 3 -- The mine operators establish 50-year treatment trusts

In this example, it is assumed that some coal mine operators will establish Site Specific Trusts to finance the cost of treatment on their individual sites. But realistically, many small producers will not have the cash to establish a site specific trust that will require an amount equal to 27 times the current annual operating costs. In some cases, the cost of the Trust will be greater than the existing bond. As treatment costs increase, these operators are likely to allow their existing reclamation bonds to be forfeited. It is estimated that small operators with large discharges and operators who have ceased coal production but are still treating discharges will not establish the 50-year trusts and will eventually forfeit their bonds. For estimating purposes, it was assumed that none of the surface mine operators and only 25% of the deep mine and refuse pile operators will be amenable to establishing a 50-year trust. For those who do not establish a trust, the public will have to pay for treatment. The costs will begin to accrue beginning in 1996 as enforcement actions and bond forfeitures occur.

The public cost the first year ranges from $34.2 million to $45.5 million. By the 50th year, the annual costs will be between $206 million and $253 million. Chart 4 and Appendix 4 show the cost of treatment as it increases for the 50 years.

Summary of the costs of Alternative 2

LOW COSTS HIGH COSTS

FIRST YEAR

10-YEAR TRUST $5.2M $10.9M

25-YEAR TRUST $26.3M $37.6M

50-YEAR TRUST $34.2M $45.5M

50th YEAR

10-YEAR TRUST $131.1M $175.4M

25-YEAR TRUST $132.6M $180.3M

50-YEAR TRUST $206.0M $253.8M

TABLE - 3

C. Alternative 3 Public Funding

In Alternatives 1 and 2, the public will assume some responsibility for treating post-mining discharges by default when forfeitures occur or when the trust funds expire. Since treatment will fall to the public sector at some point in time, an option would be to accept this eventuality and take on the financial and institutional responsibility now.

Chart 5 and Appendix 5 show the public costs for treating all the post-mining discharges beginning in 1996 to range from $42.1 million to $53.4 million. In 50 years, the costs would be in the $200 million range.

D. Summary of Costs

The following table summarizes the range of costs for the described alternatives.

FIRST YEAR COSTS   LOW HIGH
       
ALTERNATIVE 1   $2,314,927 $3,448,653
       
ALTERNATIVE 2      
  10-YEAR TRUST $5,257,401 $10,926,030
  25-YEAR TRUST $26,307,892 $37,645,150
  50-YEAR TRUST $34,204,437 $45,541,695
       
ALTERNATIVE 3   $42,100,982 $53,438,241
       
       
50TH YEAR COSTS   LOW HIGH
       
ALTERNATIVE 1   $128,680,218 $172,144,106
       
ALTERNATIVE 2      
  10-YEAR TRUST $131,150,878 $175,449,272
  25-YEAR TRUST $132,614,026 $180,319,420
  50-YEAR TRUST $206,124,181 $253,829,576
       
ALTERNATIVE 3   $177,154,288 $224,859,682
       

TABLE - 4

VI. Financing the Public Share

Each of the alternatives in Section V describe the public cost which will require a source of revenue. Providing the revenue for the treatment of post-mining discharges will be a difficult public policy issue. On one hand, there will be substantial stream quality degradation if the post-mining discharges are not treated. On the other hand, paying for the treatment will require substantial annual revenues.

The annual revenue could be obtained on a annual basis just like most other costs of government (pay-as-you-go). The revenue would need to increase over time due to inflation. The revenue could also be obtained through the establishment of a "Mine Water Treatment Trust Fund" from which the annual costs would be withdrawn. Establishing a Trust Fund would equalize the annual revenue needs over the life of the trust.

Following are some options for obtaining the needed revenue and a comparison between a "Pay-as-you-go" option and a "MWT Trust Fund" option. Also, issues to consider in evaluating the options are discussed. The annual costs for the pay-as-you-go option are shown in Charts 1 through 5 and Appendices 1 through 5 for each of the alternatives. The costs for the MWT Trust Fund option are summarized in Table 5 below. Charts 6 through 10 and Appendices 6 through 10 show how the MWT Trust Fund performs over the 50 year period for the described alternatives.

    LOW HIGH
       
ALTERNATIVE 1   $38,500,000 $53,000,000
       
ALTERNATIVE 2      
  10- YEAR TRUST $36,000,000 $51,500,000
  25- YEAR TRUST $48,000,000 $67,500,000
  50- YEAR TRUST $62,000,000 $82,000,000
       
ALTERNATIVE 3   $72,000,000 92,100,000

TABLE - 5

1. Impose a Mine Water Treatment Fee on Coal Operators Based on Coal Production

The annual production of coal in 1994 was about 60 million tons. This production rate has been in a slow decline for the past twenty years. Surface mine production has declined substantially while underground production has risen. It is unlikely that coal production will maintain the current production rate for the long-term.

The following table (Table 6) shows the production fee needed to fund the three alternatives on a pay-as-you-go basis. The fee is derived by dividing the costs shown in Appendices 1 through 5 by 60 million tons. For 1996, the fee would be $.04 per ton for the status quo alternative where the public would assume the cost of treatment as operators forfeit their bonds. The fee would be $.70 per ton if the public where to assume treatment liability for all discharges beginning in 1996. The fee would have to increase each year as illustrated in Table 5. The producers fees where projected only to 2015 (20 years) because it is unlikely that coal production will continue at the 60 million ton per year level beyond that period. Also after 20 years, it would be prudent to re-assess the assumptions and cost bases used in establishing the fee.

ANNUAL PRODUCERS FEE -- PAY-AS-YOU-GO OPTION

(dollars per ton)

    1996 2000 2005 2010 2015
             
ALTERNATIVE 1   $0.04 $0.21 $0.46 $0.70 $0.96
             
ALTERNATIVE 2            
  10-YEAR TRUST $0.09 $0.11 $0.56 $0.80 $1.09
  25-YEAR TRUST $0.44 $0.53 $0.65 $0.79 $0.96
  50-YEAR TRUST $0.57 $0.69 $0.84 $1.03 $1.25
             
ALTERNATIVE 3   $0.70 $0.82 $1.00 $1.22 $1.48

TABLE - 6

The other funding option is to establish a trust fund financed by a coal production fee from which the annual costs would be drawn. Table 7 below shows the producer fee needed to finance the trust fund option. On the low side, the fee ranges from $0.64 per ton for the status quo option to $1.21 per ton for Alternative 3. This analysis assumes a 50-year life of the trust and a uniform coal production for that period. It is unlikely that coal production will remain at the 60 million tons per year level for 50 years. To guess at a level of production without any basis would not serve this analysis very well. Suffice it to say that the production fee 20 years in the future would higher than those shown in Table 7.

Further, it should be noted that while the fee for the trust fund option is higher than the pay-as-you-go option for the first few years, by the year 2010 the fees are equal. After 2010, the pay-as-you-go option will be more costly on an annual basis.

ANNUAL PRODUCERS FEE -- TRUST FUND OPTION

    LOW HIGH
       
ALTERNATIVE 1   $0.64 $0.88
       
ALTERNATIVE 2      
  10-YEAR TRUST $0.60 $0.86
  25-YEAR TRUST $0.80 $1.13
  50-YEAR TRUST $1.03 $1.37
       
ALTERNATIVE 3   $1.21 $1.54

TABLE - 7

A coal production fee in the ranges shown in Tables 6 and 7 could result in lowered coal production because the fee could make Pennsylvania operators less competitive reducing their market share. The surface coal industry in Pennsylvania has had difficulty in recent years competing in an oversupplied coal market. Coal sales have been lost over a few cents per ton. If the coal production fee were to cause a loss in markets and less coal to be produced, the income to the trust fund would decline requiring a fee increase. This could have a spiraling effect, forcing more companies out of the coal business and leaving behind some existing post-mining discharges with a declining trust fund to pay for them. Further, coal operators already pay a production fee to the OSMRE. Surface mine operators pay 35 cents per ton; underground operators pay 15 cents per ton. This fee is used for abandoned mine reclamation with a portion reserved for mine water treatment. An additional fee could be perceived as overtaxing current mine operators who d id not create the abandoned mine land or post-mining discharge problem.

2. Impose a Mine Water Treatment Fee on Coal Users.

Normally, the price of a commodity reflects the cost to produce the commodity including the cost of protecting the environment. As production costs including the cost of environmental protection increase, the price of the commodity is adjusted to account for it. The situation is different, however, for coal mining because a post-mining discharge comes from a mine which no longer produces coal. The cost of treatment of a post-mining discharge cannot be included in the price of the coal produced from that mine.

Whether there is an existing discharge or one that will occur in the future, the cost of the coal to the users has been and will continue to be less than the true cost of production. Since the users have benefited from this lower cost, it seems reasonable to ask the users to share the cost of treatment.

The primary use for Pennsylvania coal is in the generation of electric power. Annually, about 102 billion KW of generated electric power comes from coal. The total amount of electricity generated is about 165 billion KW per year.

The following table (Table 8) shows the user fee per KW generated by coal needed to fund the pay-as-you-go option for each of the alternatives. The producer fee ranges from a fraction of a mill (about 3 cents per month for a household using 1500 KW) for the "status quo" option to less than a half a mill (61 cents per month) for "alternative 3". By 2015, the fee increases to $.86 per month and $1.31 per month respectively The fees where only projected to the year 2015 because a re-evaluation of the treatment costs would seem prudent in about 20 years.

SUMMARY OF USERS FEE -- PAY-AS-YOU-GO OPTION

    1996 2000 2005 2010 2015
             
ALTERNATIVE 1   $0.00002 $0.00012 $0.00027 $0.00041 $0.00057
             
ALTERNATIVE 2            
10-YEAR TRUST $0.00005 $0.00006 $0.00033 $0.00047 $0.00064
25-YEAR TRUST $0.00026 $0.00031 $0.00038 $0.00046 $0.00057
50-YEAR TRUST $0.00034 $0.00041 $0.00050 $0.00060 $0.00073
             
ALTERNATIVE 3   $0.00041 $0.00048 $0.00059 $0.00071 $0.00087
             

TABLE - 8

Table 9 below shows the user fee needed to support the trust fund option. On the low side, the fee ranges from less than one half a mill (57 cents per month) to about three fourths a mill ($1.06 per month) for Alternative 3. It should be noted that the fee for the Trust Fund option is higher than the Pay-as-you-go option for the first 12 to 15 years. In the long-term, however the annual costs to support the Trust Fund are lower.

SUMMARY OF USER FEE -- TRUST FUND OPTION


  LOW HIGH
       
ALTERNATIVE 1   $0.00038 $0.00052
       
ALTERNATIVE 2      
  10-YEAR TRUST $0.00035 $0.00050
  25-YEAR TRUST $0.00047 $0.00066
  50-YEAR TRUST $0.00061 $0.00080
       
ALTERNATIVE 3   $0.00071 $0.00090

TABLE - 9

The User fee for either option could come from the Gross Receipts Tax already imposed on electric power generation.

Summary and Recommendations

The existence of post-mining discharges and the insufficient financial mechanisms to insure long-term treatment present a threat to the environment. If the mine operators who are currently treating these discharges walk away, there is no institutional or financial means to insure treatment will continue. In recent years, a number of coal mine operators have gone bankrupt and forced the department to forfeit their reclamation bonds. Fortunately, there were few bad discharges at these sites and the Department was able with the available forfeited bonds to construct passive treatment systems. Long-term operation and maintenance costs, however remain an outstanding issue.

Increasing the bond is not a viable alternative and may have the effect of hastening the eventual forfeiture of the existing reclamation bonds on mine sites. Surety companies will not issue bonds for long-term obligations especially since the bond is unlikely to be returned. Collateral bonds are not viable because operators do not have the cash to pledge for these bonds. What assets are available are used to develop new mining operations.

This report presents three alternative means for providing for "perpetual" treatment. Each alternative recognizes that the public, both institutionally and financially will be forced to deal with the problem at some point in time. The fairest solution to this difficult public policy issue is to share to costs between to operator who caused to post-mining discharge through his mining activities and the user of the coal who obtained the coal at a price lower than the true cost of production.

The recommended alternative, therefore, is alternative 2 -1 with the public share being funded by a Mine Water Treatment Trust fund. In this alternative, mine operators would be required to establish a site specific trust fund for 10 years after which the MWT Trust Fund would assume the costs of treatment. In the analysis of this alternative, it was indicated that most surface mine operators would have the revenues to fund the trust. (In Alternative 2-2, most surface mine operators and in Alternative 2-3, many deep mine operators would not be able to fund the trust and the public costs would be higher for Alternatives 2-2 and 2-3 even though the operator contribution seems to be higher.) In addition, some mechanism such as a multi-year payment plan may be needed to assist operators in providing the site specific trust. In any case, the analysis gives a conservative estimate of the public costs. For the MWT Trust Fund a fee to be imposed on the users would be $0.0005 per Kilowatt of power generated at coal fired generating stations. The existing gross receipts tax on power generation would provide the revenue which would be deposited into the MWT Trust Fund. The department would manage the MWT Trust Fund; operate and maintain and where necessary construct the mine water treatment facilities.