Peabody Energy today successfully leased 721 million tons of ultra-low-sulfur coal reserves adjacent to its North Antelope Rochelle Mine in the Powder River Basin of Wyoming for a price of $1.10 per ton. With the announcement, an economic group decried Bureau of Land Management's approved lease as "well under the estimated fair market value of $2.79 per ton."

The Institute for Energy Economic and Financial Analysis (IEEFA) said the competitive-bid process for coal leases has rarely generated competition. The red flag for this is that only four of 26 major Powder River Basin coal sales since 1991 have had more than one bidder, and the four that were "competitive" only had two bidders each.

The group estimated that U.S. taxpayers will be shorted $1.2 billion because of Peabody's most recent acquisition, adding to the 30-year total they claim to be in the neighborhood of $29 billion. IEEFA's mission is "to accelerate the United States' transition to a diverse, sustainable and profitable energy economy and to reduce the nation's dependence on coal and other non-renewable energy resources."

"The deeply flawed bid process leading up to today is a perfect illustration of everything that is wrong with the way the federal government is giving away taxpayer-owned coal for what is well under fair-market value," said Tom Sanzillo, director of finance for IEEFA . "The notion that this has resulted in U.S. taxpayers being cheated out of more than a billion dollars in a single day should be a wake-up call for Washington that this broken system is badly in need of repair."

While the lease will generate $793 million in revenue, Sanzillo argued it should be closer to $2 billion to be aligned with fair-market value. BLM sees it differently.

"The successful bid met or exceeded BLM's estimate of the fair market value of the tract and was accepted," a release stated. The release also indicated Peabody, through its BTU Western Resources Inc. subsidiary, submitted the lone sealed bid. After a lease is issued, an annual rental payment of $3 per acre is required, along with a royalty payment of 12.5 percent of the value of coal produced by surface-mining methods. The lease payments for the 6,364-acre property total just over $19,000 per year.

"There are billions of dollars yet to come," said Wyoming BLM Spokeswoman Beverly Gorny, emphasizing the importance of the 12.5 percent royalty that fluctuates with market value. At current market value, the 721 million tons of mineable coal on this property would kick back nearly an additional $825 million to the BLM. "This is just the bonus bid. This is their down payment or their ticket into the event. That's all they are purchasing with that [$793 million.]"

The process for setting the fair-market value the BLM will accept as a bid involves a lengthy process from a publicly available 58-page manual. It involves geologists, appraisers and mining engineers to determine the value of the coal in the ground. When they arrive at a number, they keep it to themselves, and even a lone bidder needs to meet or beat that number. Gorny likens the bidding process to something more familiar in Las Vegas.

"Basically they are betting against the house," Gorny said. In other words, BLM considers itself a competitor to the coal-mining operations, meaning in effect there are two bidders for any coal tract, even if only one bidder submits a number for purchase. If they fail to meet the bid, it takes time to resubmit, and other mining companies, who would then have access to the failed bid number, might find it more attractive to swoop in to "steal" the bid, Gorny said.

PRB coal currently trades at $9.15 per ton, and Peabody reported $2.04 billion in worldwide sales in the first quarter, bolstered largely by its Australian operations.

A representative from Peabody said the company legally complies with the sealed bid process.

"The ultimate cost of the reserves are paid in two different ways: through the competitive auction for the right to mine the reserves, and then as a percent of the sales price at the time of production," said Meg Gallagher, spokeswoman for Peabody.

Gov. Matt Mead called the lease "good news" for the state.

"Over five years, Wyoming will get a little over $400 million from that sale," he said.

To see the IEEFA report, visit http://ieefa.org/.

For more Daily news click here and look under 'Breaking News'