Photo courtesy of Vivian Stockman and ohvec.org.
Following dramatic changes to the coal market and the failure of regulators to account for a future beyond coal, the coal mining industry is set to leave behind a toxic legacy of unreclaimed strip mines. As the coal market retracts, particularly in central Appalachia, mine operators are becoming financially insolvent and declaring bankruptcy. Other operators that remain solvent for now are nonetheless idling mines and laying off workers. Amid these dramatic changes to the industry, two significant questions remain unanswered: When companies go bankrupt, who will reclaim the abandoned strip mines left behind, and who will pay for it?
Congress passed the “Surface Mining Control and Reclamation Act” (SMCRA) in 1977 specifically to address this problem of abandoned, unreclaimed mines. Prior to SMCRA, mine operators would regularly walk away from their strip mines once all the coal had been removed. The abandoned sites persisted as scars on the landscape, discharging harmful pollutants. SMCRA was passed in the hope of putting an end to all that. SMCRA seeks to avoid the problem of abandoned mine sites by requiring operators to reclaim the disturbed areas as they mine. Surface mine operators must place layers of rock and soil back on top of mined areas, so that the landscape at least resembles its former topography, and must reestablish vegetation and restore stream channels.
SMCRA also recognizes that some mine operators may be unable or unwilling to complete reclamation. Thus the law requires companies to post financial bonds sufficient to cover the costs of cleanup should they become insolvent before finishing the job. For many years, the system has worked largely as intended. But Congress made a fundamental error when it crafted SMCRA: It presumed that mine operators would only go bankrupt sporadically and in isolation, and that the rest of the industry would pick up the slack. The law is ill-equipped to deal with the present scenario, where entire sectors of the industry are in danger of total collapse.
The coal mining industry is undergoing fundamental and historic change. Bankruptcies are increasing and stock prices of publicly traded mine operators continue to fall. And although many of these bankruptcies have been structured as reorganizations—meaning that the companies are allowed to continue operating—more companies are expected to be forced into liquidation. When a mine operator folds, it leaves behind landscapes that have been ripped open and now generate toxic water pollution. What becomes of such sites? Unfortunately, state and federal regulators not only frequently fail to accurately assess the costs of reclamation when securing reclamation bonds but also allow operators to use financial instruments that don’t provide adequate funds. As a result, no money is available to pay for reclamation.
The most problematic form of reclamation bonding involves “self-bonding.” Rather than set aside cash or secure a commitment from a third-party financial institution, operations that are self-bonded essentially promise regulators: “We’re good for it.” To determine whether an operator is eligible for self-bonding, regulators compare the operator’s total assets with its total liabilities. Unfortunately, the assets can include the value of the coal in the ground, mining equipment, and the company’s stock price. But when the entire coal market suffers a significant decline in demand, the value of the coal in the ground falls toward zero, no one wants to buy mine equipment, and investors drive down the price of mining company stock as they sell it off. One of the country’s largest coal mine operators, Alpha Natural Resources, has seen its stock price fall from over four dollars a share in May 2014 to less than a dollar today. Alpha recently warned its investors that “state regulators may determine that we are no longer eligible for self-bonding” and that it may have difficulty securing other forms of bonds. What happens when one of these self-bonded operators goes bankrupt? No money is left to pay for reclamation.
Self-bonding isn’t the only financial instrument likely to prove inadequate to the task of paying for reclamation. Some states, like Virginia, use a “pool bonding” approach. This strategy, too, is completely unprepared to address an industry-wide collapse. Pool bonding requires individual operators to pay a fraction of their total anticipated reclamation costs into a common pool. If any single operator goes bankrupt, the shared pool is tapped to pay the reclamation costs. In 2011, Virginia regulators commissioned an independent actuarial assessment of the state’s surface mining reclamation fund. That study concluded that “the program has sufficient resources to withstand the forfeiture of one or two smaller permits,” but that the “more significant risk” would come from the bankruptcy of “companies with multiple permits.” In other words, the fund is completely unprepared to address the increasingly likely scenario that multiple operators holding multiple permits will decide that they can’t or won’t follow through on their reclamation commitments.
When a mine operator goes under without reclaiming its mines and without paying for the cost of clean up, there are two possible outcomes: Either taxpayers shoulder the cost of reclamation, or the land remains barren and scarred and the streams continue to be poisoned by polluted mine runoff. Recent evidence has shown that even fully “reclaimed” mines have the potential to continue discharging pollution. Unreclaimed sites, where the mineral layers are left exposed to the elements and subject to erosion, will generate significantly more pollution.
So what’s to be done? It’s not too late for federal and state regulators to avert the coming crisis, or at least to blunt its worst effects. These regulators must immediately begin operating under the assumption that most, if not all, coal mine operators will become insolvent in the next few years. This is particularly true in the areas hardest hit by the downturn in the coal market, such as central Appalachia. Under this new operating principle, regulators would stop issuing new SMCRA permits to any operator that cannot provide an adequate bond held by a third-party financial institution. They also would set these bonds at amounts adequate to fully reclaim abandoned mines. Existing operations that rely on currently inadequate financial assurances, such as self-bonds or insufficiently capitalized bond pools, would be compelled to secure third-party bonds or to begin reclamation immediately. Although regulators have had their heads in the sand for too long, there is still a chance to avoid a landscape of abandoned mines and poisoned streams.