GAO Says Get Rid of Self Bonding

By John McFerrin

The non-partisan Government Accountability Office (GAO) has recommended that Congress consider amending the Surface Mining Coal and Reclamation Act to eliminate the use of self bonding as a type of financial assurance for coal mine reclamation.

Under West Virginia and federal law, mining companies are required to post performance bonds to assure that reclamation is completed.  If the company disappears, the Department of Environmental Protection would forfeit the bond and pay for the reclamation.  Historically, bonds were posted by insurance companies or some other financial institution.  Companies would pay the premiums; if the bond had to be forfeited, the financial institution would pay for the reclamation.

There is an alternative called “self bonding.”  Under that alternative, the mining company in effect becomes the financial institution.  It tells the Department of Environmental Protection that it has plenty of money so that if reclamation is ever needed it can pay.  If it meets financial standards set forth in the regulations, it is approved for “self bonding” and doesn’t have to post a bond backed by an insurance company, etc.

In West Virginia, about 14 per cent of the mine land is self bonded; the national rate is about 11 per cent.

This system works when the companies are prosperous and have enough money to pay for any reclamation.  The problems arise when the companies are less prosperous and can no longer pay.

The problems with self bonding became clear when the three largest coal companies in the United States filed for bankruptcy. Peabody Energy, Alpha Natural Resources, and Arch Coal all filed for bankruptcy between August, 2015, and April, 2016.  Between them they had pledged $2.3 billion in self bonding for mine cleanup.  The possibility that some or all these companies could go out of business, leaving mine cleanup costs unfunded, got everybody’s attention and led to the Government Accountability (GAO) study.

GAO found several difficulties in the self bonding system:

  • Financial situations change. There has been some decline in the demand for coal in recent years.  Companies who were fat and happy when demand was strong may no longer be so.
  • Self bonding requests are hard for regulators to evaluate, especially when there are subsidiaries involved. Even if subsidiary looks solvent and appears to have enough assets to be eligible for self bonding, a financially troubled parent could easily make the subsidiary insolvent. When the present system was set up in 1983, the regulations anticipated that state regulators would be able to evaluate the solvency of companies without financial experts.  Now finances and corporate structures can be so complicated that a financial expert is required.
  • It is hard to determine eligibility if the company has mines in multiple states and is doing self bonding in more than one state.
  • It is difficult to make companies who fall upon hard times replace self bonding with surety bonds. With changes in markets, it would be possible for a company to be prosperous when a permit is issued and be eligible for self bonding.  In the course of mining things can (and do) change so that self bonding is no longer appropriate.  Yet it is difficult to force the companies to replace the self bonding with a surety bond from an insurance company.  Being in financial difficulty makes it more difficultly for companies to secure a surety bond; forcing them to do so may force companies out of business, probably guaranteeing that the promise to reclaim inherent in self-bonding will be broken.


It is not as if this is a problem we just discovered.  In August 2016, citing the recent bankruptcies, lower market demand for coal, and the potential for more market downturn, the Office of Surface Mining issued a policy advisory to states suggesting, among other things, that states take steps to assess whether operators currently using self-bonds continue to qualify to do so and that states not accept new self bonds.  It said that states should not accept new or additional self-bonds for any permit until coal production and consumption market conditions reach equilibrium. OSM has reported that it is not likely for that to occur until at least 2021.

In 2016, a group called WildEarth Guardians petitioned the Office of Surface Mining (OSM), asking that it adopt a rule to ensure that companies with a history of financial instability not be allowed to use self bonding.  The petition was pursuant to a provision of the Surface Coal Mining Control and Reclamation Act that gives anyone the right to petition the Office of Surface Mining (OSM) suggesting a new regulation.

When OSM solicited public comments on the petition, it got 117,191 comments.  Of these, there were fourteen unique comments which opposed the petition.

In response, the Office of Surface Mining granted the petition and committed itself to doing something about self bonding. It did not commit to any specific plan, just to doing something.

Then we had an election.  Acting as directed in Executive Order 13783 (Promoting Energy Independence and Economic Growth, March 31, 2017) the Department of the Interior (which includes the Office of Surface Mining) announced in October 2017 that it was reconsidering the need for and scope of potential changes to its bonding regulations.  OSM officials said that they did not have a time line for finalizing a decision on potential changes in its bonding regulations. In addition, OSM rescinded its August 2016 policy advisory that states take steps to assess whether operators currently using self bonds can still quality to do so and that states not accept any new self-bonds.

What’s next?

Right now, the Government Accountability Office thinks that the self bonding system should be changed or eliminated.  Judging from the comments on the Office of Surface Mining’s proposal that the system be changed, the public wants it changed. The Office of Surface Mining either wants to change it or leave it alone (or “establish no time line” for change, bureaucrat speak for leave it alone), depending upon who is in office.

The Office of Surface Mining is limited in its authority to eliminate self bonding.  It is mentioned in the Surface Coal Mining and Reclamation Act itself. The Office of Surface Mining could change the regulations so that only those companies who are solvent and certain to stay that way would qualify but it could not eliminate self bonding altogether. Only Congress could do that.  It would have to change the Surface Coal Mining and Reclamation Act.

As always, stay tuned.  Before the GAO report we were moving toward drastically restricting self-bonding.  Now the current Office of Surface Mining has halted that trend.  We will see if we are headed back to the bad old days when a combination of self bonding and a declining coal market left us with under constant threat of a bankrupt coal company with a worthless commitment to reclamation.