Federal Sales of Natural Resources: Allocation and Pricing Systems

Ross W. Gorte
Specialist in Natural Resources Policy
Environment and Natural Resources Policy Division
93-1035 ENR
December 16, 1993

INTRODUCTION

As pressures to reduce the Federal deficit and/or to fund current or new programs continue to grow, many question whether higher prices for Federal resource sales might reduce the financial losses or increase the public returns from the sale of those resources. This report describes the systems used to allocate and price the several resources provided by the Federal Government --timber, forage for livestock grazing, various types of fuels and minerals, fisheries, and water from Federal water projects. (1) Other resources -- such as wildlife, freshwater and coastal marine fisheries, and water generally -- are generally managed by the States, with State responsibility for their allocation and/or sale.

FEDERAL TIMBER

Two Federal agencies, the Forest Service in the Department of Agriculture and the Bureau of Land Management (BLM) in the Department of the Interior, sell substantial quantities of timber. In general, both agencies determine salable quantities based on physical factors -- the area available for timber management, the average timber growth within that area, and the need for reserves to maintain sustainable harvest levels. Once annual sale programs are determined, each agency begins preparing individual timber sales; the number and sizes depend largely upon the number and sizes of the potential buyers in the area. The typical process takes several years to plan the sale area, complete the inventory, and prepare an environmental assessment. (2)

One of the last steps in timber sale planning is the appraisal -- the agency's estimate of the value of the timber. The appraised value is the minimum price for the timber. Both agencies have traditionally used residual value appraisals, calculating the timber's value by deducting average harvesting and milling costs from estimated market prices for the wood products; the appraisal process is also described in Federal Timber Sales. The Forest Service has been testing, and slowly adopting, transaction evidence appraisals, which estimate the timber's value by comparing the sale with other recent competitively bid Forest Service timber sales.

The timber sale contract is then offered for sale to the public, and anyone who can cut the timber may bid (except for bidders who have been debarred). The appraised value is the minimum bid and is specified in the advertisement of the contract in local newspapers. Typically, the contract is offered at an oral auction, although sealed bidding is occasionally used, and the bidder with the highest total bid value is awarded the contract. For BLM sales, the total bid value is the amount actually paid, with payments made when the timber is cut. For most Forest Service sales, the average bid value (i.e., the bid rate) is paid for the amount of timber actually removed, with the timber cut measured ("scaled") by the agency or by an independent third party. Most Forest Service timber, and nearly all BLM timber, is bid competitively, with market forces setting prices, although as much as a third of Forest Service timber is sold at or near the appraised price.

FEDERAL GRAZING

The Federal Government charges a fee for grazing livestock on the Federal lands managed by the BLM and Forest Service. Each agency identifies grazing allotments and determines the number and timing of livestock grazing, based on forage quantities and on historical grazing. All allotments are required to be associated with a base ranch -- a private livestock operation located in the vicinity of the allotment. While the agencies have the authority to reallocate allotments, allotments typically remain with the permittees indefinitely, unless they sell the base property or violate the terms of the grazing agreement. The Taylor Grazing Act specifies that a grazing permit is not a property right, but because the allotments are usually transferred with the base ranch when it is inherited or sold, the value of the allotments is typically capitalized into the value of the base ranch.

Grazing fees for both agencies have been established under a formula in the Public Rangelands Improvement Act of 1978 (PRIA), and extended by Executive Order. The formula consists of a base value (set at $1.23 per AUM (3) in 1966), adjusted by indices of livestock prices and rancher operating costs (sometimes called "ability to pay" factors); the grazing fee for FY1993 was $1.86 per AUM. Various studies have suggested that Federal grazing fees are substantially lower than private land lease rates, although ranchers argue that different requirements and costs invalidate such comparisons. However, as long as the grazing allotments are associated with a base ranch, the grazing fees cannot be competitively bid and the market value cannot be determined precisely. The appropriate grazing fee for Federal lands has been debated for decades. (4)

FEDERAL MINERALS

Four different approaches are used in the sale of minerals from Federal lands. Locatable minerals (also called hardrock minerals) are disposed under the General Mining Law of 1872. Oil and gas are disposed under one set of laws onshore, and a different set of laws offshore. (5) Salable minerals -- sand, gravel, and other common construction materials -- are sold under other guidance. Thus, this discussion is separated into these four components.

Locatable Minerals

The 1872 Mining Law was intended to promote mineral exploration and development, as part of the efforts to encourage settlement of the West. The Mining Law allows prospectors to stake claims to unclaimed areas that they believe contain valuable minerals; filing a new claim with the BLM requires a fee of $10. Claims must be kept active with a $100 annual holding fee per claim.

When a valid claim is shown to have economically recoverable minerals, the claim holder may develop the minerals, with or without a patent. A claimant may file a patent application to obtain full title to the surface and the mineral rights. The cost to file is $200 per application plus $50 per claim (one application may contain several claims). If approved, the claimant pays $2.50 per acre for placer claims (e.g., alluvial deposits of high quality sand or gravel) or $5.00 per acre for lode claims (e.g., lode or vein deposits, usually in quartz or other rock) to obtain title to the land and minerals. These per-acre fees were substantial when the Mining Law was enacted in 1872, but are a fraction of land values today. In addition, although the issue is currently being debated (along with other changes in the Mining Law), the Federal Government receives no royalties or share of the profits from locatable mineral discoveries or extraction from Federal (or ex-Federal) land. (6)

Onshore Oil and Gas

The system for leasing onshore oil and gas on Federal lands was revised in 1987, replacing the system that had been in place since 1920.(7) The BLM plans which areas are to be offered for lease and when; the Minerals Management Service (MMS) of the Department of the Interior administers the leases. The new system requires that all leasable tracts be offered initially in a competitive oral auction, with the highest responsible, qualified bidder being awarded the contract. These bids, called bonus bids, are part of the payment for oil and gas leases. Lease holders must also pay an annual rental fee of at least $1.50 per acre (increasing to $2.00 per acre after 5 years), which is replaced by a royalty of at least 12.5 percent of the value of production once production is achieved.

If no bids are received for a tract, or if the highest bid is less than the $2 per acre minimum, the lands are offered for leasing on a noncompetitive basis within 30 days, and are available for two years. The first qualified applicant is entitled to the lease, upon payment of an application fee of at least $75. The noncompetitive lease holders also must make the rental and royalty payments described above.

Offshore Oil and Gas

The Federal Government also leases oil and gas on the outer continental shelf (OCS). MMS develops 5-year leasing plans with accompanying environmental analyses for its leasing regions, and periodically offers leases for competitive bids to responsible bidders. The OCS Lands Act Amendments of 1978 authorize the Secretary of the Interior to choose among numerous sealed bidding systems, each having no more than one bidding variable and one or more fixed or set variables; those variables may be bonus bids, royalties in dollars or percentage, work commitments, or profit shares, although royalty rates must be at least 12.5 percent and profit shares (if used) must be at least 30 percent. The Secretary was directed to test options and to inform Congress of the systems tested. Concerns about the protection of coastal and marine resources have also led Congress to impose lease moratoria for specific areas. (8)

Salable Minerals

Salable minerals, also called mineral materials, include "common varieties" of sand, stone, gravel, pumice, cinders, clay, etc. These materials can be sold upon request by an applicant. Except for sales to a government entity or limited sales to a nonprofit organization, sales are to be for the fair market value, as determined by an appraisal (with a reappraisal at least every 2 years). Salable minerals are to be sold competitively, with newspaper advertisement preceding the sealed or oral bids. However, up to 100,000 cubic yards of material (or 200,000 cubic yards for public works programs or for mineral leases) may be sold noncompetitively at the fair market value.

FEDERAL FISHERIES

Under the Magnuson Fishery Conservation and Management Act, the Federal Government administers commercial fishing activity in the U.S. Exclusive Economic Zone (EEZ), generally from 3 to 200 miles offshore. Administration occurs through regional fishery management councils, composed of various interests, including recreational and commercial fish harvesters. In general, the regional councils regulate commercial fishing activity through seasons, quotas, gear, and other restrictions. Fees and other charges are minor, and are clearly not intended as "sales" of fishing rights in Federal waters; fees are currently limited under the Magnuson Act to recovering administrative costs. (9)

For the most part, and in most places, only foreign commercial harvesters are prevented from entering a fishery. However, Federal programs limit access to the mid-Atlantic surf clam and ocean quahog fishery, and will soon be implemented for other fisheries in the EEZ; some States also limit access to commercial fisheries in State waters. Current limited access programs allocate harvesting rights among commercial operators based on their historic harvests or the willingness to pay for future harvest access. Fees are limited to recovering administrative costs, although limited access permits may become quite valuable, and some interests would like to see the Magnuson Act amended so that at least some of this value is returned to the U.S. Treasury or used to enhance fisheries management activities.

FEDERAL WATER PROJECTS

The Federal Government delivers water to irrigators and to municipal and industrial users in 17 Western States (10) through projects constructed by the Bureau of Reclamation (Bureau) in the Department of the Interior. (11) Once the projects are completed, water is delivered to users at rates specified in long-term (typically 40-year) contracts. Except for fixed-rate contracts, rates may be adjusted every 5 years, depending on ability to pay and other factors.

Under the Reclamation Act of 1902, facility costs were originally to be financed with money received from public land sales, and repaid within 10 years by irrigators receiving water from Federal projects. Payments were to be deposited into a revolving reclamation fund to finance future projects. Several factors -- including administrative decisions not to charge interest, development of "ability to pay" standards, and occasional long-term fixed-rate contracts --have kept payments from covering the total cost of delivering irrigation water.

Congress established a new formula for water charges in the Reclamation Reform Act of 1982. This Act included interest charges on the unpaid principal on project capital costs and on operations and maintenance deficits accruing since 1982. While the 1982 Act left water rates in place for contractors choosing to comply with other provisions of the new law, it required those choosing to remain under prior reclamation law to pay for water used to irrigate more than 160 acres at the new, higher "full cost" rate, and required irrigators leasing lands over a 960-acre limit to pay the full cost rate.

Current charges for water delivered from reclamation facilities are based on several factors, including: (1) the "reimbursable" costs of the project at the time of construction (costs not directly attributable to project users are borne by the Federal Government); (2) the amount of irrigable land within a project area; (3) yearly operations and maintenance costs; (4) land class and ownership; (5) interest on unpaid construction costs and on operation and maintenance deficits accruing since 1982; and (6) irrigators' ability to pay. Consequently, prices for Bureau-delivered water vary from project to project and within project areas, with water from newer projects typically being more expensive than water from older projects (primarily because of higher construction costs). In 1990, water service contract rates ranged from $0.22 to $16.99 per acre-foot. (12) In contrast, the 1990 full-cost agricultural water rates ranged from $4 to $251 per acre-foot. In addition, in 1992, Congress directed the Bureau to assess a surcharge on water delivered from the Central Valley Project (CVP) in California to help pay for fish and wildlife habitat restoration (P.L. 102-575).

CONCLUSION

The Federal Government allocates many resources among users. Some of the allocations rely on market mechanisms, with competitive bidding to establish the Government's return. Other resources use other allocation methods, and then typically rely on an administered price that may, but often does not and sometimes cannot, approximate the private market value of such resources. With continued pressure to reduce the Federal deficit, alternative resource allocation and pricing mechanisms that increase Federal revenues are being suggested.

Endnotes

1. This report presents information from several CRS analysts: Betsy A. Cody on live-stock grazing and water; Marc Humphries on locatable minerals and onshore leasing; Larry Kumins on offshore leasing; and Eugene H. Buck on fisheries.

2. For more information, see: U.S. Library of Congress, Congressional Research Service. Federal Timber Sales. [by John H. Beuter.] CRS Report No. 85-96 ENR. Washington, DC: Feb. 8, 1985. 140 pp.

3. An AUM -- animal unit month -- is the amount of forage consumed by a cow and her calf in a month, and has long been the unit of measurement for livestock grazing on Federal lands.

4. For more information, see: U.S. Library of Congress, Congressional Research Service. Grazing Fees: A Primer. [by Betsy A. Cody.] CRS Report No. 93-87 ENR. Washington, DC: Dec. 3, 1993. 6 pp.

5. The Federal Government also leases other minerals onshore, including coal and phosphates, but the leasing systems for these minerals is not discussed in this report.

6. For more information, see: U.S. Library of Congress, Congressional Research Service. The 1872 Mining Law: Time for Reform?. [by Marc Humphries.] CRS Report No. IB89130. Washington, DC: updated periodically.

7. For more information, see: U.S. Library of Congress, Congressional Research Service. The Oil and Gas Leasing System on Federal Lands. [by Marc Humphries.] CRS Report No. 91-577 ENR. Washington, DC: July 10, 1991. 9 pp.

8. For more information, see: U.S. Library of Congress, Congressional Research Service. Outer Continental Shelf Leasing and Development Procedures. [by Malcolm Simmons.] Unnumbered CRS report. Washington, DC: Sept. 19, 1984. 32 pp.

9. For more information, see: U.S. Library of Congress, Congressional Research Service. The Magnuson Fishery Conservation and Management Act: Reauthorization Issues. [by Eugene H. Buck.] CRS Report No. 93-88 ENR. Washington, DC: Jan. 25, 1993. 47 pp.

10. Arizona, California, Colorado, Idaho, Kansas, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming.

11. For more information, see: U.S. Library of Congress, Congressional Research Service. Western Water Supplied: Issues in the 102d congress. [by Betsy A. Cody.] CRS Report No. IB91102 (archived). Washington, DC: Nov. 25, 1992. 14 pp.

12. An acre-foot is enough water to cover one acre of land to a depth of one foot, or 325,681 gallons.