United States District Court, S.D. New York
Decided Date: August 6, 2014.
[Copyrighted Material Omitted]
[Copyrighted Material Omitted]
For Natural Resources Defense Council, Inc., Plaintiff: Selena K. Kyle, LEAD ATTORNEY, PRO HAC VICE, Natural Resources Defense Council, Chicago, IL; Nancy Sharman Marks, Natural Resources Defense Council, Inc., New York, NY.
For United States Department of Interior, Bureau of Land Management, Defendants: Christine Schessler Poscablo, LEAD ATTORNEY, U.S. Attorney Office SDNY, New York, NY.
OPINION & ORDER
PAUL A. ENGELMAYER, United States District Judge.
This suit brought under the Freedom of Information Act, 5 U.S.C. § 552 (" FOIA" ), concerns a request by the Natural Resources Defense Council (" NRDC" ) for
records of coalmining leases previously awarded by the U.S. Department of Interior (" DOI" ) and Bureau of Land Management (" BLM" ) (collectively the " Government" ) to private mining companies in the Powder River Basin, in southeast Montana and northeast Wyoming. These leases involved billions of tons of coal.
NRDC seeks the Government's coal appraisal records from those past awards in order to determine whether BLM has complied with the Mineral Leasing Act of 1920, 30 U.SC. § § 181 - 287 (" Mineral Leasing Act" or the " Act" ), specifically, the Act's requirement that the BLM sell federal coal for no less than its fair market value. See id. § 201(a)(1). The Government has produced such records, but it has redacted them pursuant to three FOIA exemptions: Exemptions 4, 5, and 9. The parties cross-move for summary judgment on the propriety of those redactions. For the reasons that follow, each party's motion for summary judgment is granted in part and denied in part.
A. The FOIA Request
On September 21, 2012, NRDC submitted a FOIA request to the Government. Forsyth Decl. Ex. A. It sought (1) " all information and analysis documents used to appraise" each of the Powder River Basin tracts that BLM had leased since 1990, and (2) " [a]ny Interior [D]epartment guidance, handbooks, manuals or similar documents with information on estimating the value of coal tracts." Id. The Government did not, at that time, respond. Neuman Decl. ¶ 4; Pl. 56.1 ¶ 34.
On February 8, 2013, NRDC filed this lawsuit. Dkt. 1. The Government then produced the requested handbooks and manuals (on March 5, April 15, and April 25, 2013). Neuman Decl. ¶ 5. BLM, upon review of its records, determined that 27 Powder River Basin tracts had been leased since 1990, and that the information and analysis documents used to appraise each tract consisted of an appraisal report, an
economic report, an engineering report, and a geologic report. Hageman Decl. ¶ 13. BLM also determined that certain information in each of the reports was subject to one or more exemptions under FOIA, and that the exempted information would be similar for each tract. Id.
The parties thus agreed to have the Government release redacted records and Vaughn indices related to two completed lease sales--NARO North and West Antelope II--and to have the NRDC challenge any redactions or withholdings of documents as to those two sales. Dkt. 9; Pl. 56.1 ¶ 36. The parties agree that the resolution of NRDC's challenges to the Government's withholding of information pursuant to FOIA for these two lease sales would govern the other 25 lease sales. Dkt. 9 ¶ 6; Pl. 56.1 ¶ 37.
On June 5, 2013, the Government produced (1) redacted copies of the four reports for the NARO North and West Antelope II leases and (2) three Vaughn Indices (one each for the reports for both leases, and one for the computer models the Government used to value both leases). Forsyth Decl. Ex. B-M; Pl. 56.1 ¶ 38. The Government redacted content in the reports, citing FOIA Exemptions 4, 5, and 9, and withheld the computer model entirely, citing FOIA Exemption 5. Forsyth Decl. Ex. B-M; Pl. 56.1 ¶ 39.
In brief, the Government asserted that certain information in the reports was confidential to the mining companies that had submitted that information, and that the Government's own analysis in appraising the tracts would, if released, harm the government's ability to maximize revenue from future leases. Forsyth Decl. Ex. B-D. The Government also asserted that certain information contained in the geologic reports was derived from private drill holes and therefore protected under Exemption 9. Id.
On July 2, 2013, NRDC objected to all redactions and withholdings and to the adequacy of the Vaughn Indices. Forsyth Decl. Ex. N; Pl. 56. ¶ 41. On August 15, 2013, the Government agreed to release a subset of the redacted material, to accord with material that had been previously produced to a prior FOIA requester. Forsyth Decl. Ex. O; Pl. 56.1 ¶ 42. Otherwise, however, the Government refused to produce unredacted copies of the reports, to produce the computer models, or to revise its Vaughn Indices. Forsyth Decl. Ex. O; Pl. 56.1 ¶ 42. The instant motions for summary judgment followed.
B. Federal Coal and the Powder River Basin
The Mineral Leasing Act gives the Secretary of the Interior the authority to lease public lands for coal mining operations after conducting a competitive bidding process. See 30 U.S.C. § 201(a)(1). Coal production from federal leases averages about 450 million tons per year and produces about $1 billion in annual revenue. GAO at 21-22. Of that revenue, some two-thirds come from royalties for the sale of coal; one-third comes from payments for leases. Id. at 23, 25. Four lessee companies account for more than 90 percent of federal coal sales. Inspector General at 3-4.
The Powder River Basin contains one of the largest coal deposits in the world. Pl. 56.1 ¶ 1. It produces more than 40% of this nation's coal. Id. ¶ 2. The basin contains the nation's 10 top-producing coal mines, nine of which are in the Wyoming portion of the basin. GAO at 10. Almost the
entire basin is controlled by BLM, which sells coal leases to private coal mining companies for up to hundreds of millions of dollars. Pl. 56.1 ¶ ¶ 5-6. Coal in the Powder River Basin is especially attractive because production costs are low, transportation networks are readily accessible, and the coal has less sulfur than does coal from the eastern United States, enabling utilities to meet emissions limits under the Clean Air Act. GAO at 20.
There are currently 13 active coal mines in the Wyoming portion of the Powder River Basin, operated by five principal companies. Hageman Decl. ¶ 4. Since 1990, 28 tracts have been offered in competitive lease sales in the Wyoming portion of the Powder River Basin, 27 of which have been leased. Hageman Decl. ¶ 5. There are currently seven lease sales pending in the Powder River Basin, for a total of more than four billion tons of coal. Pl. 56.1 ¶ 9.
C. The Coal Leasing Process
" Since 1990, all federal coal leasing has taken place through a lease-by-application process where coal companies propose tracts of land to be put up for sale by BLM." GAO at 2. These tracts, called " maintenance tracts," " are generally adjacent to existing mining operations and are nominated by companies that own these operations." GAO at 7; see also Hageman Decl. ¶ 6 (" The applicant is almost always the mining company that owns the mine adjacent to the subject tract." ). Coal companies typically seek to maintain a 10-year coal supply at their existing mining operations. GAO at 17. By adding a maintenance tract, the coal company can " extend the life of an existing mine or [ ] expand that mine's annual production." GAO at 16.
The process generally begins when a coal company requests a license from BLM to explore an area for coal production. 43 C.F.R. § 3410.2-1; Inspector General at 4; Pl. 56.1 ¶ 10. If the exploration is successful, the company submits a " lease by application" or " LBA" request. 43 C.F.R. § 3425.1-7; Inspector General at 4; Pl. 56.1 ¶ 11. " The LBA request contains public information such as the geographic coordinates and size of the proposed lease, expected production volumes, quality of the coal, and a mine plan detailing such information as the coal extraction methods, disposition and use of the coal, and a reclamation plan for restoring the land, which is used by the BLM as part of its environmental analysis." Hageman Decl. ¶ 6; accord Inspector General at 4. " BLM reviews the LBA request and asks the lease applicant if it is willing to provide additional confidential information concerning the geology, fluid resources, engineering, and economics of existing mine operations or holdings both in conjunction with the applied-for LBA tract and without the tract." Hageman Decl. ¶ 7. BLM also decides on the final size and shape of the tract. Id.
Under the Mineral Leasing Act, BLM cannot accept less than " fair market value" (or " FMV" ) for the award, known as a sale, of a coal lease. Accordingly, before every lease sale, BLM must make an assessment of the fair market value of the lease tract's coal. Fair market value is defined under federal regulations as the cash value at which a knowledgeable owner would sell or lease the land to a knowledgeable purchaser. The estimate of fair
market value, generally expressed in cents per ton of recoverable coal, is kept confidential. GAO at 8; Pl. 56.1 ¶ 17.
BLM then publicly announces the sale and solicits sealed bids. 43 CFR § § 3422.2 & 3422.3; Hageman Decl. ¶ 10; Pl. 56.1 1 12. At the close of the sale period, BLM awards the lease to the company submitting the highest bid, as long as the company is qualified to hold the lease and the bid meets or exceeds BLM's confidential estimate of fair market value. 43 CFR § 3422.3; Inspector General at 4.
In 23 of the 28 Powder River Basin coal lease sales conducted during the past 20 years, BLM has received only one bid; in the remaining five cases, BLM received two bids. Hageman Decl. ¶ 10; see also Inspector General at 8; Pl. 56.1 ¶ 14. In lease sales where there is only one bid, BLM's confidential estimate of fair market value, therefore, effectively supplies the sole price competition for the applicant. See Inspector General at 8 (" The FMV determination is critical in coal leasing because a competitive market generally does not exist for coal leases, therefore, the FMV serves as a substitute for competition." ). There is a similar lack of competition in other states where BLM leases coal tracts. Inspector General at 8.
GAO explains the paucity of competing bids as follows:
According to BLM and coal industry representatives, there is limited competition for coal leases because of the significant capital investment and time required to establish new supporting infrastructure to start a new mine or to extend operations of an existing mine to a tract that is not directly adjacent to it. For these reasons, there have not been many new mines established on federal leases recently. For example, according to BLM officials the last new mine started on a federal lease in the Powder River Basin in Wyoming was the North Rochelle mine, which began operations in 1982. . . . In 1983, we noted a similar lack of competition for federal coal leases following the 1982 regional coal lease sale in the Powder River Basin and concluded that the market for coal leasing was largely noncompetitive because lease tracts sold " appear captive to adjacent mining operations." According to BLM officials, this same issue remains relevant today, and it is difficult to attract multiple bidders
on a lease tract if it is not adjacent to multiple mining operations. For example . . . tracts submitted for lease-by-application that are north and west of the Black Thunder mine are less likely to be bid on by the operators of the [nonadjacent] North Antelope Rochelle or Antelope mines. This is because it would be too costly and take significant time for these mine operators to move their heavy equipment to extract coal from these lease tracts, which are not directly adjacent to their existing operations. In contrast, the lease tracts that are located between two mines are more likely to be bid on by multiple mine operators, according to BLM officials.
GAO at 17-18 (emphasis added).
D. Determining Fair Market Value
BLM's Wyoming and Montana state offices use two methods to estimate fair market value: comparable sales and income. Id. at 30. Under the comparable sales approach, BLM estimates fair market value by taking prior sales as a benchmark and making adjustments based on characteristics of the tract at issue, e.g., the quality of its coal. Id. at 28-29. Under the income approach, BLM estimates fair market value based on the net present value of the projected revenues from coal sales minus the extraction costs. Id.
BLM estimates the fair market value of the coal lease in a document called an " appraisal report." Pl. 56.1 ¶ 16. The appraisal report, in turn, incorporates information from three other BLM-prepared reports: an economic report, an engineering report, and a geologic report. Id.; GAO at 8; Hageman Decl. ¶ 8.
1. The Appraisal Report
Because the appraisal report is at the heart of NRDC's FOIA request, the Court describes it in detail. The appraisal report begins with an introduction and a section entitled " Appraisal Tract Data." Together, these include data about the subject tract's location, current use, geology, coal reserves and quality, and access to water and railroads; the characteristics of that portion of the Powder River Basin and the demand for Powder River Basin coal; information on the applicant mine and, as relevant, other adjacent mines, including their geology and coal production; whether BLM expects bids from anyone other than the applicant; and the methods by which the applicant proposes to remove and transport the coal and reclaim the land. See NARO North Appraisal Report at 14-27; West Antelope II North Appraisal Report at 12-28; West Antelope II South Appraisal Report at 12-28. In response to NRDC's FOIA request here, the Government has moderately redacted this section in each appraisal report.
The next section, " General Valuation Analysis," describes how the report will estimate fair market value. This description appears to follow a standard template, which is tailored at the end according to the particular circumstances of the subject tract. BLM uses two main methods to calculate fair market value, each of which has one variant.
The first main method, the discounted cash flow (" DCF" ) method, estimates the
value of the coal lease by projecting the annual after-tax revenues from future coal sales, minus the costs of production, and discounting the net revenue, based on the time value of money, to arrive at the current value of the coal tract. In other words, DCF is a way of valuing an asset--here, a coal tract--based on its expected future revenue stream. See GAO at 28-29. As BLM explains:
This procedure provides a comprehensive estimate of the present value of a future income stream. This is accomplished through discounting, which is the process of arithmetically reducing future income to its current value based on the time value of money and the compounding of interest. The DCF takes into consideration many variables such as resource reserves, production rates, production timing, development and production costs, product selling price, taxes, discount rate, royalty rate, and economic production life. The resulting estimate of present value gives an indication of the market value of the subject property.
NARO North Appraisal Report at 28.
The weakness of the DCF method is that it is only as good as the assumptions on which it is based. As BLM notes: " [T]he large number of assumptions and estimates used in the DCF make it less than exact by nature. For example, the estimated value is extremely sensitive to price and discount rates. This means that small deviations in these variables can produce major differences in the after tax net present value." Id. In addition to using the DCF method to value the subject tract directly, BLM also uses the DCF method to perform an " incremental analysis," which " compare[s] the net present value of the existing [mining] operation both with the property and without the property." Id.; see also id. at 32.
The second main method, Comparable Sales, takes prior sales as a benchmark and makes adjustments based on differences between the comparison tracts and the tract at issue. See GAO at 28-29. Were there enough data, regression analysis could be used to apply numeric weights to the relevant variables, such that adjustments between tracts could be made quantitatively. See NARO North Appraisal Report at 29. However, there are not enough coal lease sales to make regression analysis statistically reliable. Id. As a result, BLM instead uses a technique called " bracketing," " which analyzes available sales qualitatively and locates the subject values within a range established by previous sale prices." Id. BLM makes " objective adjustments for differences that can be quantified" and " subjectively compar[es] the remaining differences." Id. BLM acknowledges that, " [w]hile useful, the comparable sales approach, even with quantitative and qualitative adjustments, may not be able to give a definitive indication of value but only a general range of value for the subject." Id. at 32.
BLM also uses a variant of the comparable sales method, called the DCF Adjusted Comparable Sales. See, e.g., id. at 30 (" In order to minimize the inherent weakness in a straight DCF analysis caused by the large number of assumptions required, the DCF adjusted comparable sales approach is used whenever possible." ). BLM compares the DCF for a comparable sale with the DCF for the subject tract; on the basis of that comparison, it adjusts the sale price of the prior tract upward or downward to achieve an estimate of the fair market value of the subject tract. Id. For example, consider a comparable tract which sold for 25 cents per ton of coal and whose DCF was 30 cents per ton, and a subject tract whose DCF is 35 cents per ton. BLM could then use that earlier sale,
at a price of 25 cents per ton, as a benchmark, and add 5 cents per ton, based on the difference between the subtract tract's DCF and the comparable tract's DCF, yielding a DCF Adjusted Comparable Sales value for the subject tract of 30 cents per ton. Id. at 30-31.
In response to NRDC's FOIA request, the Government has moderately redacted the " General Evaluation Analysis" section of the appraisal reports. As redacted, the available reports do not disclose how BLM melds these four methods--DCF, incremental DCF, Comparable Sales, and DCF Adjusted Comparable Sales--to arrive at a final estimate of fair market value. See NARO North Appraisal Report at 32; West Antelope II North Appraisal Report at 33; West Antelope II South Appraisal Report at 33.
The next section, " Comparable Sales," begins by explaining the bases on which coal lease sales were determined to be comparable to the subject tract. In the NARO North Appraisal Report, the reasoning as to two potential comparable tracts is redacted; in the other two appraisal reports, none of the reasoning as to the choice of comparable tracts has been redacted. See NARO North Appraisal Report at 32; West Antelope II North Appraisal Report at 34; West Antelope II South Appraisal Report at 34.
The section then describes, for each comparable sale, the tract's location and relationship to other mines; the tract's coal quality; the economics of the applicant mine; the timetable for mining; and the sale price. See, e.g., NARO North Appraisal Report at 33-48. The latter three categories of information are heavily redacted.
The NARO North Appraisal Report considers 14 comparable sales; the West Antelope II North Appraisal Report considers 19 prior sales; and the West Antelope II South Appraisal Report considers 20 prior sales. See NARO North Appraisal Report at 33; West Antelope II North Appraisal Report at 34; West Antelope II South Appraisal Report at 34.
The remainder of the appraisal report analyzes the value of the subject tract, in a series of sections entitled " Comparable Sales Analysis," " Economic Overview and Analysis," " Allocation of Value," " DCF Adjusted Comparable Sales Analysis," and " Summary and Conclusion." These sections have been entirely redacted in response to NRDC's FOIA request. See NARO North Appraisal Report at 49-68; West Antelope II North Appraisal Report at 56-75; West Antelope II South Appraisal Report at 57-76. The report then concludes with a short section entitled " Final Estimate of Value," which is entirely redacted in one report, see NARO North Appraisal Report at 69, and the substance of which is redacted in ...