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Major Conceptual and Factual Errors

Amid all the hoopla and invective of the current health care debate, the Bugle failed to report on an important report recently released on the Otter Creek coal tracts near Ashland. The report; “The Value of the Otter Creek Coal Tracts to the State of Montana: The Dangers of Relying on the Norwest Corporation Appraisal” was prepared by University of Montana economics department chairman emeritus Thomas Power for the Northern Plains Resource Council and the Natural Resources Defense Council.

The report finds that the appraisal report on coal in the Otter Creek tracts, prepared by Norwest Corporation, at the very least, relies on some faulty data and overly rosy economic projections. For a good overview of the problems associated with the leases see Otterly wrong: Mining undeveloped coal tracts remains a bad idea by George Ochensky in the Missoula Independent. Or, see several previous articles in the Button Valley Bugle.

As a brief recap, coal from the Otter Creeks is poor quality and very high in sodium content which limits the market for the coal. 80-90% of the market consists of four midwestern power plants that are already supplied by existing Montana mines. Otter Creek coal would merely displace coal that the state is already producing. “Such competition to sell such a large amount of coal into a limited market is certain to drive coal prices down. In addition the inroads that Otter Creek coal is able to make would be at the expense of other Montana coal producers.”

To get the coal to market would also require the building of an environmental disaster called the Tongue River Railroad from Miles City to Decker, WY. In addition to allowing coal from Otter Creek to reach midwest markets, the more important result would be opening markets for higher quality coal from Wyoming to northern tier markets now served by Montana coal. The Norwest report “…ignores the competition to these limited Montana coal markets that the Tongue River Railroad will create from Wyoming coal.midtown1

As a result of calculation errors, it significantly exaggerates the transportation cost advantage of Otter Creek coal relative to Wyoming coal, an error that could have a significant impact on financial returns to the State of Montana.” The Norwest valuation uses very low estimates for the cost of building the railroad. Backers have already increased the estimated cost from $400 to $600 million since the valuation was made. Some independent estimates run as high as a billion dollars for the railroad. As costs of building the Tongue River Railroad go up, estimates of the bonus bid of $37 million for Montana necessarily go down. If the cost of building the railroad goes up by only 40%, it could result in a bonus to the state of zero or even negative, meaning that Montana may have to pay to have the crappy coal mined. Bad data used in calculating transportation costs for the coal were used to provide increased estimates of economic benefits. “As a result of calculation errors, it significantly exaggerates the transportation cost advantage of Otter Creek coal relative to Wyoming coal, an error that could have a significant impact on financial returns to the State of Montana.

The Norwest appraisal is all based on economic data generated prior to the current economic downturn. The price of coal has plummeted. The Power report concludes that leasing the Otter Creek coal in the current economic crisis would not be “financially prudent” for Montana.

Overall, the new report concludes,

The Norwest Appraisal is incomplete, lacks foundation, contains major conceptual and factual errors, and has been outdated by changed economic circumstances. It cannot be relied on as a basis to structure the leasing of the Otter Creek Tracts. Before proceeding with leasing the Otter Creek Tracts the Montana Land Board must commission a new appraisal that avoids the numerous defects…

The Montana State Land Board will consider leasing the Otter Creek tracts in September. Members of the Land Board are,

Brian Schweitzer, Governor

Steve Bullock, Attorney General

Denise Juneau, Superintendent of Public Instruction

Monica Lindeen, State Auditor

Linda McCulloch, Secretary ofState

and they need to hear from you prior to their meeting next month. Leasing the Otter Creek coal is a really, really bad idea for Montana.

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3 Responses

  1. […] ruling and pre-cap-and-trade legislation). They’re probably also looking at the rest of the Major Conceptual and Factual Errors, brought to you courtesy The Button Valley […]

  2. Thomas Power now is a former chairman of the UM economics department. He retired to emeritus status a year or two ago.

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