Mr. Alan Moyer 2 The Republic's series repeatedly alluded to a $5.8 billion loss of revenues. That figure comes from a 1986 report released by the House Appropriations Subcommittee on Interior and Related Agencies. No similar finding has ever been reported or alleged by GAO, the Department's Office of Inspector General, or any other authority, contrary to what your newspaper stated. More important is the fact that the $5.8 billion figure is simply not credible, though it has attained near-folklore status among royalty management critics. MMS responded to the subcommittee's report within days of its release and soundly refuted most of the report's conclusions. chief among them an unsupportable 21-percent underpayment "projection," which is the basis of the billion-dollar-a-year loss estimate. As Senator Proxmire said, "The only thing wrong with this number is that it is based on analysis so faulty that a freshman statistics student would receive a big, fat 'F' if he handed it in." Your reporters received a copy of our response, and they were told that no one has challenged a word of our rebuttal not in a report, not in a hearing, not in a memo, not in any way. My interview with them, in fact, began and ended on the subject of the $5.8 billion figure. I spent a significant amount of time reviewing with them the flaws in the subcommittee's analysis of underpayments and was stunned to be told at the end of the interview that, while your reporters understood that the analysis was grossly in error, they saw no reason to doubt the conclusion. I am not at all surprised, therefore, that the $5.8 billion myth was resurrected in your newspaper. Another repeatedly articulated charge in the Republic's series was that MMS sides with industry in matters of royalty management. You state there is concern about our "cozy relationship" with companies MMS is supposed to regulate, and quote Rep. Sidney Yates stating that I have "taken sides with the oil and gas companies," and have said so. The allegation, like so many others in your series, is simply false and the evidence presented is distorted. The quote attributed to Mr. Yates appears to be an out-of-context remark made in an exchange between Mr. Yates and me at a 1987 appropriations hearing. The subject of our discourse was a particular regulatory proposal made by MMS and, in that particular instance, favored by industry. I stated in response to Mr. Yates that MMS's position and that of industry were essentially the same. I did not mean, and I don't believe that Mr. Yates construed from my remarks, that I or MMS routinely sides with industry. In fact, MMS's position on the regulatory proposal to not use Federal Energy Regulatory Commission ceilings as the minimum for gas valuation purposes has been endorsed by six Western governors and by many in Congress. In November 1987, the U.S. House of Representatives passed legislation supported by Mr. Yates (H.R. 3479) to implement this position. Similar legislation has been approved by the Senate Energy and Natural Resources Committee. Mr. Alan Moyer It is surprising that anyone would characterize our relationship with industry as cozy, given that MMS has collected, through its auditing of companies between October 1981 and August 1987, $307 million in additional royalties and late payment charges, and has denied $80 million in refund requests. MMS's demands for payments on 1,900 leases have resulted in administrative appeals and judicial litigation by companies. Currently, royalty-related cases brought by companies against MMS include 350 appeals pending before MMS; 137 appeals pending before the Interior Board of Land Appeals; and 59 cases in court. 3 I have tried to be selective in the points I would most particularly want to clarify for your readers. Enclosed is a more detailed, point-by-point response to the many errors in your series. You are, of course, welcome to share it with your readers as well, and I encourage you to do so. I hope the information contained here and in the more detailed package will be helpful to you and your staff, should the Republic report further on the MMS royalty management program. Enclosure Sincerely, (SGD) WM. D. BETTENBERG Director RESPONSE TO THE ARIZONA REPUBLIC ARTICLES Management of the Oil and Gas Program Assertions: "The federal oil and gas program is so badly managed that it has shortchanged many Indians who have leased lands to oil companies..." "Reports document fraud, waste and mismanagement at every stage of the leasing, royalty-collection and disbursing procedure." "Indian programs run by other federal agencies...the Minerals Management Service . . . also are poorly run or in trouble." Response: The Department of the Interior (Department) has acknowledged since 1980 that insufficient attention had been paid to the collection of mineral revenues during the 1970's. As world oil prices increased, so did oil, gas, and coal royalty revenues from Federal and Indian leases. By 1981, total royalties exceeded $4 billion, most of which was being remitted through various field offices of the U.S. Geological Survey (USGS) and accounted for in a 20-yearold accounting system. Over the past 6 to 8 years, however, the Department has taken a number of major actions to correct this situation and to improve the "royalty management program." In 1979, work began to replace the old accounting system. In 1981, Secretary Watt chartered a high-level advisory committee to hear from outside experts what was wrong with the program and how it should be corrected. In 1982, the Department proposed legislation to provide or clarify the authorities needed to enforce royalty provisions, and to improve disbursements and reporting to States and Indians. Congress passed a modified version of that proposal, and the Federal Oil and Gas Royalty Management Act of 1982 (FOGRMA) was enacted in January 1983. Also in 1982 and 1983, mineral royalty management functions from USGS and the Bureau of Land Management (BLM) were consolidated in the new Minerals Management Service (MMS). In 1983, a new royalty accounting system became operational. In 1985, Secretary Hodel reviewed the work that had been done and the problems which remained to be solved, and issued a Management Action Plan for Royalty Management which laid out plans and time tables to deal with the further concerns of recipients, external review groups, and others. Simultaneous with these initiatives, MMS was working diligently in less visible areas to improve royalty management. Accomplishments include implementing a major audit program, including cooperative audits with States and tribes; training payors to report and pay timely and accurately to the new accounting systems; developing better reports for royalty recipients; writing regulations to implement the legislation and improve compliance; and contracting to improve computer support. In addition, several specific actions were taken to improve services to Indians. They include: - Creation of the MMS Office of External Affairs to provide outreach to Indians. Creation of the Office of State and Tribal Program Support within the MMS Royalty Compliance Division to provide guidance and assistance to Indian tribes with cooperative and delegated audit agreements. Approval of a Memorandum of Understanding between MMS and the Bureau of Indian Affairs (BIA) to define the responsibilities of each agency and to establish a BIA/MMS Joint Steering Committee which meets quarterly to resolve problems and issues affecting Indian royalty management. Development and implementation of an Indian Lease Audit Strategy to expedite audit requests, provide information to Indian allottees on the status of audits, maximize audit resources, and identify future audit targets. Design and implementation of the State and Tribal Support System (STATSS) to provide Indian tribes and BIA offices with access to data contained in the MMS Auditing and Financial System (AFS) data bases. The result of these efforts is that while we have not solved all our problems, the management of royalty revenues is greatly improved. The General Accounting Office (GAO) and the Department's Office of Inspector General (OIG) are both auditing the MMS Royalty Management Program (RMP) on a continual basis, but their reports now concern mostly smaller-focus operational issues, rather than the program-wide failures that were documented in previous years. In fact, during a hearing in April 1987, a GAO Associate Director testified that, "I think in fairness to the Department that there has been noteworthy progress made." In addition, in the September 29, 1987, Congressional Record, Senator Proxmire concluded about royalty management that ... the Department was no longer at fault. Instead of a lashing, they deserve a pat on the back for beginning to do a difficult job well. Senator Proxmire also asserted that, "Given the complexities of [the] system, the Department is doing a reasonably good job. A little more time to continue their improvements and they may soon be doing an outstanding one." MMS Honor System Provides No Accountability Assertions: "The program is 'a system that totally relies on the good faith and trust of the (oil) producers' and whose potential for fraud is 'phenomenal,' according to Steven Moore, a Denver-based attorney who works with Indian issues." "The BIA and the minerals agency have allowed oil companies to pump billions of dollars worth of oil from Indian lands with little of no accountability by letting companies operate on an 'honor system.'" "'Our concern with the system is that as it is designed, it has no way to ensure the accuracy of payments,' Moore said. "It is a system that totally relies on the good faith and trust of the producers. "'Indians have about run out of belief in this good faith and trust. The potential for fraud in this system is phenomenal.'" Response: The MMS RMP is operated similarly to income tax reporting under the Internal Revenue Service. Those who owe royalties are expected to report and pay the correct amount due to the Federal Government. But just as with the Internal Revenue Service, MMS's collection and verification efforts do not stop at that point. Because we anticipated that there would be discrepancies and delays in payment and reporting, we have implemented several approaches to detecting and verifying that full payment has been accurately identified and made. These approaches include: Audits. Payments made to MMS are subject to audit. The MMS royalty audit program is implemented by the Royalty Compliance Division (RCD) and by State and Indian tribal auditors working with MMS under delegated agreements and cooperative agreements. The RCD audit resources are available from 13 resident audit teams and 19 mobile teams. Audit collections and refund denials total more than $387 million from program inception in October 1981 through August 1987. AFS Exception Processing. A function of the AFS, MMS's computerized royalty accounting system, is to detect late payments and certain types of underpayment. Exception processing is the identification of conditions that result in billing actions. The AFS generates billable exceptions by comparing what a payor reports and pays to what the system expects the payor to report and pay. Exception processing has been operational since February 1985 and has brought in additional collections of almost $20 million through August 1987. PAAS/AFS Comparison. The Production Accounting and Auditing System (PAAS) is an integrated system of manual procedures and automated processes for minerals production reporting, accounting, and auditing. The PAAS is designed as an extension of AFS which collects and accounts for royalties owed and paid for production from Federal and Indian leases. Based on data provided on production reports, PAAS identifies the amount of production that should be reported to AFS as sold. Sales volumes reported to AFS should match those reported to PAAS. The two systems were designed so that data would be compared regularly to identify instances of underreporting, overreporting, and nonreporting. Such comparisons have resulted in the collection of approximately $14.8 million in additional royalties from April 1985 through August 1986. |