Hearing of the Energy and Mineral Resources Subcommittee of the House Natural Resources - Getting Royalties Right: Recent Recommendations for Improving the Federal Oil and Gas Royalty System

The oversight hearing of the Subcommittee on Energy and Minerals on public lands will now come to order. The subcommittee is meeting today to hear testimony on recent recommendations of oil and gas royalty system, something that has been the subject of this subcommittee and the committee over in the Senate for sometime now.

Under Rule 4G, the chairman and the ranking member may make opening statements, and then if any other members wish to do the same, we will submit those statements under -- into the record under unanimous consent.

Additionally, under committee Rule 4H, additional material for the record should be submitted by members or witnesses within 10 days, and that includes questions that members may have, but may not have had the opportunity to ask during the hearing. We obviously urge members to submit those questions, and we ask for the witnesses to provide a timely response on the answers to the questions that have been submitted.

Chairman -- as chairman, I spoke with the ranking member just a moment ago, it's our intention to conclude this hearing by around noontime, we have a number of votes and we have other meetings that we are compelled to participate in, and so we will try to get as much work done as we can in the next two hours.

Let me just make a brief opening statement, and I want to thank -- begin by thanking the witnesses in panel 1 and panel 2, for your due diligence, and for your testimony, and I know you'll do your very best to answer the questions that we have for you.

We are obviously here today, as I said earlier, to continue to focus on how the government collects royalties for oil and gas that's produced in federal lands. This is the third time that the Natural Resources Committee has examined the issue in Congress, and my guess is that it won't be the last.

In the past year-and-a-half there have been multiple reports of the problems under royalty collections. Some are less significant, some I think are much more significant, and we'll endeavor to find from the witnesses your own take as to how we best do this job.

Three of the organizations involved in the reports that have been written as to the success or to the level of effectiveness that Minerals and Management Services have done on their job of collecting royalties are here today. Representatives from the Government Accountability Office, the Interiors inspector general, and the Royalty Policy Committee are the first on our panel.

We look forward to hearing about the recommendations that first came out in the Senate hearing, the 100 or so recommendations that I understand Minerals and Management Services is in the process of implementing.

We also have Assistant Sectary Stephen Allred and Director Randall Luthi here today, so that we can find out how some of these recommendations are being implemented. Dennis Roller from North Dakota is here to describe some of the issues from the State and Tribal standpoint that also participate and are beneficiaries of the collection of these royalties.

And in addition, it will probably be a first for this committee, we have a witness; you might be surprised, from the Internal Revenue Service, Acting Director Linda Stiff. I only asked her to come here today because I have some questions about my own taxes.

(Laughter.)

REP. COSTA: Not true. Of course, we have invited the IRS here because one of the recent reports that was done earlier, discuses how the Internal Revenue Service could act as a good model for our oil and gas royalty collection system. And to the degree that there are comparisons, we would like to learn on whether or not those comparisons would make sense or are applicable in the case of Mineral and Management Services.

I also am glad because I think that frames the issue well in part with the Internal Revenue Service, the IRS that of course can be maligned; they are respectable -- respected for their responsibility in collecting money from the American taxpayer.

Meanwhile, Mineral and Management Services collects this money for the American taxpayers. One collects it from the American taxpayer, the other collects for the American taxpayer. I think, we seem to do very well in the first case, some of my constituents argue they do it too well.

I am not sure that we are doing quite as well in the second category with regards to the royalty collection. And that's obviously the purpose of today's hearing. We bring -- the Mineral and Management Service brings a staggering amount of money, last year over $11 billion as a source of income for our nation's government. And it's expected to do more this year, in part, because of the rise in oil prices and natural gas.

But the reports we are here to discuss show that in fact honest folks believe the job could be done better, and I believe that we have a responsibility and need to ensure that we do the best job possible for getting America's taxpayer's dollars our fair share from our abundance of energy resources.

As I said, this won't be the last hearing on the subject. I look forward to taking the testimony today.

And not just as it relates to the royalty program, but how other efforts can be improved, and the issue as to whether or not in kind versus the royalty collection, which is not a new discussion.

And Ranking Member Pearce and others have had opined as to their thoughts as to what's the best way that we can do this. I think it's still an issue that we have to try to reach some consensus on. And I know there are many differences of opinion on that point.

But let me conclude by saying that simply because we've always done things this way it doesn't necessarily mean that it is the best way to do them. Times change, technology changes, MMS is in the process of trying to institute this $150 million new computerized program. I keep getting mixed reports on the success of it.

And I think that we need to make sure that we are adaptive to protect the American interests of these resources. I now would like to, with a great deal of pride, recognize the Ranking Member Mr. Pearce from New Mexico for his opening remarks.

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REP. COSTA: Thank you, Mr. Pearce, I appreciate your comments, and I don't want to get into a debate with you at this point, but I would indicate in meetings I had last week with Shell folks; they have indicated that they -- who've done the most in oil shale and the areas that you made response to that they are probably five or ten years away, even though they think there is tremendous prospects as you noted, and in terms of their ability to get the technological efforts to make it cost effective as it relates to energy offshore.

You and I, I think, have closer agreement than we have on others, but under the Clinton Administration with Republican Congress, record leases were given in the late 1990s; those leases have continued in the Bush Administration and they are continuing to provide leases.

So we do have problems in states like Florida, and California, which I represent, where folks don't want to drill offshore. And it is a question as you pointed out in your testimony wanting to have it both ways.

I might add that those are not a circumstance of the majority or a minority because in both those cases we had Republican governors, who in Florida and in California, in a bipartisan code, chose not to seek that expiration development. It's a problem that we have to come together with as a nation, I think in a bipartisan fashion.

And I think I just want to point out that we have witnesses here who will tell us what we are doing and give us their opinion and we'll listen. And then the good sharp questioning that you're always a part of, I know will be a part of this -- the record of this testimony, and I look forward to it.

Mr. Earl Devaney is the inspector general of the Department of the Interior, and Mr. David Deal is the vice chairman of the Royalty Policy Committee within the Department of the Interior. And Mr. Frank Rusco is the acting director of the Natural Resources and Environment for the General Accounting Office.

Timing lights gentlemen, on the table, you are familiar with I know. And I am sure you've properly focused that you will be within that timeframe. I'd like to now recognize Mr. Devaney to testify for five minutes and we will go from there.

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REP. COSTA: Thank you very much, Mr. Devaney. We do appreciate your focus and due diligence as the inspector general.

It is probably a good segue that we now go to our next witness, who was selected in part with some other folks, Secretary Kempthorne, to really look at the problems associated with the issue that we are attempting to deal with here today and have been now for several years.

David Deal is the vice chair of Royalty Policy Committee and has been part of the commission that Secretary Kempthorne put together to examine this carefully and closely with their experience and to provide a set of recommendations that was noted earlier, Getting Royalties Right: The Recent Recommendations For Improving the Federal Oil & Gas Royalty System. So we, with that introduction, look forward to your testimony, Mr. Deal.

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REP. COSTA: Thank you, Mr. Rusco.

Now, let's get to the questions. To all three of you, we -- does it make sense in looking at the track record of the Royalty-in-Kind program, it seems to indicate that given the vagaries of the marketplace that there are disincentive or seemingly that it is working, but that maybe someone outside of Mineral and Management Services should be doing the review. Three of you, could you opine quickly on whether or not they are in the appropriate place to make the review?

MR. RUSCO: Go ahead.

MR. DEVANEY: Okay. Let me take a grab at this.

REP. COSTA: Please use the mike.

MR. DEVANEY: I'm sorry. Can you hear me?

REP. COSTA: Yes.

MR. DEVANEY: Okay. Let me take a stab at that. My answer to that is no, that it is not wise to export this program outside the agency. That's an alluring possibility, but I really question whether or not that solves any problems that might be perceived. And all three of us have identified some shortcomings in the program.

You've heard both of my colleagues at the table here talk about the existing staff. They are energetic. More important than that, they were very knowledgeable. Royalty management involves not just strict accounting, but a deep understanding of --

REP. COSTA: I think you are responding to the entirety of the program. I was talking about the analysis of the program.

MR. DEVANEY: Okay. Maybe I don't understand the question. I'm sorry sir.

REP. COSTA: Well, I mean, the point being is that it is a complicated area. I understand they have about 50 people that deal with the review of this in Kind program, and they are dealing in a very complex marketplace in terms of trying to make these determinations. And whether or not that analysis is most properly done within that segment within Minerals and Management Services was my question.

MR. DEVANEY: I see. Are you confining this to RIK or --

REP. COSTA: Yes.

MR. DEVANEY: Yes, okay. Well, here again, I think my answer would be the same, although I would recognize RIK has a different character. MMS is still on the learning curve. They would be the first to admit that. However, in the last several years, they've made great progress. The recommendations we've made have been to several very discrete recommendations to kind of --

REP. COSTA: We'll look at those recommendations. I want to get the other response quickly.

Mr. Devaney?

MR. DEVANEY: Mr. Chairman, I think they can do it. I think it is a matter of making sure that they have their policies and procedures in place. When we first went in there, there weren't too many written documents that described how the process was supposed to work. Also, I think they need the right people there and I think they are making positive changes to make that happen.

REP. COSTA: All right.

Mr. Rusco?

MS. FRANZEL: Hello, Mr. Chairman. I'll answer on behalf of GAO. Our findings with regard to the program, we did not really detect large governance issues that would cause us to say that it needs to be taken outside of the current environment, but rather internal control issues and data reliability issues --

REP. COSTA: All right.

MS. FRANZEL: -- which really would reflect the major tune-up that Mr. Deal characterized as being needed.

REP. COSTA: All right. Thank you.

Mr. Devaney, you indicated that in your September 2007 report that other investigations might be forthcoming as a result of what you found. Are you guys moving ahead with those and what are the topics?

MR. DEVANEY: Yes, those are the four cases of investigations I mentioned that involved potential criminal violations and that's all we have left. And we are trying very hard to get those closed.

REP. COSTA: All right.

Mr. Deal, the whole panel talks about the concerns in the report of the lack of price thresholds and infamous 1998-99 lease sales, which were combined in the Kerr-McGee case. It threatens to impact the federal government maybe in the tune of $30 billion or more. In your report, you recommended to Congress and the secretary continued to explore legislative options. Do you have any suggestions on what we can do particularly if the case is lost?

MR. DEAL: Well, this is a very tough nut to crack. You've heard testimony before from the department, which I would agree with. You know, contract is a contract. We did exhort the, as other people have, exhort the department to continue to seek out those companies as several companies already have -- seek out companies, additional companies to renegotiate their leases and take into account the price thresholds.

This is tough, though. It's a -- it poses a very tough legal problem. We did not on the subcommittee spend a lot of time on that. It had been -- not because we were trivializing the issue, but it already had been studied at great length --

REP. COSTA: I think we understand it's difficult --

MR. DEAL: Yeah, yeah.

REP. COSTA: -- and that's why we're looking for recommendations.

MR. DEAL: Yeah, I wish I could shed more light on it. You know, of course the Kerr-McGee case may move the whole issue if appealed, but it is on appeal, so who knows what's going to happen.

REP. COSTA: All right.

MR. DEAL: So -- I wish I could eliminate it more, but I can't.

REP. COSTA: Okay.

Last question quickly, Mr. Devaney, you know, when we look at the situation over the collections that your office brought in, over $700 million in the last 10 years. I know the Justice Department now gets a small cut on the money on the cases they win -- 3 percent, I think. Do you have any suggestion that a similar circumstance might apply in this instance?

MR. DEVANEY: Well, naturally, I think I'd like to see a similar opportunity for any inspector general that investigates in this area. I think there are about 11 inspector generals that do qui tam work. I'll speak for myself. We don't do as much as I'd like to do. And it's a resource issue.

I think you get a big bang for your buck when you do these cases. So I think it would be an interesting and fruitful idea to try to put maybe 1 percent towards the investigative efforts. I think the DOJ gets 3 percent.

REP. COSTA: Yeah. All right. Thank you very much. My time has expired.

The gentleman from New Mexico is poised waiting and ready with his questions.

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REP. COSTA: All right, the gentleman's time has expired.

Mr. Rusco, this may be appropriate for you. There's -- in the Royalty-in-Kind Program there's an industry practice that I've learned about that's called "swinging."

In California and other places we used to refer to swinging as a different concept, but my understanding is --

(Laughter)

REP. COSTA: -- that when the price is low, I mean, the industry provides more of supply and when the price is high, they provide less. I guess that's the definition more or less.

Do you think you could explain that practice and whether or not you think that's a problem with the Royalty-in-Kind payment?

MR. RUSCO: The process would exist if a Royalty-in-Kind -- and I will speak for gas producers in particular because there's been a case that MMS identified of that going on in natural gas.

This would be the case if MMS had contracted with someone to provide natural gas Royalty-in-Kind and then sold that to a buyer and then the deliveries would vary according to the price of natural gas and the deliveries would be lower if the prices were higher and greater if the prices were lower.

That's what the -- that's what swinging is, and MMS did identify some of that going on.

REP. COSTA: So you think it may be a problem?

MR. RUSCO: The extent of which -- the problem we don't know, but we do know that it has happened in the past. The --

REP. COSTA: All right.

MR. RUSCO: -- MMS has identified it. You'd have to ask them.

REP. COSTA: Okay, before my time expires -- Mr. Devaney, you've expressed concerns in the culture -- about the culture, in your own testimony, of the Royalty-in-Kind Program in the past, especially as it relates to ethics, potential ethics violations that are on -- your investigations, I know, are now ongoing and I know that you can't speak specifically about that, but I'd like to get a general sense without talking about the specifics.

Whether or not we're talking about petty types of crime or whether we're talking about wholesale criminal intent that could cost the American treasury significant amounts of money?

MR. DEVANEY: I think the way I'd like to answer that, Mr. Chairman, is most of the continued investigations involve personnel behavior, at a minimum ethical lapses with potential criminal violations involved as well.

I think that has stopped and I think the department has made some personnel changes that were very helpful. I think at the end of the day, if people are not prosecuted, we're going to turn this matter over to Assistant Secretary Allred for administrative action and I'm confident that he'll take that action.

REP. COSTA: All right, Mr. Rusco and Mr. Devaney, there's been a recommendation from the Royalty Policy Committee that Mr. Deal is dealing with that they establish a trust-fund for MMS operations.

What do both of you think about that, quickly?

MR. DEVANEY: I'll just say that I really don't have an opinion on that.

REP. COSTA: Mr. Rusco?

MR. RUSCO: We've not addressed that either.

REP. COSTA: You haven't? Okay. The -- Mr. Rusco, talked about the focus of Mineral Management Services on compliance review versus audits and the lack of -- I was inferring from your testimony that you were suggesting that they perform greater focus on audits than compared to review -- compliance review.

Would you like to speak a little more detail about the problems and why you think so?

MR. RUSCO: Yes. I think that -- in our work we found that the data coming in to MMS were unreliable, that there aren't enough controls on that data, there aren't verification with third party data and as a result of that, when MMS does compliance reviews or audits, they frequently find that additional royalties are due and we are concerned about the mix of compliance reviews and audits because compliance reviews are less rigorous than audits.

However, we don't -- we are not commenting on the precise mix because we have not evaluated that.

REP. COSTA: Well, you know, when I talked to Mineral Management Services and I talked about how many auditors they have and whether or not they have sufficient tools to do the job, and I think about the companies that they're engaged with and how sophisticated and operating they are, it just seems like a lot of paper manual entries are taking place.

Why can't a lot of this data be automated and transferred to Mineral Management Services computer, with paper copies being kept for independent reviews?

Just seems to me like so much of their effort, notwithstanding the $150 million investment, has gone for naught. Quickly.

MR. RUSCO: We agree that the IT systems are inadequately designed and there are many gaps that need to be filled.

REP. COSTA: Okay, all right, good. My time has run out. Do either of you have a quick comment on that? You concur, disagree?

MR. : I would concur. I think this IT system really needs to be fixed.

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REP. COSTA: Okay, very good. Well, then let's move on to the next panel. Gentlemen, to be continued and I'm sure that Mr. Pearce and I, and maybe other members of the subcommittee will have questions that we will submit to you and we hope that you'll respond in a timely manner.

I think Mr. Pearce is correct, if he didn't get an answer to last year's question, that is inappropriate and I would hope that would be corrected.

So, with that understood, gentlemen, thank you again for your testimony and we look forward to continuing this discussion as we try to -- as Mr. Deal said, tune-up the deficiencies that exist within Minerals and Management Services.

The next panel involves the following witnesses. The Honorable Stephen Allred, who is the Assistant Secretary of Land and Minerals Management with U.S. Department of Interior.

In addition, we have Mr. Dennis Roller, who is the auditor manager for North Dakota's State Auditor's Office that will give us a state and tribal -- a local perspective.

We also have Mister -- excuse me, Miss Linda Stiff, who is also testifying, as I noted before, the acting commissioner of the Internal Revenue Service.

And then the last two individuals that will testify is Mr. Randall Luthi, for Minerals Management Service and Lawrence Finfer, who is the deputy director of the Office of Policy Analysis within the Department of Interior.

So, lady and gentleman, we would like you to be focused with the five-minute rule and let us begin with Mister -- the Honorable Stephen Allred, Assistant Secretary for Lands, Minerals and Management within the Department of Interior. Mr. Allred.

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REP. COSTA: Sounds like you've been busy.

MR. LUTHI: Yeah, that represents the monitoring approximately of 5.7 trillion cubic feet of natural gas and 585 million barrels of oil from federal and Indian leases.

Since 2003, we have completed 59 internal control reviews, identified 713 recommendations for improvement, and we've successfully implemented 612.

The Royalty Management Program has been reviewed and analyzed by the GAO, our IG, annual CFO audits and external independent peer reviews.

Since Fiscal Year 2003, 24 external reviews have resulted in a 195 recommendations, of which at this we've closed a 124.

Annual audits on our royalty management and financial statements are conducted by an independent firm, KPMG under contract of the IG.

We've received an unqualified, which is a good, clean audit for the past six years, with some minor findings. We've worked to correct those findings to improve the overall processing of our system and to make these reports more useful to the public.

In addition, the recent RPC subcommittee report contains a 110 recommendations spanning the three bureaus, MMS, Bureau of Land Management and Bureau of Indian Affairs.

Of the 110, we're responsible for 73. Twenty two of these recommendations are going to require coordination. As of February 11th, 16 of the 110 are complete. Of the remaining 94, 29 are already underway.

We've developed a joint action plan with all -- with the other two agencies and we have a plan to implement or evaluate all of the committee's -- subcommittee's recommendations. Some of the recommendations, we'll need to consult with the state and tribal and other stakeholders as well.

One of the common themes throughout the subcommittee's report is the need for the three royalty management bureaus to work as partners, to make sure we're using the best practices available and we are doing that.

Internally, we already identified the need for better coordination and flow of communication between our offshore management -- our offshore minerals program and Minerals Royalty Management.

Those efforts are underway. The stovepipes are being breached and new connections are being forged. Our partnership and communications with our external reviewing organizations do not stop when we receive a report.

For example, the subcommittee member Mr. Bob Wenzel and the subcommittee's efforts paved the way for us to establish an ongoing relationship with the IRS to compare and contrast our risk-based compliance approaches and to learn from their experience.

This last fall we met with the U.S. Attorney's Office and the IG's office to strengthen our relationship regarding qui tam cases.

This group meets every month now to joint -- to discuss joint training on detecting and referring false claims and how best to work with the U.S. Attorney's Office.

It was no surprise to me when the RPC concluded that we are an effective steward for the minerals management program and that we are generally concerned about its improvements.

I see this every day, that where much is given, much is expected. Like the IRS, we've targeted high revenue producers with compliance reviews and audits.

As part of our evolution we are now developing an in-place a risk-based strategy for compliance that extends coverage to a greater number of companies and properties.

The IG and the RPC recommended we developed a strategy and it will help us, we believe, in the future to help target those properties and lessees where audits and compliance reviews are warranted and where we need additional resources.

I'm very pleased with those efforts but recognize there's more work to be done. We will work quickly to implement the remaining recommendations.

Concerning the GAO draft report, it seems very clear to me that this is still clearly a work-in-progress, and that the findings represented today may not be complete.

We stand ready with additional data and to work closely with them to complete their analysis. In conclusion, Mr. Chairman, a director can have no greater goal than to leave an agency better when they arrived.

With the efforts of our MMS employees, you and your subcommittee's willingness to work with us and the other partnerships we developed, that goal is clearly within reach. Thank you for your time.

REP. COSTA: Thank you very much, Mr. Luthi and we will now move on to the next witness, Mr. Lawrence Finfer, is that correct? Mr. Finfer is the deputy director of the Office of Policy Analysis for the Department of Interior.

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REP. COSTA: Thank you. I appreciate your comments and how much of that is applicable in this sense, we'll try to determine, but we thank you for being here.

Our last witness is Mr. Dennis Roller, who is the royalty audit section manager for the office of the state of North Dakota. And I assume that when you testify this morning, Mr. Roller, that you also do so with the fact that you'll meet and confer with other auditors from other states throughout the country, and with tribal groups and that there is a general sense of the challenges you face.

MR. ROLLER: Yes, sir. Mr. Chairman and members of the committee --

REP. COSTA: Yes, you do, or yes --

MR. ROLLER: Yes, we do. Yes, I do.

REP. COSTA: You like my statement.

MR. ROLLER: Yes.

REP. COSTA: Okay.

MR. ROLLER: It's not a -- it's not STRAC's voted upon view, but there was general consensus, as I state in my testimony, in certain areas that need review or need a tune-up.

REP. COSTA: Thank you.

MR. ROLLER: Mr. Chairman and members of the committee, thank you for the opportunity to comment and share my views concerning the wide array of challenges faced by the Minerals Management Service in state and tribal compliance delegations.

The first major challenge we are facing is the state of misreporting of the oil and gas operations report, or OGOR, the production reporting document and the MMS 2014s or the payment reporting document.

Many state and tribal delegations have expressed their concerns over the lack of correct reporting in additional compliance hours used because of the incorrect reporting, as has the GAO earlier today.

This reporting issue goes to the core of having an effective and efficient royalty management and compliance program. Having complete and current OGOR data is one of the first steps in having an efficient and effective compliance system.

The MMS does not have complete and current OGOR data. The next step to have an effective royalty compliance program is having correct and complete 2014 data.

Yes, the MMS states that overall company 2014 reporting accuracy is around 97 percent, but that measure is based on the percentage of lines processed through the MMS acceptance system the first time.

This appears to be a good measure. The problem is that there are very few edit checks in the acceptance systems, so very few lines are not accepted the first time.

Because of the lack of correct and complete 2014 reporting, our audits now entail a reconciliation of all 2014 payments made by our company for the review period in order to determine what the company intended to report and to pay.

In my written testimony, I explained what is meant by reconciling every single 2014 payment. In general, it means that the lease number or agreement number was not reported correctly and we have to try to determine what the correct lease number or agreement number is.

An IRS comparable scenario of this would be if I file my taxes under friend A's social security number, and friend A files it under friend B's social security number, et cetera.

You can see the mess that would present for social security retirement benefits. Comparing the OGOR data, what volume we expect to receive royalties on, to what was actually received -- 2014 payments is a must in order to have an effective and efficient compliance program.

Another area of concern that has been expressed to me by several delegations is interest. The MMS reengineered system did not have an interest module to bill late-payment interest until May 2003.

In a recent IG report, the MMS stated that interest will be caught-up by the end of federal fiscal year '07, but based on the interest date that the MMS have provided, there are many compliance royalty collections and late paid royalties for which interest has not been billed.

More importantly, we have determined that in many instances when a company pays the royalties late, the system doesn't bill late paid interest and doesn't recoup the interest that was paid to the company on their estimate.

In essence the company has paid interest to pay their royalties late. Another area of concern expressed by some of the delegations is MMS's unwillingness to accept STRAC input, or make a STRAC suggested change.

An example of this is STRAC's written request on January 15, 2003, to then Director R.M. Johnnie Burton to immediately withdraw the guidelines regarding statute of limitations for demands, orders and appeal decisions for federal leases.

Under these guidelines, MMS required, one, that the perspective only statute of limitations enacted under RISBA (ph) be applied retroactively to oil and gas production; and two, that RISBA statute of limitations apply to solid minerals although not covered under RISBA.

The result of the guidelines was that appeal were deemed lost, demands of payments were not issued, audit proposed and royalties uncollected.

The dollars lost is unknown because MMS never evaluated the impact of the guidelines before issuing them, making them binding on the state delegations.

In 2007, the U.S. District court for the District of Columbia, in a suit brought by the California state controller invalidated the guidelines as arbitrary and capricious, noting as grounds many of the arguments STRAC made to MMS in 2003.

In November of 2007, the MMS director issued a memorandum rescinding those guidelines, yet MMS has done nothing to date towards collection of royalties impacted by the guidelines.

Another area of concern, as expressed by several delegations, states mainly, as it does not affect tribes is the net receipt sharing of the administrative provision, which reduces by two percent the state's share of the royalties from public domain lands.

The two percent results in approximately a $40 million decrease in royalty revenue to states from which the minerals are to be produced. However, every U.S. citizen benefits from the royalty revenue program because of the revenue generation of the program.

If every U.S. citizen benefit from the program, then why is the cost of administering the program being unfairly applied to only the states that produce the federal mineral?

The finally -- that I was asked to report is the RPC report on MMS. I was asked as STRAC's chair to discuss STRAC's opinion in views of the report.

Unfortunately, due to the timing of this hearing and the reports, STRAC has not had an opportunity to meet as a whole and discuss the report.

However, several STRAC delegations have provided comments to me upon learning that Congress wanted STRAC's views of the report.

Those have been included in my written testimony. A general summation of those comments is that the report highlights many important areas of concerns, but STRAC delegations should have the voice in how those concerns are addressed and corrected.

In closing, this is about giving the U.S. citizens what they deserve, an effective and efficient royalty management program for their minerals.

Ultimately, it is about data management and without good data, the program cannot be effective and efficient. This concludes my testimony.

Thank you for the opportunity to appear before the committee today. I'll be happy to answer any questions you may have and go into more details.

REP. COSTA: Thank you very much, Mr. Roller. We appreciate your testimony.

Director Luthi, in reference to the comments that Mr. Roller made -- last year, as you know, a federal court rule that Mineral and Management Service's guidelines, by not pursuing certain unpaid royalties, were unlawful.

About a week and half ago, I sent you a letter that was signed by some of my colleagues asking for details on how you were planning to follow up on the cases, that you stopped because of the -- as the court said, unlawful guidelines.

Can you provide any information yet, and what the follow-up is on these cases that were dropped?

MR. LUTHI: Thank you, Mr. Chairman. I did receive your letter. We put it into our system and I've asked for it to get a response as soon as possible.

I would like to wait until that written response is available so I know it's accurate.

REP. COSTA: All right. Well, speaking of your system, I understand that Accenture, the computer company -- or company that was contracted with, received a $150 million on a program that it seems based on the testimony here this morning isn't working, at least to the expectation levels.

Some have said it's a failure, some said that in part because the new contract is -- I guess was awarded last fall.

Did you -- when you awarded the new contract last fall, did you factor in what -- the shortcomings of the previous contract and are we going to be able to get beyond this, what I would refer to as green eyeshade approach of accounting that the department seems to be plagued with?

MR. LUTHI: Mr. Chairman, I appreciate the question. Accenture was the contractor to put together the system. As you might guess, this isn't an off-the-shelf system, and now frankly it has been a challenge to make it work.

When we -- the award that you mentioned last fall is currently under review one more time because one of the other contractors asked some questions and we're going back and look at the award.

But I think in general the answer to your question is it's a system that's -- has not been perfect. We've had to go in and make several changes to it, but as to the point now where it is working and it's working, I would say for the most part effectively.

We are going to continue to work with it. I think it's going to make more financial sense to stay with the current program rather than to try and throw it out and start all over again.

Again, it's not a system that you normally see. It has to be a system that can calculate interest, which was difficult for it to do.

It's got to recognize different production values. It might be possibly --

REP. COSTA: I appreciate the complexity but I mean, this is something that we'll continue to follow obviously. It seems to have frustrated a lot of us.

Mr. Finfer, could you describe a little more detail, what MMS could learn about how the Internal Revenue Service handles its compliance activities?

MR. FINFER: Yes, sir. We consulted with the IRS on the risk- based approach and again they have 40 years more experience in this.

Obviously they're dealing with a much more complex universe, many more industries, many more layers and so on, but in meeting a wide variety of their senior managers, and I must say IRS was very generous about affording us the time with them. One of the key things that came out was, you have to have a very strong data support system and underlay.

Without good data, without reliable data and data systems support, it's very hard to implement a risk-based approach.

Another thing was that you need -- is that you are never in a situation where you can set it and forget it. Your work is never done.

What is today's big risk may not be a big risk tomorrow, and vice versa. So you have to constantly evolve the system through constant evaluation, feedback, retooling and so on.

And third, that a good -- a fundamental objective of a risk-based approach isn't necessarily increasing collections per se, but it's identifying behaviors which might not necessarily be costing the taxpayers a lot of money now but which if it -- but if they proliferate it, would cost a lot of money and getting on those quickly, so that you don't create problems and those were among the many key insights.

Again --

REP. COSTA: No, I know, a lot of recommendations --

MR. FINFER: Yeah.

REP. COSTA: -- and my time is quickly going. I'm really intrigued with this further development and I was talking with the ranking member on risk-assessment versus risk-management, because frankly I think there's a lot to be gained in that area.

I also believe, whether we're talking about this instance, or whether we're talking about health and safety, it's one of the areas that we and government generally perform poorly. That's my opinion.

Quickly, your reports mention the possibility of an alternative government structure for the Royalty-in-Kind Program.

Could you describe what those are?

MR. FINFER: Yes. Royalty-in-Kind involves the government operating an enterprise, pure and simple, and unless one is opposed to that -- and some are -- but if you are not opposed to that, then obviously the goal needs to be to enable it to operate effectively as a business to get the greatest net returns for the taxpayers.

An alternative -- so we recommended a cost-benefit analysis of potential alternative governance structures. This might include, for example, something comparable to what's called an FFRDC, federally funded research and development center, like the National Labs.

Those sorts of entities are tied to the respective departments, in that case, DOE and in this case it would be tied to Interior and MMS.

REP. COSTA: Yeah.

MR. FINFER: The advantage of that structure is that they would be freed from some of the strictures that inhibit the ability of the program to operate like an enterprise.

For example, some of the personnel requirements they'd be freed from, so they could compete to get high quality personnel.

There wouldn't be any question about whether they had to follow contracting procedures that other programs might have to follow.

However, we said at the same time that if an alternative governance structure is proposed in legislation, it would need to be balanced by heightened oversight. There's a tradeoff here.

If you're going to get more freedom to operate, you also need to have heightened oversight and in that case, we recommended the establishment of an independent oversight board, which would have the power to make recommendations to the secretary, which the secretary would have to respond to, with a published finding as to why he or she accepted, modified or rejected the board's recommendation.

REP. COSTA: All right, I've gone beyond my time but I would like to ask unanimous consent that a statement from the Project on Government Oversight be entered into the record without objection and Mr. Pearce will be the last questioner.

With his indulgence, though, if you could give me a quick response, Mr. Roller, do you see any positive changes as a result of the recommendations MMS has already implemented? Quickly, because I've exceeded my time.

MR. ROLLER: To be honest, I haven't had any experience in knowing what recommendations have been implemented that hasn't been discussed with STRAC or anybody so --

REP. COSTA: Well, obviously you can answer it very quickly then because -- I may follow-up with you then on that question.

The gentleman from New Mexico is -- has his time and when he completes his questioning, we will conclude this hearing.

BREAK IN TRANSCRIPT

Thank you, Mr. Pearce, the gentleman from New Mexico. We will continue to work with the various parties on this issue and we'll look at the recommendations and see if we can figure out a way in a collaborative fashion that we can pursue those.

As I think Mr. Deal said, there's tune-up -- I kind of like that term. So, every once in a while I need a tune-up. So I want to thank all the witnesses that -- for your testimony and your patience and we look forward to continuing to work with you.

The -- I've got some, I think, comments I need to make here. We want to note to the members of the subcommittee that they have additional -- if they have additional questions for witnesses that we will ask you to respond to these in writing.

The hearing record will be held open for 10 days to allow those responses to be submitted. If there is no further business before the subcommittee, once again I want to thank the members of the subcommittee and the staff and all those who worked to put this hearing together.

And the subcommittee now is adjourned.

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