Cover Story – Rehabilitation Bonds – Hazlewood Mine Fire Inquiry 2015/16

By on May 26, 2016

DR ELIZABETH GIBSON, General Manager of the CMPA provides an insight on the final report from the Hazelwood Mine Fire Inquiry.

The CMPA has been waiting with keen interest for the final report from the Hazelwood Mine Fire Inquiry: Report 2015/2016 Volume IV – Mine Rehabilitation (Report). This Report was tabled in Parliament in April 2016 and is available at
http://hazelwoodinquiry.vic.gov.au/201516-report/volume-iv-mine-rehabilitation/.

The Board was tasked with identifying mine rehabilitation options for the three Latrobe Valley coal mines and whether the rehabilitation liability assessments are adequate and whether the current rehabilitation bond system is effective.It is whether a blanket approach is taken which is of concern to CMPA.

Rehabilitation liability assessments

Rehabilitation liabilities are determined with regards to the Establishment and management of rehabilitation bonds for the mining and the extractive industry (policy). This policy states, the Bond Calculator is the recommended method for determining a sites rehabilitation liability. The Bond Calculator breaks down the costs across an operation into a series of domains based on land use (such as workshops and plant, open pits or overburden dumps). Volumes and quantities are entered into the worksheet and costs calculated using the default third party contract rates. The Bond Calculator automatically tallies the costs from each of the operations domains and has an allowance for project management, contingency and monitoring expenses based on a percentage of the total cost. Contingency costs are calculated at a rate of at least 10 per cent but a higher rate may be applied depending on the complexity of environmental management of the operation. The Bond Review Project was not completed, however, the Board decided to address the requirements of the Terms of Reference to the extent possible, based on progress to date with the Project.

The Board and Counsel Assisting raised the following issues:

  • Several areas of potential costs which are not currently included as a specific cost;
  • The cost of research necessary to inform the mine operators about the viability of their rehabilitation plans;
  • The costs submitted by the mine operators assumed they were going to rehabilitate and not a third party operator –the Board considered that the third party costings should be used;
  • The Board considered the probabilistic method used by AECOM (Project contractor) is an appropriate method of calculating future liabilities;
  • The Board found mine operators own rehabilitation liability estimates are likely to be based on some unsound assumptions.

Effectiveness of the rehabilitation bond system

The Boards Terms of Reference ask it to report on whether the current rehabilitation bond systemis effective for the Latrobe Valley coal mines.There was found to be a significant gap between the coal miners estimate of their rehabilitation liabilities and the independent estimate produced by AECOM in the Bond Review Project. However, there were deficiencies found with AECOMs determinations. The Board accepted the current estimates (of bond liabilities) are likely to increase as various geotechnical, hydrogeological and fire prevention risk factors are further investigated and resolved. It was also found there is insufficient expertise within ERR to enable the Minister to request s. 79A assessments and audits.

The Board recommended on the evidence heard, the Minister should pursuant to s. 80(4) of MRSDA consider the sufficiency of the existing bonds on an interim basis pending the completion of the Bond Review Project. It is interesting to read the Board notes, among other things outlines that:

  • A high bond level could potentially have negative financial impacts for the mine operators, with resulting opportunity costs. The bond could potentially tie up funds in the immediate short-term that could otherwise be used for progressive rehabilitation and vital research.

Alternative financial assurance mechanisms

The Board is required to consider whether there are practical, sustainable, efficient and effective alternative financial assurance mechanisms which will ensure the mine operators will carry out the required rehabilitation of the mine sites. The Board is required to consider the Bond Review Project in its deliberations on this Term of Reference. The Board again notes the incompletion of the Bond Review Project and the ERR is awaiting advice from NERA Economic Consulting about its policy review of the bond system. Whilst not stating a preferred method, the Board considers the alternative mechanisms which are most likely to be practical, sustainable, efficient and effective are the bond discount mechanism (discounted bond for progressive rehabilitation) and a post closure trust fund. The CMPA hopes sense will prevail and a risk-based approach will be taken with respect to calculation of rehabilitation bond liability – extractive industries being a much lower risk than mines and coal mines. Additionally, only approximately $20k has been spent by the Victorian Government over the past 30 years in rehabilitation of quarries. This compares starkly with mines where the Victorian Government has spent $millions.

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