[Federal Register Volume 64, Number 160 (Thursday, August 19, 1999)] [Proposed Rules] [Pages 45213-45215] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 99-21506] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE INTERIOR Minerals Management Service 30 CFR Part 206 RIN 1010-AC59 Valuation of Federal Geothermal Resources AGENCY: Minerals Management Service, Interior. ACTION: Advance notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: In response to deregulation of the electric power market in California and resulting changes to the geothermal industry, the Minerals Management Service (MMS) is considering amending its regulations regarding the valuation, for royalty purposes, of Federal geothermal resources used to generate electricity. MMS specifically seeks comments on the use of the netback procedure to value geothermal resources that are not sold under arm's-length contracts, whether the existing netback procedure should be modified, and whether there are reasonable alternatives to netback valuation. MMS also seeks comments on any other aspects of the rules including the rules governing valuation of resources used in direct utilization processes, particularly alternatives for valuing those resources that are not subject to a sales transaction. DATES: Comments must be received on or before October 18, 1999. ADDRESSES: The mailing address for written comments regarding geothermal valuation issues is David S. Guzy, Chief, Rules and Publications Staff, Minerals Management Service, Royalty Management Program, P.O. Box 25165, MS 3021, Denver, Colorado 80225. Courier address is Building 85, Room A-613, Denver Federal Center, Denver, Colorado 80225. E-mail address is RMP.[email protected]. For additional details, see SUPPLEMENTARY INFORMATION. FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and Publications Staff, MMS, Royalty Management Program, at telephone (303) 231-3432, FAX (303) 231-3385, or e-mail [email protected]. SUPPLEMENTARY INFORMATION: Public Comment Procedure: If you wish to comment, you may submit your comments by any one of several methods. You may mail comments to David S. Guzy, Chief, Rules and Publications Staff, Minerals Management Service, Royalty Management Program, P.O. Box 25165, MS 3021, Denver, CO 80225-0165. Courier or overnight delivery address is Building 85, Room A-613, Denver Federal Center, Denver, Colorado 80225. You may also comment via the Internet to RMP.[email protected]. Please submit Internet comments as an ASCII file avoiding the use of special characters and any form of encryption. Please also include ``Attn.: RIN 1010-AC59'' and your name and return address in your Internet message. If you do not receive a confirmation from the system that we have received your Internet message, contact David S. Guzy directly at (303) 231-3432. We will post public comments after the comment period closes on the Internet at http://www.rmp.mms.gov. You may arrange to view paper copies of the comments by contacting David S. Guzy, Chief, Rules and Publications Staff, telephone (303)231-3432, FAX (303)231-3385. Our practice is to make comments, including names and addresses of respondents, available for public review on the Internet and during regular business hours at our offices in Lakewood, Colorado. Individual respondents may request that we withhold their home address from the rulemaking record, which we will honor to the extent allowable by law. There also may be circumstances in which we would withhold from the rulemaking record a respondent's identity, as allowable by law. If you wish us to withhold your name and/or address, you must state this prominently at the beginning of your comment. However, we will not consider anonymous comments. We will make all submissions from organizations or businesses, and from individuals identifying themselves as representatives or officials of organizations or businesses, available for public inspection in their entirety. I. Background The Geothermal Steam Act of 1970, as amended (30 U.S.C. 1001-1025), requires the lessee to pay royalty to the United States on the amount or value of steam, or any other form of heat or energy derived from production under the lease and sold or used by the lessee or reasonably susceptible to sale or use by the lessee. Federal geothermal leases [[Page 45214]] reserve to the Secretary considerable discretion to determine value for royalty purposes. As steward of the Nation's public resources, the Secretary is responsible for ensuring that the public receives a fair return--in the form of royalties--in exchange for the lessee's exclusive right and privilege to extract and use geothermal resources produced from Federal leases. The value of geothermal resources for royalty purposes is defined by regulation in 30 CFR part 206. The purpose of this Advance Notice of Proposed Rulemaking is to solicit comments on possible new methods of determining the royalty value of Federal geothermal resources. We also seek comments on other aspects of the geothermal rules. We will consider the comments received in response to this Advance Notice in developing a proposed rulemaking, which MMS would publish in the Federal Register. We are specifically requesting comments on the netback valuation procedure defined in 30 CFR 206.353 and 206.354 (1998) and whether there are reasonable alternatives to that procedure. The netback procedure derives the value of the geothermal resource by subtracting the lessee's costs of generating and transmitting electricity from the lessee's revenue received for the sale of electricity. The amount remaining from this calculation is the value of the geothermal resource upon which royalty is due. (You can find a detailed description of the netback procedure in MMS's ``Geothermal Payor Handbook-Product Valuation'' at www.rmp.mms.gov/custserv/pubserv/handbook.htm.) Netback is now the most widely used method to value Federal geothermal resources. Application of the netback method in the deregulated California electric power market has resulted in a dramatic decrease in geothermal royalty payments. When the current geothermal rules were adopted in 1992, electricity generated by geothermal resources was subject to incentive pricing. Because of this incentive and the inherent risk involved in developing geothermal resources, the Department allowed a generous rate of return in the netback calculation. However, this incentive pricing is no longer being paid, and we are concerned about whether twice the Standard and Poor's BBB industrial bond rate is still the appropriate rate of return to use in the netback calculation. Over the past 2 years, State and county agencies that share in this royalty are seeing losses in royalty revenue from 50 percent to over 95 percent. County officials have told MMS that they do not have a ready source of replacement funds. Members of Congress have also become alarmed at the declining royalties and have asked us to expeditiously reevaluate our geothermal valuation regulations to assure taxpayers a fair return for their resources. II. Goals of Valuation Alternatives The goals of any proposed alternative to the current netback procedure, whether a modification to the existing netback procedure or a completely different valuation method, should be twofold. First, the proposed method should derive a value of the resource that reflects its market value. Second, the proposed method should be easy to apply and readily verifiable. To achieve these goals, we pose the following questions: 1. Should we modify the netback procedure and, if so, how? 2. Should we abandon the netback procedure in favor of an alternative valuation method? 3. What are the alternative methods to value geothermal resources that are not subject to a sales transaction? (Note that reliance on comparable arm's-length sales is not a viable alternative because in most cases there are no arm's-length sales of Federal geothermal resources that could be used to establish value.) If you propose an alternative valuation method, please describe it in sufficient detail to provide an understanding of its workings and effects. Please use examples where possible. III. Possible Alternative Valuation Methods As a starting point for discussion, we request comments on the following possible alternatives: (a) Modification of the existing netback valuation procedure. Two areas where the existing netback procedure might be modified are: (1) reducing the rate of return on capital investments; and (2) reducing the limits on deductions. The current rate of return, twice the Standard and Poor's industrial BBB bond rate, yields an annual return on power plant and transmission investments of about 15 percent at current rates. We ask what rationale exists to reduce this rate and, if so, to what standard (for example, 1 x BBB, 1.5 x BBB, another index, etc.). MMS currently limits the combined generating and transmission deductions to 99 percent of the lessee's monthly gross proceeds for the sale of electricity. Should this limit be reduced and, if so, to what amount? We are also interested in suggestions for other modifications to the netback procedure. (b) A ``rate-of-return'' method. This method would use discounted cash flow analyses (DCFs) to determine a resource value that yields the same rate of return for both the resource recovery and power plant portions of the geothermal project. This would ensure that, for royalty purposes, an equal portion of the total return from a combined geothermal resource recovery and electricity generating operation would be allocated to the resource recovery activity. The lessee would prepare separate DCFs for both the resource recovery and power plant portions of the project using its actual costs associated with developing and operating each portion. DCFs for the resource recovery would assume a range of geothermal resource values to represent expected income for the field. DCFs for the power plant would assume a range of geothermal resource values to represent the cost of purchasing the resource, and a range of electricity prices to represent expected income. Starting with a given electricity price for the power plant, the lessee would repeat the DCFs for each project portion over the range of resource values until the rate of return for the resource recovery operation equals the rate of return for the power plant. The lessee would repeat the DCFs over the range of expected electricity prices to determine the relationship between electricity price and resource value. The value of the geothermal resource equals the cost of purchasing the geothermal resource when the rates of return for both portions are the same. We request comments and analyses of the feasibility of using the ``rate-of-return'' method for valuing geothermal resources. We also ask for suggested improvements to this method. (c) A ``percentage-of-revenue'' method. This method would set the value of the geothermal resource as a percentage of the electricity value. In most cases the electricity value would be the lessee's total revenue received for the sale of electricity and other generating services. We ask what percentages are reasonable and how they are determined. We also ask whether the percentages should be fixed or whether they should vary with time or price of electricity, such as a step or sliding scale. Again, we offer these alternatives as a starting point for discussion. We invite you to suggest other valuation methods not presented here. [[Page 45215]] IV. Valuation of Resources Used in Direct Utilization Processes We also solicit comments on the valuation standards for direct utilization at 30 CFR 206.355, particularly options for the ``alternative fuel'' method used to value geothermal resources that are not subject to a sales transaction. Proposed alternative methods should satisfy the valuation goals discussed above. V. Other Comments MMS also seeks comments on any other aspects of the rules. Dated: August 13, 1999. Shayla Freeman Simmons, Acting Assistant Secretary, Land and Minerals Management. [FR Doc. 99-21506 Filed 8-18-99; 8:45 am] BILLING CODE 4310-MR-P