[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]


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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.

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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