Geothermal Resource Leasing and Geothermal Resources Unit Agreements

DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Parts 3200 and 3280

[W0-310 9131 PP]

RIN 1004-AD86

Geothermal Resource Leasing and Geothermal Resources Unit Agreements

AGENCY:

Bureau of Land Management, Interior.

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would revise the Bureau of Land Management's existing geothermal resources leasing and unit agreement regulations to implement the Energy Policy Act of 2005. The proposed rule would restructure existing regulations concerning the general geothermal leasing process and would revise existing regulations on royalties and readjustment of lease terms, conditions, and rentals. The rule would also revise existing regulations on lease duration and work commitment requirements, annual rental and credit of rental towards royalty, unit and communitization agreements, and acreage limitations. Additional revisions required by the Energy Policy Act include various technical corrections. Other proposed changes in sections unaffected by changes in the statute would clarify existing procedures, improve grammatical construction, conform the regulations to new administrative regulatory standards, and correct existing errors.

DATES:

Send your comments to reach the Bureau of Land Management (BLM) on or before September 19, 2006. The BLM will not necessarily consider any comments received after the above date during its decision on the proposed rule.

ADDRESSES:

Mail: Director (630), Bureau of Land Management, Eastern States Office, 7450 Boston Boulevard, Springfield, VA 22153.

Hand Delivery: 1620 L Street, NW., Suite 401, Washington, DC 20036.

E-mail:

comments_washington@BLM.gov.

Federal eRulemaking Portal:

http://www.regulations.gov.

Send comments on the information collections in the proposal to: Interior Desk Officer (1004-AD86), Office of Information and Regulatory Affairs, Office of Management and Budget (OMB), (202) 395-6566 (facsimile); e-mail:

oira_docket@omb.eop.gov.

Please also send a copy to BLM.

FOR FURTHER INFORMATION CONTACT:

Kermit Witherbee at (202) 452-0385 or Ian Senio at (202) 452-5049. Persons who use a telecommunications device for the deaf (TDD) may contact these persons through the Federal Information Relay Service (FIRS) at 1-800-877-8339, 24 hours a day, 7 days a week.

SUPPLEMENTARY INFORMATION:

I. Public Comment Procedures

II. Background

III. Discussion of the Proposed Rule

IV. Procedural Matters

I. Public Comment Procedures

A. How Do I File Comments?

You may submit your comments by any one of several methods:

• You may mail your comments to: Director (630), Bureau of Land Management, Eastern States Office, 7450 Boston Boulevard, Springfield, Virginia 22153, Attention: RIN 1004-D86.

• You may deliver comments to 1620 L Street, NW., Suite 401, Washington, DC 20036.

• You may comment directly via the internet by accessing our automated commenting system located at

www.blm.gov/nhp/news/regulatory/index.htm

and following the instructions there.

• You may e-mail your comment to:

comments_washington@blm.gov.

(Include “Attn: AD86” in the subject line).

Please make your comments on the proposed rule as specific as possible, confine them to issues pertinent to the proposed rule, and explain the reason for any changes you recommend. Where possible, your comments should reference the specific section or paragraph of the proposal that you are addressing.

The Department of the Interior may not necessarily consider or include in the Administrative Record for the final rule comments that we receive after the close of the comment period (see

DATES

) or comments delivered to an address other than those listed above (see

ADDRESSES

).

B. May I Review Comments Others Submit?

Our practice is to make comments, including names and home addresses of respondents, available for public review. Individual respondents may request that we withhold their names and or home addresses, but if you wish us to consider withholding this information, you must state this prominently at the beginning of your comments. In addition, you must present a rationale for withholding this information. This rationale must demonstrate that disclosure “would constitute an unwarranted invasion of privacy.” Unsupported assertions will not meet this burden. In the absence of exceptional, documentable circumstances, this information will be released.

We will always make 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.

II. Background

The Bureau of Land Management (BLM) is proposing these new regulations to implement the Energy Policy Act of 2005 (P.L. 109-58), which became law on August 8, 2005. Sections 221 through 236 of this Act address geothermal development and substantially amend the Geothermal Steam Act of 1970. The Geothermal Steam Act of 1970, as amended, 30 U.S.C. 1001—1028, provides the authority for BLM to allow for the exploration, development, and utilization of geothermal resources on BLM-managed public lands, as well as geothermal resources on lands managed by other surface management agencies, such as the United States Forest Service.

One of the more significant changes in the Energy Policy Act of 2005 is the general requirement, with a few exceptions, for geothermal resources to be offered through a competitive leasing process. Lands not successfully sold in

the competitive process can be leased noncompetitively.

The Energy Policy Act also made significant changes in the way royalties are assessed on Federal leases. These changes were similar to, and in some cases identical to, recommendations in a 2005 report from the Geothermal Valuation Subcommittee (Subcommittee) of the Minerals Management Service's (MMS) Royalty Policy Committee (RPC). The RPC, established under the Federal Advisory Committee Act, makes recommendations on issues related to royalties on Federal resources and typically consists of representatives from Federal and State governments and industries paying royalties for the development of Federal resources. The Subcommittee was formed to address MMS's geothermal royalty valuation regulations in an effort to simplify the language and reduce administrative costs to the geothermal industry. The Subcommittee was composed of members from one industry association, several geothermal producers, two of the major states affected, and MMS staff. A BLM representative served as technical advisor to the Subcommittee. The Subcommittee's goal was to develop more efficient royalty valuation methods that would ensure a fair return to the Federal Government as well as to encourage geothermal development. The Energy Policy Act requires that for new leases in non-arm's length transactions or no-sale situations the royalty on electricity produced from geothermal resources be based on the gross proceeds from the sale of electricity, rather than on the “net back” system that was used prior to the Energy Policy Act. Lessees who use geothermal resources directly will pay fees according to a fee schedule that would be established by MMS. Under the new law, existing lessees have the opportunity to convert the royalty provisions in their leases to those of the Energy Policy Act. MMS is publishing proposed new regulations to implement the changes in the Energy Policy Act simultaneously with BLM's proposed rule. BLM and MMS have worked together to coordinate their proposed rules.

References to MMS rules appear throughout BLM's proposed rules because BLM and MMS share responsibility with regard to the geothermal leasing program. BLM holds lease sales, issues geothermal leases and generally administers the leases. BLM establishes the terms of the leases, including royalty rates, and enforces the lease terms. MMS is responsible for collecting rents (other than the first year's rent) and royalties, and for enforcing the royalty obligations. The proposed MMS rules contain provisions that carry out its responsibilities. Appropriate cross-references are contained both in the BLM and MMS regulations.

Other changes made by the Energy Policy Act include restructured lease terms (length of time a lease is in effect) and lease term extensions, and provisions for leases for exclusive direct use of geothermal resources, without sale, that may be issued noncompetitively. The Act also increased the maximum acreage of an individual lease and gave the Secretary of the Interior greater authority to require lessees to commit to unit agreements to conserve geothermal resources.

Most of the proposed changes in the regulations of this part would implement the new provisions of the Energy Policy Act. Other proposed changes in sections unaffected by changes in the statute would clarify existing procedures, improve grammatical construction, conform the regulations to new administrative or regulatory standards, and correct existing errors. Substantive changes unrelated to the change in statute are discussed under each subpart of this preamble.

III. Discussion of the Proposed Rule

Subpart 3200—Geothermal Resources Leasing

In subpart 3200, we propose changes to the definitions section and propose to add three sections to the end of the subpart.

Definitions

Section 3200.1 contains definitions of terms used throughout parts 3200 and 3280. The proposed rule would remove the definitions of terms and concepts that would no longer be used under the proposal (or were not used previously). Definitions proposed to be removed include “additional term,” “cooperative agreement,” “extended term,” and “pay instead of produce in commercial quantities.”

Proposed new definitions include “initial extension” and “additional extension.” These two definitions reflect terms that are used in proposed subpart 3207, and implement concepts enacted in 30 U.S.C. 1005(a). The portion of the preamble discussing subpart 3207 addresses these changes.

Other definitions added include “direct use” and “direct use leases.” The proposed definition of the term “direct use” is taken from the definition at 30 U.S.C. 1001(g). The proposed definition would state that “direct use means utilization of geothermal resources for commercial, residential, agricultural, public facilities, or other energy needs other than the commercial production or generation of electricity.” The word “generation” is used in addition to the statutory word “production” to be consistent with the usage in 30 U.S.C. 1003(f), which also addresses direct use.

The proposed definition of the term “direct use lease” would be “a lease issued in an area BLM designates as available exclusively for direct use of geothermal resources, without sale, for purposes other than commercial generation of electricity.” This definition is intended to describe the geothermal leases that would be issued under proposed subpart 3205, which would implement 30 U.S.C. 1003(f).

The term “geothermal exploration permit” would be clarified to explain that a BLM authorization to conduct exploration activities would occur under a Notice of Intent to Conduct Geothermal Resource Exploration Operations, a specific BLM Form.

The term “gross proceeds,” used in the royalty context, would be defined through a cross-reference to the applicable MMS definition.

The term “commercial production or generation of electricity” would be defined to mean generation of electricity that is sold or is subject to sale, including the electricity or energy that is required to convert geothermal energy into electrical energy for sale. This term is needed in determining whether geothermal resource production is subject to royalties or direct use fees, as referenced in 30 U.S.C. 1004(b). The statute does not expressly address whether the electricity required to convert geothermal energy into electrical energy for sale (the parasitic load) should be considered as a component of the generation of electricity or should be considered as a direct use. BLM believes it is more appropriate to consider this as part of the electrical generation process both: (1) To encourage the production of geothermal resources (by not imposing a fee for a necessary cost of electricity generation); and (2) Because measurement of such usage would be difficult and expensive and the amount of moneys generated through the collection of fees would be quite small relative to the measurement effort.

The term “commercial production” would mean production of geothermal resources when the economic benefits from the production are greater than the cost of production. This proposed

definition would implement a term used in 30 U.S.C. 1004(f)(1), related to advanced royalties (see proposed § 3212.15). The term is also used for the purpose of qualifying for a drilling extension at proposed § 3207.14.

The term “geothermal steam and associated geothermal resources” would be slightly modified to follow the statutory definition at 30 U.S.C. 1001.

Types of Leases

Proposed § 3200.6 would provide general information explaining that under the proposed rule BLM would issue two types of geothermal leases. The first category would be leases that may be used for any type of geothermal use, such as commercial generation of electricity or direct use of the resource. Such leases would be competitively issued under subpart 3203 or noncompetitively issued under subpart 3204. The second category, a new category required by the Energy Policy Act of 2005 (30 U.S.C. 1003(f)), would be those that could only be used for direct use without sale, i.e., direct use leases issued under proposed subpart 3205.

Transition Rules

The Energy Policy Act of 2005 at 30 U.S.C. 1005(d), directed that the Secretary by regulation establish transition rules for leases issued before August 8, 2005. Little guidance was provided in that section except for requiring that the transition rules include provision for two-year extensions for leases nearing the end of their terms on August 8, 2005, under certain circumstances.

Proposed §§ 3200.7 and 3200.8 would contain transition rules, addressing how the revised regulations would apply to: (1) Leases in effect on August 8, 2005, the enactment date of the Energy Policy Act of 2005; and (2) Leases issued after August 8, 2005, but based on lease applications pending on August 8, 2005.

Proposed § 3200.7 would address the regulatory status of geothermal leases in effect on August 8, 2005. Existing Federal leases generally provide that they are subject to existing BLM rules, and also to future BLM regulatory changes. This makes sense because the agency continually makes changes to its regulatory programs, and lessees have no legitimate expectations as a general matter to remain forever subject to regulations in effect on the day their leases were issued. Accordingly, proposed § 3200.7 would make leases in effect on August 8, 2005, generally subject to the revised parts 3200 and 3280.

There are certain provisions of geothermal leases for which existing lessees did have reasonable expectations would not be changed, and on which they may have based their planned and existing operations. Therefore, the proposed rule, at § 3200.7(a)(1), attempts to capture such expectations by proposing an exception to the general rule. The exception would provide that leases in effect on August 8, 2005, would be subject to the regulations in effect on August 8, 2005, with regard to regulatory provisions relating to royalties, minimum royalties, rentals, primary term and lease extensions, diligence and annual work requirements, and renewals.

Proposed § 3200.7(a)(2) would allow the lessee of a lease in effect on August 8, 2005, to elect to be subject to all of the regulations in part 3200 and part 3280, without regard to the exceptions in paragraph (a)(1). The lessee would have to make such an election no later than 18 months after a final rule becomes effective. The election derives from 30 U.S.C. 1003(d)(2) that allows a similar election to lessees whose lease applications were pending on August 8, 2005. BLM believes that leases in effect on August 8, 2005, should be treated as least as favorably as those lessees who only had an application pending on that date. Thus, BLM is proposing that an election be allowable. The proposed rule would make it clear that although a general election would be allowed, changes relating to royalty terms could only occur under the royalty conversion rules of proposed § 3212.25, discussed in the next paragraph and later in this preamble.

Proposed § 3200.7(b) would clarify that two other features of the Energy Policy Act of 2005 apply to leases in effect on August 8, 2005: Royalty conversion (section 224(e) of the Energy Policy Act) and production incentives (section 224(c) and (d) of the Energy Policy Act). The proposal would clarify that the lessee of a lease in effect on August 8, 2005, may: (1) Choose to convert lease terms relating to royalties under subpart 3212; or (2) If it does not convert lease terms relating to royalties, apply for a production incentive under subpart 3212 (if eligible under that subpart). Royalty conversion and production incentives are addressed later in this preamble.

Proposed § 3200.7(c) would implement the two-year extension authorized in the statute. Under the proposal, the lessee of a lease in effect on August 8, 2005, could apply to extend a lease that was within two years of the end of its term on August 8, 2005, for up to two years, to allow achievement of production under the lease or to allow the lease to be included in a producing unit.

Proposed § 3200.8 would implement 30 U.S.C. 1003(d)(2), relating to the status of geothermal lease applications pending on August 8, 2005, and the status of leases issued pursuant to such applications. That section of the Energy Policy Act of 2005 provides that pending lease applications and leases issued pursuant to those applications are subject to “this section as in effect on the day before” August 8, 2005 (30 U.S.C. 1003(d)(2)).

Although 30 U.S.C. 1003(d)(2) uses the term “this section,” BLM interprets it to mean the entire Geothermal Steam Act, as in effect on the day before August 8, 2005. Because § 1003 of the Act addresses the leasing process, interpreting the phrase “this section” to mean only § 1003 would allow pending lease applications to be processed noncompetitively, but would make the provision meaningless with regard to subsequently issued leases. Accordingly, BLM construes 30 U.S.C. 1003(d)(2) more broadly to allow leases issued pursuant to applications pending on August 8, 2005, to be subject to the regulations in effect before that date, to the same extent as leases in effect on August 8, 2005. In other words, leases issued pursuant to applications pending on August 8, 2005, would be subject to the revised parts 3200 and 3280, except that such leases would be subject to the regulations in effect on August 8, 2005, with regard to regulatory provisions relating to royalties, minimum royalties, rentals, primary term and lease extensions, diligence and annual work requirements, and renewals. As provided in the statute, the proposal would allow lessees to elect to be subject to the revised rules in their entirety.

Subpart 3201—Available Lands

Existing subpart 3201 addresses which lands are available for geothermal leasing and which lands are not available for geothermal leasing. The proposed subpart would be substantively unchanged from the existing subpart. Changes have been proposed to clarify terminology, and improve grammar and readability.

Subpart 3202—Lessee Qualifications

Existing subpart 3202 addresses who may hold geothermal leases, qualifications to hold a geothermal lease, whether other persons are allowed to act on an applicant's behalf, and what happens if an applicant for a lease dies. The proposed subpart would be substantively unchanged from the

existing subpart. Changes have been proposed to clarify terminology, and improve grammar and readability. There are several places in existing regulations that the term “offer” is used incorrectly. This proposed rule would replace the term “offer” with the term “application” to make it clear that “applications” are filed by the public and “offers” are made by BLM.

Subpart 3203—Competitive Leasing

Subpart 3203 would explain the process for competitive leasing under the Energy Policy Act amendments to the Geothermal Steam Act. The new provisions at 30 U.S.C.1003 require competitive leasing to the highest responsible qualified bidder except as otherwise specifically provided in the Act. This new statutory scheme differs from the previous one, which provided for competitive bidding only for lands within a known geothermal resource area or lands from terminated, expired, or relinquished leases, or at BLM's discretion when there was public interest.

Proposed § 3203.5 explains the three stages of the competitive leasing process. It would also summarize the four specific circumstances in which leases would be issued on a non-competitive basis that are addressed in detail at Subparts 3204 and 3205.

Proposed § 3203.10 would describe the process for nominating lands for competitive sale. It would implement the new statutory provision, at 30 U.S.C. 1006, that a lease may not exceed 5,120 acres unless the area to be leased includes an irregular subdivision. The previous statutory restriction was 2,560 acres. This section would also explain how a nominator must describe the lands nominated. These land description provisions were previously found at § 3204.11. The only change from those provisions would be a clarification that lands surveyed under the public land rectangular survey system should be described to the nearest aliquot part. This section would also make clear that a nominator may submit more than one nomination, as long as each nomination satisfies the acreage and land description requirements and includes the required filing fee, and that BLM may reconfigure lands to be included in each parcel offered for sale.

Proposed § 3203.11 would implement the new statutory provision, at 30 U.S.C. 1003(e), that BLM may offer parcels as a block at a competitive sale when it is reasonable to expect that a geothermal resource that can be produced as one unit underlies those parcels.

Proposed § 3203.12 would provide for a filing fee for nominations of lands of $100 per nomination plus 10 cents per acre of lands nominated. BLM is authorized to charge reasonable filing fees under § 304(a) of the Federal Land Policy and Management Act of 1976, 43 U.S.C. 1734(a). While the general Federal policy is to charge a processing fee that recovers the agency's reasonable processing costs (see OMB Circular No. A-25; 330 D.M. 1.3A; Solicitor's M-Opinion No. M-36987), BLM does not have cost data at this point regarding its cost for processing nominations. We are therefore proposing a nominal filing fee, which is not intended to reimburse the government for its processing costs, but instead to limit filings to serious applicants. See Solicitor's M-Opinion No. M-36987, “BLM's Authority To Recover Costs of Minerals Document Processing,” at n.6. In the final rule, we would move the amount of the fee from this section to the fee schedule at § 3000.12, cross-reference § 3000.12, and make a conforming change to § 3000.12. We will collect data on the costs of processing these nominations and expect to propose to charge a processing fee to cover agency costs in the future.

Proposed § 3203.13 would implement the new statutory requirement at 30 U.S.C. 1003(b) to hold a competitive lease sale at least once every 2 years in States where nominations are pending. This section would also allow for a sale to include lands in more than one State. Current regulations at § 3205.13 state that BLM will not accept bids which do not meet or exceed the fair market value as determined before the sale using generally acceptable appraisal methods. We have not included the requirement in this rule because we have concluded that the competitive bidding process itself is a reflection of the fair market value of the lease. Moreover, eliminating this bidding floor may encourage more competitive bidding, which both serves the Energy Policy Act policy of encouraging development of geothermal resources and is economically beneficial to the United States to the extent leases are issued competitively. This is because noncompetitive leases issued at a later date would be issued without any bonus bid (see discussion of proposed § 3204.11, below) and would have lower rates of rental (see discussion of proposed § 3211.11, below).

Proposed §§ 3203.14 and 3203.15 would describe how BLM will notify the public of competitive lease sales, the types of information BLM will include in a notice of sale, and how BLM will conduct the sale. These sections differ in some respects from sections in the current regulations at subpart 3205 that addressed competitive leasing under the former statutory scheme. Unlike the current regulations, the proposed sections would not restrict the competitive sale process to sealed bids, but would be flexible enough to allow other competitive sale formats, such as oral auctions. We anticipate that most sales would be conducted through an oral auction.

In order to protect the bidding process, we propose to add at § 3203.15(c) a standard auction requirement that a bid may not be withdrawn and that a bid constitutes a legally binding commitment. This is current BLM practice both in the geothermal and oil and gas leasing programs.

Proposed § 3203.17 would provide information related to the payment obligations of a successful bidder. Because the proposed competitive sale process would no longer be restricted to sealed bids, a bidder would not have to submit any payments unless at the end of the sale it was the high bidder. This section would provide that a successful bidder must pay twenty percent of the bid, the total first year's rental, and the processing fee by close of business on the day of the sale or such other time as BLM may specify. While the general expectation would be that these payments be made on the day of the sale, we propose to allow BLM to specify another time for payments to be made if circumstances so require, for example, the following business day. We also propose to add personal checks to the list of financial instruments that may be used to make it easier for the successful bidder to make payments immediately after the sale. Proposed § 3203.17(c), like current § 3205.16, would require that the balance of the bid be submitted within 15 calendar days after the sale.

Proposed § 3203.18 would cross-reference proposed subpart 3204, which would implement the statutory provision at 30 U.S.C. 1003(c) providing for the noncompetitive offering of parcels that did not receive bids in a competitive lease sale.

Subpart 3204—Noncompetitive Leasing Other Than Direct Use Leases

Proposed subpart 3204 would describe when and how BLM will issue noncompetitive geothermal leases. The most common method of obtaining noncompetitive leases under this subpart would be to apply for parcels of land that did not receive bids in a competitive sale. This subpart would not address noncompetitive leases for lands available exclusively for direct

use of geothermal resources, which would be addressed at proposed subpart 3205.

Proposed § 3204.5 would describe the four types of lands available for noncompetitive leasing: (1) Parcels of land that did not receive bids in a competitive sale; (2) Lands available exclusively for direct use, addressed at proposed subpart 3205; (3) Lands subject to mining claims, addressed at proposed subpart 3204.12, and (4) Lands for which a lease application was pending on August 8, 2005, if the applicant so chooses.

Proposed § 3204.10 would require an applicant for a noncompetitive lease to submit a processing fee and advance rent. The advance rent would be refunded if the application were rejected or withdrawn. These provisions are substantively the same as current § 3204.12.

Proposed § 3204.11 would implement the statutory requirement at 30 U.S.C. 1003(c) that lands for which no bid was received in a competitive lease sale would be available for noncompetitive leasing for two years following the date of the competitive sale. The proposed sections would explain the procedures for this type of noncompetitive leasing, which are similar to the procedures for acquiring a noncompetitive oil and gas lease for lands that were not sold at a competitive lease sale. See 43 CFR 3110.2 and 3110.5-1. The section would provide that for the first 30 days following the competitive sale, applications would be accepted only for parcels as configured in the sale notice. As in the oil and gas regulations, this provision is for efficiency of administration. In the month following a sale, BLM processes both leases that sold at the lease sale and those for which noncompetitive applications are received after the sale; adding the burden of reconfiguring parcels during that period would slow down the process for other leases. Proposed § 3204.11 would also provide that all applications received for a particular parcel on the first business day after the competitive sale would be considered as simultaneously filed, and BLM would select one at random to receive a lease offer. As in the oil and gas regulations, this is intended to provide all interested parties an equal opportunity to apply during the first 24 hours after the lease sale.

BLM would not require a person to submit a bid for a noncompetitive lease to reflect fair market value because no bid had been received at the competitive lease sale. Moreover, it would be difficult for BLM to determine what an appropriate bid should be in that situation, and allowing leases to be obtained without a bid should encourage additional geothermal exploration and development.

Proposed § 3204.12 would implement the statutory provision at 30 U.S.C. 1003(b)(3) that allows a mining claimant with an approved plan of operations to apply for a noncompetitive geothermal lease.

Proposed § 3204.13 would implement a portion of the statutory provision at 30 U.S.C. § 1003(d)(2) that allows lease applications pending on August 8, 2005 to be processed under then-existing policies and procedures unless the applicant elects for the lease to be subject to the new leasing procedures.

Proposed § 3204.14, governing the amendment of noncompetitive lease applications, would provide that an applicant may amend an application at any time before BLM issues a lease if the amended application meets the requirements in this subpart and as long as the amendment does not add lands not included in the original application. To add lands, an applicant would have to file a new application. (The withdrawal of lands from noncompetitive lease applications would be covered by proposed § 3204.15, discussed below.) Section 3204.18 of the current regulations does not prohibit amendments that add lands, but provides that BLM will determine priority based on the date it receives the amended lease application rather than on the date of the original application. Current § 3204.18 does not differentiate between amendments that add lands and those that do not. We decided that adding lands to an application was equivalent to submitting a new application, thus requiring a change in the priority. We therefore propose to require that a new application be filed in cases of proposed amendments when an applicant wants to add lands to an already submitted application. Because amendments other than adding lands do not require BLM to revise the priority date, we do not propose to require a new application for such amendments.

Proposed § 3204.15 would provide that for 30 days after a competitive lease sale, BLM would not accept partial withdrawals of noncompetitive lease applications and would only accept withdrawals of entire noncompetitive lease applications. After 30 days, partial as well as whole withdrawals would be allowed at any time before BLM issues the lease. This would be a change from current § 3204.17, which does not contain the restriction in the first 30 days. This proposed provision is parallel to the provision at proposed § 3204.11 restricting noncompetitive applications for reconfigured lease parcels for the first 30 days following a competitive sale. If an applicant applied for a parcel as configured in the sale notice, then immediately applied to withdraw the application with respect to only a portion of the parcel, the result would be the same as applying for a reconfigured parcel. Allowing this would thus defeat the provision in proposed § 3204.11. Proposed § 3204.15 would also provide that if a partial withdrawal results in failure to meet the minimum acreage required for a lease in proposed § 3206.12, BLM will reject the lease application. This provision is in § 3204.17 of the current regulations.

Subpart 3205—Direct Use Leasing

The Energy Policy Act provides the authority for BLM to issue leases solely for the direct use of geothermal resources under certain conditions. Subpart 3205 would be a new subpart added to describe these conditions and the process for applying for a direct use lease. This subpart would implement the provisions of 30 U.S.C. 1003(f).

Proposed § 3205.6 would address the conditions under which BLM would issue a direct use lease to an applicant. “Direct use lease” as used in this subpart has a specific meaning, and is defined at proposed § 3200.1 as “a lease issued in an area BLM designates as available exclusively for direct use of geothermal resources, without sale, for purposes other than commercial generation of electricity.” Regular geothermal leases also permit direct use of the geothermal resource, which the lessee may choose not to sell, but that circumstance would not convert a regular geothermal lease into a direct use lease. A regular geothermal lessee may choose to sell the resource for direct use or may choose to use the resource for the commercial generation of electricity, choices that a direct use lessee does not have.

Proposed § 3205.6 would explain that a direct use lease may be issued only for lands that BLM has determined are appropriate for exclusive direct use, without sale, for purposes other than commercial generation of electricity. BLM would make the determination of whether the lands are appropriate for direct use leasing on a case-by-case basis at the time of application. The advantage of a direct use lease would be that it could be issued noncompetitively to the first qualified applicant if BLM determined that there was no competitive interest in the geothermal resources on the land to be leased. BLM would make this determination after publishing a notice of proposed leasing

and receiving no nominations to include the land in a competitive lease sale (as required by 30 U.S.C. § 1003(f)). Proposed § 3205.6 would also provide that the acreage covered by a direct use lease application could not exceed the quantity of acreage that is reasonably necessary for the proposed use, as required at 30 U.S.C. 1003(g).

Proposed § 3205.7 would specifically address the acreage restrictions applicable to a direct use lease as provided by 30 U.S.C. 1003(g) (not greater than reasonably necessary for the proposed use) and 30 U.S.C. 1006 (not more than 5,120 acres for any geothermal lease, except in the case of an irregular subdivision).

Proposed § 3205.10 would explain the procedures for applying for a direct use lease and the types of information to be submitted with an application. The information that is submitted is used by BLM to determine if the requested acreage is necessary for the intended operation as described in § 3205.7. This section would also require the submission of a nonrefundable processing fee for noncompetitive lease applications, as required by § 3204.12 of the current regulations.

Proposed § 3205.12 would address direct use lease applications for lands managed by an agency other than BLM, explaining that BLM would forward a copy of such an application to the other agency. If that agency consented to leasing and recommended that the lands were appropriate for a direct use lease, BLM would consider that consent and recommendation in determining whether to issue the lease. This section would require that BLM obtain the consent of the surface management agency before issuing a direct use lease.

Proposed §§ 3205.13 and 3205.14 would allow an applicant for a direct use lease to withdraw its application at any time or amend its application, without adding new lands, prior to lease issuance. To add new lands, an applicant would have to file a new application (see proposed § 3204.14).

Proposed § 3205.15 discusses how BLM will inform an applicant of its decision to approve or deny a direct use lease application.

Subpart 3206—Lease Issuance

Subpart 3206 in both the current and proposed regulations addresses lease issuance in general.

Proposed § 3206.10 is nearly identical to current § 3206.10, with the addition of a provision notifying applicants that all payments must be made before BLM will issue a lease. This addition reflects current BLM practice.

Proposed § 3206.11, which implements 30 U.S.C. 1026, is unchanged from current regulations except for changing the words “will not significantly impact” at the beginning of paragraph (b), to “will not have a significant adverse impact on,” which more closely tracks the language of 30 U.S.C. 1026(c).

Proposed § 3206.12 would address minimum and maximum lease sizes, which are addressed in the current regulations at § 3204.14. The maximum lease size would be increased from 2,560 acres to 5,120 acres, as provided at 30 U.S.C. 1006.

Proposed § 3206.13 would address the maximum acreage that one lessee may hold, which is addressed in the current regulations at § 3206.12. The proposed section is identical to the first sentence of current § 3206.12 and implements 30 U.S.C. 1006, which sets the limit at 51,200 acres in any one State. The remainder of § 3206.12 of the current regulations would be deleted because the Energy Policy Act amendments deleted those provisions in the statute.

Proposed § 3206.14 would explain how BLM computes acreage holdings. This proposed section is identical to current § 3206.13, except for minor editorial changes.

Proposed § 3206.15, explaining how BLM would charge acreage holdings if the United States owns only a fractional interest in the geothermal resources, is identical to current § 3206.14, except for minor editorial changes.

Proposed § 3206.16 would explain that acreage is not chargeable against the acreage limitations if it is included in any approved unit agreement or development or drilling contract. These exclusions would implement 30 U.S.C. 1017(d) and (g)(2) and are addressed at § 3206.15 in the current regulations. Reference in current regulations to cooperative agreements was deleted because they are no longer mentioned in this part.

Proposed § 3206.17, which would address what BLM does if a lessee's holdings exceed the maximum acreage limits set in proposed § 3206.13, is identical to § 3206.16 of the current regulations.

Proposed § 3206.18, which would address when BLM issues a lease, is identical to § 3206.18 of the current regulations, except for a minor editorial change.

Subpart 3207—Lease Terms and Extensions

Subpart 3207 would explain the new scheme of lease terms and extensions provided at 30 U.S.C. 1005.

Proposed § 3207.5 would summarize the new lease terms (length of time a lease is in effect) and lease term extensions, which include: (1) A ten-year primary term and two five-year extensions of the primary term; (2) A five-year drilling extension; (3) A production extension of up to 35 years; and (4) A renewal term of up to 55 years.

Proposed §§ 3207.10, 3207.11, and 3207.12 would address the primary term of a lease and explain the requirements for obtaining and continuing extensions of the primary term. The statute, at 30 U.S.C. 1005(b), includes a provision that “for each year after the 10th year of the lease” lessees must “satisfy minimum work requirements prescribed by the Secretary that apply to the lease for that year.” This section can be read as providing that the Secretary may require that a lessee complete certain work requirements in 1 year of the lease that apply to the following year of the lease, in terms of informing the Secretary's decision whether the lease may continue into that following year. Under this interpretation, a work requirement applicable to the 12th lease year would require that work be performed by the end of the 11th year, and a requirement applicable to the 11th lease year would require that work be performed by the end of the 10th year.

Even under an interpretation that 30 U.S.C. 1005(b) requires only that work be performed in the 11th lease year and thereafter, BLM must give effect to the statutory mandate at 30 U.S.C. 1005(a)(1) that the primary term at the beginning of a lease is ten years. BLM cannot wait until the end of the 11th lease year to determine whether to grant the initial five-year extension because that would provide lessees with a de facto primary term of 11 years, in contravention of the statutory mandate. Because the general rule-making authority granted to the Secretary at 30 U.S.C. 1023 allows the Secretary to prescribe rules appropriate to carry out the provisions of the Act, BLM has authority to prescribe work requirements that must be completed by the end of the 10th lease year, in order to give effect to the statutory ten-year primary term and provide a basis for deciding whether BLM will grant the initial 5-year extension.

Thus, § 3207.11 would provide requirements that a lessee must meet within the 10-year primary term for a lessee to be eligible for the initial 5-year extension of the primary term. BLM formulated its list of potential types of work that could be performed to meet the work requirements based on the statutory provision, at 30 U.S.C.

1005(b)(2). The provisions require that the work should establish a geothermal potential or, if that potential has been established, should confirm the existence of producible geothermal resources. The amount of work that must be performed is quantified as a minimum dollar expenditure per acre, as it is in the current regulations (see current §§ 3210.13 (diligent exploration requirements) and 3208.14 (significant expenditures)).

For the work requirements that must be completed by the end of the tenth year of the lease, we propose at § 3207.11(a) a $40 per acre expenditure over the ten-year period of the primary term of the lease, which is the same expenditure that is required at § 3210.13 of the current regulations for diligent exploration during the primary term. For work requirements for each year of the initial five-year extension, we propose at § 3207.12(a) an annual dollar expenditure of $15 per acre, which is the same as required at § 3208.14 of the current regulations for significant expenditures during a first lease extension. For work requirements for each year of the additional five-year extension, we propose at § 3207.12(c) an annual dollar expenditure of $25 per acre. We determined that the dollar expenditure for work requirements should increase enough during an additional extension to motivate a lessee to put a lease into production if it is not already producing in commercial quantities by the end of the 15th year. As the annual expenditure requirement would increase $11 per acre after the 10th lease year (from $40 over a 10-year period, or an average of $4 per acre per year, to $15 per acre per year), we are proposing that the expenditure requirement increase by a nearly equivalent amount—$10 per acre—after the 15th lease year (from $15 to $25 per acre per year). We believe this level of increase will serve the purpose of encouraging diligent development of the resource.

We are also proposing an automatic inflation adjustment for the minimum work requirements and for monetary payments in lieu of the work performance. We would include a provision in §§ 3207.11 and 3207.12 to adjust the dollar amount of the requirements automatically every three calendar years. The adjustment would be based on the Implicit Price Deflator for Gross Domestic Product that is published annually by the U.S. Department of Commerce. Because the work requirements would simply be based on a mathematical formula, we would make these adjustments in succeeding final rules without notice and comment. This is the procedure that BLM used in its cost recovery rule published on October 7, 2005 (70 FR 58872).

Proposed §§ 3207.11(b) and 3207.12(d) would allow a lessee to make minimum annual payments instead of performing the work requirements, as provided in the statute at 30 U.S.C. 1005(c). These sections would provide that a lessee may make a payment equivalent to the required work expenditure, such that the total of the payment and the value of the work performed equals the dollar value of the expenditure that would otherwise be required. As provided in the statute, these sections would also allow BLM to limit the number of years that it would accept such payments, if it determined that payments in lieu of work requirements would impair achievement of diligent development of the geothermal resource. We concluded that such impairment determinations were more appropriately made on a case-by-case basis and therefore we did not include in the rule a specific limit on the number of years that BLM will accept such payments.

The proposed rule would take a different approach than the approach contained in the existing rules regarding the amount of payments that would be allowable in lieu of work performance. Existing §§ 3210.15 and 3208.13 allow for a lessee to make payments in lieu of performing work requirements, but the payment amounts are substantially less than the value of the work otherwise necessary to be performed. The current rules thus appear to create a disincentive to the performance of work. BLM would reject the existing scheme in the proposal, and not allow payments in a lesser amount than the value of the required work. As stated above, if a lessee were to choose to make payments instead of performing work, the proposed rule would require a lessee to make minimum annual payments in amounts equivalent to the required work expenditure, such that the total of the payment and the value of the work performed equals the dollar value of the expenditure that would otherwise be required. By eliminating the disincentive to perform work, the proposal would further the statutory purpose of encouraging the development of geothermal resources.

Proposed §§ 3207.11(b) and 3207.12(d) would also provide that a lessee is exempt from work requirements if it submits documentation to BLM showing that it has produced or utilized geothermal resources in commercial quantities. This would implement 30 U.S.C. 1005(f), which provides that minimum work requirements do not apply after the date on which the geothermal resource is utilized in commercial quantities.

Proposed §§ 3207.11(c) and (e), and 3207.12(f) and (g) would provide timeframes for a lessee to submit information to BLM showing that it has met the work requirements or paid or produced in lieu thereof, explain the type of information that must be submitted, and explain BLM's approval process.

Proposed § 3207.12(e) would provide that if a lessee expends an amount greater than the dollar expenditure required in that year on suitable development activities, the lessee may apply any excess payment to any subsequent year within that same 5-year extension period. This is similar to § 3208.14(a) of the current regulations.

Proposed § 3207.13 would exempt from the work requirements a lessee whose lease overlies a mining claim when: (1) The mining claim has a plan of operations approved by the appropriate Federal land management agency; and (2) Development of the geothermal resource would interfere with the mining operations. This would implement 30 U.S.C. 1005(e).

Proposed §§ 3207.14 and 3207.15 would implement the 5-year drilling and 35-year production extensions provided for in the statute at 30 U.S.C. 1005(g). The previous version of the statute contained not only these extensions (at former 30 U.S.C.1005(c)), but also a separate 40-year production extension (at former 30 U.S.C. 1005(a)). Because the 2005 statutory amendments eliminated the 40-year production extension, we examined more carefully the language of the 5-year drilling and 35-year production extension provision, to determine its applicability. We concluded that the language in the statute supports applying the 5-year drilling and 35-year production extensions to regular leases, as well as to leases under cooperative or unit agreements.

The statute provides for a drilling extension only if a lessee is engaged in qualifying drilling operations at the time the primary term ends. (See 30 U.S.C. 1005(g).) Under the new statutory and regulatory scheme, if the lessee has submitted information showing that it has met the applicable requirements (work activities or payment or production in lieu thereof), the primary term would be extended each year past the 10th year and would end only at the end of the 20th year. If, however, the lessee fails to submit information showing that it has met the applicable requirements during any extension year

after the 10th lease year, the lease would terminate at the end of that year. (See discussion of proposed §§ 3207.11 and 3207.12, above.) Thus, proposed § 3207.14 would allow the drilling extension only if: (1) A lessee was drilling over the end of the 20th lease year (when the primary term would end due to lease expiration); or (2) A lessee had failed to submit information showing that it had met the requirements for an extension of the primary term and was drilling over the end of a year subsequent to the 10th year (in which case the primary term would terminate due to a failure to comply with requirements). The proposed section would further specify that to qualify for the drilling extension, the lessee must be drilling a well for the purposes of commercial production to a target that BLM determines is adequate, based on the local geology and type of proposed development. The proposed section would also provide, as does the statute, that the lease would expire if, at the end of the five-year drilling extension, the lessee did not qualify for a production extension (

i.e.

, if the lessee was not producing or utilizing the geothermal resource in commercial quantities—see discussion of proposed § 3207.15, below).

Proposed § 3207.15 would provide a production extension of up to 35 years for a lease that is: (1) Actually producing geothermal resources in commercial quantities; or (2) Has a well capable of producing geothermal resources in commercial quantities and the lessee is making diligent efforts to utilize the resource. This would reflect the definition at 30 U.S.C. 1005(h) of “produced or utilized in commercial quantities.” Although that term would be defined at § 3200.1, we also propose to include the definition in this section for the reader's convenience. The section would also indicate what types of information a lessee must provide to BLM for it to determine whether to grant a production extension. A lessee with a BLM-approved utilization plan allowing for seasonal operation would be eligible for the production extension as long as it was producing or utilizing the geothermal resource in commercial quantities during the periods that the utilization plan provided for operations.

Proposed § 3207.16 would implement the lease renewal provision at 30 U.S.C. 1005(g). The statute provides for renewal “for a second term.” We have interpreted “second term” to mean a period equal to the length of the primary term including the initial and additional extensions (a total of 20 years) plus the length of the production extension (up to 35 years) for a total renewal period of up to 55 years. This section would also specify that the renewal term continues only so long as the lessee is producing or utilizing geothermal resources in commercial quantities. The term “produced or utilized in commercial quantities” is defined in proposed § 3200.1.

Proposed § 3207.17 would provide that leases committed to a unit agreement that would expire before the unit term would expire may be extended to match the term of the unit if unit development has been diligently pursued. Paragraph (a) of this section is virtually identical to the current regulation at § 3208.10(a)(4), with a slight change in wording to remove any implication that the holder of the expiring lease must be the one to have diligently pursued unit development.

Proposed § 3207.18 would implement 30 U.S.C. 1017(f)(3) and provide that a lease that is eliminated from a unit is eligible for a drilling extension or a production extension if it meets the requirements for such extensions.

Subpart 3208—Extending the Primary Lease Term

Existing subpart 3208 would be removed because under this proposed rule the subject of extensions of lease terms would be addressed in proposed subpart 3207.

Subpart 3209—Conversion of Lease Producing Byproducts

Existing subpart 3209 would be removed because the lease conversions that subpart covers are no longer allowable under the Energy Policy Act of 2005.

Subpart 3210—Additional Lease Information

Proposed §§ 3210.10 and 3210.11 on lease segregation would remain substantively unchanged from the existing sections.

Proposed § 3210.12 would reference new lease size limits and the processing fee for lease consolidations. In other respects, it would be substantively unchanged from the existing section.

Existing §§ 3210.13, 3210.14, 3210.15, and 3210.16, all of which pertain to diligent exploration requirements, would be removed. These provisions would be addressed by the sections related to work requirements in proposed subpart 3207. Despite their removal, their substantive terms would continue to be applicable to leases existing on August 8, 2005 and leases issued after August 8, 2005 in response to applications pending on that date, unless the lessees elect to be subject to the new regulatory requirements that would be adopted in this rulemaking.

Proposed § 3210.13 on leasing or locating minerals on a geothermal lease would remain substantively unchanged from existing § 3210.17.

Proposed § 3210.14, pertaining to readjustment of the terms and conditions of geothermal leases, would replace existing §§ 3210.18, 3210.19, and 3210.20 that relate to the same topic. It would implement 30 U.S.C. 1007, as revised by the Energy Policy Act of 2005. Proposed § 3210.14(a) on readjustment of lease terms and conditions would replace existing §§ 3210.18 and 3210.19(a). With one exception, proposed paragraph 3210.14(a) would be substantively unchanged from existing § 3210.18. Existing § 3210.18 provides that once BLM and the other agency reach agreement, BLM will readjust the terms of the lease. The existing rule does not state, as the statute requires at 30 U.S.C. 1007(c), that the other agency must approve the readjustment. Proposed § 3210.14(a)(2) would clarify that the other agency must approve the proposed readjustment. “Approval” is the term used in 30 U.S.C. 1007(c).

Proposed § 3210.14(b) would replace existing § 3210.20(a). The existing 22.5 percent royalty cap for readjusted leases would be removed because that cap is no longer in the statute.

Proposed §§ 3210.14(c), (d), and (e) would implement the procedures of 30 U.S.C. 1007(b), and are somewhat different than the procedures in existing rules at 43 CFR 3210.19 and 3210.20. Under existing §§ 3210.19(a) and 3210.20(b), BLM notifies lessees in writing of proposed readjustments and provides the lessee 30 days to object in writing to the new terms. The existing rules provide further that if a lessee does not object, the proposed new terms will become part of an existing lease and that if a lessee does object, BLM will issue an appealable final decision on the new terms and conditions. The existing rules, however, do not expressly mention certain concepts contained in the statute that are described below.

Under the proposal BLM would give a lessee a written proposal to adjust the rentals, royalties, or other terms and conditions of its lease. The lessee would have 30 days after receiving the proposal to file with BLM an objection in writing to the proposed new terms and conditions. If the lessee does not object in writing or relinquish its lease, it would conclusively be deemed to have agreed to the proposed new terms and conditions. This concept, implied but not expressly stated in the existing

rules, is taken directly from the statute. BLM would then issue a written decision under proposed § 3210.14(d), setting the date that the new terms and conditions become effective as part of the lease. This decision would be in full force and effect under its own terms, and under proposed § 3210.14(d), the lessee would not be authorized to appeal the BLM decision to the Department's Office of Hearings and Appeals.

Proposed paragraph (e) establishes procedures for the situations where a lessee files a timely objection to the proposed readjustment and is intended to implement a portion of 30 U.S.C. 1007(b) that is not addressed in existing regulations. Under proposed paragraph (e)(1), if a lessee files a timely objection in writing, BLM could issue a written decision making the readjusted rental and royalty terms effective no sooner than 90 days after receiving the objections, unless BLM reaches an agreement with the lessee as to the readjusted terms of the lease that makes such terms effective sooner.

Under proposed § 3210.14(e)(2), if BLM does not reach an agreement with the lessee by 60 days after receiving the lessee's objections, then either the lessee or BLM may terminate the lease, upon giving the other party 30 days' notice in writing. This provision is contained in 30 U.S.C. 1007(b), but does not appear in the current regulations. The proposed rule would clarify that a lease termination under proposed paragraph (e)(2) would not affect a lessee's obligations that accrued under the lease when it was in effect, including those specified in § 3200.4.

Unlike a BLM decision under proposed § 3210.14(d), a lessee could appeal a BLM readjustment decision under proposed § 3210.14(e)(1). Proposed § 3210.15 would address such appeals. It would provide that if a lessee appeals BLM's decision under § 3210.14(e)(2) to readjust lease terms and conditions, or rental or royalty rate, the decision would be effective during the appeal. If the lessee wins its appeal and BLM would have to change its decision, the lessee would receive a refund or credit for any overpaid rents or royalties.

In summary, BLM would provide a lessee 30 days to object to a proposed readjustment decision. If the lessee objects, BLM could issue a written decision making the readjusted rental and royalty terms effective no sooner than 90 days after receiving the objection. A lessee would have 30 days to appeal that decision under Office of Hearings and Appeals regulations. In addition to the appeal process, BLM and the lessee could attempt to negotiate an agreement within 60 days after receiving the objection. If an agreement is reached, the appeal would be withdrawn. If an agreement is not reached, either the lessee or BLM could terminate the lease, even if an appeal would be pending.

Proposed §§ 3210.16 and 3210.17, relating to drainage of geothermal resources, would be substantively unchanged from existing §§ 3210.22 and 3210.23.

Subpart 3211 Filing and Processing Fees, Rent, Direct Use Fees, and Royalties

Existing § 3211.10 establishes filing fees, rent, and minimum royalties for geothermal leases. In the proposed rule, existing § 3211.10 would be split into several new sections because of the changes to lease rental rates, royalty rates, and minimum royalty requirements in the Energy Policy Act of 2005. Proposed § 3211.10 would only address processing and filing fees. Rather than listing the various fees for lease nomination, lease filing, and subsequent lease transactions, proposed § 3211.10 would reference existing 43 CFR 3000.12, which sets fees for all mineral applications and transactions. BLM expects to update § 3000.12 from time to time to reflect actual costs associated with these activities. If the specific fees were included in this part, the geothermal regulations would have to be changed every time fees were revised.

Proposed § 3211.11 would establish rental rates for geothermal leases. The new lease rental rates would be taken directly from 30 U.S.C. 1004(a)(3)(A) and (B). The rental rates in the Energy Policy Act of 2005 have changed significantly from the rental rates in the existing regulations. While the rental for noncompetitive leases remains at $1 per acre per year for the first 10 years, the rental for competitive leasing has increased from $2 per acre per year to $3 per acre per year from years 2 through 10. Starting with the eleventh year, the rental rate for all leases increases to $5 per acre per year. Proposed § 3211.11(d) would carry forward the current provision regarding fractional mineral interests that currently is contained in § 3211.13. The references to minimum royalties in the existing rule would be removed because the Geothermal Steam Act as revised by the Energy Policy Act no longer provides for minimum royalties.

Proposed § 3211.12 is virtually the same as existing § 3211.12. The Energy Policy Act of 2005 did not make any changes to whom the rent is paid for the first year and subsequent years.

Proposed § 3211.13 addresses when rental payments are due and would replace existing § 3211.11. The rule would provide that rent is always due in advance. MMS must receive annual rental payments by the anniversary date of each lease year. If less than a full year remains on a lease, a lessee must still pay a full year's rent by the anniversary date of the lease. The payment of rent in advance is required by 30 U.S.C. 1004(a)(3). As this was also required in the original Steam Act of 1970, there are no substantial changes to this portion of the provision. The reference in existing § 3211.11 to the automatic termination of leases by operation of law would not be included in the new section because the statute has changed in this regard. Lease termination for non-payment of rental is addressed in § 3214.14 of this proposed rule and is discussed later in this preamble.

Proposed § 3211.14 would require that a lessee must always pay rental, whether the lease is in a unit or outside of a unit, whether the lease is in production or not, and whether royalties or direct use fees apply to production from the lease. This would be a substantial change from existing §§ 3211.14 and 3211.15. Under the current regulations, based on Section 5(d) of the Geothermal Steam Act (30 U.S.C. 1004(d) in effect prior to the Energy Policy Act of 2005), rent was not required once the lease went into production or was deemed to have a well capable of production. Under the earlier statute, the lessee paid a royalty on production, or a minimum royalty of $2 per acre per year, whichever was greater “in lieu” of rent. The Energy Policy Act of 2005 does not contain the “in lieu” language, and also eliminated the requirement of a minimum royalty. The statute now requires rent to be paid as long as the lease is in effect (but does allow a credit against royalties, as discussed below). There are no provisions in the Energy Policy Act of 2005 to waive or alter the rental requirement for leases committed to a unit or pooling agreement and there are no distinctions, other than the rental rate, for leases obtained competitively or noncompetitively, or used for direct use or commercial electrical generation.

Existing § 3211.17 would be removed because, as mentioned above, minimum royalties would no longer apply to new leases.

It should be noted that, even if BLM were to finalize these proposed rules, under proposed § 3200.7(a) the rental and minimum royalty schemes of the existing regulations would continue to

apply to leases in effect on August 8, 2005, unless the lessees elect under proposed § 3200.7(a)(2) to have the new regulatory provisions apply to them. This also applies to leases issued after August 8, 2005, in response to applications pending on that date.

Proposed § 3211.15, together with applicable MMS regulations, would implement 30 U.S.C. 1004(e), which requires that the advance rental payments be credited towards royalty due on production in that lease year. The rule would provide that a lessee may credit rental towards royalty under MMS proposed regulations at 30 CFR 218.303. Under the statute the rental credit against royalty is allowed only for rent paid before the first day of the year for which the rental is owed. In other words, no credit would be allowable for rent paid after the lease anniversary date, even if the lease were not terminated. Thus, although lessees would be allowed to maintain their leases by paying rent plus a late fee within 45 days of the lease anniversary date, they could not credit such late rental payments against royalties.

Also, there are no provisions in the Energy Policy Act of 2005 to carry over rental paid in excess of royalty from one lease year as a credit against royalty for production in another year. Because rental is always due on a lease, the rental payment effectively becomes the equivalent of a minimum royalty payment that was required prior to the Energy Policy Act of 2005.

Proposed § 3211.16 would provide that rental paid could not be credited against fees owed for direct use of geothermal resources. This would also appear in proposed MMS proposed regulations at 30 CFR 218.304. The Energy Policy Act of 2005 (30 U.S.C. 1004(e)), allows only the “crediting of rental towards

royalty

” (emphasis added). Rentals cannot be credited towards the payment of direct use fees because a clear distinction exists between “royalties” and “fees” in the Energy Policy Act of 2005. Under 30 U.S.C. 1004(b), the provision that establishes direct use fees, direct use fees are paid “in lieu of royalties” for direct use of geothermal resources that a lessee uses for a purpose other than the commercial generation of electricity and does not sell. Thus, such fee payments would not constitute royalty payments. Under the proposed rule, lessees would pay direct use fees in addition to rental.

Proposed § 3211.17 would establish royalty rates on geothermal resources produced from or attributable to a geothermal lease that are used in the commercial generation of electricity from or attributable to a geothermal lease. The Energy Policy Act of 2005 (30 U.S.C. 1004(a)(1)(A) and (B)) provides for a royalty on the sale of electricity produced from geothermal resources ranging from 1 percent to 2.5 percent of gross proceeds for the first 10 years of production, and from 2 percent to 5 percent of gross proceeds thereafter. BLM interprets this section of the Energy Policy Act to apply to situations in which the lessee does not sell the geothermal resource produced from its lease or engages in a non-arm's-length transaction. Although the statute establishes an allowable royalty range, the statute contemplates under 30 U.S.C. 1004(c) that actual royalty rates would be established by regulation. Under proposed § 3211.17(a)(1)(i), BLM would establish one royalty rate, 1.75 percent, that would apply to geothermal leases in the first 10 years of a lease, and a second royalty rate, 3.5 percent, that would apply in subsequent years with respect to geothermal resources that a lessee or its affiliate uses to generate electricity that it sells. Proposed § 3211.17(a)(1)(iii) would reiterate the language in the Energy Policy Act of 2005 that the percentages in paragraphs (i) and (ii) must be applied to the gross proceeds from the sale of electricity, as opposed to the gross proceeds from the sale of the geothermal resource, and would specify that gross proceeds must be determined in accordance with applicable proposed MMS rules.

Proposed § 3211.17(a) would apply to leases issued on or after August 8, 2005, except for those leases issued in response to lease applications that were pending on August 8, 2005 that would be subject to the BLM regulations in effect on that date. Under proposed § 3200.8(b), lessees of leases issued in response to lease applications that were pending on August 8, 2005, could elect to have the new royalty rates apply to such leases.

The methodology prescribed in 30 U.S.C. 1004(a)(1)(A) and (B) represents a significant change from the way royalty is currently determined. For leases issued before August 8, 2005 (and for leases issued in response to applications that were pending on August 8, 2005, that are subject to existing BLM rules), a royalty rate from 10 percent to 15 percent of the value of the geothermal resource is in effect. Historically, arms-length sales of geothermal resources from a lessee to a third party utility were common and the arms-length transaction established the value of the resource. For most situations where there was no sale of geothermal resource (as is the case for virtually all existing leases), the value of the geothermal resource was artificially derived using the “netback” method developed by MMS, a method that in practice has been cumbersome for both MMS and the lessees, and often resulted in almost no royalty being paid. For example, lessees at The Geysers geothermal field informed MMS that the netback method was unworkable and negotiated with MMS to adopt a simpler “percent of gross proceeds” method instead.

The Energy Policy Act of 2005 simplifies the way in which royalty is valued by basing royalties on a percentage of gross proceeds derived from the sale of electricity. Section 1004(c) of the Act requires that the royalty rate provide a simplified administrative system, encourage new development, and be revenue neutral for a period of 10 years when compared to the valuation methods currently in place. The change to a “percent of gross proceeds” method for all new leases would accomplish the first two mandates of the Energy Policy Act of 2005. Such a method would be easier for BLM, MMS, and industry to administer than the current scheme, and this should help encourage development.

In establishing the proposed royalty rates, BLM has relied upon the rates recommended by the MMS Royalty Policy Committee (RPC) Geothermal Valuation Subcommittee. Both the RPC and the Geothermal Subcommittee were chartered under the Federal Advisory Committee Act, and included representatives from the geothermal industry, State and local government, and the public at large. The rates recommended by the Subcommittee were 1.75 percent for the first 10 years, and 3.5 percent thereafter. The 3.5 percent royalty rate was based on the national average amount of royalty that is currently paid from producing Federal geothermal leases. In 2003 and 2004, the average royalty rate, expressed as a percent of gross proceeds, was 3.64 percent and 3.94 percent, respectively.

According to the Geothermal Valuation Subcommittee Report (May, 2005, page 10), “Under the netback method, historically during the beginning years of an electrical generation project (between 1-10 years), lessees pay a very low percentage of the gross proceeds from the sale of electricity and in later years of the project (after 10 years), the percentage increases * * *. The recommended proposal [1.75 percent and 3.5 percent] attempts to replicate this historical trend under the netback method over the long term.” Although the RPC recommendation is not based on a

detailed study, it was intended to achieve revenue neutrality for both the initial 10 years, and subsequent years. Because the royalty rate range established in the statute for the time period beyond the first 10 years is double that of the first 10 year period, BLM believes the intent of Congress was to require a higher royalty rate in subsequent years to account for projected higher electrical prices and fewer capital expenditures.

BLM also expects to conduct a study that would project royalty received from existing projects using the existing valuation methods, over the next 10 years. A percent of gross proceeds that would generate an equivalent amount royalty would then be determined. BLM anticipates that the study we are contracting could refine the proposed rates, but would not change them substantially. While there is no specific guidance in the Energy Policy Act of 2005 regarding revenue neutrality past the next 10 years, the study may also address royalties under the existing methods from 10 years to 40 years.

The Energy Policy Act of 2005, as codified at 30 U.S.C. 1004(a)(1)(A) requires a royalty of 1 percent to 2.5 percent of gross proceeds from the sale of electricity “during the first 10 years of production under the lease.” BLM is interpreting this language to mean that the 10-year period to which the 1.75 percent royalty rate applies would start during the month for which commercial operation is first achieved, and would continue for 120 consecutive months, unless a suspension of operations and production was granted under 3212.

Proposed § 3211.17(a)(2) would set the royalty rate for the arms-length sale of resources at 10 percent of gross proceeds from that sale. The Energy Policy Act of 2005 is silent regarding the situation where the lessee sells the resource to an unaffiliated purchaser that produces electricity, rather than the electricity itself. To address these situations, BLM is using the recommendations found in the Geothermal Valuation Subcommittee Report (May, 2005, page 9) which states that “[t]he lessee shall pay a royalty on the geothermal resources sold under arm's-length conditions to a plant that generates electricity based on a royalty rate in the lease multiplied by the gross proceeds the lessee derives from the sale of the geothermal resources.” The Geothermal Steam Act, prior to the amendments of the Energy Policy Act of 2005, required a royalty rate of 10 to 15 percent, and current BLM practice is to issue all leases with a royalty rate of 10 percent. Section 2 of the standard lease terms listed on BLM form 3200-24, “Offer to Lease and Lease for Geothermal Resources,” sets the royalty rate at 10 percent. The ten percent royalty rate in this proposed paragraph would be adopted from the current practice, and is one that the Subcommittee Report characterized as “[n]o change in royalty valuation.”

While the 10 percent royalty rate in the case of an arms-length sale of resources for the commercial generation of electricity could appear to require higher payments by a lessee than the 1.75 and 3.5 percent that would be required for “no-sales” situations in paragraph (a)(1), the actual amount of royalty paid would be roughly equivalent. This is because the 10 percent rate would apply to the gross proceeds from the sale of the geothermal resource, whereas the 1.75 and 3.5 percent rates for electrical generation would apply to the gross proceeds from the sale of electricity. The electricity generated represents a refined product with a much higher value than the heat resource entering a power plant. Therefore, 1.75 and 3.5 percent of a high-value product would be roughly equivalent to 10 percent of a lower value product. Because the proposed 10 percent royalty on the gross proceeds from an arms-length sale of resource required by § 3211.17(a)(2) is the same as the royalty that would be required under existing lease terms, this paragraph would be revenue neutral.

As discussed earlier, the royalty rates for geothermal leases in effect on August 8, 2005 would continue under the existing terms of such leases, unless a lessee converted to the royalty terms of the new statute under proposed § 3212.25. Eligibility for and procedures for such conversions are discussed later in this preamble in the discussion of Proposed subpart 3212. When such conversions do occur, proposed § 3211.17(b) would establish the royalty rates for different conversion situations.

Conversion of the royalty terms of existing geothermal leases is governed by section 224(e) of the Energy Policy Act of 2005. That section does not make the royalty rate ranges stated in 30 U.S.C. 1004(a)(1) applicable to existing leases that are converting to new royalty terms. Instead, the royalty conversion language in § 224(e)(1)(B) of the Energy Policy Act of 2005 requires that except for leases where the geothermal resource is used for a direct use to which a fee schedule applies, royalties are to be computed on a percentage of the gross proceeds from the sale of electricity. Under the statute the royalty rate is to be set at the percent of gross proceeds to “yield total royalty payments equivalent to payments that would have been received from comparable production under the royalty rate in effect for the lease before the date of enactment * * *.” Thus, under proposed § 3211.17(b)(1), BLM would seek to determine a percentage of gross proceeds from the sale of electricity that would result in the same amount of royalty to be paid as the current valuation method. The determination of such a royalty rate would be done on a case-by-case basis, and would be based on the information submitted by the applicant.

As required by § 224(e)(1)(B) of the Energy Policy Act of 2005, proposed § 3211.17(b)(1) would apply to converted leases that produce geothermal resources that are used to generate electricity that is sold, regardless of whether the geothermal resource is sold in an arm's-length transaction to the generator of electricity or the lessee or its affiliate generates the electricity. In a situation where a lessee engages in an arm's-length sale of the geothermal resource to the generator of the electricity that is sold, BLM would not approve the conversion unless BLM had adequate assurance that the lessee will have access in the future to the amount of gross proceeds from the sale of the electricity so that the royalty could be determined. BLM understands that no existing lessee currently engages in arms-length sales of geothermal resources to commercial generators of electricity, but that could change in the future.

In addition, § 3211.17(b) would establish the royalty rate for leases that elect to convert to the royalty terms of the Energy Policy Act of 2005, but have never produced geothermal resources. For these cases, BLM would have no data on which to determine a royalty rate that would be revenue neutral. Therefore, BLM would assign the royalty rates in proposed § 3211.17(a) (1.75 percent for the first 10 years and 3.5 percent thereafter). Because the royalty rates in proposed § 3211.17 were derived to be revenue neutral, this would meet the intent of section 224(e)(1)(B) of the Energy Policy Act of 2005.

Proposed § 3211.17(b)(2) would reiterate language in section 224(e)(1) of the Energy Policy Act of 2005, requiring the gross proceeds established for leases that are converting royalty terms, to be based on gross proceeds from the sale of electricity, and not on gross proceeds from the sale of geothermal resources, and would make it clear that the determination of gross proceeds would occur under proposed MMS regulations at 30 CFR part 206, subpart H.

Proposed § 3211.17(c) would be included to address royalty rates for existing leases and leases issued from applications pending on August 8, 2005, that choose not to convert to the royalty terms of the Energy Policy Act of 2005. The royalty rates for these leases have already been established in existing leases and the lease form. This paragraph would not establish new requirements, but would be included for completeness and convenience of the reader.

Proposed § 3211.18 would implement 30 U.S.C. 1004(b) and section 224(e)(1)(A) of the Energy Policy Act and would address the royalty rates for the direct use of production from or attributable to a geothermal lease.

Proposed § 3211.18(a) would establish the royalty rates for new leases (other than leases issued in response to applications that were pending on that date for which the lessee elects to be subject to royalty regulations in effect on that date) and for existing leases whose royalty terms are modified under proposed § 3212.25. Paragraph (a)(1) would provide that a royalty rate does not apply to the direct use of geothermal resource production that a lessee or its affiliate does not sell. Instead, a lessee would pay direct use fees according to a schedule published by the MMS. (See the MMS proposed regulations at 30 CFR 206.356 for the schedule.) The direct use fee schedule would apply to traditional direct uses such as greenhouse heating, space heating, and industrial heating applications, as well as to non-commercial generation of electricity as described under proposed § 3211.18(c), below.

Under proposed § 3211.18(a)(2), a lessee who produces a geothermal resource and sells it at arm's-length to a purchaser who uses it for direct use purposes would be required to pay a royalty of ten percent. The rule would provide further that the ten percent royalty rate would be applied to the gross proceeds derived from the arm's-length sale under applicable proposed MMS regulations at 30 CFR part 206, subpart H. Proposed § 3211.18(a)(2) would maintain the current royalty rate of 10 percent set in existing 43 CFR 3211.10.

The Energy Policy Act of 2005 does not address situations where a lessee sells geothermal resources in an arm's-length sale to a purchaser who utilizes such resources for direct use purposes. Under 30 U.S.C. 1004(b)(1)(B), the required schedule of fees applies only to those situations where the lessee “does not sell” geothermal resources. Because the royalty provisions in § 1004(a)(1) of the Act specifically refer to electrical generation, they do not cover sale for direct use, either. To the extent that a gap exists in the statute, we would fill that gap with respect to new leases under the rulemaking authority of 30 U.S.C. 1023.

Similarly, a gap exists under the royalty conversion provisions of § 224(e)(1) of the Energy Policy Act of 2005. Section 224(e)(1)(A) establishes the royalties for converted leases that meet the requirements of 30 U.S.C. 1004(b), i.e., leases whose geothermal resources are used for direct use purposes where no sale of the geothermal resources occurs. Section 224(e)(1)(B) establishes the royalties for converted leases that involve the sale of electricity (royalties are to be based upon a percentage of gross proceeds from the sale of electricity). Neither subparagraph establishes the royalty rate for converted leases where a lessee sells geothermal resources in an arm's-length sale to a purchaser who utilizes such resources for direct use purposes. Thus under proposed § 3211.18(a)(2), we would fill that gap with respect to converted leases under the rulemaking authority of 30 U.S.C. 1023.

While the 10 percent royalty rate in the case of an arm's-length sale of direct use resources could appear to require higher payments by a lessee than the 1.75 percent to 3.5 percent required for electrical generation under proposed § 3211.17, the actual amount of royalty paid would be roughly equivalent. This is because the 10 percent rate for direct use applies to the value of the resource and the 1.75 percent and 3.5 percent rates for electrical generation applies to the gross proceeds from the sale of electricity. The electricity generated represents a refined product with a much higher value than the heat resource being sold for direct use. Therefore, 1.75 percent and 3.5 percent of a high-value product is roughly equivalent to 10 percent of a lower value product.

The new statute, at 30 U.S.C. 1004(b)(3), requires that if a State, tribal, or local government is the lessee and uses geothermal resources without sale and for public purposes other than commercial generation of electricity, the Secretary must charge only a nominal fee for use of the resource. Proposed § 3211.18(a)(3) would address this provision of the statute by referencing proposed MMS rules that would implement this provision (see proposed 30 CFR 206.366). The fee that MMS sets would be paid in addition to the rental due on the lease.

Proposed § 3211.18(b) would be included to clarify that for leases issued before August 8, 2005, that do not convert the royalty terms of their lease, and for leases issued from applications pending on August 8, 2005, where the lessee elects not to convert, the royalty rate is established in the lease form and those leases will continue to use existing royalty rates. This paragraph would not establish new requirements, but would be included for completeness and convenience of the reader.

Proposed § 3211.18(c) would be added to clarify BLM's interpretation of how to address non-commercial generation of electricity. If a lessee generates electricity that is used solely for the operation of a direct use facility and does not sell the electricity, this would be considered a direct use subject to the direct use fee schedule.

The new statute, 30 U.S.C. 1004(b)(1), restricts the use of the direct use fee schedule to situations where the resource is used “for a purpose other than the commercial generation of electricity.” As discussed earlier, the statute requires a royalty based on a percent of gross proceeds for commercial generation of electricity (§§ 1004(a)(A) and (B)). However, the statute does not expressly address non-commercial generation of electricity, such as electricity generated to run fans, pumps, lights, automatic valves, and instrumentation in direct use facilities. If electricity is not sold, there would be no gross proceeds upon which to base a royalty. BLM does not believe the intent of the Energy Policy Act of 2005 is to allow the use of Federal geothermal resources to generate non-commercial electricity without compensation. Therefore, as a permissible interpretation of the statute, BLM construes the non-commercial generation of electricity to be a direct use of the resource subject to the direct use fee schedule.

Proposed § 3211.19(a) would implement 30 U.S.C. 1004(a)(2) by setting the proposed royalty rate on byproducts listed in the first section of the Mineral Leasing Act (MLA), 30 U.S.C. 181 (

e.g.

, coal, phosphate, oil and gas, oil shale, sodium, sulfur, and potash) to be the same as the royalty rates in the Mineral Leasing Act and implementing regulations. The list of byproducts that would be included as examples in the proposed rule is not the complete list of minerals covered under the MLA because certain minerals, such as oil shale, would be physically impossible to produce as a byproduct.

In its amendments to 30 U.S.C. 1004, the Energy Policy Act of 2005 removed the language of previous 30 U.S.C. 1004(b) that established royalties of up to 5 percent for byproducts that are not listed in the Mineral Leasing Act, such

as gold, silver, zinc, etc. The removal of such text appears to create a gap in the statute. It is not clear whether Congress intended to establish such royalties at zero, or to leave it to the Secretary to set an appropriate royalty rate for such byproducts. Given the general policy established under section 102(a)(9) of the Federal Land Management and Policy Act, 43 U.S.C. 1701(a)(9), to receive fair market value for the use of the public lands and their resources, BLM believes it appropriate, and proposes in § 3211.19(b), to set a royalty rate of 5 percent of the gross proceeds from the sale of such byproduct, under the rulemaking authority of 30 U.S.C. 1023. The proposal would maintain the current royalty rate of 5 percent for such byproducts under 43 CFR 3211.10. BLM solicits comments on whether this rate is fair and based upon an acceptable interpretation of the statute.

Proposed § 3211.20 would provide that a lessee could credit advance royalty toward royalty due under proposed MMS regulations at 30 CFR 218.305(c). This provision, and the proposed MMS rule, would implement 30 U.S.C. 1004(f)(2) that allows for crediting advanced royalty payments towards royalty due on production.

Subpart 3212—Lease Suspensions and Royalty Rate Reductions

Proposed § 3212.10 would address the difference between a suspension of operations and production and a suspension of operations. Under proposed § 3212.10(a) a suspension of operations and production is a temporary relief from production obligations which a lessee may request from BLM.

The proposal would remove the basis listed in the current rule referring to economic conditions making it unjustifiable to continue operations. BLM believes that a lessee should not be able to hold a lease indefinitely merely because it is uneconomic to conduct operations. This would not promote the development and recovery of geothermal resources. In circumstances where geothermal operations would become economic, the new statute provides that a lessee that is subject to the new regulations could cease production and hold its lease through the payment of advanced royalty. (See proposed § 3212.15(a).) Under the statute, the payment of advanced royalties is limited to 10 years. Proposed § 3212.10(b) would explain that a suspension of operations is when BLM, on its own initiative, orders a lessee to temporarily stop production in the interest of conservation. The proposed regulatory text would more closely follow the statute at 30 U.S.C. 1010 than the existing regulation.

Proposed § 3212.11 would remain substantively unchanged except that the proposed rule would clarify that unit obligations could be separately suspended under proposed subpart 3287.

Proposed § 3212.12 would be similar to the existing section except that paragraph (b) would clarify that a lessee could not unilaterally terminate a suspension that BLM ordered. The reference to minimum royalties would also be removed.

Proposed § 3212.13 would be substantively similar to the existing rule except that during a suspension of operations, BLM could suspend lease or royalty obligations if BLM determined that a lessee would be denied all beneficial use of its lease during the period of the suspension.

Proposed § 3212.14 would remove the existing reference to minimum royalties and substitute the word “terminate” for the existing word “cancel,” because the remedy referred to should be a termination, not a cancellation.

Proposed § 3212.15 would address whether a lease can remain in full force and effect if a lessee ceases production and BLM does not grant a suspension. Proposed § 3212.15 would implement 30 U.S.C. 1004(f)(1) and (3). The intent of this proposed section is to allow temporary cessations of production, lasting more than a month, without lease termination and without a lessee having to apply for a suspension of operations and production.

Under this proposed rule BLM would not allow production stoppages of less than one full calendar month to be considered a cessation of production. BLM added this limitation for several reasons:

(1) Routine maintenance, such as plant overhauls, is an inherent part of producing a geothermal resource. While overhauls and other maintenance can last more than a month, most maintenance operations only require plant shut down for a period of days or weeks. Because maintenance is an inherent part of producing a geothermal resource, performing maintenance is still considered to be “production.”

(2) From an administrative standpoint, tracking shutdowns lasting less than a month would be expensive and cumbersome. The reports that BLM receives are all based on calendar months. If a lease was shut down for an entire calendar month, the reports required by subpart 3270 would indicate zero production and this would flag BLM to consider implementing this section of the regulations. However, if a lease produced for part of a month, the reports would indicate some quantity of production. The only way BLM could determine if the lease was not producing for part of a month would be a physical inspection of the lease and a review of the metering records to determine when the lease was shut-in.

(3) If a lease produces for any portion of a month, royalty would be due. As long as a lessee is diligently producing from its lease, there is no need to collect a royalty on actual production for a portion of a month and an advance royalty for cessation of production for the remainder of the month. Proposed § 3212.15 would only apply if a lease is shut in for more than a calendar month.

Proposed § 3212.15 contains separate paragraphs, each of which would describe a set of circumstances under which a cessation of production could occur without lease termination. Proposed § 3212.15(a) would implement 30 U.S.C. 1004(f)(1) that allows the payment of advanced royalty in lieu of production. Under the proposed rule, once commercial production is achieved, a lessee would be allowed a total of 10 years with no production, without lease termination or having to apply for a suspension of operations, if the lessee continued to pay advanced royalty under proposed MMS regulations at 30 CFR 218.305. BLM has interpreted 30 U.S.C. 1004(f)(1) to allow a total of 120 months (10 years), whether consecutive or not. The benefits in paragraph (a) would not be available to leases subject to existing royalty provisions,

i.e.

, leases in effect before August 8, 2005, and leases issued after August 7, 2005 in response to applications pending on August 8, 2005, unless lessees of such leases elect to convert their royalty provisions under proposed §§ 3212.25 or 3200.8(b).

Because the statutory language is specific to leases on which royalty was previously paid, proposed § 3212.15(a) would not apply to direct use operations where the resource is not sold, because such users pay fees instead of royalties. Therefore, a lessee using the geothermal resource for seasonal operations in a greenhouse, for example, could not pay advanced royalties during the months of the year when no production occurs to maintain its lease in effect. However, if BLM approved the seasonal operations as part of the lessee's utilization plan, it would not be considered a cessation of production. If seasonal operations were not approved, the lessee would need a lease suspension to maintain the lease in effect.

For proposed § 3212.15(a), “commercial production” would be different from “produced or utilized in

commercial quantities,” because this section is not intended to apply to leases that have a well capable of production; it is only intended to apply to leases that are in actual production or are receiving allocated production through some type of agreement.

Proposed § 3212.15(b) specifies other circumstances that would allow leases to remain in full force and effect without having to pay advanced royalties if production ceases. This section would include situations when BLM: (1) Requires or causes the cessation of production; or (2) Determines that the cessation of production is required or otherwise caused by the Secretary of the Air Force, Army, or Navy; by a State or a political subdivision of a State; or by a force majeure. This section would implement 30 U.S.C. 1004(f)(3).

Proposed § 3212.15(c) would exempt lessees from having to pay advanced royalties during extended outages due to maintenance activities that are necessary to maintain operations. For this paragraph to apply, the maintenance would be required to last more than one calendar month and would require prior BLM approval. To approve such a request, the lessee would have to demonstrate to BLM's satisfaction that the cessation was part of required maintenance. The basis for this provision is that maintenance required to maintain operations is a production activity, not a cessation of operations. Required maintenance activities under this paragraph could include overhauling a power plant, re-drilling or re-working wells that are critical to plant operation, or repairing and improving gathering systems or transmission lines that necessitate the discontinuation of production.

Proposed § 3212.16 would replace existing § 3212.15 and provide the standards for reduction, suspension, or waiver of rental or royalties. It would be similar to the existing section but would more closely follow the statutory provision at 30 U.S.C. 1012.

Paragraph (b) would make clear that BLM would not approve a royalty reduction, suspension, or waiver unless all royalty interest owners other than the United States accept a similar reduction, suspension, or waiver. This provision is in existing regulations at § 3212.16(b).

Proposed § 3212.17 would specify the information that must be included with a request for a royalty or rental rate reduction, suspension, or waiver. It would include the information currently in § 3212.16, but clarify that all of the information must be submitted.

The Energy Policy Act of 2005 (at section 224(c) and (d)) establishes production incentives for new facilities and qualified expansion projects that are put into commercial operation by August 8, 2011. The incentives are in the form of a four-year, 50 percent reduction in royalty from what otherwise would be due. Proposed §§ 3212.18 through 3212.24, and proposed MMS regulations at 30 CFR 218.307, would implement these statutory provisions.

If a project is defined as a “new facility,” all of the production from that facility is subject to the 50 percent reduction in royalty that would otherwise be due. If a project is defined as a “qualified expansion project,” only the additional electricity generated as a result of the project is subject to the reduced royalty. Qualifying a project as a “new facility” would generally be more difficult and would typically result in more capital expenditure than an expansion project. Although a “qualified expansion project” may be easier to achieve, strict monthly production targets would be established that the project must meet in order to qualify.

Proposed § 3212.18 would provide a general description of the requirements for obtaining a production incentive. The production incentives would only be available for those leases that were issued before August 8, 2005, and that do not convert their royalty provisions under proposed § 3212.25. Because section 224(c) of the Energy Policy Act specifically refers to reductions in royalty, BLM has interpreted this to mean that the incentives are intended only for the commercial generation of electricity and not for direct use projects.

Proposed § 3212.19 would require lessees seeking a production incentive to submit a written request for a production incentive describing a project that may qualify as a new facility or qualified expansion project. Because each type of project offers specific benefits and restrictions for the lessee, the request would need to identify whether a lessee is requesting that the project be considered a new facility or a qualified expansion project, and to provide sufficient supporting information. In order to qualify for incentives under this paragraph, BLM must receive the request before August 7, 2011. Although the statute does not prescribe an application process, one clearly is needed. Because each project qualifying for a production incentive is unique, BLM would need sufficient information to determine the type of production incentive the applicant should receive (new facility or qualified expansion project). This determination would dictate the information that would need to be submitted and the requirements that the lessee would need to satisfy to receive the reduction in royalty.

BLM does not anticipate developing a specific application form; instead, the application could be in the form of a letter. The letter would provide a description of the project and whether the applicant prefers the project to be considered a new facility or a qualified expansion project. If the applicant is requesting the project to be considered as a new facility, the letter should include sufficient technical justification to support the general criteria set forth in § 3212.22. If the applicant is requesting the project to be considered as a qualified expansion project, the letter should describe the anticipated amount of capital expenditure per § 3212.21(a) and the estimated increase in net generation resulting from the project per § 3212.21(b). The letter should include sufficient technical detail to support these estimates.

Proposed § 3212.20 would describe how BLM would review a request for a production incentive. Under the proposal, BLM would review incentive requests on a case-by-case basis to determine whether a proposed project meets the criteria for a qualified expansion project under proposed § 3212.21 or a new facility under proposed § 3212.22 (see the discussions below of the criteria for qualified expansion projects and new facilities). If the request does not meet the criteria for the type of project the lessee requests, BLM would determine whether it meets the criteria for the other type of production incentive project.

Under proposed § 3212.20(b), if BLM determined that a lessee has a qualified expansion project, BLM would, as part of its approval, provide the lessee with a schedule of monthly target net generation amounts. These amounts would quantify the required 10 percent increase in net generation over the projected net generation without the project. The schedule would be specific to the facility or facilities that are affected by the project and would cover the 48-month time period during which the production incentive may apply. The lessee would receive the production incentive only for those months in which its net generation met the monthly target. BLM believes that averaging of production should not be allowed (see the preamble discussion of § 3212.23).

Proposed § 3212.21 would specify the criteria necessary to establish a qualified

expansion project for the purpose of obtaining a production incentive. Because one goal of the Energy Policy Act of 2005 is to encourage new projects that would increase the amount of electricity generated from geothermal resources, BLM would not approve projects for this incentive that do not involve significant capital expenditure. Specifically, BLM is concerned that a production incentive could be abused if a lessee simply opened production valves to achieve the required increase in generation. Examples of activities involving substantial capital expenditure could include: (1) The drilling of additional wells; (2) Retrofitting existing wells and collection systems to increase production rates; (3) Retrofitting turbines or power plant components to increase efficiency; (4) Adding additional generation capacity to existing plants; and (5) Enhanced recovery projects such as augmented injection. Projects that are not associated with substantial capital expenditure, such as opening production valves or operating existing equipment at higher rates, would not be considered to be qualified expansion projects.

While the Energy Policy Act of 2005 specifically refers to “expansion of the facility” in relation to qualified expansion projects, BLM has broadly interpreted this to mean the expansion of any portion of a geothermal project that would result in increased generation. This includes not only expansion to the power plant, but also projects in the well field, such as additional drilling, workovers, and enhanced geothermal projects such as augmented injection or acid and fracture stimulation.

In addition, the project would need to have the potential to increase the net generation by more than 10 percent over the projected generation without the project, using data from the previous 5 years. If 5 years of data were not available, it would not be considered to be a qualified expansion project. Under section 224(d) of the Energy Policy Act of 2005, a qualified expansion project must increase “production” by at least 10 percent over the production in the previous 5 years, taking into consideration production trends that occurred in those 5 years. BLM interpreted this provision to mean that if 5 years of data were not available, the project could not be classified as a qualified expansion project. In addition, BLM interprets the term “production” to mean “net generation,” because this would meet the intent of the statute to increase the amount of useable electricity from geothermal resources.

If a lessee were to satisfy the criteria for a qualified expansion project, BLM would perform a reservoir analysis of the 5 years of data that is submitted and, from that analysis, would develop a monthly schedule of target net generation amounts that would have to be met in order to qualify for a reduced royalty for that month. The lessee could perform its own reservoir analysis and develop a schedule of target generation amounts. However, BLM would review the analysis and could modify the schedule. Because the production incentive is only in effect for four years, the schedule would cover the 48-month period for which the production incentive may be applied.

Proposed § 3212.22 would identify criteria for determining whether a project qualified as a “new facility.” Because BLM does not have a formal definition for “facility” and because of the high degree of variation in projects, each application would be considered on a case-by-case basis based on the factors described in the rule. Listed factors in favor of concluding that a project qualifies as a new facility would include: (1) The project requires a new site license or facility construction permit if it is on Federal lands; (2) The project requires a new Commercial Use Permit; (3) The project includes at least one new turbine-generator unit; (4) The project involves a new sales contract; (5) The project involves a new or substantially larger footprint; or (6) The project is not contiguous to an existing project. Generally, a new facility would not be: (1) Authorized only with a Geothermal Drilling Permit; (2) Constructed entirely within the footprint of an existing facility; or (3) Involve only well field projects such as drilling new wells, increasing injection, and enhanced recovery projects.

If BLM determines that a proposed project could be approved either as a “new facility” or as “qualified expansion project,” BLM would approve the application under the category requested by the applicant. If a project would not qualify as a “new facility” BLM would automatically review it, with no action necessary on the applicant's part, to see if it would qualify as a “qualified expansion project.”

Proposed § 3212.23 would describe how production incentives would apply to qualified expansion projects. The Energy Policy Act of 2005, at section 224(d), requires a production incentive to be granted if a qualified expansion project resulted in a 10 percent increase in production. However, that section of the Act is silent on how long the 10 percent increase would have to be maintained. BLM is concerned that a project could meet or exceed the target increase for a short period, yet obtain the production incentive for the entire allowable four year period. BLM believes the intent of the production incentive is to encourage projects that would result in a sustainable increase in production. Therefore, proposed § 3212.23 authorizes a reduced royalty only for those months where the qualified expansion project is meeting or exceeding the BLM-established net generation targets.

The Energy Policy Act of 2005, at section 224(c)(1)(b), requires the production incentive be applied to “qualified expansion geothermal energy,” which is further defined in section 224(d)(1) of the Energy Policy Act as being a “production” increase as a result of the expansion of the facility. BLM has interpreted this to mean that the reduced royalty only applies to the increase in net generation resulting from a qualified expansion project. To define the increase in net generation, proposed § 3212.23 would include an equation that uses the target generation amounts defined in proposed § 3212.20 as a basis. The denominator of the equation (1.1) converts the target generation amount to the baseline generation amount which represents the amount of electricity that would have been generated without the qualified expansion project.

To simplify the administration and tracking of the production incentives, the production incentive would take effect on the first day of the month following the commencement of commercial operation of the project, but only for those months where the net generation targets are met. The amount of the production incentive for qualified expansion projects would be established by the proposed MMS regulations.

Under Proposed § 3212.24, for projects that qualify as “new facilities,” the royalty on all the net generation from the facility would be reduced by 50 percent for the 48-month period following the commencement of commercial operation, regardless of the amount of electricity generated. To simplify the administration and tracking of the production incentives, the production incentive would take effect on the first day of the month following the commencement of commercial operation of the project. The amount of the production incentive for new facilities would be established by the proposed MMS regulations.

Proposed § 3212.25(a) would implement Section 224(e) of the Energy Policy Act of 2005, that allows lessees of geothermal leases issued before

August 8, 2005, to request that BLM modify their leases to convert the terms of their leases relating to the payment of royalties to the royalty and direct use fee terms in the Energy Policy Act of 2005. Proposed § 3212.25(a) would also provide that, if BLM modified the royalty terms of a lease, the new royalties and direct use fees would apply to all production from or allocated to that lease. Proposed § 3212.25(b) would reference proposed §§ 3211.17 and 3211.18 and applicable MMS rules for the specific royalty rates and direct use fees that would apply to a modified lease.

In implementing section 224(e) of the Energy Policy Act of 2005, BLM construes the statute to mean that the only royalty term of the lease that would be converted is the royalty rate on production from or allocated to the lease. Other lease and statutory terms exist, such as “minimum royalty” (existing § 3211.10) and “advanced royalty” during cessation of production (proposed § 3212.15), that BLM proposes not be converted.

For example, under the proposed rule, if the lessee of a lease issued prior to August 8, 2005, elected to convert the royalty terms of the lease under proposed § 3212.25, the lessee would be subject to the new royalty rate on gross proceeds for the commercial generation of electricity and direct use fee schedule for direct use operations. The lessee would, however, continue to be subject to the existing minimum royalty terms of their lease and not be required to pay rental once commercial production begins. In addition, the lessee would not be subject to paying advanced royalty if it ceased production for more than a calendar month.

This interpretation is based upon possible complications that could occur if some, but not all, of the other provisions changed. For example, under the Geothermal Steam Act, prior to the amendments made by the Energy Policy Act of 2005, rental on a lease was only due until the lease begins actual production or is deemed to have a well capable of production. At that point, the greater of actual royalty on production or minimum royalty is due every month. If BLM were to include the minimum royalty terms in the conversion under proposed § 3212.25, lessees electing to convert the royalty terms of their lease would no longer pay minimum royalty because there is no minimum royalty provision in the Energy Policy Act of 2005. But, once a lease had a well deemed capable of production, the rental commitments of the existing lease terms would end; therefore, unless the rental provisions of the new statute applied, the lessee would not pay rental or minimum royalty. BLM does not believe it was the intent of the Energy Policy Act of 2005 to allow lessees to hold a lease without making some type of payment. The Energy Policy Act of 2005 does not include provisions to change the rental terms of existing leases; only the royalty terms.

In addition, if lessees do not convert the requirement for minimum royalty payment under existing § 3211.10, requiring the payment of advanced royalties when production ceases for more than a calendar month would be burdensome and redundant. In cases where a lessee does not produce for a calendar month, the existing minimum royalty provisions require that minimum royalty be paid. BLM believes that Congress did not intend for more than one payment to be made if production ceases.

BLM believes that its proposal would be the simplest to administer. Requiring existing lessees who convert the royalty terms of their leases to eliminate minimum royalties without establishing new rental obligations and to pay advanced royalties in lieu of minimum royalties if production ceases, would be confusing and difficult to administer, and is not what Congress intended when it allowed existing lessees to convert royalty rates. Conversion of royalty rates only appears to be a straightforward way to implement the statute without imposing unnecessary complications. BLM is soliciting comments on this interpretation.

Section 224(e) of the Energy Policy Act of 2005 requires any lessee wishing to convert the royalty rate terms of its lease to apply to BLM. Proposed § 3212.26 would establish an application process and would require certain types of information to be submitted together with the application. For electrical generation, the lessee must submit enough information to allow BLM to determine how much royalty the lessee would have paid under the netback method, if that is the current method the lessee is using. As mentioned earlier, in situations where a lessee or its affiliate is selling geothermal resources at arm's length before those resources are used to generate electricity, the lessee would be required to document in its application that it has access to the purchaser's gross proceeds derived from the sale of the electricity. From the information contained in the application, BLM would calculate a new royalty rate that would result in the same amount of royalty.

Proposed § 3212.26(c) would state that BLM must receive an application to convert no later than 18 months following the effective date of the applicable final rule. For direct use operations, the applicable final rule is 30 CFR 206 (direct use fee schedule) and for the commercial generation of electricity, the applicable final rule is 43 CFR 3200 (lease royalty rates). This section would implement section 224(e)(2) of the Energy Policy Act of 2005. If both the MMS and BLM final rules were made effective on the same day, then all applications would have to be received by the same day, and the text of the final rule could be simplified.

Proposed § 3212.27 would implement section 224(e)(3) and (4) of the Energy Policy Act of 2005, and would also require BLM to consult with MMS in implementing the royalty conversion provision. BLM would also review an application to ensure that the lessee has suitable meters necessary to determine the royalty due under the modified lease terms.

Subpart 3213—Relinquishment, Termination, and Cancellation

Proposed §§ 3213.10 and 3213.11 relating to lease relinquishment would contain minor changes from the existing sections.

Proposed § 3213.12 relating to the minimum size of a remaining lease following a partial relinquishment would be amended to create an exception for direct use leases. The exception would be necessary because, under 30 U.S.C. 1003(g)(1), the size of direct use leases could easily be less than 640 acres.

Proposed § 3213.13 would contain some editorial changes. For the most part, it would be substantively unchanged from the existing regulation, although it would clarify that surface and other resources would need to be reclaimed as well as restored.

Proposed § 3213.14 would implement 30 U.S.C. 1004(g) regarding the termination of a lease for failure to pay rentals on time. This proposal would represent a substantial change from the procedures currently in place under existing §§ 3213.14 through 3213.20, which are based on statutory language that was removed by the Energy Policy Act of 2005. Under existing § 3213.14 (which implemented former 30 U.S.C. 1004(c)), failure to pay the full rental amount by the anniversary date of the lease results in automatic termination of the lease by operation of law. No grace period is provided for late payment. Existing § 3213.15 (which implemented a proviso in former 30 U.S.C. 1004(c)) provides that a lease will not terminate if MMS receives a timely rental payment that is deficient by a nominal amount.

Under the existing rule, MMS notifies the lessee of the nominal deficiency and provides a date by which a further payment must be paid. If the payment is not made in the time allowed, BLM terminates the lease as of the anniversary date of the lease. Existing §§ 3213.17, 3213.18, 3213.19, and 3213.20 contain a process for petitioning for lease reinstatement if a lease is terminated for failure to pay rent on time. The lessee has 30 days from receiving a termination notice to petition for lease reinstatement and must demonstrate that the failure to pay rent on time was justifiable or was not due to a lack of diligence. These regulatory provisions are also based on former 30 U.S.C. 1004(c). The Energy Policy Act of 2005 removed the provisions of 30 U.S.C. 1004(c) relating to lease termination, replacing them with the provisions of current 30 U.S.C. 1004(g), described below. The new statute contains no express process to petition for lease reinstatement.

Under the revised statute at 30 U.S.C. 1004(g)(1), a 45-day grace period beginning on the date of the failure to pay the rental (the lease anniversary date) is provided for a lessee to pay its rent in full before BLM will terminate a lease. The Secretary must terminate any lease with respect to which rental is not paid in full on the expiration of the 45-day period beginning on the date of the failure to pay the rental. Unlike the former statute, the new statute contains no exception for timely rental payments that are deficient by a nominal amount. The section provides further, at 30 U.S.C. 1004(g)(3), that a lease that would have otherwise terminated upon expiration of the 45-day period, will not terminate if the lessee pays to the Secretary, before the end of that period, the amount of rental due plus a late fee equal to 10 percent of the amount due. Proposed § 3213.14(a) would implement this statutory provision. This provision would also make clear that if MMS does not receive a lessee's rental plus the late fee by the end of the 45-day period described above, BLM will terminate the lease.

Under 30 U.S.C. 1004(g)(2), the Secretary is required to “promptly” notify a lessee that has not paid rental required under the lease that the lease will be terminated at the end of the 45-day period referred to in 30 U.S.C. 1004(g)(1). MMS will provide this notification. The legislative intent of this paragraph appears to be that the Secretary should put a lessee on notice that it has a grace period to pay rental before its lease would be terminated for failure to pay. From a logistical standpoint, however, this legislative intent may be frustrated. For instance, it may take MMS a considerable amount of time to notify lessees that the lease anniversary date has passed and that MMS has not received the rental payment when it was due. If, for example, it were to take MMS 30 days to provide the required notification, a lessee would only have 15 days notice to pay within the 45-day timeframe required by paragraph (1) of the Act. As a further example, it is possible in certain circumstances that the MMS notification would not occur until after the expiration of the 45-day period, and after the BLM lease termination.

BLM is concerned that the practical difficulties with providing a lessee with adequate notice could lead to the unintended consequence of having leases terminate without the lessees being provided adequate notice to pay their overdue rental. Such an outcome would seem to be inconsistent with the requirement that the Secretary “promptly” notify the lessee of the unpaid rental. Proposed § 3213.14(b) would address this situation and provide a remedy that BLM believes would be consistent with Congressional intent. The proposed rule would ensure that lessees have at least 30 days notice to pay overdue rental in full. It would provide that if a lessee receives MMS notification of the non-payment of rental less than 30 days before the end of the 45-day period, the lessee will have a full 30 days from receipt of the notice to pay its rental in full. If MMS received the rent plus the 10 percent late fee within 30 days after the lessee received the notification, BLM would either not terminate the lease for non-payment of rental or would reinstate a lease that was terminated under proposed § 3213.14(a). In other words, every lessee would have no less than 30 days notice to either avoid a lease termination or to have its lease reinstated if it were terminated at the end of the 45-day period.

The statutory basis for proposed § 3213.14(b) is as follows: The statute does not expressly address the situation where, in practice, the “prompt” notification would compress the actual notice to a lessee to less than 30 days. The proposed rule would more fully implement the Congressional intent of providing adequate notice to a lessee. Moreover, under 30 U.S.C. 1023, the Secretary may prescribe regulations that it may deem appropriate to carry out the provisions of the Act, and may include, without limitation, rules to prevent waste, conserve geothermal resources, and protect the public interest. Proposed § 3213.14(b) would further all of these goals, and also implement congressional intent to provide a fair grace period to a lessee who fails to pay rent on time. Although not directly applicable, this proposal would be consistent with the intent of 30 U.S.C. 1011 that a lease not be terminated for any violation unless the lessee has 30 days notice to correct the violation.

Proposed § 3213.15 would carry forward the text of existing § 3213.16. Existing §§ 3213.15, 3213.17, 3213.18, 3213.19, and 3213.20 would be removed because they do not reflect the current statute.

Existing §§ 3213.21 and 3213.22, relating to lease expiration, would be removed because these matters would be covered in proposed subpart 3207, relating to terms and extensions of leases.

Proposed §§ 3213.16, 3213.17, 3213.18, and 3213.19 would clarify the provisions and terminology of existing §§ 3213.23, 3213.24, and 3213.25, relating to lease cancellation and termination. Lease cancellation would mean undoing the lease as if it never existed.

This would be covered by proposed § 3213.16 and limited to situations when BLM issued a lease in error.

In other circumstances, the existing rules use the term “cancel” when the appropriate term should be “terminate.” Thus, proposed § 3213.17 would describe situations where BLM could terminate (not cancel) a lease as of a particular date. Conforming changes would be made to other provisions of the proposed regulations by replacement of the word “cancellation” with the word “termination.” The rule would also clarify that it does not apply to non-payment of rent which, as explained above, would be covered by proposed § 3213.14. In response to a request by MMS, BLM would clarify in proposed § 3213.17 that among the bases for lease termination would be the nonpayment of royalties and fees under 30 CFR 206 and 218. This is not new in substance, but a reminder to lessees of the possible consequences of not making correct payments to MMS.

Proposed § 3213.19 would address circumstances where BLM notifies a lessee that its lease is being terminated because of a violation. It would clarify the procedures of existing § 3213.25 by specifying that a hearing may be requested in the context of the appeal of a proposed lease termination. It also would follow the statutory text of 30 U.S.C. 1011 in that a lessee could avoid lease termination by diligently proceeding to correct a violation, and that it is insufficient to make a good faith attempt to correct the violation without actually correcting it.

Subpart 3214—Personal and Surety Bonds and Subpart 3215—Bond Release, Termination, and Cancellation

Both proposed and existing subparts 3214 and 3215 address bonding of geothermal operations. Most sections of the proposed subparts would be substantively unchanged from their existing counterparts. Changes have been proposed to clarify terminology, and improve grammar and readability. The proposed substantive changes are discussed.

In proposed § 3214.14(b), we propose that the bond may be increased to reclaim the surface and other resources. The existing rule does not expressly include “other resources.”

In proposed § 3214.18, the title would be clarified to match the content of the section. Proposed § 3214.18(b) would clarify that reclamation responsibilities extend to resources other than the surface, and proposed § 3214.18(d) would expressly mention royalties as well as rents.

Proposed § 3215.13 would be reorganized for clarity. It would also clarify that even after bond termination, a surety and any other bond provider remains responsible for obligations that accrued during the period of liability while a bond was in effect.

Subpart 3216—Transfers

Existing subpart 3216 addresses geothermal lease transfers. The proposed subpart would almost entirely be substantively unchanged from the existing subpart. Changes have been proposed to clarify terminology, and improve grammar and readability. Proposed section § 3216.14 would be changed to indicate that the filing fees for transfers are now found in § 3000.12 of the chapter.

Proposed § 3216.19 would recognize that direct use leases have different size constraints than regular geothermal leases. Thus, the proposed section relating to the size of allowable lease transfers would contain an exception for direct use leases.

Subpart 3217—Cooperative Agreements

Existing subpart 3217 addresses cooperative agreements. The proposed subpart would have few substantive changes from the existing subpart. Changes have been proposed to clarify terminology, and improve grammar and readability.

Subpart 3217 describes two types of cooperative agreements, unit and communitization agreements, and addresses the requirements of Federal lessees who join with others to conserve the geothermal resource under communitization agreements. The Energy Policy Act of 2005, at 30 U.S.C. 1017(e) specifically authorizes the pooling of land under communitization agreements in order to develop geothermal resources where operators cannot successfully develop tracts independently. BLM cannot approve these agreements unless BLM determines them to be in the public interest.

Proposed § 3217.10, describing unit agreements, would be revised to more closely follow the statutory language at 30 U.S.C. 1017(a). The term “cooperative plan” would be removed from the existing § 3217.10 because the agency does not require approval of a cooperative plan and does not use that term in a regulatory context.

Sections 3217.11 through 3217.13 are substantively unchanged from existing regulations.

The term “operating contracts” would be removed from proposed §§ 3217.14 and 3217.15, leaving the statutory terms “drilling contract” and “development contract,” both of which appear in 30 U.S.C. 1017(g). BLM uses the terms “drilling contract” and “development contract” interchangeably to describe the agreement parties use to cooperatively explore under a communitization agreement. Proposed § 3217.14(b) would include reference to regional exploration, which typically describes the scope of drilling or development contracts. This section has also been revised to make it clear that drilling or development contracts are limited to exploration activities. Proposed § 3217.14(c) would be added to acknowledge current BLM practice of coordinating the review of a proposed drilling or development contract with the appropriate State agencies. Section 3217.14(d) would be changed to more accurately reflect a provision of the Energy Policy Act that requires BLM to determine that approval of a drilling or development contract best serves or is necessary for the conservation of natural resources, public convenience or necessity, or the interests of the United States.

Subpart 3250—Exploration Operations—General; Subpart 3251—Exploration Operations: Getting BLM Approval; Subpart 3252—Conducting Exploration Operations; Subpart 3253—Reports: Exploration Operations; Subpart 3254—Inspection, Enforcement, and Noncompliance for Exploration Operations; Subpart 3255—Confidential, Proprietary Information; and Subpart 3256—Exploration Operations Relief and Appeals

Subparts 3250 through 3256 contain provisions regulating geothermal exploration of Federal lands. Proposed changes to these subparts would clarify existing terminology and procedures and make the subparts more readable.

Several changes are proposed throughout these subparts to clarify that an approved Notice of Intent to Conduct Geothermal Resource Exploration Operations would be equivalent to a permit. In most cases the terms “Notice of Intent” or “Notice of Intent to Conduct Geothermal Resource Exploration Operations” would be substituted for the terms “exploration permit” or “permit.”

Proposed § 3250.10 is substantively unchanged from existing regulations.

Proposed § 3250.11, addressing the general question related to where exploration can occur, would be moved from existing § 3251.11 of the subpart addressing exploration approval. This would necessitate the renumbering of subpart 3251.

Proposed §§ 3250.12 and 3250.13 are substantively unchanged from existing regulations. The content of proposed new § 3250.14 would be taken from existing § 3250.11. This proposed reorganization would provide a more logical sequence of general questions related to the regulation of exploration operations.

There would be no substantive changes to §§ 3251.10-15. As mentioned previously, the content of existing § 3251.11 would be moved to proposed § 3250.11 and the remaining sections would be renumbered to correspond to proposed §§ 3251.10-14.

Proposed § 3251.15(b) would revise existing § 3251.16(b) to ensure that bond release could not occur unless operators not only have reclaimed the land surface, but also, if necessary, resolved other environmental, cultural, scenic, or recreational issues. Reclamation includes resolving the impacts of geothermal exploration activities on resource values in addition to reclamation of the land.

There are no substantive changes proposed in subparts 3252 through 3256.

Subpart 3260—Geothermal Drilling Operations—General; Subpart 3261—Drilling Operations: Getting a Permit; Subpart 3262—Conducting Drilling Operations; Subpart 3263—Well Abandonment; Subpart 3264—Reports-Drilling Operations; Subpart 3265-Inspection, Enforcement, and Noncompliance for Drilling Operations; Subpart 3266—Confidential, Proprietary Information; and Subpart 3267—Geothermal Drilling Operations Relief and Appeals

Subparts 3260 through 3267 establish permitting and operations procedures for drilling and testing geothermal wells as well as producing or injecting geothermal resources. These subparts also address other types of geothermal well operations. No substantive changes are proposed to these subparts. Changes have been proposed to clarify terminology, and improve grammar and readability.

Subpart 3270—Utilization of Geothermal Resources—General; Subpart 3271—Utilization Operations: Getting a Permit; Subpart 3272—Utilization Plan and Facility Construction Permit; Subpart 3273—How to Apply for a Site License; Subpart 3274—Applying for and Obtaining a Commercial Use Permit; Subpart 3275—Conducting Utilization Operations; Subpart 3276—Reports: Utilization Operations; Subpart 3277—Inspections, Enforcement, and Noncompliance; Subpart 3278—Confidential, Proprietary Information; and Subpart 3279—Utilization Relief and Appeals

The regulations in subparts 3270 through 3279 address the permitting and operating requirements for the utilization of geothermal resources. Except as referenced below, no other substantive changes are proposed to these subparts. Changes have been proposed to clarify terminology, and improve grammar and readability.

Proposed § 3275.14 would be amended in one respect. The current requirement to measure the temperature out of a facility (current § 3275.14(c)(3)) would be removed because this information would no longer be needed for the valuation of direct use operations using the MMS fee schedules. For “no-sales” situations, leases issued under the Energy Policy Act and leases converting to the new royalty terms under §§ 3212.25 or 3200.8 would no longer have to calculate the amount of heat displaced by the geothermal resource. Instead, they would use a direct use fee schedule that is based only on inlet temperature and the monthly volume or mass produced. In developing the direct use fee schedule, MMS assumed a fixed outlet temperature of 130 °F, which greatly simplifies the metering system and the calculations.

For situations involving the arms-length sale of geothermal resources to a direct use facility and for leases issued under the previous royalty terms which do not convert to the new royalty terms, both of which BLM believes will be relatively rare, proposed § 3275.14(d) would give BLM the authority to require outlet temperature recorders on a case-by-case basis, if needed.

Proposed § 3276.14 would eliminate the requirements of existing § 3276.14(a) to report a daily breakdown of flow, average temperature in, and average temperature out. The information requirements in existing sections § 3276.14(d) and (e) would also be eliminated. The purpose of the data was to allow the calculation and verification of thermal energy displaced, which is the basis of valuation in the existing MMS regulations. For leases issued under the Energy Policy Act and for existing leases that convert to the new royalty terms of the Energy Policy Act under §§ 3212.25 or 3200.8, direct use operations would now be valued using the MMS fee schedule which determines fees due as a function of inlet temperature and monthly volume or mass produced. Therefore, collection of the data would no longer be necessary.

For situations where the resource is sold under an arm's length contract for use in a direct use facility and for leases issued with the previous royalty terms that do not convert to the royalty terms of the Energy Policy Act, the daily breakdown of flow, average temperature in, and average temperature out may still be required. However, BLM believes these situations will be relatively rare and can be handled on a case by case basis under § 3276.14(d).

Part 3280—Geothermal Resources Unit Agreements

This proposed rule would revise existing part 3280 to implement the Energy Policy Act of 2005 relating to unit agreements, specifically 30 U.S.C. 1017. Additionally, the regulations in part 3280 have not been updated since the 1970s, other than to add the unit review requirement mandated by a 1988 amendment to the Geothermal Steam Act. Therefore, other additions to the proposed rule would be included to provide needed procedural requirements related to unit agreement administration. These changes and additions are intended to clarify BLM's expanded authority regarding unitization as provided under the Energy Policy Act of 2005, the unit operator's application and operational requirements, and to identify how BLM would review an application and make necessary unit agreement administration decisions, given the manner in which geothermal resources are developed. Changes would include provisions specifying that BLM could require: (1) The formation of a unit agreement; (2) Existing Federal leases to commit to a unit agreement; (3) New leases to contain a provision requiring the lessee to agree to commit to a unit agreement if BLM so requires; (4) A modification of the rate of resource exploration or development within a unit; and (5) Establishing that a majority interest of owners in a lease has the authority to commit the lease to a unit agreement. Other changes in this proposal do not change existing procedure or practice, but clarify and articulate unit agreement requirements. These provisions include: (1) Setting out the application procedures for unit area designations and the unit agreements, in the order each step typically occurs; (2) Identifying BLM's procedures for reviewing applications and making final decisions regarding unit area designations, unit agreements, and participating areas; (3) Explaining BLM procedures for administering a unit agreement once it is in effect; (4) Specifying how a unit operator could receive BLM approval to modify unit terms, especially those related to unit contraction; and (5) Establishing minimum initial and continuing unit development requirements and conditions for terminating the unit agreement. In effect, the proposed provisions would standardize existing practices, assure consistent BLM procedures, and would inform the public as to how BLM handles unit agreements.

Subpart 3280—Geothermal Resources Unit Agreements: General

Proposed § 3280.1 would explain that the purpose and scope of part 3280 is to provide holders of Federal and non-Federal geothermal leases and owners of non-Federal mineral interests the opportunity to unite under a Federal geothermal unit agreement to explore for and develop geothermal resources in a manner meeting the public interest.

The existing authority, § 3280.0-3, would be removed as unnecessary. The authority citation for the part follows the Table of Contents for part 3280, and the discussion of functions within the Interior Department is covered by the Department of the Interior Departmental Manual and delegations to BLM.

Proposed § 3280.2 would include definitions from existing § 3280.0-5, with certain revisions. Unnecessary definitions of terms such as “agreement” and “cooperative agreement” would be removed. Several definitions would be added, including definitions for the terms “unit contraction provision,” “plan of development,” “public interest,” “reasonably proven to produce” and “unit well.”

BLM's policy regarding the formation of units that is set forth in existing § 3280.0-2 would be revised and included in proposed § 3280.3. The new section would set forth the policy contained in 30 U.S.C. 1017(a) that for the purpose of more properly conserving the natural resources of any geothermal reservoir, field, or like area, or any part thereof (whether or not any part of the geothermal reservoir, field, or like area, is subject to any unit agreement), lessees thereof and their representatives could unite with each other, or jointly or separately with others, in collectively adopting and operating under a unit agreement for the reservoir, field, or like area, or any part thereof, including direct use resources, if determined and certified by BLM to be necessary or advisable in the public interest.

Proposed § 3280.4 would address BLM's authority to require the formation of a unit agreement and BLM's authority to require leases to be committed to a unit agreement and would implement 30 U.S.C. 1017(a)(3) and (b). Proposed § 3280.4(a) would provide that BLM could initiate the formation of a unit agreement, or require an existing Federal lease to commit to a unit agreement, if it was in the public interest. This implements a statutory provision and does not require the consent of a lessee. Modification of lease terms to facilitate creation and operation of the unit does require lessee consent, however (30 U.S.C. 1017(a)(4) and proposed § 3280.5). Proposed § 3280.4(b) would state that BLM could require that leases becoming effective on or after August 8, 2005, contain a provision stating that BLM could require commitment of the lease to a unit agreement. Under this provision BLM could also prescribe the unit agreement to which such lease would be required to commit in order to protect the rights of all parties in interest, including the United States. This provision implements 30 U.S.C. 1017(b)(2).

As mentioned above, proposed § 3280.5 would provide that BLM could, with the consent of the lessees involved, establish, alter, change, or revoke rates of operations (including drilling, operations, production, and other requirements) of the leases and make conditions with respect to the leases, with the consent of the lessees, in connection with the creation and operation of any such unit agreement as the BLM could consider necessary or advisable to secure the protection of the public interest. This would implement 30 U.S.C. 1017(a)(4)(A). The proposal would also provide that if leases to be included in a unit have unlike lease terms, the leases will not be required to be modified to be in the same unit. This would implement 30 U.S.C. 1017(a)(4)(B).

Proposed § 3280.6 would provide that BLM could require a unit agreement that applies to lands owned by the United States to contain a provision under which BLM or an entity designated in the unit agreement could alter or modify, from time to time, the rate of resource exploration, development, or production quantity or rate under the unit agreement. This proposed section would implement 30 U.S.C. 1017(c).

Proposed § 3280.7 would clarify that BLM cannot require lands which are not under Federal administration.

Subpart 3281—Application, Review, and Approval of a Unit Agreement

Proposed subpart 3281 would reorganize the application, review, and decision procedures for unit area designation and the unit agreement into a sequential, step-by-step, description. The proposed regulations would describe in detail the steps to follow and the information a prospective unit operator would have to submit, as well as the process BLM would follow to make application decisions. The first step would be for BLM to make a designation of the proposed unit area.

Proposed § 3281.1 would make clear that before a unit agreement is effective, BLM must designate the unit area and approve the unit agreement.

Proposed § 3281.2 would provide a list of information that the unit operator must submit before BLM can make a unit area designation. The prospective unit operator would be required to submit a geologic report, a map of the proposed unit area, a list of leases and tracts located in the proposed unit area and any other information BLM requires.

Proposed § 3281.3 would provide more detail on the types of geologic information the unit operator should provide to document that the proposed unit area is geologically contiguous and suitable for exploration, development, and production of the resource.

Proposed § 3281.4 would make it clear that proposed unit areas are not required to be of a specific size or shape, but the size could require the drilling of more than one unit well to meet minimum initial unit obligations.

Proposed § 3281.5 would explain how BLM would resolve unit applications that contain overlapping areas. If separate unit applications overlap, BLM could: (1) Approve the unit application designation which best meets public interest requirements; (2) Designate a different unit area; or (3) Require revision of the applications. BLM would not approve any proposed unit agreement if it included lands committed to another unit agreement already in effect.

Proposed § 3281.6 would describe how BLM would determine whether to approve unit designation and how BLM will notify operators of the decision. Among other considerations, BLM would determine if the geologic basis for the unit area is sound for the development of the unit area, which is the principal factor in deciding whether the unit area would be designated.

Under the proposal, if BLM approves a unit area designation, the prospective unit operator would initiate the steps required for unit agreement approval. Proposed § 3281.7 describes the information a unit operator must submit to BLM for unit agreement approval.

Consistent with existing regulations at § 3281.3, the prospective unit operator would be required to provide an opportunity for all owners of mineral rights and lease interests to join the unit under proposed § 3281.8 and then supply BLM with documentation of the commitment status of each lease or tract as required by proposed § 3281.9. Documentation would include a signed joinder agreement or evidence the interest owners were offered an opportunity to join the unit. Under 30 U.S.C. 1017(a)(2) and § 3281.9(b), a majority interest of owners in a lease could commit the lease to a unit agreement.

Proposed § 3281.10 explains that BLM would review the commitment status documentation to insure that the prospective unit operator will have sufficient control of the unit area to conduct resource development in the public interest.

Proposed § 3281.11 would address the required qualifications of a prospective unit operator. The qualification requirements for unit operators have not changed. This is consistent with existing § 3282.1.

Proposed § 3281.12 would explain that owners of mineral rights and lease interest committed to the unit are the

parties who nominate a unit operator; however, BLM must determine if the nominee meets the qualifications before the unit operator is designated.

Proposed § 3281.13 would address the formats or models for unit agreements. This section would allow a unit applicant the flexibility to create a unit agreement that best matches the specific development scenario or energy market conditions in an area. The prospective unit operator could use the model unit agreement proposed in § 3286.1, the model with variances noted, or another format that meets the requirements outlined in the next two proposed regulatory sections. While existing regulations at § 3281.1 allow for variances from a model unit agreement, the proposed regulations clearly describe the information that needs to be in a unit agreement should the applicant choose not to use the model agreement.

Proposed § 3281.14 is new to these regulations. The addition of § 3281.14 does not change existing procedures related to the required provisions in a unit agreement. Existing regulations required the unit applicant to determine the minimum requirements of a unit agreement by following the model agreement. Listing the minimum requirements and terms for unit agreement should assist applicants in determining what terms and conditions are required in a unit agreement.

Proposed § 3281.15 would list the minimum initial unit obligation information that the unit agreement must contain. To meet the minimum initial unit obligation, the unit operator would have to diligently drill and complete at least one unit well. The information required by this section will be used to ensure that the well would be: (1) Located on a tract committed to the agreement; (2) Drilled to the depth or geologic formation specified in the unit agreement, unless commercial resources are found at a shallower depth; and (3) Completed within the time frame specified in the unit agreement. Depending on the size of the unit, BLM could require the drilling of more than one unit well to meet the minimum initial unit obligation. Since the unit well, by definition, would have to be designed to produce or utilize resources in commercial quantities, the completion of a narrow diameter well could satisfy the initial obligation only if the well is capable of production in commercial quantities. BLM would make this determination on a case-by-case basis. Other exploration operations, such as drilling temperature gradient wells, could also be used to satisfy part of the minimum initial unit obligation.

Proposed § 3281.16 would clarify existing practice to submit Plans of Development for the unit at the time of unit designation, and for future activities not addressed in an existing Plan of Development. Plans of Development must be submitted to BLM for future unit activities until after a producible unit well is completed.

Proposed § 3281.17 would describe the information that a unit operator must include in a Plan of Development. While the scope and types of activities described in the Plan of Development may vary, a Plan of Development must include the completion of at least one unit well.

Proposed § 3281.18 would make it clear that BLM will not designate a unit area until the Plan of Development ensures that unit activities will meet the public interest requirements.

Proposed § 3281.19 would discuss BLM's response to a proposed unit agreement. In all instances, BLM's review of a proposed unit agreement must conclude that approval of the unit complies with these regulations and is in the public interest. This section of the proposed rule also requires BLM to coordinate the review of a proposed unit agreement with appropriate State and other Federal surface management agencies. This is consistent with current practice. Under this section BLM would provide the applicant with written notification of unit rejection or approval.

Proposed § 3281.20 would establish the effective date of an agreement as the first day of the month following BLM approval. The unit operator would have the option of requesting the effective date be the first day of the month in which BLM approved the agreement, or a more appropriate date if agreed to by BLM.

Subpart 3282—Participating Area

Proposed subpart 3282 would define several procedural requirements regarding participating areas.

Section 3282.1 of the proposed rule would define a participating area as those portions of the unit area BLM determines: (1) Are reasonably proven to produce in commercial quantities; or (2) Support production in commercial quantities such as through pressure support from injection wells.

Proposed § 3282.2 would explain that commercial operations cannot begin without BLM approval of a participating area. This is necessary to ensure proper allocation of production and royalties within the unit.

Proposed § 3282.3 would specify that a unit operator would have to propose a participating area the earlier of 30 days before starting commercial operation, or 60 days after BLM determined a well is produced or utilized in commercial quantities.

Proposed § 3282.4 would describe the general information (

e.g.

, maps showing all tracts and lease information) that the unit operator must submit to BLM when applying for a participating area.

Proposed § 3282.5 would describe the technical information (

e.g.

, interpretations of well performance and geology documenting the tracts contributing to production) that the unit operator must submit to BLM when applying for a participating area.

Proposed § 3282.6 would specify the circumstances requiring a unit operator to apply to revise a participating area boundary. This proposed section would also allow unit operators to request a delay in modifying participating area boundaries when active drilling is not complete.

Information on the establishment of an effective date for new or revised participating areas would be in proposed § 3282.7. Provisions in this section would provide flexibility in establishing the effective date, provided the date is not earlier than the effective date of the unit agreement.

Proposed § 3282.8 would outline the following as the three reasons BLM would reject revision of a participating area: (1) If the unit operator does not supply the required information; (2) If the information does not support approval; or (3) If the proposed revision reduces the size of the participating area because of resource depletion in a certain area. The third reason is included as a matter of equity because a lessee should not lose the benefit of unitization if its resources are utilized before other resources in the participating area. To provide otherwise would serve as a disincentive to having a lease's resources developed early in the life of a participating area.

Proposed § 3282.9 would provide that production be allocated equally to all lands in a participating area which are committed to the unit agreement. For instance, if you owned or controlled full interest in 100 acres within a participating area of 1000 acres, you would be allocated 10 percent of the production from the participating area.

Proposed § 3282.10 would specify that unleased Federal lands, which are available for leasing and located within the participating area, would receive a proportionate allocation of production for royalty purposes. The unit operator would pay royalty to the United States on these lands. This section further provides that if BLM is not allowed to lease the unleased Federal lands in the

participating area because of restrictions based on planning decisions or other statutory requirements, the lands will not receive an allocation of production (see § 3201.11).

Proposed § 3282.11 would explain that BLM may determine that a participating area could continue where only intermittent production is occurring, provided such a determination is in the public interest. The regulations describe direct use facilities that only utilize geothermal resources during winter months as an example of intermittent production that BLM would consider in the public interest.

Proposed § 3282.12 would provide that a participating area would terminate when the unit operator either permanently stops commercial operations, or 60 days after receiving notification from BLM that operations are not being conducted in accordance with the unit agreement, participating area approval, or the public interest. If the unit operator can demonstrate that BLM's reason for termination is in error or the situation warranting the termination has been rectified, BLM may decide to not terminate the participating area.

Subpart 3283—Modifications to the Unit Agreement

Proposed subpart 3283 would establish how modifications to a unit agreement could be proposed and approved. This proposed rule would add new provisions to specify the conditions under which a unit operator could request an extension of the unit contraction date and/or a partial contraction of the unit area. Providing this flexibility for unit administration decisions by BLM is necessary since a unit operator could have spent substantial amounts of money discovering commercial resources which can not be immediately developed due to conditions beyond the operator's control. An inability to place portions of a unit into production could subject leases to termination where either commercial resources could have been found or monitoring or injection wells not directly involved in production are located. This would reduce the incentive for additional exploration and development in the unit area, which is contrary to public interest objectives.

Proposed § 3283.1 would provide that a unit operator could request a modification of the unit agreements after all unit interests have agreed to the change in the agreement. After review, BLM will notify the unit operator of BLM's decision and effective date of approval, if applicable.

Proposed § 3283.2 would discuss circumstances under which the unit operator could request BLM to revise contraction provisions of a unit agreement. Contraction provisions of a unit agreement describe how lands will be removed from the unit agreement as exploration and development activities determine which lands are not capable of producing geothermal resources in commercial quantities. Under this section, an operator could also propose an extension of the unit contraction date and/or a partial contraction of the unit area. This section outlines both the information the operator must provide and information the operator should provide to BLM in support of a request to revise contraction provisions of the unit area. BLM would approve the request if we determine that revision was in the public interest. BLM may also add conditions to the approval such as requiring an annual renewal or setting the timing and conditions for when phased contractions or termination of the revision could occur.

Proposed § 3283.4 would address adding or removing lands from an agreement when BLM determines, based on information submitted by the unit operator, that new or additional geologic information modifies the basis for the unit boundary. Once BLM notifies the unit operator of approval of the revision to the unit, the unit operator must notify all interest owners in the unit area revision.

Proposed § 3283.5 would implement 30 U.S.C. 1017(f) that requires review of unit agreements at 5 year intervals to eliminate any lands in the unit area not necessary for unit operations.

Proposed § 3283.6 would describe the purpose of the periodic review, the basis for eliminating lands from the unit, and the consequences of elimination on leased lands.

Proposed § 3283.7 would provide that unit operators may be changed only with BLM's written approval.

Proposed § 3283.8 would describe the requirements of the new operator. The new operator must meet the qualification requirements, submit evidence of adequate bonding for Federal lands, and provide written acceptance of the unit terms and conditions to BLM.

Proposed § 3283.9 would provide that the change of unit operator is effective when BLM approves the new operator in writing.

Proposed § 3283.10 would explain that the previous unit operator would remain responsible for all duties and responsibilities until BLM approved the new unit operator. This section also makes it clear that previous unit operators remain responsible for liabilities and obligations that accrued before a new unit operator was approved.

Proposed § 3283.11 would acknowledge that a unit agreement does not modify stipulations in Federal leases. While certain lease provisions, such as lease term, annual work requirements, and royalty provisions are altered by commitment of lands to a unit, lease stipulations, such as those designed to protect the environment or other resources, are not superseded by the terms of a unit agreement.

Proposed § 3283.12 would stipulate that persons acquiring Federal interests in a unit agreement are bound by the terms and conditions of the unit agreement.

Subpart 3284—Unit Operations

Proposed subpart 3284 would discuss unit operations, unit operator responsibilities for those operations, and how BLM would admin

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