Valuation of Federal Geothermal Resources

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010-AC59

Valuation of Federal Geothermal Resources

AGENCY: Minerals Management Service, Interior.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: In response to deregulation of the electric power market in

California and resulting changes to the geothermal industry, the

Minerals Management Service (MMS) is considering amending its

regulations regarding the valuation, for royalty purposes, of Federal

geothermal resources used to generate electricity. MMS specifically

seeks comments on the use of the netback procedure to value geothermal

resources that are not sold under arm's-length contracts, whether the

existing netback procedure should be modified, and whether there are

reasonable alternatives to netback valuation. MMS also seeks comments

on any other aspects of the rules including the rules governing

valuation of resources used in direct utilization processes,

particularly alternatives for valuing those resources that are not

subject to a sales transaction.

DATES: Comments must be received on or before October 18, 1999.

ADDRESSES: The mailing address for written comments regarding

geothermal valuation issues is David S. Guzy, Chief, Rules and

Publications Staff, Minerals Management Service, Royalty Management

Program, P.O. Box 25165, MS 3021, Denver, Colorado 80225. Courier

address is Building 85, Room A-613, Denver Federal Center, Denver,

Colorado 80225. E-mail address is RMP.[email protected]. For additional

details, see SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: David S. Guzy, Chief, Rules and

Publications Staff, MMS, Royalty Management Program, at telephone (303)

231-3432, FAX (303) 231-3385, or e-mail [email protected].

SUPPLEMENTARY INFORMATION:

Public Comment Procedure: If you wish to comment, you may submit

your comments by any one of several methods. You may mail comments to

David S. Guzy, Chief, Rules and Publications Staff, Minerals Management

Service, Royalty Management Program, P.O. Box 25165, MS 3021, Denver,

CO 80225-0165. Courier or overnight delivery address is Building 85,

Room A-613, Denver Federal Center, Denver, Colorado 80225. You may also

comment via the Internet to RMP.[email protected]. Please submit

Internet comments as an ASCII file avoiding the use of special

characters and any form of encryption. Please also include ``Attn.: RIN

1010-AC59'' and your name and return address in your Internet message.

If you do not receive a confirmation from the system that we have

received your Internet message, contact David S. Guzy directly at (303)

231-3432.

We will post public comments after the comment period closes on the

Internet at http://www.rmp.mms.gov. You may arrange to view paper

copies of the comments by contacting David S. Guzy, Chief, Rules and

Publications Staff, telephone (303)231-3432, FAX (303)231-3385. Our

practice is to make comments, including names and addresses of

respondents, available for public review on the Internet and during

regular business hours at our offices in Lakewood, Colorado. Individual

respondents may request that we withhold their home address from the

rulemaking record, which we will honor to the extent allowable by law.

There also may be circumstances in which we would withhold from the

rulemaking record a respondent's identity, as allowable by law. If you

wish us to withhold your name and/or address, you must state this

prominently at the beginning of your comment. However, we will not

consider anonymous comments. We will make all submissions from

organizations or businesses, and from individuals identifying

themselves as representatives or officials of organizations or

businesses, available for public inspection in their entirety.

I. Background

The Geothermal Steam Act of 1970, as amended (30 U.S.C. 1001-1025),

requires the lessee to pay royalty to the United States on the amount

or value of steam, or any other form of heat or energy derived from

production under the lease and sold or used by the lessee or reasonably

susceptible to sale or use by the lessee. Federal geothermal leases

[[Page 45214]]

reserve to the Secretary considerable discretion to determine value for

royalty purposes. As steward of the Nation's public resources, the

Secretary is responsible for ensuring that the public receives a fair

return--in the form of royalties--in exchange for the lessee's

exclusive right and privilege to extract and use geothermal resources

produced from Federal leases. The value of geothermal resources for

royalty purposes is defined by regulation in 30 CFR part 206. The

purpose of this Advance Notice of Proposed Rulemaking is to solicit

comments on possible new methods of determining the royalty value of

Federal geothermal resources. We also seek comments on other aspects of

the geothermal rules. We will consider the comments received in

response to this Advance Notice in developing a proposed rulemaking,

which MMS would publish in the Federal Register.

We are specifically requesting comments on the netback valuation

procedure defined in 30 CFR 206.353 and 206.354 (1998) and whether

there are reasonable alternatives to that procedure. The netback

procedure derives the value of the geothermal resource by subtracting

the lessee's costs of generating and transmitting electricity from the

lessee's revenue received for the sale of electricity. The amount

remaining from this calculation is the value of the geothermal resource

upon which royalty is due. (You can find a detailed description of the

netback procedure in MMS's ``Geothermal Payor Handbook-Product

Valuation'' at www.rmp.mms.gov/custserv/pubserv/handbook.htm.) Netback

is now the most widely used method to value Federal geothermal

resources.

Application of the netback method in the deregulated California

electric power market has resulted in a dramatic decrease in geothermal

royalty payments. When the current geothermal rules were adopted in

1992, electricity generated by geothermal resources was subject to

incentive pricing. Because of this incentive and the inherent risk

involved in developing geothermal resources, the Department allowed a

generous rate of return in the netback calculation. However, this

incentive pricing is no longer being paid, and we are concerned about

whether twice the Standard and Poor's BBB industrial bond rate is still

the appropriate rate of return to use in the netback calculation.

Over the past 2 years, State and county agencies that share in this

royalty are seeing losses in royalty revenue from 50 percent to over 95

percent. County officials have told MMS that they do not have a ready

source of replacement funds. Members of Congress have also become

alarmed at the declining royalties and have asked us to expeditiously

reevaluate our geothermal valuation regulations to assure taxpayers a

fair return for their resources.

II. Goals of Valuation Alternatives

The goals of any proposed alternative to the current netback

procedure, whether a modification to the existing netback procedure or

a completely different valuation method, should be twofold. First, the

proposed method should derive a value of the resource that reflects its

market value. Second, the proposed method should be easy to apply and

readily verifiable.

To achieve these goals, we pose the following questions:

1. Should we modify the netback procedure and, if so, how?

2. Should we abandon the netback procedure in favor of an

alternative valuation method?

3. What are the alternative methods to value geothermal resources

that are not subject to a sales transaction? (Note that reliance on

comparable arm's-length sales is not a viable alternative because in

most cases there are no arm's-length sales of Federal geothermal

resources that could be used to establish value.)

If you propose an alternative valuation method, please describe it

in sufficient detail to provide an understanding of its workings and

effects. Please use examples where possible.

III. Possible Alternative Valuation Methods

As a starting point for discussion, we request comments on the

following possible alternatives:

(a) Modification of the existing netback valuation procedure.

Two areas where the existing netback procedure might be modified

are: (1) reducing the rate of return on capital investments; and (2)

reducing the limits on deductions. The current rate of return, twice

the Standard and Poor's industrial BBB bond rate, yields an annual

return on power plant and transmission investments of about 15 percent

at current rates. We ask what rationale exists to reduce this rate and,

if so, to what standard (for example, 1 x BBB, 1.5 x BBB, another

index, etc.).

MMS currently limits the combined generating and transmission

deductions to 99 percent of the lessee's monthly gross proceeds for the

sale of electricity. Should this limit be reduced and, if so, to what

amount?

We are also interested in suggestions for other modifications to

the netback procedure.

(b) A ``rate-of-return'' method.

This method would use discounted cash flow analyses (DCFs) to

determine a resource value that yields the same rate of return for both

the resource recovery and power plant portions of the geothermal

project. This would ensure that, for royalty purposes, an equal portion

of the total return from a combined geothermal resource recovery and

electricity generating operation would be allocated to the resource

recovery activity.

The lessee would prepare separate DCFs for both the resource

recovery and power plant portions of the project using its actual costs

associated with developing and operating each portion. DCFs for the

resource recovery would assume a range of geothermal resource values to

represent expected income for the field. DCFs for the power plant would

assume a range of geothermal resource values to represent the cost of

purchasing the resource, and a range of electricity prices to represent

expected income.

Starting with a given electricity price for the power plant, the

lessee would repeat the DCFs for each project portion over the range of

resource values until the rate of return for the resource recovery

operation equals the rate of return for the power plant. The lessee

would repeat the DCFs over the range of expected electricity prices to

determine the relationship between electricity price and resource

value. The value of the geothermal resource equals the cost of

purchasing the geothermal resource when the rates of return for both

portions are the same.

We request comments and analyses of the feasibility of using the

``rate-of-return'' method for valuing geothermal resources. We also ask

for suggested improvements to this method.

(c) A ``percentage-of-revenue'' method.

This method would set the value of the geothermal resource as a

percentage of the electricity value. In most cases the electricity

value would be the lessee's total revenue received for the sale of

electricity and other generating services. We ask what percentages are

reasonable and how they are determined. We also ask whether the

percentages should be fixed or whether they should vary with time or

price of electricity, such as a step or sliding scale.

Again, we offer these alternatives as a starting point for

discussion. We invite you to suggest other valuation methods not

presented here.

[[Page 45215]]

IV. Valuation of Resources Used in Direct Utilization Processes

We also solicit comments on the valuation standards for direct

utilization at 30 CFR 206.355, particularly options for the

``alternative fuel'' method used to value geothermal resources that are

not subject to a sales transaction. Proposed alternative methods should

satisfy the valuation goals discussed above.

V. Other Comments

MMS also seeks comments on any other aspects of the rules.

Dated: August 13, 1999.

Shayla Freeman Simmons,

Acting Assistant Secretary, Land and Minerals Management.

[FR Doc. 99-21506 Filed 8-18-99; 8:45 am]

BILLING CODE 4310-MR-P