[Federal Register Volume 64, Number 160 (Thursday, August 19, 1999)]
[Proposed Rules]
[Pages 45213-45215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21506]
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DEPARTMENT OF THE INTERIOR
Minerals Management Service
30 CFR Part 206
RIN 1010-AC59
Valuation of Federal Geothermal Resources
AGENCY: Minerals Management Service, Interior.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: In response to deregulation of the electric power market in
California and resulting changes to the geothermal industry, the
Minerals Management Service (MMS) is considering amending its
regulations regarding the valuation, for royalty purposes, of Federal
geothermal resources used to generate electricity. MMS specifically
seeks comments on the use of the netback procedure to value geothermal
resources that are not sold under arm's-length contracts, whether the
existing netback procedure should be modified, and whether there are
reasonable alternatives to netback valuation. MMS also seeks comments
on any other aspects of the rules including the rules governing
valuation of resources used in direct utilization processes,
particularly alternatives for valuing those resources that are not
subject to a sales transaction.
DATES: Comments must be received on or before October 18, 1999.
ADDRESSES: The mailing address for written comments regarding
geothermal valuation issues is David S. Guzy, Chief, Rules and
Publications Staff, Minerals Management Service, Royalty Management
Program, P.O. Box 25165, MS 3021, Denver, Colorado 80225. Courier
address is Building 85, Room A-613, Denver Federal Center, Denver,
Colorado 80225. E-mail address is RMP.comments@mms.gov. 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 david.guzy@mms.gov.
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.comments@mms.gov. 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
