Geothermal Valuation, 41516-41542 [06-6219]

Agencies

• DEPARTMENT OF THE INTERIOR
• Minerals Management Service

[Federal Register Volume 71, Number 140 (Friday, July 21, 2006)]
[Proposed Rules]
[Pages 41516-41542]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-6219]



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Part II





Department of the Interior





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Minerals Management Service



30 CFR Parts 202, 206, 210, 217, and 218



Bureau of Land Management

43 CFR Parts 3200 and 3280



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Royalty Management--Geothermal Resources; and Minerals Management--Oil 
and Gas Leasing; Proposed Rules

Federal Register / Vol. 71, No. 140 / Friday, July 21, 2006 / 
Proposed Rules

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DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 202, 206, 210, 217, and 218

RIN 1010-AD32


Geothermal Valuation

AGENCY: Minerals Management Service (MMS), Interior.

ACTION: Proposed rule.

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SUMMARY: The MMS is proposing new regulations implementing the 
provisions of the Energy Policy Act of 2005 (EPAct) governing the 
payment of royalty on geothermal resources produced from Federal leases 
and the payment of direct use fees in lieu of royalties. The EPAct 
provisions amend the Geothermal Steam Act of 1970 (GSA). The new 
regulations would amend the current MMS geothermal royalty valuation 
regulations and simplify the royalty calculations for geothermal 
resources for leases issued under the EPAct and leases whose terms are 
modified under the EPAct. The new regulations would also amend various 
related provisions in the MMS rules.

DATES: Comments must be submitted on or before September 19, 2006.

ADDRESSES: You may submit comments on the rulemaking by any of the 
following methods listed below. Please use the Regulation Identifier 
Number (RIN) 1010-AD32 in your message. See also Public Comment 
Procedure under Procedural Matters:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions on the Web site for submitting comments.
     E-mail: mrm.comments@mms.gov. Please include ``Attn: RIN 
1010-AD32'' and your name and return address in your Internet message. 
If you do not receive a confirmation that we have received your 
Internet message, call the contact person listed below.
     Regular U.S. Mail: Minerals Management Service, Minerals 
Revenue Management, Chief of Staff Office--Denver, P.O. Box 25165, MS 
302B2, Denver, Colorado 80225-0165.
     Overnight mail, courier, or hand-delivery: Minerals 
Management Service, Minerals Revenue Management, Building 85, Room A-
614, West 6th Ave. and Kipling Blvd., Denver Federal Center, Denver, 
Colorado 80225.
    Information Collection Request (ICR) Comments: Submit written 
comments by either fax (202) 395-6566 or e-mail (OIRA--
Docket@omb.eop.gov) directly to the Office of Information and 
Regulatory Affairs, Office of Management and Budget (OMB), Attention: 
Desk Officer for the Department of the Interior [OMB Control Number ICR 
1010-NEW) as it relates to the proposed geothermal valuation rule].
    Please also send a copy of your comments to MMS via e-mail at 
mrm.comments@mms.gov. Include the title of the information collection 
and the OMB control number in the ``Attention'' line of your comment. 
Also include your name and return address. If you do not receive a 
confirmation that we have received your e-mail, contact Sharron 
Gebhardt at (303) 231-3211.
    You may also mail a copy of your comments to Sharron Gebhardt, Lead 
Regulatory Specialist, Minerals Management Service, Minerals Revenue 
Management, P.O. Box 25165, MS 302B2, Denver, Colorado 80225. If you 
use an overnight courier service or wish to hand-deliver your comments, 
our courier address is Building 85, Room A-614, Denver Federal Center, 
West 6th Ave. and Kipling Blvd., Denver, Colorado 80225.

FOR FURTHER INFORMATION CONTACT: Sharron Gebhardt, Lead Regulatory 
Specialist, Minerals Revenue Management (MRM), MMS, telephone (303) 
231-3211, fax (303) 231-3781, or e-mail sharron.gebhardt@mms.gov. The 
principal authors of this rule are Sarah L. Inderbitzin of the Office 
of the Solicitor and Herb Black of MRM, MMS, Department of the 
Interior.

SUPPLEMENTARY INFORMATION:

I. Background

A. Pre-EPAct Statutory Provisions and Current Regulations

    Under the GSA (30 U.S.C. 1001 et seq.) before its amendment by the 
EPAct (Pub. L. No. 109-58, 119 Stat. 594), geothermal leases were 
issued with a reserved royalty of not less than 10 percent and not more 
than 15 percent ``of the amount or value of steam, or any other form of 
heat or energy derived from production under the lease and sold or 
utilized by the lessee * * *.'' 30 U.S.C. 1004(a) (emphasis added). The 
leases further provide for a royalty of not less than 5 percent ``of 
the value of any byproduct derived from production under the lease * * 
*.'' 30 U.S.C. 1004(b). The GSA further grants the Secretary broad 
rulemaking authority. 30 U.S.C. 1023. The lease instruments also 
reserved to the Secretary the authority to establish the value of 
geothermal production or byproducts for royalty purposes. Under these 
provisions, the current rules for valuing geothermal resources for 
royalty purposes at 30 CFR 206.350-206.358 were promulgated in 1991.
    Currently, there are 50 producing Federal geothermal leases in 
Utah, New Mexico, California, and Nevada. These leases comprise 15 
electrical generation projects and 2 direct use projects (an onion 
drying plant and a project that uses geothermal heat to preheat boiler 
water). Royalty revenues from Federal geothermal leases totaled 
approximately $11,000,000 in 2004. Fifty percent of those revenues go 
to the states in which the leases are located (30 U.S.C. 191(a)).
    The current royalty valuation methods for geothermal resources are 
grouped first by usage, i.e., electrical generation, direct use, and 
byproducts. Within each usage category, valuation methods are grouped 
by the method of disposition of the resources, i.e., arm's-length 
(unaffiliated) sales, non-arm's-length sales, and no sales.
    In an earlier effort to streamline the MMS geothermal regulations, 
on October 28, 2004, MMS's Royalty Policy Committee (RPC) formed the 
Geothermal Valuation Subcommittee (Subcommittee) to address the MMS 
geothermal royalty valuation regulations in an effort to simplify the 
regulations and reduce administrative costs to the geothermal industry. 
The Subcommittee was comprised of members from one industry 
association, several geothermal producers, two of the major states 
affected, and MMS employees. A representative of the Bureau of Land 
Management (BLM) served as technical advisor to the Subcommittee. The 
RPC requested that the Subcommittee work together to develop more 
efficient royalty valuation methods that will ensure a fair return to 
the Federal Government as well as encourage geothermal development. The 
Subcommittee prepared a report and submitted it to the RPC, and on May 
26, 2005, the RPC accepted the Subcommittee's recommendations.

B. The EPAct

    On August 8, 2005, the President signed into law the EPAct, Pub. L. 
109-58, 119 Stat. 595. Sections 221 through 237 of the EPAct, entitled 
the ``John Rishel Geothermal Steam Act Amendments,'' amended the GSA, 
30 U.S.C. 1001 et seq. (1970). Congress enacted the EPAct geothermal 
amendments to encourage geothermal production through regulatory 
streamlining and incentives. S. Rep. No. 78, 109th Cong., 1st Sess. 
(2005).
    This proposed rule would implement the EPAct provisions. It also 
would incorporate most of the Subcommittee's concepts, with 
modifications necessary to comply with the EPAct. This proposed rule:

[[Page 41517]]

     For 30 CFR part 206, subpart H: (1) Explains the general 
royalty calculation and payment, direct use fee, and royalty valuation 
provisions of this subpart; (2) defines which leases the subpart 
applies to; (3) provides definitions of terms used in the subpart; (4) 
proposes some changes to conform to plain English writing; and (5) 
proposes changes necessary to implement provisions of the EPAct.
     For 30 CFR parts 202, 210, 217, and 218: (1) Proposes 
changes necessary to implement provisions of the EPAct; and (2) reflect 
the proposed amendments to 30 CFR part 206, subpart H.

II. Explanation of Proposed Amendments

    Before reading the additional explanatory information below, please 
turn to the proposed rule language that we would codify in the Code of 
Federal Regulations (CFR) if this rule is finalized as written. The 
rule language immediately follows the ``List of Subjects in 30 CFR 
parts 202, 206, 210, 217, and 218.''
    When you have read the rule thoroughly, please return to the 
preamble discussion below. The preamble contains additional information 
about the proposed rule, such as why we defined a term in a certain 
manner, why we chose a certain procedure, and how we interpret the law 
this rule implements.

A. Section-by-Section Analysis of 30 CFR Part 202--Royalties, Subpart 
H--Geothermal Resources

    The MMS proposes to amend 30 CFR 202.351 and 202.353 in several 
respects. First, we rewrote those sections in plain English, added the 
term ``fees'' where applicable to reflect the fees in lieu of royalties 
that proposed 30 CFR 206.356(b) would prescribe. We also have referred 
to 30 CFR part 206, subpart H, where appropriate.
    Second, paragraph 202.351(a) currently states that all royalties 
must be paid ``in-value.'' In this context, the term ``in-value'' 
refers to payment in money, not to royalty valuation. Because the EPAct 
now allows lessees a credit against royalties owed on geothermal 
resources for delivery of electricity ``in-kind'' to states and 
counties that would receive a portion of royalty revenues, and to avoid 
confusion in situations where MMS will not be determining royalty 
value, we would revise the provision in paragraph (a) to read: ``Except 
for the amount credited against royalties for in-kind deliveries of 
electricity to a state or county under 30 CFR 218.306, you must pay 
royalties and direct use fees in money.''
    Finally, we would add a new subparagraph 202.353(b)(3) which states 
that lessees may report the quantity of direct use resources in 
``Millions of pounds to the nearest million pounds of geothermal fluid 
produced if valuation is in terms of mass.'' Like the other quantity 
reporting requirements in this section, ``to the nearest whole'' means 
that if you produce 1,500,000.00 pounds of the geothermal resource, you 
would report the quantity as 2 million (2,000,000.00) pounds. Likewise, 
if you produce 1,499,000.00 pounds, you would report 1 million 
(1,000,000.00) pounds.

B. Section-by-Section Analysis of 30 CFR Part 206--Product Valuation, 
Subpart H--Geothermal Resources

What is the purpose of this subpart? (Proposed Sec.  206.350)
    Paragraph (a) of this section would explain what leases are subject 
to this subpart. This subpart would be applicable to all geothermal 
resources produced from Federal geothermal leases issued under the GSA, 
as amended by the EPAct. It also would explain that the purpose of this 
subpart is to prescribe how to calculate royalties and fees on 
geothermal production.
    Paragraph (b) would explain that MMS may audit and adjust all 
royalty and fee payments.
    Paragraph (c) would ensure that if the regulations in this subpart 
are inconsistent with a statute, settlement agreement, written 
agreement, or lease provision, then that provision, not the regulation, 
will govern to the extent of the inconsistency. This is particularly 
important in this proposed rulemaking to ensure that the provisions of 
the negotiated valuation agreements MMS and lessees entered into prior 
to this rulemaking remain unaffected by this rulemaking.
What definitions apply to this subpart? (Proposed Sec.  206.351)
    This section would explain the definitions applicable to this 
subpart. For purposes of discussion, this preamble will discuss only 
new or modified definitions, except modifications to existing language 
to use plain English that do not make substantive changes.
    The MMS proposes to add a definition of the term affiliate and 
revise the definition of the term arm's-length contract to be identical 
to the June 2000 Federal crude oil valuation rule published March 15, 
2000 (65 FR 14022), and the March 2005 Federal gas valuation rule 
published March 10, 2005 (70 FR 11869) (collectively ``Federal oil and 
gas valuation rules''), and to conform the geothermal valuation rule 
with the D.C. Circuit's holding in National Mining Association v. 
Department of the Interior, 177 F.3d 1 (D.C. Cir. 1999). As in the 
Federal oil and gas valuation rules, MMS is proposing to define the 
term affiliate separately from the term arm's length-contract. We 
believe this clarifies and simplifies the definitions and should 
promote better understanding of both arm's-length contract and 
affiliate. For a full explanation of the reasons for this proposed 
change to the definitions, see the discussion in the preamble to the 
June 2000 final crude oil valuation rule at 65 FR 14039-14040.
    The MMS also proposes to add definitions of allowance and byproduct 
transportation allowance to this subpart.
    In the EPAct, Congress added a provision regarding the royalty rate 
applicable to those byproducts that are minerals specified in the 
Mineral Leasing Act of 1920, 30 U.S.C. 181. The EPAct provision was 
silent regarding other byproducts, which therefore are not affected. 
The proposed definition of byproducts includes both those that are 
minerals identified in 30 U.S.C. 181 and those that are not.
    The proposed rule also would define three classes of leases, 
because the royalty calculation method a lessee must use depends on the 
type of lease. A Class I lease would mean (1) a lease BLM issued under 
the GSA before August 8, 2005, which the lessee does not elect to 
convert to a Class II lease (defined below) under BLM's proposed rule 
at 43 CFR 3212.25, or (2) a lease BLM issued in response to a lease 
application that was pending on August 8, 2005, which the lessee does 
not elect to convert to a Class II lease under BLM's proposed 
regulations at 43 CFR 3200.8. A Class II lease would mean a geothermal 
lease BLM issued on or after the effective date of the final BLM 
regulation under 43 CFR parts 3203, 3204, or 3205, except for a lease 
issued in response to an application that was pending on August 8, 
2005, which the lessee elects not to convert to a Class II lease under 
43 CFR 3200.8. A Class III lease would mean a Class I lease that the 
lessee converts to a Class II lease under 43 CFR 3212.25.
    In the EPAct, Congress enacted the new definition of direct use 
discussed below. Part of that definition included the term commercial 
production of electricity, but did not define that term. Other sections 
of the EPAct (see the new 30 U.S.C. 1004(b), added by EPAct

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Sec.  223(a), and new 30 U.S.C. 1003(f), added by EPAct Sec.  223(b)) 
use the term commercial generation of electricity. The two terms appear 
from the statutory context to have the same meaning. Therefore, 
commercial production or generation of electricity would mean 
generation of electricity that is sold or is subject to sale, including 
the electricity that is required to convert geothermal energy into 
electrical energy for sale.
    As a technical amendment, Sec.  236(g) of the EPAct defined direct 
use to mean the use of geothermal resources from Class I, II, or III 
leases ``for commercial, residential, agricultural, public facilities, 
or other energy needs, other than the commercial production of 
electricity.'' Thus, we are proposing to use that definition, but 
substituting the word ``generation'' for ``production'' for consistency 
and accuracy.
    We propose to change direct utilization facility in the current 
rule to direct use facility to conform to the new definition of direct 
use.
    The definition of lease would remain the same as in the existing 
rule.
    Lessee (you) would mean any person to whom the United States issues 
a geothermal lease, and any person who has been assigned an obligation 
to make royalty, fee, or other payments required by the lease. This 
would include any person who has an interest in a geothermal lease as 
well as an operator or payor who has no interest in the lease but who 
has assumed the royalty, fee, or other payment responsibility.
    The term lessee also would include any affiliate of the lessee that 
uses the geothermal resource to generate electricity, in a direct use 
process, or to recover byproducts, or any affiliate that sells or 
transports lease production. We added the lessee's affiliate to the 
definition to eliminate the need to have separate regulations for non-
arm's-length sales or use of geothermal resources without sale.
    We changed the definition of marketable condition to more closely 
conform to the definition contained in other subparts of part 206. 
Thus, marketable condition would mean lease products that are 
sufficiently free from impurities and otherwise in a condition that 
they will be accepted by a purchaser under a sales contract typical for 
the disposition of such lease products produced from the field or area.
    Plant parasitic electricity would be defined to mean the amount of 
electricity used to run a power plant. This term has always been in the 
definition of plant tailgate electricity. Therefore, for clarity, we 
propose to define it in this rulemaking.
    Public purpose would mean a program carried out by a state, tribal, 
or local government for the purpose of providing facilities or services 
for the benefit of the public in connection with, but not limited to, 
public health, safety, or welfare, other than the commercial generation 
of electricity. Use of lands or facilities for habitation, cultivation, 
trade, or manufacturing is permissible only when necessary for and 
integral to (i.e., an essential part of) the public purpose. This is 
the same definition the Department has already promulgated under 43 CFR 
2740.0-5. As discussed further in our comments to new Sec.  206.366 
below, in the EPAct Sec.  223(a), Congress authorized the Secretary to 
charge nominal fees for a state, tribal, or local government lessee's 
use of geothermal resources without sale for ``public purposes.'' We 
added this definition because Congress did not define public purpose.
    The Department did not define public safety or welfare in 43 CFR 
part 2740. Therefore, we propose to use the definition already used by 
the Federal Government in its Federal Property Management Regulations 
found at 41 CFR part 102-37, Appendix C. Those regulations state that 
public safety or welfare means a program carried out or promoted by a 
public agency for public purposes involving, directly or indirectly, 
protection, safety, and law enforcement activities, and the criminal 
justice system of a given political area. Public safety programs may 
include, but are not limited to, those carried out by:
    (1) Public police departments;
    (2) Sheriffs' offices;
    (3) The courts;
    (4) Penal and correctional institutions (including juvenile 
facilities);
    (5) State and local civil defense organizations; and
    (6) Fire departments and rescue squads (including volunteer fire 
departments and rescue squads supported in whole or in part with public 
funds).
How do I calculate the royalty due on geothermal resources used for 
commercial generation of electricity? (Proposed Sec.  206.352)
    This section would explain how you must calculate the royalty due 
on geothermal resources used to generate electricity.
    Paragraph (a) would apply to Class I, II, and III leases where the 
lessee sold the geothermal resources at arm's length and the purchaser 
uses the resource to generate electricity. (The MMS presently knows of 
no such current situations, but we anticipate the possibility that some 
lessees may enter into such arrangements in the future.) The RPC 
recommended that in such instances, the lessee should pay a royalty 
based on a royalty rate in the lease multiplied by the gross proceeds 
the lessee derives from the sale of geothermal resources. The RPC 
recommended no change in royalty valuation under the current rules or 
in royalty rates for new or existing leases. The EPAct is silent 
regarding the situation where the lessee sells the resource to an 
unaffiliated purchaser that produces electricity, rather than producing 
the electricity itself. Therefore, we are proposing to accept the RPC 
recommendations to base royalties for existing (Class I), new (Class 
II), and converted or pending application (Class III) leases, on the 
gross proceeds from the sale of the geothermal resource to the arm's-
length purchaser.
    For non-arm's length-sales of geothermal resources used for 
electrical generation, the RPC recommended that MMS negotiate with each 
lessee to determine the value of the geothermal resources sold under 
non-arm's-length or no sales situations. Although lessees may still 
request such a methodology under Sec.  206.364 of this subpart, we 
believe it is much simpler, and more consistent with the EPAct and the 
Federal oil and gas valuation rules, to base royalties on the gross 
proceeds from the affiliate's sale of the geothermal resource. As 
explained above, the gross proceeds accruing to the lessee would 
include the lessee's affiliate's arm's-length sale of the geothermal 
resource. This eliminates the necessity of examining ``comparable 
arm's-length contracts'' when the lessee transfers to its affiliate, 
and the affiliate then sells the resource at arm's length. It also 
eliminates the need for a geothermal netback procedure wherein the 
lessee would have the burden of determining the value of the geothermal 
resource based on the sales of electricity by an unrelated purchaser.
    Paragraph (b) would explain how to value a geothermal resource for 
each class of lease in ``no sales'' situations, i.e, where you or your 
affiliate use the geothermal resource in your own power plant for the 
generation and sale of electricity. The RPC did not address this 
situation, so we kept the current rule language for Class I leases, 
with some modifications discussed below, and followed the EPAct for 
Class II and III leases.
    Thus, under subparagraph (b)(1), for Class I leases, the royalty on 
geothermal resources produced would be

[[Page 41519]]

determined in accordance with the first applicable of the following 
paragraphs:
    (1) The gross proceeds accruing from the arm's-length sale of the 
electricity less applicable deductions determined under Sec. Sec.  
206.353 and 206.354 times the royalty rate in the lease. This is 
essentially the old geothermal netback procedure. However, it is less 
burdensome because a lessee who generates and sells electricity will 
have all of the necessary information. Furthermore, as explained above, 
because an affiliate's arm's-length sale of electricity is the lessee's 
gross proceeds, there is no need to distinguish between arm's-length 
and non-arm's-length sales. Finally, this subparagraph also would 
explain that under no circumstances shall the deductions reduce the 
royalty value of the geothermal resource to zero; or
    (2) A royalty determined by any other valuation method approved by 
MMS under Sec.  206.364.
    Subparagraph (2) would apply to Class II leases. In EPAct Sec.  
224(a)(1), Congress prescribed a royalty on electricity produced using 
geothermal resources, other than direct use of geothermal resources of:
    (1) Not less than 1 percent and not more than 2.5 percent of the 
gross proceeds from the sale of electricity produced from such 
geothermal resources during the first 10 years of production under the 
lease; and
    (2) Not less than 2 and not more than 5 percent of the gross 
proceeds from the sale of electricity produced from such geothermal 
resources during each year after such 10-year period.
    Congress also specified that any regulation implementing EPAct 
Sec.  224(a)(1) should seek:
    (1) To provide lessees a simplified administrative system;
    (2) to encourage new development; and
    (3) to achieve the same level of royalty revenues over a 10-year 
period as the regulation in effect on the date of enactment of this 
subsection.
    Therefore, for Class II leases, MMS is proposing a simple 
methodology where the royalty on geothermal resources produced would be 
your gross proceeds from the sale of electricity for the production 
month multiplied by the royalty rate BLM prescribed for your lease 
under proposed 43 CFR 3211.17, its regulation implementing Sec.  
224(a)(1) of the EPAct. Because the royalty rate BLM prescribes will 
take into account achieving the same level of royalty revenues over a 
10-year period as the regulation in effect on the date of enactment of 
the EPAct, it will have taken into account any possible deductions that 
would have been available under the current regulations and should 
achieve the same level of royalty revenues over the next 10 years as 
the current regulations. Accordingly, this paragraph of the proposed 
regulation would not allow any deductions. In addition, because this 
proposal greatly simplifies the valuation methodology, it should 
encourage new development.
    Subparagraph (3) would apply to Class III leases. For Class III 
leases, in EPAct Sec.  224(e)(1)(b), Congress prescribed that royalties 
be computed on a percentage of the gross proceeds from the sale of 
electricity, at a royalty rate that is expected to yield total royalty 
payments equivalent to payments that would have been received for 
comparable production under the royalty rate in effect for the lease 
before the date of enactment of this subsection. Thus, we are proposing 
to require you to calculate the royalty on geothermal resources 
produced as your gross proceeds from the sale of electricity for the 
production month multiplied by the royalty rate BLM calculated for your 
lease under proposed 43 CFR 3211.17. The royalty rate BLM calculates 
will be expected to yield total royalty payments equivalent to payments 
that would have been received for comparable production under the 
royalty rate in effect for the lease before the date of enactment of 
the EPAct. Accordingly, that royalty rate will take into account any 
deductions you were taking prior to the EPAct's enactment. As a result, 
you would not be allowed to reduce your gross proceeds by any 
deductions under this subparagraph.
How do I determine transmission deductions? (Proposed Sec.  206.353)
    This section would explain how to determine your transmission 
deductions. We have streamlined and rewritten the current rule in plain 
English.
    The MMS also proposes to amend Sec.  206.353 in two other respects. 
First, just as we did in the Federal oil and gas valuation rules, we 
propose to eliminate the requirement that the lessee report its 
transmission deduction using a separate line entry on the Form MMS-
2014. That requirement is no longer relevant because the Form MMS-2014 
has been revised. While you still would report the transmission 
deduction in a discrete field, it would not be strictly on a separate 
line from associated sales transaction data. The proposal would revise 
the regulation accordingly.
    Second, we also would delete the final paragraph (f) of Sec.  
206.353. That paragraph provided for a one-time refund of royalties 
based on the royalty value of actual dismantlement costs of a 
transmission line in excess of income value from salvage at the 
completion of dismantlement and salvage operations. This provision has 
never been used and is complicated administratively. Therefore, we 
propose to delete it. This would result in renumbering the section with 
the corresponding new paragraph (f).
How do I determine generating deductions? (Proposed Sec.  206.354)
    This section would explain that if you determine the value of your 
geothermal resource under Sec.  206.352(b)(1)(i) of this subpart, you 
may deduct your reasonable actual costs incurred to generate 
electricity from the plant tailgate value of the electricity (usually 
the transmission-reduced value of the delivered electricity). We 
propose to rewrite the current rule in plain English form.
    We also would delete the final paragraph (f) of Sec.  206.354(f). 
That paragraph provided for a one-time refund of royalties based on the 
royalty value of actual dismantlement costs of a power plant in excess 
of income value from salvage at the completion of dismantlement and 
salvage operations. This provision has never been used and is 
complicated administratively. Therefore, we propose to delete it.
How do I calculate royalty due on geothermal resources I sell arm's 
length to a purchaser for direct use? (Proposed Sec.  206.355)
    This section would explain how to calculate royalty on geothermal 
resources if you sell geothermal resources produced from Class I, II, 
or III leases at arm's length to a purchaser for direct use. The EPAct 
did not address such transactions. Therefore, we are proposing that in 
such instances, the royalty on the geothermal resource would be the 
gross proceeds accruing to you from the sale of the geothermal resource 
to the arm's-length purchaser times the royalty rate in your lease or 
that BLM prescribes under proposed 43 CFR 3211.18.
    We believe this valuation methodology would best meet Congress' 
goals that any regulation implementing EPAct Sec.  224(a)(1) should: 
(1) provide lessees a simplified administrative system; (2) encourage 
new development; and (3) achieve the same level of royalty revenues 
over a 10-year period as the regulation in effect on the date of 
enactment of this subsection.

[[Page 41520]]

How do I calculate royalty due on geothermal resources I use for direct 
use purposes? (Proposed Sec.  206.356).
    This section would explain how a lessee must calculate royalty on a 
geothermal resource it uses itself for direct use purposes, i.e., that 
it does not sell. The Subcommittee recommended that for existing 
leases, MMS, in consultation with BLM, should develop and publish a 
royalty schedule every 3 years for lessees to use to determine the 
royalties due on direct use operations. The Subcommittee also 
recommended that the royalty schedule be based on the wellhead (inlet) 
temperature and an ``assumed'' fixed outlet temperature of 130 [deg]F. 
In addition, the Subcommittee recommended that the lessee would meter 
wellhead (inlet) temperature and monthly production and use the 
published royalty schedule to determine monthly royalties due.
    The Subcommittee used the following equation to develop a royalty 
schedule for determining royalty due as a function of temperature of 
the geothermal resource used for direct use: where:
[GRAPHIC] [TIFF OMITTED] TP21JY06.000

RTin = royalty due as a function of inlet temperature, $/
106 gallons
[rho] = water density at inlet temperature, lbms/gallon
Tin = measured inlet temperature, [deg]F
Tout = established proxy outlet temperature 130 [deg]F
e = boiler efficiency factor for coal (75 percent)
Pprbc = 3-year historical average of Powder River Basin coal 
($/MMBtu)
Frr = lease royalty rate.

    However, in the EPAct, Congress did not change the royalty 
provisions for existing leases. Therefore, for Class I leases, we are 
proposing to keep the existing regulations with minor plain English 
modifications.
    In Sec.  223(a) of the EPAct, for Class II leases, and Sec.  
224(e), for Class III leases, Congress did direct the Secretary to:
    Establish a schedule of fees, in lieu of royalties for geothermal 
resources, that a lessee or its affiliate--
    (A) Uses for a purpose other than the commercial generation of 
electricity; and
    (B) Does not sell.
    Congress also stated that the schedule of fees:
    (A) May be based on the quantity or thermal content, or both, of 
geothermal resources used;
    (B) Shall ensure a fair return to the United States for use of the 
resource; and
    (C) Shall encourage development of the resource.
    Thus, in paragraph (b), for Class II and Class III leases, we are 
proposing that lessees calculate the fee for geothermal resources they 
use for direct use by multiplying the appropriate fee from the 
following schedule in subparagraph (b)(1) of this section by the number 
of gallons or pounds they produce from the direct use lease each month.

                                             Direct Use Fee Schedule
                                                   [Hot water]
----------------------------------------------------------------------------------------------------------------
              If your average monthly inlet temperature ([deg]F) is                     Your fees are . . .
----------------------------------------------------------------------------------------------------------------
                                                                  But less  than    ($/million      ($/million
                         At least . . .                                . . .         gallons)         pounds)
----------------------------------------------------------------------------------------------------------------
130.............................................................             140           2.524           0.307
140.............................................................             150           7.549           0.921
150.............................................................             160          12.543           1.536
160.............................................................             170          17.503           2.150
170.............................................................             180          22.426           2.764
180.............................................................             190          27.310           3.379
190.............................................................             200          32.153           3.993
200.............................................................             210          36.955           4.607
210.............................................................             220          41.710           5.221
220.............................................................             230          46.417           5.836
230.............................................................             240          51.075           6.450
240.............................................................             250          55.682           7.064
250.............................................................             260          60.236           7.679
260.............................................................             270          64.736           8.293
270.............................................................             280          69.176           8.907
280.............................................................             290          73.558           9.521
290.............................................................             300          77.876          10.136
300.............................................................             310          82.133          10.750
310.............................................................             320          86.328          11.364
320.............................................................             330          90.445          11.979
330.............................................................             340          94.501          12.593
340.............................................................             350          98.481          13.207
350.............................................................             360         102.387          13.821
----------------------------------------------------------------------------------------------------------------

    Under subparagraph (b)(1)(i), for direct use lease geothermal 
resources with an average monthly inlet temperature of 130 [deg]F or 
less, you would have to pay only the lease rental.
    This proposed fee schedule uses the methodology the Subcommittee 
recommended to develop the schedule of fees, but updated the schedule 
to reflect current Powder River Basin coal prices. The MMS, in 
consultation with BLM, also made two modifications to the formula the 
Subcommittee recommended. First, we expressed royalty due in dollars 
($) per million (106) gallons and dollars ($) per million 
(106) pounds to correspond with BLM geothermal resource 
measurement requirements in 43 CFR part 3275. We also changed the 
boiler efficiency factor from 75 percent to 70 percent to correspond to 
MMS regulations at 30 CFR 206.355(c)(1)(ii). In addition, rather than 
updating the schedule every 3 years, MMS is retaining the flexibility 
to, in consultation with BLM, develop and publish a revised fee 
schedule in the Federal Register as needed.
    In addition, as the Subcommittee report stated, BLM did a further 
study

[[Page 41521]]

of actual outlet temperatures at direct use facilities and found that 
130 [deg]F was more representative than the initial RPC estimate of 120 
[deg]F. Therefore, we are changing the assumed outlet temperature in 
the fee schedule to 130 [deg]F.
    We believe this proposal meets Congress' directives because it is 
based on the quantity and thermal content of the geothermal resource. 
In addition, we believe it will encourage development of geothermal 
resources because of the simplified valuation methodology and resultant 
administrative savings.
    We also believe that it will ensure a ``fair return'' to the United 
States for the use of the resource. ``A fair return is one which, under 
prudent and economical management, is just and reasonable to both the 
public and the utility.'' Mississippi Power & Light Co. v. Mississippi 
Ex Rel. Moore, 487 U.S. 354, 366 (1988) (quoting Southern Bell Tel. & 
Tel. Co. v. Mississippi Public Service Comm'n, 237 Miss. 157, 241, 113 
So. 2d 622, 656 (1959); Mississippi Public Service Comm'n v. 
Mississippi Power Co., 429 So. 2d 883 (Miss. 1983). In this instance, 
to determine fair value, the BLM representative of the Subcommittee 
performed an analysis to determine the feasibility of using binary 
electrical generation values as a basis for valuing direct use of 
Federal geothermal resources. The Subcommittee was attempting to find a 
fair royalty value for direct use facilities. Direct use facilities use 
lower temperature geothermal resources than most geothermal power 
plants. However, binary power plants use the lowest temperature 
geothermal resources of any geothermal power plants. Therefore, binary 
power plants value was selected to be the most comparable to direct use 
facilities' geothermal value.
    The results of the Subcommittee's analysis concluded that the 
bottom of the binary value range was the lowest value when compared to 
various direct use valuation methods. In addition, the study showed 
that the binary valuation (approximately $0.28/MMBtu--$0.77/MMBtu) was 
comparable to alternative fuel valuation using Powder River Basin coal 
spot prices published by Energy Information Administration of the 
Department of Energy (approximately $0.30/MMBtu).
    The Subcommittee then compared the value of Powder River coal spot 
prices to wood chips and natural gas prices for sample months from 
years 1997 through 2002. After further deliberations, the Subcommittee 
recommended that MMS use the 3-year historical average of published 
Powder River Basin coal spot prices to develop the fee schedule for 
direct use basically because of its continuity of value and public 
availability.
    We welcome comments on the methodology used to develop the fee 
schedule and the use of published Powder River Basin coal spot prices 
to derive a ``fair return'' for the resource.
    Paragraph (b)(3) would implement Sec.  223(c) of the EPAct to allow 
retroactive application of the fee schedule to any existing (Class I) 
lease that converts to an EPAct (Class III) lease. This paragraph would 
explain that the schedule of fees established under paragraph (b)(1) 
will apply to any Class III lease with respect to any royalty payments 
previously paid, when the lease was a Class I lease, that were due and 
owing, and were paid, on or after July 16, 2003. If you use this 
provision and owe additional monies based on the fee schedule, you 
would have to pay the difference plus interest on that difference 
computed under 30 CFR 218.302. If you use this provision and overpaid 
royalties based on the fee schedule, you would be entitled to a refund 
or credit from MMS of 50 percent of the overpaid royalties. You would 
be restricted to a refund of 50 percent of the royalties because, under 
Sec.  223(c) of the EPAct, MMS may not refund royalties paid to a state 
under 30 U.S.C. 1019 before the date of enactment of the EPAct. 
However, Sec.  223(c) did not exempt states from refunds of late 
payment interest previously paid on overpaid royalties under 30 U.S.C. 
191a. Therefore, you would be entitled to a refund or credit of any 
late payment interest that you previously paid on overpaid royalties.
How do I calculate royalty due on byproducts? (Proposed Sec.  206.357)
    Neither the Subcommittee nor the EPAct addressed valuation of 
byproducts. Therefore, MMS is retaining the current valuation 
methodology and applying it to byproducts produced from Class I, II, or 
III leases. The MMS made some modifications for plain English purposes. 
Also, in paragraph (a), like the gross proceeds provisions discussed 
above, the gross proceeds accruing to affiliate would be the gross 
proceeds accruing to the lessee where the affiliate makes the first 
arm's-length sale of the byproducts, less any applicable byproduct 
transportation allowances determined under Sec. Sec.  206.358 and 
206.359 of this subpart. The MMS is proposing to renumber the current 
byproduct transportation allowance regulations at 30 CFR 206.357 and 
206.358 to new Sec. Sec.  206.358 and 206.359.
What records must I keep to support my calculations of royalty or fees 
under this subpart? (Proposed Sec.  206.360)
How will MMS determine whether my royalty value, gross proceeds, or 
fees are correct? (Proposed Sec.  206.361)
What are my responsibilities to place production into marketable 
condition and to market production? (Proposed Sec.  206.362)
When is an MMS audit, review, reconciliation, monitoring, or other like 
process considered final? (Proposed Sec.  206.363)
Does MMS protect information I provide? (Proposed Sec.  206.365)
    The MMS is proposing amendments to the text of its recordkeeping, 
gross proceeds, marketable condition and marketing, audit, and 
confidentiality requirements and procedures to apply principles in the 
context of geothermal royalties and fees that are consistent with the 
Federal oil and gas royalty regulations. In addition, like those rules, 
rather than repeat the requirements or procedures in each applicable 
section of this rule, MMS is proposing to have these sections apply to 
this entire subpart. However, the substantive requirements remain 
unchanged.
How do I request a value or gross proceeds determination? (Proposed 
Sec.  206.364)
    To be consistent with the Federal oil and gas valuation rules, MMS 
is proposing to provide a procedure for valuation or gross proceeds 
determinations regarding geothermal resources produced from Class I 
leases and for byproducts produced from Class I, II, or III leases that 
is more than simply nonbinding guidance. The proposed rule would 
provide that you may request a value or gross proceeds determination 
from MMS. (Your request would have to identify all leases involved, the 
record title or operating rights owners, and the operators or payors 
for those leases, and explain all relevant facts.) The MMS could 
either:
    (1) Issue a determination signed by the Assistant Secretary, Land 
and Minerals Management; or
    (2) Issue a determination by MMS; or
    (3) Decline to provide a determination.
    A determination signed by the Assistant Secretary, Land and 
Minerals Management, would be binding on both you and MMS until the 
Assistant Secretary modifies or rescinds it. It also would be the final 
action of the Department and subject to judicial review under the 
Administrative Procedure Act, 5 U.S.C. 701-706.

[[Page 41522]]

    In contrast, a determination MMS issued would be binding on MMS and 
delegated states, but not on you, with respect to the specific 
situation addressed in the determination, unless the MMS or the 
Assistant Secretary modifies or rescinds it.
    A determination by MMS would not be an appealable decision or order 
under 30 CFR part 290, subpart B. However, if you received an order 
requiring you to pay royalty on the same basis as the determination, 
you could appeal that order under 30 CFR part 290, subpart B.
    Further discussion of determinations can be found in the 2000 
Federal oil valuation regulation published March 15, 2000 (65 FR 
14022).
What is the nominal fee that a state, tribal, or local government 
lessee must pay for the use of geothermal resources? (Proposed Sec.  
206.366)
    Section 223(a) of the EPAct directs the Secretary to charge 
``nominal fees'' if a state, tribal, or local government lessee uses a 
geothermal resource without sale and for public purposes other than 
commercial generation of electricity. This section implements that 
provision and explains that a ``nominal fee'' means a slight or de 
minimis fee. The MMS is not publishing a schedule of fees for this 
section so that it has the flexibility to calculate appropriate nominal 
fees on a case-by-case basis.

C. Section-by-Section Analysis of 30 CFR Part 210--Forms and Reports, 
Subpart H--Geothermal Resources

    We propose to delete Sec.  210.352 because MMS no longer requires 
payor information forms.

D. Section-by-Section Analysis of 30 CFR Part 217--Audits and 
Inspections, Subpart H-Geothermal Resources

    This subpart is currently reserved. Therefore, as part of this 
rulemaking, to be consistent with requirements for other mineral 
leases, MMS proposes to add new Sec. Sec.  217.300 through 217.302.
Audit or Review of Records. (Proposed Sec.  217.300)
    This section would provide that the Secretary, or his/her 
authorized representative, shall initiate and conduct audits or reviews 
relating to the scope, nature, and extent of compliance by lessees, 
operators, revenue payors, and other persons with rental, royalty, 
fees, and other payment requirements on a Federal geothermal lease. 
Audits or reviews would also relate to compliance with applicable 
regulations and orders. All audits or reviews would be conducted in 
accordance with this notice and other requirements of 30 U.S.C. 1717.
Lease Account Reconciliations (Proposed Sec.  217.301)
    This section would provide that specific lease account 
reconciliations shall be performed with priority being given to 
reconciling those lease accounts specifically identified by a state as 
having significant potential for underpayment.
Definitions (Proposed Sec.  217.302)
    This section would provide that terms used in this subpart shall 
have the same meaning as in 30 U.S.C. 1702.

E. Section-by-Section Analysis of 30 CFR Part 218--Collection of 
Royalties, Rentals, Bonuses and Other Monies Due the Federal Government 
and Credits and Incentives Due Lessees, Subpart F--Geothermal Resources

    In Sec.  230 of the EPAct, Congress authorized lessees to credit 
annual rentals paid against royalties. To implement EPAct Sec.  230, 
MMS proposes to add new sections 218.303 through 218.307 to this 
subpart.
May I credit rental towards royalty? (Proposed Sec.  218.303)
    Proposed section 218.303 would provide that if you pay your annual 
rental for your lease before the first day of the year for which the 
annual rental is owed and the annual rental you paid is less than or 
equal to the royalty you owe that year, then you could credit the 
annual rental that you paid toward the royalty due for that lease year 
at any time during that lease year. For example, if you paid $1,000 in 
rental for the 7th lease year and during that year you owe $50,000 in 
production royalty, then you could deduct the rental ($1,000) from the 
monthly royalty due for any month during the 7th lease year, resulting 
in a net production royalty payment of $49,000 for that year.
    On the other hand, if the annual rental you paid is more than the 
royalty you owe that year, then you would not pay royalty during that 
lease year. For example, if you paid $1,000 in rental for the 7th lease 
year and during that year you owe $500 in production royalty, then you 
would not owe any production royalty. However, the rule would also 
provide that you may not apply any annual rental paid in excess of the 
royalty due for a particular lease year as a credit against royalties 
due for production in a future year.
May I credit rental towards direct use fees? (Proposed Sec.  218.304)
    This section would provide that you may not credit annual rental 
towards direct use fees you are required to pay that year under 30 CFR 
206.356(b). Congress did not authorize crediting rentals against fees 
in the EPAct. Therefore, you would have to pay the direct use fees in 
addition to the annual rental due.
How do I pay advanced royalties I owe under 43 CFR 3212.15(a)? 
(Proposed Sec.  218.305)
    In Sec.  232 of the EPAct, Congress mandated that if a lessee 
ceases production for any reason, the lessee must pay advanced 
royalties in lieu of production royalties to maintain the lease. 
Therefore, proposed section 218.305 would explain that if you must pay 
advanced royalties to retain your lease under BLM regulations at 43 CFR 
3212.[MRM1]15(a), then you would have to pay an advanced 
royalty monthly equal to the average monthly royalty you paid under 30 
CFR part 206, subpart H, for the last 3 years the lease was producing. 
If your lease has been producing for less than 3 years, then you would 
use the average monthly royalty payment for the entire period your 
lease has been producing continuously.
    You would have to ensure that MMS receives your advanced royalty 
payment before the first day of each month for which production has 
ceased. You could credit any advanced royalty you pay against your 
future production royalties recouped after your lease resumes 
production. You could not reduce the amount of any production royalty 
paid for any year below zero.
    For example, assume that you paid $12,000 in production royalties 
annually in 2004, 2005, and 2006, and you plan to cease production on 
January 1, 2007. Your advanced royalty would be $1,000 (($12,000 x 3) / 
36) and would be due before January 1, 2007. Also, assume that you paid 
$12,000 ($1,000 x 12) in advanced royalty from January 1, 2007, through 
December 31, 2007, and resumed production January 1, 2008. Furthermore, 
assume that in January 2008, your production royalties due were $1,500. 
You could recoup $1,500 of the $12,000 as payment for the $1,500 in 
production royalties due. You also could continue to recoup the $10,500 
balance of advanced royalties paid ($12,000 - $1,500) against future 
production royalties paid.

[[Page 41523]]

May I receive a credit against production royalties for in-kind 
deliveries of electricity I provide under contract to a state or county 
government? (Proposed Sec.  218.306)
    Section 224(a) of the EPAct authorizes MMS to provide lessees with 
credits against part of the royalty due for in-kind deliveries of 
electricity that lessees provide to states or counties under contracts 
the Secretary approves. Therefore, proposed Sec.  218.306 in paragraph 
(a) would explain if you both deliver electricity in kind to a state or 
county and pay production royalties, then you may receive a credit 
against production royalties for electricity that you deliver in kind 
under contract to a state or county government. It also would explain 
that you may receive a credit only if three conditions are met. First, 
the state or county to which you provide electricity is a state or 
county that would receive a portion of your royalties under 30 U.S.C. 
191 or 30 U.S.C 1019, except as otherwise provided under the Mineral 
Leasing Act for Acquired Lands, 30 U.S.C. 355, because your lease is 
located in that state or county. If your lease is located in more than 
one state or county, the revenues are paid to the respective states or 
counties based on each state's or county's proportionate share of the 
total acres in the lease. For example, assume you have a 1,000 acre 
lease. Also, assume that half of your lease is in Nevada and half is in 
California. If you provide electricity to California, you would be 
entitled to a credit only against the royalty in value due for the 500 
acres located in California.
    Second, MMS would have to approve in advance your contract with the 
state or county to which you are providing in-kind electricity.
    Third, your contract would have to provide that you will use the 
wholesale value of the electricity for the area where your lease is 
located to establish the specific methodology to determine the amount 
of the credit.
    Paragraph (b) would provide that the maximum credit you may take is 
equal to the portion of the royalty revenue that MMS would have paid to 
the state or county that is a party to the contract had you paid 
royalty in money on all the electricity you delivered to the state or 
county based on the wholesale value of the electricity. You would have 
to pay in money any royalty amount that is not offset by the credit 
allowed under this section, calculated based on the wholesale value of 
the electricity. For example, assume that you have a geothermal lease 
in New Mexico and that you delivered 10,000 megawatt-hours of 
electricity in a month to New Mexico under a contract MMS approved. 
Furthermore, assume that the wholesale value of megawatt-hours in the 
area where your lease is located is $30.00 per megawatt-hour that 
month. If you had paid royalties in money on the basis of that 
wholesale value, and further assuming that you have a Class I lease 
with a 10-percent royalty rate, you would have paid $30,000 to MMS. The 
MMS then would have paid 50 percent of that amount ($15,000) to the 
State of New Mexico. You would be entitled to a credit of $15,000 
against the amount you would otherwise owe to MMS when royalty is 
calculated on that basis. You would have to pay the remaining $15,000 
to MMS in money.
    Paragraph (c) would explain that the electricity the state or 
county government receives from you would satisfy the Secretary's 
payment obligation to the state or county under 30 U.S.C. 191 or 30 
U.S.C. 1019. Thus, using the same example, the 10,000 kilowatt hours 
you delivered to New Mexico would satisfy the Secretary's payment 
obligation to that state that month under 30 U.S.C. 191 and 30 U.S.C. 
1019, and MMS would not pay any part of the $1,500 that you paid in 
money to the state.
How do I pay royalties due for my existing leases that qualify for 
near-term production incentives under 43 CFR part 3212? (Proposed Sec.  
218.307)
    To implement Sec.  224(c) of the EPAct, MMS proposes to add Sec.  
218.307. This section would explain that if you qualify for a 
production incentive under BLM regulations at 43 CFR part 3212 
(Sec. Sec.  3212.18 through 3212.24), then you would pay 50 percent of 
the amount of the total royalty that would otherwise be due under 30 
CFR part 206, subpart H. For example, if you qualified for a production 
incentive and you owed $1,000 in royalties under 30 CFR part 206, 
subpart H, then you would pay $500 in royalties (50 percent of $1,000).

III. Procedural Matters

1. Public Comment Policy

    Our practice is to make comments, including names and home 
addresses of respondents, available for public review during regular 
business hours and on our Web site at https://www.mrm.mms.gov/Laws_R_
D/FRNotices/FRHome.htm. 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 comments. 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.

2. Summary Cost and Royalty Impact Data

    Of the proposed changes to the geothermal valuation regulations 
outlined above, only a few will have a royalty impact on industry, 
States, or the Federal Government. This section addresses those changes 
and discusses the extent of their impacts. There are no ``Costs and 
Benefits,'' under the meaning identified by OMB, as a result of the 
proposed rule. However, there are certain estimated royalty effects of 
the proposed rule to all potentially affected groups: industry, States 
and local governments, and the Federal Government. These are summarized 
below. There are no associated costs, to industry or to the Federal 
Government, of administering the proposed rule.
    Of the proposed changes that have royalty cost impacts, three will 
result in royalty decreases for industry, States, and MMS. One will 
result in an increase to the counties with producing Federal geothermal 
leases. The net impact of the six changes will result in an expected 
overall royalty revenue decrease of $4,101,583 to the Federal 
Government, a corresponding increase to counties of $4,071,583, and a 
decrease of $30,000 in royalties to the States.
    We have evaluated potential effects on federally recognized Indian 
tribes and have determined that the changes we are proposing for 
Federal leases would not apply to and currently would not have an 
impact on Indian leases. In addition, this proposed rule does not have 
tribal implications that impose substantial direct compliance costs on 
Indian tribal governments.
A. Industry
    (1) Royalty Impacts. (a) No Change in Royalties--Electrical 
Generation. Because the EPAct mandates that the royalty revenues 
received by MMS should be the same as what would have been received 
under the valuation methods of the current regulations, there would be 
no revenue impact for electrical generation projects. Electrical 
generation lessees that remain under the current regulations would pay 
the same

[[Page 41524]]

royalties as they have been paying all along. Electrical generation 
lessees who modify their leases to the new regulation's percentage of 
gross proceeds method should pay the same level of royalties as they 
have paid under the current regulations. New lessees would have royalty 
rates determined by BLM that should result in the same level of 
royalties for 10 years as they would have paid under the current 
regulations.
    (b) Net Decrease in Royalties--Direct Use--Estimated at $60,000. 
Current direct use lessees who do not sell the geothermal resources 
would have the option to convert their leases to the new fee schedule, 
which would result in a reduction of $60,000 per year from the current 
level of royalties, a 95-percent reduction. In addition, all new direct 
use lessees who do not sell the geothermal resources under the new 
regulations would use the same fee schedule, also paying about 95 
percent less than they would have under the current regulations.
    (2) Administrative Costs. The MMS has determined that there are no 
expected administrative cost changes.
B. State and Local Governments
    (1) Royalty Impacts--State Governments. (a) Net Decrease in 
Royalties--Direct Use--Estimated at $30,000. The MMS estimates that 
States impacted by this rule would receive the same royalties as they 
do currently for electrical generation leases. However, because of the 
95-percent decrease in revenue collected from direct use leases, States 
who receive a share of that revenue under 30 U.S.C. 191 would be 
impacted by the revenue decrease. It is unknown how this would affect 
the counties because the States distribute royalty revenues to their 
counties directly without MMS involvement. The new fee schedule would 
result in approximately 95-percent reduction in royalties paid to 
States from direct use projects. The MMS estimates the reduction to be 
$30,000 per year.
    (2) Administrative Costs--State Governments. The MMS has determined 
that there are no expected administrative cost changes for State 
governments.
    (3) Royalty Impacts--Local Governments. (a) Net Increase in 
Royalties--Estimated at $4,071,583. The EPAct mandates a new 
distribution of 25 percent of royalties to the counties. This 25 
percent would cut the Federal share in half from 50 percent to 25 
percent, and leaves the States' share as 50 percent. The counties would 
receive a new 25-percent distribution of total geothermal royalty 
revenue under the EPAct, which would increase their revenues by 
$4,071,583 per year from the Federal Government.
    Prior to the EPAct, MMS distributed 50 percent of the geothermal 
royalties to the States and retained 50 percent for the Federal 
Government. The EPAct now mandates that MMS directly distribute 25 
percent of geothermal royalties to the counties that contain producing 
geothermal Federal leases. This 25-percent county share is taken from 
the Federal share, cutting it in half, to 25 percent of the total 
geothermal royalties. The State distribution of 50 percent would remain 
unchanged under the EPAct.
    (4) Administrative Costs--Local Governments. This rule would not 
impose any additional burden on local governments. The counties where 
geothermal facilities are located on Federal leases would receive a new 
distribution of 25 percent of the total geothermal royalties for the 
first time directly from the Federal Government, whereas in the past it 
was left up to the States to distribute geothermal royalty revenues to 
the counties. It is not known exactly how much geothermal royalty 
revenue is distributed to counties by the States, as it is up to each 
State to do this distribution and is not currently under MMS control.
C. Federal Government
    The total combined royalty impact on the Federal Government would 
be a decrease of $4,101,583 ($4,071,583 for electrical generation and 
$30,000 for direct use).
    (1) Royalty Impacts (a) Net Decrease in Royalties--Electrical 
Generation--Estimated at $4,071,583. The Federal Government would be 
impacted by a net overall decrease in royalties as a result of the 
proposed changes to the regulations governing the new distribution of 
25 percent of total royalties to the counties and the new direct use 
fee schedule. The net impact on the Federal Government would be a 
decrease of approximately $4,071,583 for electrical generation.
    (b) Net Decrease in Royalties--Direct Use--Estimated at $30,000. 
The Federal Government would also be impacted by the 95-percent 
decrease in revenues from direct use leases due to the proposed direct 
use fee schedule. The MMS estimates the reduction to be $30,000 per 
year.
    (2) Administrative Costs--Federal Government. The MMS does not 
expect any administrative cost changes for the Federal Government.
D. Summary of Costs and Royalty Impacts to Industry, State and Local 
Governments, and the Federal Government
    In the table below, a negative number means a reduction in payment 
or receipt of royalties or a reduction in costs. A positive number 
means an increase in payment or receipt of royalties or an increase in 
costs. The net expected change in royalty impact is the sum of the 
royalty increases and decreases. If no costs are represented for 
administrative or royalty impacts, then the increase, decrease and net 
values impacts are all zero.

              Summary of expected Costs and Royalty Impacts
-----------------------------------------------