[Federal Register Volume 71, Number 140 (Friday, July 21, 2006)]
[Proposed Rules]
[Pages 41516-41542]
From the Federal Register Online via the Government Publishing 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  

[[Page 41516]]


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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: http://www.regulations.gov. 
Follow the instructions on the Web site for submitting comments.
     E-mail: [email protected]. 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 ([email protected]) 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 
[email protected]. 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 [email protected]. 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 http://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
------------------------------------------------------------------------
                                          Costs and royalty increases or
                                                 royalty decreases
               Description               -------------------------------
                                                            Subsequent
                                            First year         years
------------------------------------------------------------------------
                               A. Industry
------------------------------------------------------------------------
Royalty Decrease from Direct Use Fee            -$60,000        -$60,000
 Schedule...............................
Net Expected Change in Royalty (direct           -60,000         -60,000
 use fee) Payments from Industry........
------------------------------------------------------------------------
                     B. State and Local Governments
------------------------------------------------------------------------
State:
    Royalty Decrease to State                    -30,000         -30,000
     Governments........................
Local Governments (counties):

[[Page 41525]]

 
    Royalty Increase to counties........      +4,071,583       4,071,583
Net Expected Change in Royalty Payments       +4,041,583      +4,041,583
 to State and Local Governments.........
------------------------------------------------------------------------
                          C. Federal Government
------------------------------------------------------------------------
Royalty Decrease from 25 percent Royalty      -4,071,583      -4,071,583
 Disbursement to Counties...............
Royalty Decrease from New Direct Use Fee         -30,000         -30,000
 Schedule Implementation................
Net Expected Change in Royalty Payments       -4,101,583      -4,101,583
 to Federal Government..................
------------------------------------------------------------------------

3. Regulatory Planning and Review, Executive Order 12866

    In accordance with the criteria in Executive Order 12866, this 
proposed rule is not a significant regulatory action. The Office of 
Management and Budget (OMB) makes the final determination under 
Executive Order 12866.
    a. This proposed rule would not have an annual effect of $100 
million or adversely affect an economic sector, productivity, jobs, the 
environment, or other units of Government.
    b. This proposed rule would not create inconsistencies with other 
agencies' actions.
    c. This proposed rule would not materially affect entitlements, 
grants, user fees, loan programs, or the rights and obligations of 
their recipients.
    d. This proposed rule would not raise novel legal or policy issues. 
Under the criteria in Executive Order 12866, this proposed rule is not 
an economically significant regulatory action as it does not exceed the 
$100 million threshold.

4. Regulatory Flexibility Act

    The Department of the Interior certifies that this proposed rule 
would not have a significant economic effect on a substantial number of 
small entities as defined under the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.). An initial Regulatory Flexibility Analysis is not 
required. Accordingly, a Small Entity Compliance Guide is not required.
    Your comments are important. The Small Business and Agricultural 
Regulatory Enforcement Ombudsman and 10 Regional Fairness Boards were 
established to receive comments from small businesses about Federal 
agency enforcement actions. The Ombudsman will annually evaluate the 
enforcement activities and rate each agency's responsiveness to small 
business. You may comment to the Small Business Administration without 
fear of retaliation. Disciplinary action for retaliation by an MMS 
employee may include suspension or termination from employment with the 
Department of the Interior.

5. Small Business Regulatory Enforcement Act (SBREFA)

    This proposed rule is not a major rule under 5 U.S.C. 804(2), the 
Small Business Regulatory Enforcement Fairness Act. This proposed rule:
    a. Would not have an annual effect on the economy of $100 million 
or more.
    b. Would not cause a major increase in costs or prices for 
consumers, individual industries, Federal, state, or local government 
agencies, or geographic regions.
    c. Would not have significant adverse effects on competition, 
employment, investment, productivity, innovation, or the ability of 
U.S.-based enterprises to compete with foreign-based enterprises.

6. Unfunded Mandates Reform Act

    In accordance with the Unfunded Mandates Reform Act (2 U.S.C. 1501 
et seq.):
    a. This proposed rule would not ``significantly or uniquely'' 
affect small governments. Therefore, a Small Government Agency Plan is 
not required.
    b. This proposed rule would not produce a Federal mandate of $100 
million or greater in any year, i.e., it would not be a ``significant 
regulatory action'' under the Unfunded Mandates Reform Act. The 
analysis prepared for Executive Order 12866 meets the requirements of 
the Unfunded Mandates Reform Act.

7. Governmental Actions and Interference With Constitutionally 
Protected Property Rights (Takings), Executive Order 12630

    In accordance with Executive Order 12630, this proposed rule does 
not have significant takings implications. A takings implication 
assessment is not required.

8. Federalism, Executive Order 13132

    In accordance with Executive Order 13132, this proposed rule would 
not have federalism implications; hence, a federalism assessment is not 
required. It would not substantially and directly affect the 
relationship between the Federal and state governments. The management 
of Federal leases is the responsibility of the Secretary of the 
Interior. Royalties collected from Federal leases are shared with state 
governments on a percentage basis as prescribed by law. This proposed 
rule would not alter any lease management or royalty value sharing 
provisions. It would determine the value of production for royalty 
value computation purposes only. This proposed rule would not impose 
costs on states or localities.

9. Civil Justice Reform, Executive Order 12988

    In accordance with Executive Order 12988, the Office of the 
Solicitor has determined that this proposed rule would not unduly 
burden the judicial system and meets the exception requirements of 
Sec. Sec.  3(a) and 3(b)(2) of the Order.

10. Paperwork Reduction Act of 1995 (PRA)

    This proposed rule, RIN 1010-AD32, would contain new information 
collection requirements. The title of the new information collection 
request (ICR) is ``30 CFR Parts 202, 206, 210, 217, and 218--Valuation 
of Geothermal Resources.''
    The intent of this proposed rulemaking is to change the methodology 
for geothermal royalty valuation and simplify these calculations for 
both direct use and electrical generation purposes. We have submitted 
an ICR to OMB for review and approval under Sec.  3507(d) of the PRA. 
When this rule becomes effective, we will prepare the required OMB 
Forms and transfer the burden hours to

[[Page 41526]]

their respective primary collections. As part of our continuing effort 
to reduce paperwork and respondent burden, we will invite the public 
and other Federal agencies to comment on any aspect of the reporting 
burden through the information collection process.
    Submit written comments by either fax (202) 395-6566 or e-mail 
([email protected]) directly to the Office of Information and 
Regulatory Affairs, 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].
    Also submit copies of written comments to Sharron L. 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, our courier address is Building 85, 
Room A-614, Denver Federal Center, W. 6th Ave., and Kipling Blvd., 
Denver, Colorado 80225. You may also e-mail your comments to us at 
[email protected]. 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.
    The OMB has up to 60 days to approve or disapprove this collection 
of information but may respond after 30 days. Therefore, public 
comments should be submitted to OMB within 30 days in order to assure 
their maximum consideration. However, we will consider all comments 
received during the comment period for this notice of proposed 
rulemaking.
    This ICR has a new collection of regulatory information for a total 
program change of 174 burden hours. The proposed rule uses Form-MMS 
2014, which is covered in ICR 1010-0140 (expires October 31, 2006). See 
the following chart for burden hours by CFR citation:

                                                Burden Breakdown
----------------------------------------------------------------------------------------------------------------
                                      Reporting and
  30  CFR Parts 202, 206, 210,        recordkeeping         Hour burden     Average number of    Annual burden
          217, and 218                 requirement                           annual responses        hours
----------------------------------------------------------------------------------------------------------------
                                               Part 202--Royalties
                                         Subpart H--Geothermal Resources
----------------------------------------------------------------------------------------------------------------
                    Sec.   202.353 Measurement standards for reporting and paying royalties.
----------------------------------------------------------------------------------------------------------------
202.353........................  (a) For geothermal         Burden covered under OMB Control Number 1010-0140
                                  resources used to                     (expires October 31, 2006).
                                  generate electricity,
                                  you must report the
                                  quantity on which
                                  royalty is due on
                                  Form MMS-2014 * * *.
                                 (b) For geothermal
                                  resources used in
                                  direct use processes,
                                  you must report the
                                  quantity on which
                                  royalty or fee is due
                                  on Form MMS-2014 * *
                                  *.
                                 (c) For byproducts,
                                  you must report the
                                  quantity on which
                                  royalty is due on
                                  Form MMS-2014 * * *.
                                 (d) For commercially
                                  demineralized water,
                                  you must report the
                                  quantity on which
                                  royalty is due on
                                  Form MMS-2014 * * *.
                                 (e) You must maintain    The Office of Regulatory Affairs (ORA) determined that
                                  quality measurements      the audit process is not covered by the PRA because
                                  for audit purposes.        MMS staff asks non-standard questions to resolve
                                                                                exceptions.
----------------------------------------------------------------------------------------------------------------
                                           Part 206--Product Valuation
                                         Subpart H--Geothermal Resources
----------------------------------------------------------------------------------------------------------------
   Sec.   206.352 How do I calculate the royalty due on geothermal resources used for commercial generation of
                                                  electricity?
----------------------------------------------------------------------------------------------------------------
206.352;.......................  (b)(1)(ii) A royalty    1                  1                  1
                                  determined by any
                                  other reasonable
                                  method approved by
                                  MMS under Sec.
                                  206.364 of this
                                  subpart.
----------------------------------------------------------------------------------------------------------------
                           Sec.   206.353 How do I determine transmission deductions?
----------------------------------------------------------------------------------------------------------------
206.353........................  (c)(2)(i)(A) such           The ORA determined that the audit process is not
                                  purchase as necessary   covered by the PRA because MMS staff asks non-standard
                                  * * *.                              questions to resolve exceptions
                                 (d)(9) Any other            The ORA determined that the audit process is not
                                  directly allocable      covered by the PRA because MMS staff asks non-standard
                                  and attributable                    questions to resolve exceptions
                                  operating expense
                                  which you can
                                  document, including *
                                  * *.
                                 (e) Allowable               The ORA determined that the audit process is not
                                  maintenance expenses    covered by the PRA because MMS staff asks non-standard
                                  include: * * * (4)                 questions to resolve exceptions.
                                  Other directly
                                  allocable and
                                  attributable
                                  maintenance expenses,
                                  which you can
                                  document.
                                 (g) To compute costs    1                  1                  1
                                  associated with
                                  capital investment *
                                  * * the lessee may
                                  not later elect to
                                  change to the other
                                  alternative without
                                  MMS approval.

[[Page 41527]]

 
                                 (h) To compute          1                  1                  1
                                  depreciation you may
                                  elect * * * you may
                                  not change methods
                                  without MMS approval.
                                 (l) * * * In                The ORA determined that the audit process is not
                                  conducting reviews      covered by the PRA because MMS staff asks non-standard
                                  and audits, MMS may                questions to resolve exceptions.
                                  require you to submit
                                  arm's-length
                                  transmission
                                  contracts, production
                                  agreements, operating
                                  agreements, and
                                  related documents.
                                 (l) * * *               Burden hours covered under OMB Control Number 1010-0140
                                  Recordkeeping                         (expires October 31, 2006).
                                  requirements are
                                  found at part 212 of
                                  this chapter.
                                 (n) In conducting           The ORA determined that the audit process is not
                                  reviews and audits,     covered by the PRA because MMS staff asks non-standard
                                  MMS may require you                questions to resolve exceptions.
                                  to submit all data
                                  used to calculate the
                                  deduction. You must
                                  comply with any such
                                  requirements within
                                  the time MMS
                                  specifies.
                                 (n) Recordkeeping       Burden hours covered under OMB Control Number 1010-0140
                                  requirements are                      (expires October 31, 2006).
                                  found at part 212 of
                                  this chapter.
                                 (o)(2) You must submit  Burden hours covered under OMB Control Number 1010-0140
                                  corrected Forms MMS-                  (expires October 31, 2006).
                                  2014 to reflect
                                  adjustments to
                                  royalty payments in
                                  accordance with MMS
                                  instructions.
----------------------------------------------------------------------------------------------------------------
                            Sec.   206.354 How Do I Determine Generating Deductions?
----------------------------------------------------------------------------------------------------------------
206.354........................  (b)(1)(ii) You must     1                  1                  1
                                  redetermine your
                                  generating costs
                                  annually * * * you
                                  may not later elect
                                  to use a different
                                  deduction period
                                  without MMS approval.
                                 (c)(2)(i)(A) The            The ORA determined that the audit process is not
                                  purchase is necessary   covered by the PRA because MMS staff asks non-standard
                                  * * *.                             questions to resolve exceptions.
                                 (d)(9) Any other            The ORA determined that the audit process is not
                                  directly allocable      covered by the PRA because MMS staff asks non-standard
                                  and attributable                   questions to resolve exceptions.
                                  operating expense
                                  which you can
                                  document, including *
                                  * *.
                                 (e) Allowable               The ORA determined that the audit process is not
                                  maintenance expenses    covered by the PRA because MMS staff asks non-standard
                                  include: * * * (4)                 questions to resolve exceptions.
                                  Other directly
                                  allocable and
                                  attributable
                                  maintenance expenses,
                                  which you can
                                  document.
                                 (g) * * * After a       1                  1                  1
                                  lessee has elected to
                                  use either method,
                                  the lessee may not
                                  later elect to change
                                  to the other
                                  alternative without
                                  MMS approval.
                                 (h) To compute          1                  1                  1
                                  depreciation, you may
                                  elect to use either a
                                  straight-line
                                  depreciation method
                                  based on the life of
                                  the geothermal
                                  project, usually the
                                  term of the
                                  electricity sales
                                  contract or other
                                  depreciation period
                                  acceptable to MMS, or
                                  a unit-of-production
                                  method. After you
                                  make an election, you
                                  may not change
                                  methods without MMS
                                  approval.
                                 (l)(1) * * * In             The ORA determined that the audit process is not
                                  conducting reviews      covered by the PRA because MMS staff asks non-standard
                                  and audits MMS may                 questions to resolve exceptions.
                                  require you to submit
                                  arm's-length power
                                  plant contracts * * *.
                                 (l)(1) * * *            Burden hours covered under OMB Control Number 1010-0140
                                  Recordkeeping                         (expires October 31, 2006).
                                  requirements are
                                  found at part 212 of
                                  this chapter.
                                 (l)(3) * * * The MMS        The ORA determined that the audit process is not
                                  may require you to      covered by the PRA because MMS staff asks non-standard
                                  submit all data used               questions to resolve exceptions.
                                  to calculate the
                                  deduction.
                                 (l)(3) * * *            Burden hours covered under OMB Control Number 1010-0140
                                  Recordkeeping                         (expires October 31, 2006).
                                  requirements are
                                  found at part 212 of
                                  this chapter.
                                 (m)(2) You must submit  Burden hours covered under OMB Control Number 1010-0140
                                  corrected Forms-2014                  (expires October 31, 2006).
                                  to reflect
                                  adjustments to
                                  royalty payments in
                                  accordance with MMS
                                  instructions.
----------------------------------------------------------------------------------------------------------------

[[Page 41528]]

 
      Sec.   206.356 How do I calculate royalty due on geothermal resources I use for direct use purposes?
----------------------------------------------------------------------------------------------------------------
206.356........................  (a)(1) The weighted     1                  1                  1
                                  average of the gross
                                  proceeds * * * In
                                  evaluating the
                                  acceptability of
                                  arm's-length
                                  contracts * * *.
                                 (a)(2) * * * The        48                 2                  96
                                  efficiency of the
                                  alternative energy
                                  source shall be * * *
                                  or proposed by the
                                  lessee and approved
                                  MMS.
                                 (a)(3) A royalty        1                  1                  1
                                  determined by * * *
                                  approved by MMS * * *.
                                 (b)(3) * * * you must   1                  1                  1
                                  provide MMS data
                                  showing the amount of
                                  geothermal production
                                  in pounds or gallons
                                  of geothermal fluid
                                  to input into the fee
                                  schedule * * *.
                                 (c) For geothermal      1                  1                  1
                                  resources other than
                                  hot water, MMS will
                                  determine fees on a
                                  case-by-case basis.
----------------------------------------------------------------------------------------------------------------
                          Sec.   206.357 How do I calculate royalty due on byproducts?
----------------------------------------------------------------------------------------------------------------
206.357........................  (c) A value determined  1                  1                  1
                                  by any other
                                  reasonable valuation
                                  method approved by
                                  MMS..
----------------------------------------------------------------------------------------------------------------
                          Sec.   206.358 What are byproduct transportation allowances?
----------------------------------------------------------------------------------------------------------------
206.358........................  (d) Reporting           Burden hours covered under OMB Control Number 1010-0140
                                  requirements. (1)                     (expires October 31, 2006).
                                  Arm's-length
                                  contracts. (i) You
                                  must use a discrete
                                  field on Form MMS-
                                  2014 to notify MMS of
                                  a transportation
                                  allowance.
                                 (d)(1)(ii) In               The ORA determined that the audit process is not
                                  conducting reviews      covered by the PRA because MMS staff asks non-standard
                                  and audits, MMS may                questions to resolve exceptions.
                                  require you to submit
                                  * * *.
                                 (d)(1)(ii)              Burden hours covered under OMB Control Number 1010-0140
                                  Recordkeeping                         (expires October 31, 2006).
                                  requirements are
                                  found at part 212 of
                                  this chapter.
                                 (d)(2) Non-arm's-       Burden hours covered under OMB Control Number 1010-0140
                                  length or no                          (expires October 31, 2006).
                                  contract. (i) You
                                  must use a discrete
                                  field on Form MMS-
                                  2014 to notify MMS of
                                  a transportation
                                  allowance.
                                 (d)(2)(iii) In              The ORA determined that the audit process is not
                                  conducting reviews      covered by the PRA because MMS staff asks non-standard
                                  and audits, MMS may                questions to resolve exceptions.
                                  require you to submit
                                  * * *.
                                 (d)(2)(iii)             Burden hours covered under OMB Control Number 1010-0140
                                  Recordkeeping                         (expires October 31, 2006).
                                  requirements are
                                  found at part 212 of
                                  this chapter.
                                 (e)(2) You must submit  Burden hours covered under OMB Control Number 1010-0140
                                  corrected Form MMS-                   (expires October 31, 2006).
                                  2014 to reflect
                                  adjustments to
                                  royalty payments in
                                  accordance with MMS
                                  instructions.
                                 (h) If MMS reviews or       The ORA determined that the audit process is not
                                  audits your royalty     covered by the PRA because MMS staff asks non-standard
                                  payments, you must                  questions to resolve exceptions
                                  make available to
                                  authorized MMS
                                  representatives or to
                                  other authorized
                                  persons all
                                  transportation
                                  contracts and all
                                  other information as
                                  may be necessary to
                                  support a byproduct
                                  transportation
                                  allowance.
----------------------------------------------------------------------------------------------------------------
                     Sec.   206.359 How do I determine byproduct transportation allowances?
----------------------------------------------------------------------------------------------------------------
206.359........................  (a)(2) * * * MMS will       The ORA determined that the audit process is not
                                  require you to          covered by the PRA because MMS staff asks non-standard
                                  determine the * * *                questions to resolve exceptions.
                                  MMS will notify you
                                  and give you an
                                  opportunity to
                                  provide written
                                  information
                                  justifying your
                                  transportation costs.
                                 (c)(2)(i)(A) The            The ORA determined that the audit process is not
                                  purchase is necessary   covered by the PRA because MMS staff asks non-standard
                                  * * *.                             questions to resolve exceptions.
                                 (d)(9) Any other            The ORA determined that the audit process is not
                                  directly allocable      covered by the PRA because MMS staff asks non-standard
                                  and attributable                    questions to resolve exceptions
                                  operating expense
                                  which you can
                                  document, including *
                                  * *.
                                 (e) Allowable               The ORA determined that the audit process is not
                                  maintenance expenses    covered by the PRA because MMS staff asks non-standard
                                  include:* * * (4)                   questions to resolve exceptions
                                  Other directly
                                  allocable and
                                  attributable
                                  maintenance expenses,
                                  which you can
                                  document.* * *.

[[Page 41529]]

 
                                 (g) To compute costs *  1                  1                  1
                                  * * the lessee may
                                  not later elect to
                                  change to the other
                                  alternative without
                                  MMS approval.* * *.
                                                        --------------------------------------------------------
                                 (h) To compute          1                  1                  1
                                  depreciation * * *
                                  After you make an
                                  election, you may not
                                  change methods
                                  without MMS approval..
----------------------------------------------------------------------------------------------------------------
    Sec.   206.360 What records must I keep to support my calculations of royalty or fees under this subpart?
----------------------------------------------------------------------------------------------------------------
206.360........................  * * * you must retain      Burden hours covered under OMB Control Number 1010-
                                  all data relevant * *              0140 (expires October 31, 2006).
                                  *.
                                 Recordkeeping              Burden hours covered under OMB Control Number 1010-
                                  requirements are                   0140 (expires October 31, 2006).
                                  found in part 212 of
                                  this chapter..
                                 You must be able to         The ORA determined that the audit process is not
                                  show: (1) How you       covered by the PRA because MMS staff asks non-standard
                                  calculated * * * (2)               questions to resolve exceptions.
                                  How you complied * *
                                  * (b) Upon request,
                                  you must submit all
                                  data to MMS..
----------------------------------------------------------------------------------------------------------------
          Sec.   206.361 How will MMS determine whether my royalty, gross proceeds or fees are correct?
----------------------------------------------------------------------------------------------------------------
206.361........................  (b) * * * MMS may           The ORA determined that the audit process is not
                                  require you to          covered by the PRA because MMS staff asks non-standard
                                  increase the gross                 questions to resolve exceptions.
                                  proceeds to reflect *
                                  * * MMS may require
                                  you to use another
                                  valuation method * *
                                  * MMS will notify you
                                  to give you an
                                  opportunity to
                                  provide written
                                  information
                                  justifying your gross
                                  proceeds * * *.
                                 (c) For arm's-length        The ORA determined that the audit process is not
                                  sales, you have the     covered by the PRA because MMS staff asks non-standard
                                  burden of                          questions to resolve exceptions.
                                  demonstrating * * *.
                                 (d) The MMS may             The ORA determined that the audit process is not
                                  require you to          covered by the PRA because MMS staff asks non-standard
                                  certify that the                   questions to resolve exceptions.
                                  provisions in your
                                  sales contract
                                  include * * *.
                                 (f)(2) Contract         1                  1                  1
                                  revisions or
                                  amendments you make
                                  must be in writing
                                  and signed by all
                                  parties to the
                                  contract..
----------------------------------------------------------------------------------------------------------------
                    Sec.   206.364 How do I request a value or gross proceeds determination?
----------------------------------------------------------------------------------------------------------------
206.364........................  (a) You may request a   3                  20                 60
                                  value determination
                                  from MMS. * * Your
                                  request must:.
                                 (1) Be in writing * *
                                  *.
----------------------------------------------------------------------------------------------------------------
                                           Part 210--Forms and Reports
                                         Subpart H--Geothermal Resources
----------------------------------------------------------------------------------------------------------------
                                     Sec.   210.352 Payor information forms.
----------------------------------------------------------------------------------------------------------------
210.352........................  The Payor Information     The payor information form was discontinued through
                                  Form * * * (f)            reengineering by 2001. This rule removes geothermal
                                  Abandonment of a            references to the form from the Code of Federal
                                  lease. * * *.               Regulations. There are no current burden hours.
----------------------------------------------------------------------------------------------------------------
                                        Part 217--Audits and Inspections
                                         Subpart G--Geothermal Resources
----------------------------------------------------------------------------------------------------------------
                                   Sec.   217.300 Audits or review of records.
----------------------------------------------------------------------------------------------------------------
217.300........................  The Secretary, or his/      The ORA determined that the audit process is not
                                  her authorized          covered by the PRA because MMS staff asks non-standard
                                  representative shall               questions to resolve exceptions.
                                  initiate and conduct
                                  audits or reviews
                                  relating * * * Audits
                                  or reviews will also
                                  relate to compliance
                                  * * * All audits or
                                  reviews will be
                                  conducted in
                                  accordance with * * *.

[[Page 41530]]

 
 PART 218--Collection of royalties, rentals, bonuses and other monies due the Federal Government and Credits and
                                             Incentives Due Lessees
----------------------------------------------------------------------------------------------------------------
                                         Subpart F--Geothermal Resources
----------------------------------------------------------------------------------------------------------------
   Sec.   218.306 May I receive a credit against production royalties for in-kind deliveries of electricity I
                             provide under contract to a state or county government?
----------------------------------------------------------------------------------------------------------------
218.306........................  (a)(2) MMS approves in  4                  1                  4
                                  advance your contract
                                  * * *.
                                --------------------------------------------------------------------------------
    Burden Hour Total..........  ......................  .................  37                 174
----------------------------------------------------------------------------------------------------------------

    Public Comment Policy. The PRA (44 U.S.C. 3501 et seq.) provides 
that an agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid OMB control number. Before submitting an ICR to OMB, 
PRA Sec.  3506(c)(2)(A) requires each agency ``* * * to provide notice 
* * * and otherwise consult with members of the public and affected 
agencies concerning each proposed collection of information * * *.'' 
Agencies must specifically solicit comments to: (a) Evaluate whether 
the proposed collection of information is necessary for the agency to 
perform its duties, including whether the information is useful; (b) 
evaluate the accuracy of the agency's estimate of the burden of the 
proposed collection of information; (c) enhance the quality, 
usefulness, and clarity of the information to be collected; and (d) 
minimize the burden on the respondents, including the use of automated 
collection techniques or other forms of information technology.
    The PRA also requires agencies to estimate the total annual 
reporting ``non-hour cost'' burden to respondents or recordkeepers 
resulting from the collection of information. If you have costs to 
generate, maintain, and disclose this information, you should comment 
and provide your total capital and startup cost components or annual 
operation, maintenance, and purchase of service components. You should 
describe the methods you use to estimate major cost factors, including 
system and technology acquisition, expected useful life of capital 
equipment, discount rate(s), and the period over which you incur costs. 
Capital and startup costs include, among other items, computers and 
software you purchase to prepare for collecting information; 
monitoring, sampling, and testing equipment; and record storage 
facilities. Generally, your estimates should not include equipment or 
services purchased: (i) Before October 1, 1995; (ii) to comply with 
requirements not associated with the information collection; (iii) for 
reasons other than to provide information or keep records for the 
Government; or (iv) as part of customary and usual business or private 
practices.
    We will summarize written responses to this proposed information 
collection and address them in our final rule. We will provide a copy 
of the ICR to you without charge upon request, and the ICR will also be 
posted on our Web site at www.mrm.mms.gov/Laws_R_D/FRNotices/FRInfColl.htm.
    We will post all comments in response to this proposed information 
collection on our Web site at www.mrm.mms.gov/Laws_R_D/InfoColl/InfoColCom.htm. We will also make copies of the comments available for 
public review, including names and addresses of respondents, during 
regular business hours at our offices in Lakewood, Colorado. Individual 
respondents may request that we withhold their home address from the 
public 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 
request that we withhold your name and/or address, 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.

11. National Environmental Policy Act (NEPA)

    This proposed rule deals with financial matters and would have no 
direct effect on MMS decisions on environmental activities. Pursuant to 
516 DM 2.3A (2), Section 1.10 of 516 DM 2, Appendix 1 excludes from 
documentation in an environmental assessment or impact statement 
``policies, directives, regulations and guidelines of an 
administrative, financial, legal, technical or procedural nature; or 
the environmental effects of which are too broad, speculative, or 
conjectural to lend themselves to meaningful analysis and will be 
subject later to the NEPA process, either collectively or case-by-
case.'' Section 1.3 of the same appendix clarifies that royalties and 
audits are considered to be routine financial transactions that are 
subject to categorical exclusion from the NEPA process.

12. Government-to-Government Relationship With Tribes

    In accordance with the President's memorandum of April 29, 1994, 
``Government-to-Government Relations with Native American Tribal 
Governments'' (59 FR 22951) and Department Manual 512 DM 2, we have 
evaluated potential effects on federally recognized Indian tribes and 
have determined that the changes we are proposing for Federal leases do 
not apply to and would not have an impact on Indian leases.

13. Effects on the Nation's Energy Supply, Executive Order 13211

    In accordance with Executive Order 13211, this regulation would not 
have a significant adverse effect on the Nation's energy supply, 
distribution, or use. The proposed changes primarily involve royalty 
valuation of geothermal production to simplify royalty

[[Page 41531]]

valuation, hence, any impact to the way industry does business should 
be positive, and as the EPAct directs, should encourage energy 
development and marketing. The proposed rule would not otherwise impact 
energy supply, distribution, or use.

14. Consultation and Coordination With Indian Tribal Governments, 
Executive Order 13175

    In accordance with Executive Order 13175, we have evaluated this 
proposed rule and determined that it has no potential effects on 
federally recognized Indian tribes. This proposed rule does not have 
tribal implications that impose substantial direct compliance costs on 
Indian tribal governments.

15. Clarity of This Regulation

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand. We invite your comments on how to make 
this rule easier to understand, including answers to questions such as 
the following: (1) Are the requirements in the rule clearly stated? (2) 
Does the rule contain technical language or jargon that interferes with 
its clarity? (3) Does the format of the rule (grouping and order of 
sections, use of headings, paragraphing, etc.) aid or reduce its 
clarity? (4) Would the rule be easier to understand if it were divided 
into more (but shorter) sections? (A ``section'' appears in bold type 
and is preceded by the symbol Sec.  and a numbered heading; for 
example, Sec.  204.200 What is the purpose of this part?) (5) Is the 
description of the rule in the SUPPLEMENTARY INFORMATION section of the 
preamble helpful in understanding the proposed rule? What else could we 
do to make the rule easier to understand? Send a copy of any comments 
that concern how we could make this rule easier to understand to: 
Office of Regulatory Affairs, Department of the Interior, Room 7229, 
1849 C Street, NW., Washington, DC 20240. You may also e-mail the 
comments to this address: [email protected].

List of Subjects in 30 CFR Parts 202, 206, 210, 217, and 218

    Geothermal, valuation, royalty, Energy Policy Act of 2005, direct 
use, arm's length.

    Dated: June 28, 2006.
R. M. ``Johnnie'' Burton,
Director, Minerals Management Service, Exercising the delegated 
authority of the Assistant Secretary of Land and Minerals Management.

    For the reasons stated in the preamble, the Minerals Management 
Service proposes to amend 30 CFR parts 202, 206, 210, and 218 as set 
forth below:

PART 202--ROYALTIES

    1. The authority for part 202 continues to read as follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et 
seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et 
seq.; 1701 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq.; 1331 et 
seq., 1801 et seq.

Subpart H--Geothermal Resources

    2. Revise Sec.  202.351 to read as follows:


Sec.  202.351  Royalties on geothermal resources.

    (a)(1) Royalties on geothermal resources, including byproducts, 
shall be at the royalty rate(s) specified in the lease, unless the 
Secretary of the Interior temporarily waives, suspends, or reduces that 
rate(s). Royalty value is determined under 30 CFR part 206, subpart H.
    (2) Fees in lieu of royalties on geothermal resources are 
prescribed in 30 CFR part 206, subpart H.
    (3) 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.
    (b)(1) Royalties or fees are due on all geothermal resources, 
except those specified in paragraph (b)(2) of this section, that are 
produced from a lease and that are sold or used by the lessee or are 
reasonably susceptible to sale or use by the lessee.
    (2)(i) Geothermal resources that are unavoidably lost, as 
determined by the Bureau of Land Management (BLM), and geothermal 
resources that are reinjected prior to use on or off the lease, as 
approved by BLM, are not subject to royalty or direct use fees.
    (ii) The Minerals Management Service (MMS) will allow free of 
royalty or fees a reasonable amount of geothermal energy necessary to 
generate electricity for internal power plant operations or to generate 
electricity returned to the lease for lease operations. If a power 
plant uses geothermal production from more than one lease, or uses 
unitized or communitized production, only that proportionate share of 
each lease's production (actual or allocated) necessary to operate the 
power plant may be used royalty free.
    (iii) MMS will also allow royalty-free a reasonable amount of 
commercially demineralized water necessary for power plant operations 
or otherwise used on or for the benefit of the lease.
    (3) Royalties on byproducts are due at the time the recovered 
byproduct is used, sold, or otherwise finally disposed of. Byproducts 
produced and added to stockpiles or inventory do not require payment of 
royalty until the byproducts are sold, utilized, or otherwise finally 
disposed of. The MMS may ask BLM to increase the lease bond to protect 
the lessor's interest when BLM determines that stockpiles or 
inventories become excessive.
    (c) If BLM determines that geothermal resources (including 
byproducts) were avoidably lost or wasted from the lease, or that 
geothermal resources (including byproducts) were drained from the lease 
for which compensatory royalty (or compensatory fees in lieu of 
compensatory royalty) are due, the value of those geothermal resources, 
or the royalty or fees owed, shall be determined under 30 CFR part 206, 
subpart H.
    (d) If a lessee receives insurance or other compensation for 
unavoidably lost geothermal resources (including byproducts), royalties 
at the rates specified in the lease (or fees in lieu of royalties) are 
due on the amount of, or as a result of, that compensation. This 
paragraph shall not apply to compensation through self-insurance.
    3. Revise Sec.  202.353 to read as follows:


Sec.  202.353  Measurement standards for reporting and paying 
royalties.

    (a) For geothermal resources used to generate electricity, you must 
report the quantity on which royalty is due on Form MMS-2014 (Report of 
Sales and Royalty Remittance) as follows:
    (1) For geothermal resources for which royalty is calculated under 
30 CFR 206.352(a), (b)(2), and (b)(3), you must report quantities in:
    (i) Kilowatt-hours to the nearest whole kilowatt-hour if the 
contract specifies payment in terms of generated electricity;
    (ii) Thousands of pounds to the nearest whole thousand pounds if 
the contract for the geothermal resources specifies payment in terms of 
weight; or
    (iii) Millions of Btu's to the nearest whole million Btu if the 
sales contract for the geothermal resources specifies payment in terms 
of heat or thermal energy.
    (2) For geothermal resources for which royalty is calculated under 
30 CFR 206.352(b)(1), you must report the quantities in kilowatt-hours 
to the nearest whole kilowatt-hour.
    (b) For geothermal resources used in direct use processes, you must 
report the quantity on which royalty or fee is due on Form MMS-2014 in:
    (1) Millions of Btu's to the nearest whole million Btu if valuation 
is in

[[Page 41532]]

terms of thermal energy used or displaced;
    (2) Millions of gallons to the nearest million gallons of 
geothermal fluid produced if valuation is in terms of volume;
    (3) Millions of pounds to the nearest million pounds of geothermal 
fluid produced if valuation is in terms of mass; or
    (4) Any other measurement unit MMS approves for valuation and 
reporting purposes.
    (c) For byproducts, you must report the quantity on which royalty 
is due on Form MMS-2014 consistent with MMS-established reporting 
standards.
    (d) For commercially demineralized water, you must report the 
quantity on which royalty is due on Form MMS-2014 in hundreds of 
gallons to the nearest hundred gallon.
    (e) You need not report the quality of geothermal resources, 
including byproducts, to MMS. You must maintain quality measurements 
for audit purposes. Quality measurements include, but are not limited 
to:
    (1) Temperatures and chemical analyses for fluid geothermal 
resources; and
    (2) Chemical analyses, weight percent, or other purity measurements 
for byproducts.

PART 206--PRODUCT VALUATION

    4. The authority for part 206 continues to read as follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396 et seq., 396a et 
seq., 2101 et seq.; 30 U.S.C. 181 et seq., 351 et seq., 1001 et 
seq.; 1701 et seq.; 31 U.S.C. 9701; 43 U.S.C. 1301 et seq.; 1331 et 
seq., 1801 et seq.

    5-6. Revise subpart H to read as follows:

Subpart H--Geothermal Resources

Sec.
206.350 What is the purpose of this subpart?
206.351 What definitions apply to this subpart?
206.352 How do I calculate the royalty due on geothermal resources 
used for commercial generation of electricity?
206.353 How do I determine transmission deductions?
206.354 How do I determine generating deductions?
206.355 How do I calculate royalty due on geothermal resources I 
sell arm's-length to a purchaser for direct use?
206.356 How do I calculate royalty due on geothermal resources I use 
for direct use purposes?
206.357 How do I calculate royalty due on byproducts?
206.358 What are byproduct transportation allowances?
206.359 How do I determine byproduct transportation allowances?
206.360 What records must I keep to support my calculations of 
royalty or fees under this subpart?
206.361 How will MMS determine whether my royalty value, gross 
proceeds, or fees are correct?
206.362 What are my responsibilities to place production into 
marketable condition and to market production?
206.363 When is an MMS audit, review, reconciliation, monitoring, or 
other like process considered final?
206.364 How do I request a value or gross proceeds determination?
206.365 Does MMS protect information I provide?
206.366 What is the nominal fee that a state, tribal, or local 
government lessee must pay for the use of geothermal resources?

Subpart H--Geothermal Resources


Sec.  206.350  What is the purpose of this subpart?

    (a) This subpart applies to all geothermal resources produced from 
Federal geothermal leases issued pursuant to the Geothermal Steam Act 
of 1970 (GSA), as amended by the Energy Policy Act of 2005 (EPAct) (30 
U.S.C. 1001 et seq.). The purposes of this subpart are to prescribe how 
to calculate royalties and fees for geothermal production.
    (b) MMS may audit and adjust all royalty and fee payments.
    (c) If the regulations in this subpart are inconsistent with:
    (1) A Federal statute;
    (2) A settlement agreement between the United States and a lessee 
resulting from administrative or judicial litigation;
    (3) A written agreement between the lessee and the MMS Director or 
Assistant Secretary, Land and Minerals Management of the Department of 
the Interior, establishing a method to determine the royalty from any 
lease that MMS expects at least would approximate the value or royalty 
established under this subpart, including a value or gross proceeds 
determination under Sec.  206.364 of this subpart; or
    (4) An express provision of a geothermal lease subject to this 
subpart, then the statute, settlement agreement, written agreement, or 
lease provision will govern to the extent of the inconsistency.


Sec.  206.351  What definitions apply to this subpart?

    Affiliate means a person who controls, is controlled by, or is 
under common control with another person. For purposes of this subpart:
    (1) Ownership or common ownership of more than 50 percent of the 
voting securities, or instruments of ownership, or other forms of 
ownership, of another person constitutes control. Ownership of less 
than 10 percent constitutes a presumption of noncontrol that MMS may 
rebut.
    (2) If there is ownership or common ownership of 10 through 50 
percent of the voting securities or instruments of ownership, or other 
forms of ownership of another person, MMS will consider the following 
factors in determining whether there is control under the circumstances 
of a particular case:
    (i) The extent to which there are common officers or directors;
    (ii) With respect to the voting securities, or instruments of 
ownership, or other forms of ownership: the percentage of ownership or 
common ownership, the relative percentage of ownership or common 
ownership compared to the percentage(s) of ownership by other persons, 
whether a person is the greatest single owner, or whether there is an 
opposing voting bloc of greater ownership;
    (iii) Operation of a lease, plant, pipeline, or other facility;
    (iv) The extent of participation by other owners in operations and 
day-to-day management of a lease, plant, pipeline, or other facility; 
and
    (v) Other evidence of power to exercise control over or common 
control with another person.
    (3) Regardless of any percentage of ownership or common ownership, 
relatives, either by blood or marriage, are affiliates.
    Allowance means a deduction in determining value for royalty 
purposes.
    Arm's-length contract means a contract or agreement between 
independent persons who are not affiliates and who have opposing 
economic interests regarding that contract. To be considered arm's 
length for any production month, a contract must satisfy this 
definition for that month, as well as when the contract was executed.
    Audit means a review, conducted in accordance with generally 
accepted accounting and auditing standards, of royalty or fee payment 
compliance activities of lessees or other interest holders who pay 
royalties, fees, rents, or bonuses on Federal geothermal leases.
    Byproduct (or mineral) means products or minerals (exclusive of 
oil, hydrocarbon gas, and helium), found in solution or in association 
with geothermal steam, that no person would extract and produce by 
themselves because they are worth less than 75 percent of the value of 
the geothermal steam or because extraction and production would be too 
difficult.

[[Page 41533]]

    Byproduct recovery facility means a facility where byproducts are 
placed in marketable condition.
    Byproduct transportation allowance means an allowance for the 
reasonable, actual costs of moving byproducts to a point of sale or 
delivery off the lease, unit area, or communitized area, or away from a 
byproduct recovery facility. The byproduct transportation allowance 
does not include gathering costs. You must report a byproduct 
transportation allowance as a separate discrete field on the Form MMS-
2014.
    Class I lease means:
    (1) A lease that BLM issued under the GSA before August 8, 2005, 
for which the lessee does not elect to convert to a Class II lease 
under 43 CFR 3212.25; or
    (2) A lease issued in response to an application that was pending 
on August 8, 2005, for which the lessee does not elect to convert to a 
Class II lease under 43 CFR 3200.8.
    Class II lease means a geothermal lease that BLM issued on or after 
[effective date of final BLM regulation] under 43 CFR subparts 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.
    Class III lease means a Class I lease that the lessee converts to a 
Class II lease under 43 CFR 3212.25.
    Commercial production or generation of electricity means 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.
    Contract means any oral or written agreement, including amendments 
or revisions thereto, between two or more persons and enforceable by 
law that with due consideration creates an obligation.
    Deduction means a subtraction the lessee uses to determine the 
value of geothermal resources produced from a Class I lease that the 
lessee uses to generate electricity.
    Delivered electricity means the amount of electricity in kilowatt-
hours delivered to the purchaser.
    Direct use means the utilization of geothermal resources for 
commercial, residential, agricultural, public facilities, or other 
energy needs, other than the commercial generation of electricity.
    Direct use facility means a facility that uses the heat or other 
energy of the geothermal resource for direct use purposes.
    Electrical facility means a power plant or other facility that uses 
a geothermal resource to generate electricity.
    Field means the land surface vertically projected over a subsurface 
geothermal reservoir encompassing at least the outermost boundaries of 
all geothermal accumulations known to be within that reservoir. 
Geothermal fields are usually given names and their official boundaries 
are often designated by regulatory agencies in the respective states in 
which the fields are located.
    Gathering means the efficient movement of lease production from the 
wellhead to the point of utilization.
    Generating deduction means a deduction for the lessee's reasonable, 
actual costs of generating plant tailgate electricity.
    Geothermal resources mean:
    (1) All products of geothermal processes, including indigenous 
steam, hot water, and hot brines;
    (2) Steam and other gases, hot water, and hot brines resulting from 
water, gas, or other fluids artificially introduced into geothermal 
formations;
    (3) Heat or other associated energy found in geothermal formations; 
and
    (4) Any byproducts.
    Gross proceeds (for royalty payment purposes) means the total 
monies and other consideration accruing to a geothermal lessee for the 
sale of electricity or of the geothermal resource. Gross proceeds 
includes, but is not limited to:
    (1) Payments to the lessee for certain services such as effluent 
injection, field operation and maintenance, drilling or workover of 
wells, or field gathering to the extent that the lessee is obligated to 
perform such functions at no cost to the Federal Government;
    (2) Reimbursements for production taxes and other taxes. Tax 
reimbursements are part of gross proceeds accruing to a lessee even 
though the Federal royalty interest may be exempt from taxation; and
    (3) Any monies and other consideration, including the forms of 
consideration identified in this paragraph, to which a lessee is 
contractually or legally entitled but which it does not seek to collect 
through reasonable efforts.
    Lease means a geothermal lease issued under the authority of the 
GSA, unless the context indicates otherwise.
    Lessee (you) means 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 
includes 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. This also 
includes 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.
    Marketable condition means 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 from the field or area of such lease products.
    Person means any individual, firm, corporation, association, 
partnership, consortium, or joint venture (when established as a 
separate entity).
    Plant parasitic electricity means electricity used to run a power 
plant.
    Plant tailgate electricity means the amount of electricity in 
kilowatt-hours generated by a power plant exclusive of plant parasitic 
electricity, but inclusive of any electricity generated by the power 
plant and returned to the lease for lease operations. Plant tailgate 
electricity should be measured at, or calculated for, the high voltage 
side of the transformer in the plant switchyard.
    Point of utilization means the power plant or direct use facility 
in which the geothermal resource is utilized.
    Public purpose means 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.
    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 or welfare 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).
    Reasonable alternative fuel means a conventional fuel (such as 
coal, oil, gas, or wood) that would normally be used

[[Page 41534]]

as a source of heat in direct-use operations.
    Secretary means the Secretary of the Department of the Interior or 
any person duly authorized to exercise the powers vested in that 
office.
    Transmission deduction means a deduction for the lessee's 
reasonable actual costs incurred to wheel or transmit the electricity 
from the lessee's power plant to the purchaser's delivery point.
    Wheeling means the transmission of electricity from a power plant 
to the point of delivery.


Sec.  206.352  How do I calculate the royalty due on geothermal 
resources used for commercial generation of electricity?

    (a) If you sold geothermal resources produced from Class I, II, and 
III leases at arm's length that the purchaser uses to generate 
electricity, then the royalty on the geothermal resources is 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 or calculates under 43 CFR 3211.17. See Sec.  206.361 
for additional provisions applicable to determining gross proceeds 
under arm's-length sales.
    (b) If you use the geothermal resource in your own power plant for 
the generation and sale of electricity:
    (1) For Class I leases, you must determine the royalty on 
geothermal resources produced in accordance with the first applicable 
of the following paragraphs:
    (i) The gross proceeds accruing to you for the arm's-length sale of 
the electricity less applicable deductions determined under Sec.  
206.353 and Sec.  206.354 of this part times the royalty rate in your 
lease. See Sec.  206.361 for additional provisions applicable to 
determining gross proceeds under arm's-length sales. Under no 
circumstances shall the deductions reduce the royalty of the geothermal 
resource to zero; or
    (ii) A royalty determined by any other reasonable method approved 
by MMS under Sec.  206.364 of this subpart.
    (2) For Class II leases, the royalty on geothermal resources 
produced is your gross proceeds from the sale of electricity for the 
production month multiplied by the royalty rate BLM prescribed for your 
lease under 43 CFR 3211.17. See Sec.  206.361 for additional provisions 
applicable to determining gross proceeds under arm's-length sales. You 
may not reduce gross proceeds by any deductions.
    (3) For Class III leases, the royalty on geothermal resources 
produced is your gross proceeds from the sale of electricity for the 
production month multiplied by the royalty rate BLM calculated for your 
lease under 43 CFR 3211.17. See Sec.  206.361 for additional provisions 
applicable to determining gross proceeds under arm's-length sales. You 
may not reduce gross proceeds by any deductions.


Sec.  206.353  How do I determine transmission deductions?

    (a) If you determine the value of your geothermal resources under 
Sec.  206.352(b)(1)(i) of this subpart, you may subtract a transmission 
deduction from the gross proceeds you received for the sale of 
electricity to determine the plant tailgate value of the electricity.
    (1) The transmission deduction consists of either or both of two 
components:
    (i) Transmission line costs as determined under paragraph (b) of 
this section; and
    (ii) Wheeling costs if the electricity is transmitted across a 
third-party's transmission line under an arm's-length wheeling 
agreement.
    (2) You may deduct the actual costs you (including your 
affiliate(s)) incur for transmitting electricity under your arm's-
length wheeling contract.
    (b) To determine your transmission-line cost, you must follow the 
requirements of paragraphs (b)(1) and (b)(2) of this section.
    (1) Base transmission-line costs on your actual costs associated 
with the construction and operation of a transmission line for the 
purpose of transmitting electricity attributable and allocable to your 
power plant utilizing Federal geothermal resources.
    (i) You must determine the monthly transmission line cost component 
of the transmission deduction by multiplying the annual transmission-
line cost rate (in dollars per kilowatt-hour) by the amount of 
electricity delivered for the reporting month.
    (ii) You must redetermine the transmission line cost rate annually 
at the beginning of the same month of the year in which the 
transmission line was placed into service, the same month of the year 
in which the power plant was placed into service; or at your option, at 
a time concurrent with the beginning of your annual corporate 
accounting period. However, the period you select must coincide with 
the same period you chose for the generating deduction under Sec.  
206.354(b)(1). After you choose a deduction period, you may not later 
elect to use a different deduction period without MMS approval.
    (2) Base your transmission-line costs on your actual costs for 
transmission during the reporting period, including:
    (i) Operating and maintenance expenses under paragraphs (d) and (e) 
of this section;
    (ii) Overhead under paragraph (f) of this section; and either
    (iii) Depreciation under paragraphs (g) and (h) of this section; 
and a return on undepreciated capital investment under paragraphs (g) 
and (i) of this section or
    (iv) A return on the capital investment in the transmission line 
under paragraphs (g) and (j) of this section.
    (c)(1) Allowable capital costs under paragraph (b) of this section 
are generally those for depreciable fixed assets (including costs of 
delivery and installation of capital equipment) which are an integral 
part of the transmission line.
    (2)(i) You may include a return on capital you invested in the 
purchase of real estate for transmission facilities if:
    (A) Such purchase is necessary; and
    (B) The surface is not part of the Federal lease.
    (ii) The rate of return shall be the same rate determined under 
paragraph (k) of this section.
    (d) Allowable operating expenses include:
    (1) Operations supervision and engineering;
    (2) Operations labor;
    (3) Fuel;
    (4) Utilities;
    (5) Materials;
    (6) Ad valorem property taxes;
    (7) Rent;
    (8) Supplies; and
    (9) Any other directly allocable and attributable operating or 
maintenance expense which you can document.
    (e) Allowable maintenance expenses include:
    (1) Maintenance of the transmission line;
    (2) Maintenance of equipment;
    (3) Maintenance labor; and
    (4) Other directly allocable and attributable maintenance expenses, 
which you can document.
    (f) Overhead directly attributable and allocable to the operation 
and maintenance of the transmission line is an allowable expense. State 
and Federal income taxes and severance taxes and other fees, including 
royalties, are not allowable expenses.
    (g) To compute costs associated with capital investment, a lessee 
may use either depreciation with a return on undepreciated capital 
investment, or a return on capital investment in the transmission line. 
After a lessee has elected to use either method, the lessee may not 
later elect to change to the other alternative without MMS approval.
    (h) To compute depreciation, you may elect to use either a 
straight-line

[[Page 41535]]

depreciation method based on the life of equipment or on the life of 
the reserves which the transmission line services, or a return on 
capital investment method. After you make an election, you may not 
change methods without MMS approval. With or without a change in 
ownership, you may depreciate a transmission line only once.
    (i) To calculate a return on undepreciated capital investment, 
multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the transmission 
deduction by the rate of return provided in paragraph (k) of this 
section.
    (j) To compute a return on capital investment in the transmission 
line, multiply the allowable capital investment in the transmission 
line by the rate of return determined pursuant to paragraph (k) of this 
section. There is no allowance for depreciation.
    (k) The rate of return must be 2.0 times the industrial rate 
associated with Standard & Poor's BBB rating. The BBB rate must be the 
monthly average rate as published in Standard & Poor's Bond Guide for 
the first month for which the allowance is applicable. Redetermine the 
rate at the beginning of each subsequent calendar year.
    (l) Calculate the deduction for transmission costs based on your 
cost of transmitting electricity through each individual transmission 
line. In conducting reviews and audits, MMS may require you to submit 
arm's-length transmission contracts, production agreements, operating 
agreements, and related documents. You must comply with any such 
requirements within the time MMS specifies. Recordkeeping requirements 
are found at part 212 of this chapter.
    (m) For new transmission facilities or arrangements, base your 
initial deduction on estimates of allowable electricity transmission 
costs for the applicable period. Use the most recently available 
operations data for the transmission line or, if such data are not 
available, use estimates based on data for similar transmission lines. 
Paragraph (o) of this section will apply when you amend your report 
based on your actual costs.
    (n) In conducting reviews and audits, MMS may require you to submit 
all data used to calculate the deduction. You must comply with any such 
requirements within the time MMS specifies. Recordkeeping requirements 
are found at part 212 of this chapter.
    (o) If your actual transmission deduction differs from your 
estimate under Sec.  206.352(a)(1), you must submit corrected Forms 
MMS-2014 according to MMS instructions. You then must make payments or 
may receive a refund or credit as shown in the following table:

------------------------------------------------------------------------
 If your actual transmission deduction
                is . . .                            Then . . .
------------------------------------------------------------------------
(1) Less than the amount you estimated   you must pay:
 and used to calculate royalties under   (i) Additional royalties
 Sec.   206.352(a)(1) during the          retroactive to the first month
 reporting period.                        of the reporting period; and
                                         (ii) Interest computed under 30
                                          CFR 218.302.
(2) Greater than the amount you          you are entitled to a refund or
 estimated and used to calculate          credit without interest.
 royalties under Sec.   206.352(a)(1).
------------------------------------------------------------------------

    (p) Under no circumstances shall the transmission deduction plus 
the generating deduction reduce the royalty value of the geothermal 
resource to zero.


Sec.  206.354  How do I determine generating deductions?

    (a) If you determine the value of your geothermal resources under 
Sec.  206.352(b)(1)(i) of this subpart, you may take a generating 
deduction. If you take a generating deduction, you must 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). You may deduct the actual costs 
you incur for generating electricity under your arm's-length power 
plant contract.
    (b)(1) You must base your generating costs deduction on your actual 
annual costs associated with the construction and operation of a 
geothermal power plant.
    (i) You must determine your monthly generating deduction by 
multiplying the annual generating cost rate (in dollars per kilowatt-
hour) by the amount of plant tailgate electricity measured (or 
computed) for the reporting month. The generating cost rate is 
determined from the annual amount of your plant tailgate electricity.
    (ii) You must redetermine your generating cost rate annually at the 
beginning of the same month of the year in which the power plant was 
placed into service or, at your option, at a time concurrent with the 
beginning of your annual corporate accounting period. However, the 
period you select must coincide with the same period chosen for the 
transmission deduction under Sec.  206.353(b)(1). After you choose a 
deduction period, you may not later elect to use a different deduction 
period without MMS approval.
    (2) Base your generating costs on your actual power plant costs 
during the reporting period, including:
    (i) Operating and maintenance expenses under paragraphs (d) and (e) 
of this section;
    (ii) Overhead under paragraph (f) of this section; and either
    (iii) Depreciation under paragraphs (g) and (h) of this section and 
a return on undepreciated capital investment under paragraph (g) and 
(i) of this section; or
    (iv) a return on capital investment in the power plant under 
paragraphs (g) and (j) of this section.
    (c)(1) Allowable capital costs under paragraph (b) of this section 
are generally those for depreciable fixed assets (including costs of 
delivery and installation of capital equipment) which are an integral 
part of the power plant or are required by the design specifications of 
the power conversion cycle.
    (2)(i) You may include a return on capital you invested in the 
purchase of real estate for a power plant site if:
    (A)The purchase is necessary; and,
    (B) The surface is not part of the Federal lease.
    (ii) The rate of return shall be the same rate determined under 
paragraph (k) of this section.
    (3) You may not deduct the costs of gathering systems and other 
production-related facilities.
    (d) Allowable operating expenses include:
    (1) Operations supervision and engineering;
    (2) Operations labor;
    (3) Auxiliary fuel and/or utilities used to operate the power plant 
during down time;
    (4) Utilities;
    (5) Materials;
    (6) Ad valorem property taxes;
    (7) Rent;
    (8) Supplies; and
    (9) Any other directly allocable and attributable operating 
expense.

[[Page 41536]]

    (e) Allowable maintenance expenses include:
    (1) Maintenance of the power plant;
    (2) Maintenance of equipment;
    (3) Maintenance labor; and
    (4) Other directly allocable and attributable maintenance expenses.
    (f) Overhead directly attributable and allocable to the operation 
and maintenance of the power plant is an allowable expense. State and 
Federal income taxes and severance taxes and other fees, including 
royalties, are not allowable expenses.
    (g) To compute costs associated with capital investment, a lessee 
may use either depreciation with a return on undepreciated capital 
investment, or a return on capital investment in the power plant. After 
a lessee has elected to use either method, the lessee may not later 
elect to change to the other alternative without MMS approval.
    (h) To compute depreciation, you may elect to use either a 
straight-line depreciation method based on the life of the geothermal 
project, usually the term of the electricity sales contract or other 
depreciation period acceptable to MMS, or a unit-of-production method. 
After you make an election, you may not change methods without MMS 
approval. You may not depreciate equipment below a reasonable salvage 
value. With or without a change in ownership, you may depreciate a 
power plant only once.
    (i) To calculate a return on undepreciated capital investment, 
multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the generating 
deduction allowance by the rate of return provided in paragraph (k) of 
this section.
    (j) To compute a return on capital investment in the power plant, 
multiply the allowable capital investment in the power plant by the 
rate of return determined pursuant to paragraph (k) of this section. 
There is no allowance for depreciation.
    (k) The rate of return must be 2.0 times the industrial rate 
associated with Standard & Poor's BBB rating. The BBB rate must be the 
monthly average rate as published in Standard & Poor's Bond Guide for 
the first month for which the allowance is applicable. You must 
redetermine the rate at the beginning of each subsequent calendar year.
    (l) Calculate the deduction for generating costs based on your cost 
of generating electricity through each individual power plant.
    (1) In conducting reviews and audits, MMS may require you to submit 
arm's-length power plant contracts, production agreements, operating 
agreements, and related documents. You must comply with any such 
requirements within the time MMS specifies. Recordkeeping requirements 
are found at part 212 of this chapter.
    (2) For new power plants or arrangements, base your initial 
deduction on estimates of allowable electricity generation costs for 
the applicable period. Use the most recently available operations data 
for the power plant or, if such data are not available, use estimates 
based on data for similar power plants. Paragraph (m) of this section 
will apply when you amend your report based on your actual costs.
    (3) In conducting reviews and audits, MMS may require you to submit 
all data used to calculate the deduction. You must comply with any such 
requirements within the time MMS specifies. Recordkeeping requirements 
are found at part 212 of this chapter.
    (m) If your actual generating deduction at the end of the annual 
reporting period is different from your estimated payment, you must 
submit corrected Forms MMS-2014 to reflect adjustments to royalty 
payments in accordance with MMS instructions. You then must make 
payments or may receive a refund or credit as shown in the following 
table:

------------------------------------------------------------------------
 If your actual generating deduction is
                 . . .                              Then . . .
------------------------------------------------------------------------
(1) Less than the amount you estimated   you must pay:
 and used to calculate royalties under   (i) Additional royalties
 Sec.   206.352(a)(1) during the          retroactive to the first month
 reporting period.                        of the reporting period; and
                                         (ii) Interest computed under 30
                                          CFR 218.302.
(2) Greater than the amount you          you are entitled to a refund or
 estimated and used to calculate          credit without interest.
 royalties under Sec.   206.352(a)(1).
------------------------------------------------------------------------

    (n) Under no circumstances shall the transmission deduction plus 
the generating deduction reduce the royalty value of the geothermal 
resource to zero.


Sec.  206.355  How do I calculate royalty due on geothermal resources I 
sell arm's-length to a purchaser for direct use?

    If you sell geothermal resources produced from Class I, II, or III 
leases at arm's-length to a purchaser for direct use, then the royalty 
on the geothermal resource is 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 43 CFR 
3211.18. See Sec.  206.361 for additional provisions applicable to 
determining gross proceeds under arm's-length sales.


Sec.  206.356  How do I calculate royalty due on geothermal resources I 
use for direct use purposes?

    If you use the geothermal resource for direct use:
    (a) For Class I leases, you must determine the royalty due on 
geothermal resources in accordance with the first applicable of the 
following three paragraphs.
    (1) The weighted average of the gross proceeds established in 
arm's-length contracts for the purchase of significant quantities of 
geothermal resources to operate the lessee's same direct-use facility 
times the royalty rate in your lease. In evaluating the acceptability 
of arm's-length contracts, the following factors shall be considered: 
Time of execution, duration, terms, volume, quality of resource, and 
such other factors as may be appropriate to reflect the value of the 
resource.
    (2) The equivalent value of the least expensive, reasonable 
alternative energy source (fuel) times the royalty rate in your lease. 
The equivalent value of the least expensive, reasonable alternative 
energy source shall be based on the amount of thermal energy that would 
otherwise be used by the direct use facility in place of the geothermal 
resource. That amount of thermal energy (in Btu's) displaced by the 
geothermal resource shall be determined by the equation:

[[Page 41537]]

[GRAPHIC] [TIFF OMITTED] TP21JY06.001


Where hin is the enthalpy in Btu's/lb at the direct use 
facility inlet (based on measured inlet temperature), hout 
is the enthalpy in Btu's/lb at the facility outlet (based on measured 
outlet temperature), density is in lbs/cu ft based on inlet 
temperature, the factor 0.133681 (cu ft/gal) converts gallons to cubic 
feet, and volume is the quantity of geothermal fluid in gallons 
produced at the wellhead or measured at an approved point. The 
efficiency of the alternative energy source shall be 0.7 for coal and 
0.8 for oil, natural gas, and other fuels derived from oil and natural 
gas, or an efficiency factor proposed by the lessee and approved by 
MMS. The methods of measuring resource parameters (temperature, volume, 
etc.) and the frequency of computing and accumulating the amount of 
thermal energy displaced shall be determined and approved by BLM.
    (3) A royalty determined by any other reasonable method approved by 
MMS or the Assistant Secretary, Land and Minerals Management of the 
Department of the Interior, under Sec.  206.364 of this part.
    (b) For hot water produced from Class II and Class III leases, you 
must multiply the appropriate fee from the schedule in subparagraph 
(b)(1) of this section by the number of gallons or pounds you produce 
from the direct use lease each month.
    (1) You must use the following fee schedule to calculate fees due 
under this section:

                                             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
----------------------------------------------------------------------------------------------------------------

    (i) For direct use geothermal resources with an average monthly 
inlet temperature of 130 [deg]F or less, you must only pay the lease 
rental.
    (ii) The MMS, in consultation with BLM, will develop and publish a 
revised fee schedule in the Federal Register, as needed.
    (iii) The MMS, in consultation with BLM, will calculate revised 
fees schedules using the following formulas:
For reporting on a volume basis:
[GRAPHIC] [TIFF OMITTED] TP21JY06.002

For reporting on a mass basis:
[GRAPHIC] [TIFF OMITTED] TP21JY06.003


Where:

RV = Royalty due as a function produced volume in the fee 
schedule, expressed as dollars ($) per million (106) 
gallons;
Rm = Royalty due as a function of produced mass in the fee 
schedule, expressed as dollars ($) per million (106) pounds;
[rho] = Water density at inlet temperature expressed as lbs per gallon;
Tin = Measured inlet temperature in [deg]F (as required by 
BLM under 43 CFR part 3275);
Tout = Established assumed outlet temperature of 130 [deg]F;
e = Boiler Efficiency Factor for coal of 70%;
Pprbc = The three year historical average of Powder River 
Basin spot coal prices, as published by the Energy Information 
Administration, in dollars ($) per MMBtu;
Frr = The assumed Lease Royalty Rate of 10%

    (2) The fee that you report is subject to monitoring, review, and 
audit.
    (3) The schedule of fees established under this paragraph will 
apply to any Class III lease with respect to any royalty payments 
previously made when the lease was a Class I lease that were due and 
owing, and were paid, on or after July 16, 2003. To use this provision, 
you must provide MMS data

[[Page 41538]]

showing the amount of geothermal production in pounds or gallons of 
geothermal fluid to input into the fee schedule (see 43 CFR part 3276).
    (i) If the royalties you previously paid are less than the fees due 
under this section, then you must pay the difference. You must pay 
interest on that difference computed under 30 CFR 218.302.
    (ii) If the royalties you previously paid are more than the fees 
due under this section, then you are entitled to a refund or credit 
from MMS of fifty percent of the overpaid royalties. You are also 
entitled to a refund or credit of any interest that you paid on the 
overpaid royalties.
    (c) For geothermal resources other than hot water, MMS will 
determine fees on a case-by-case basis.


Sec.  206.357  How do I calculate royalty due on byproducts?

    If you sell byproducts, then you must determine the royalty due on 
the byproducts produced from Class I, II, or III leases in accordance 
with the first applicable of the following paragraphs:
    (a) The gross proceeds accruing to you for the arm's-length sale of 
the byproducts, less any applicable byproduct transportation allowances 
determined under Sec. Sec.  206.357 and 206.358 times the royalty rate 
in your lease or that BLM prescribes under 43 CFR 3211.19. See Sec.  
206.361 for additional provisions applicable to determining gross 
proceeds;
    (b) Other relevant matters including, but not limited to, published 
or publicly available spot-market prices, or information submitted by 
the lessee concerning circumstances unique to a particular lease 
operation or the saleability of certain byproducts; or
    (c) A value determined by any other reasonable valuation method 
approved by MMS.


Sec.  206.358  What are byproduct transportation allowances?

    (a) When you determine the value of byproducts at a point off the 
geothermal lease, unit, or participating area, you are allowed a 
deduction in determining value, for royalty purposes, for your 
reasonable, actual costs incurred to:
    (1) Transport the byproducts from a Federal lease, unit, or 
participating area to a sales point or point of delivery that is off 
the lease, unit, or participating area; or
    (2) Transport the byproducts from a Federal lease, unit, or 
participating area, or from a geothermal use facility to a byproduct 
recovery facility when that byproduct recovery facility is off the 
lease, unit, or participating area and, if applicable, from the 
recovery facility to a sales point or point of delivery off the lease, 
unit, or participating area.
    (b) Costs for transporting geothermal fluids from the lease to the 
geothermal use facility, whether on or off the lease, shall not be 
included in the byproduct transportation allowance.
    (c)(1) When you transport byproducts from a lease, unit, 
participating area, or geothermal use facility to a byproduct recovery 
facility, you are not required to allocate transportation costs between 
the quantity of marketable byproducts and the rejected waste material. 
The byproduct transportation allowance is authorized for the total 
production that is transported. You must express byproduct 
transportation allowances as a cost per unit of marketable byproducts 
transported.
    (2) For byproducts that are extracted on the lease, unit, 
participating area, or at the geothermal use facility, the byproduct 
transportation allowance is authorized for the total byproduct that is 
transported to a point of sale off the lease, unit, or participating 
area. You must express byproduct transportation allowances as a cost 
per unit of byproduct transported.
    (3) Transportation costs shall be authorized as allowances only 
when the transported byproduct is sold, delivered, or otherwise 
utilized by the lessee and royalties are reported and paid.
    (d) Reporting requirements--(1) Arm's-length contracts. (i) You 
must use a discrete field on Form MMS-2014 to notify MMS of a 
transportation allowance.
    (ii) In conducting reviews and audits, MMS may require you to 
submit arm's-length transportation contracts, production agreements, 
operating agreements, and related documents. You must comply with any 
such requirements within the time MMS specifies. Recordkeeping 
requirements are found at part 212 of this chapter.
    (2) Non-arm's-length or no contract. (i) You must use a discrete 
field on Form MMS-2014 to notify MMS of a transportation allowance.
    (ii) For new transportation facilities or arrangements, base your 
initial deduction on estimates of allowable byproduct transportation 
costs for the applicable period. Use the most recently available 
operations data for the transportation system or, if such data are not 
available, use estimates based on data for similar transportation 
systems. Paragraph (e) of this section will apply when you amend your 
report based on your actual costs.
    (iii) In conducting reviews and audits, MMS may require you to 
submit all data used to calculate the deduction. You must comply with 
any such requirements within the time MMS specifies. Recordkeeping 
requirements are found at part 212 of this chapter.
    (e)(1) If the actual transmission deduction you determined at the 
end of the annual reporting period is:
    (i) Less than the amount you estimated and used to calculate 
royalties under Sec.  206.356(a) during the reporting period, then you 
must pay additional royalties retroactive to the first month of the 
reporting period, plus interest computed under 30 CFR 218.302; or
    (ii) Greater than the amount you estimated and used to calculate 
royalties under Sec.  206.356(a) you are entitled to a refund or credit 
without interest.
    (2) You must submit corrected Forms MMS-2014 to reflect adjustments 
to royalty payments in accordance with MMS instructions.
    (f) Byproduct transportation allowances are subject to monitoring, 
review, and audit. If, after a review and/or audit, MMS determines that 
you have improperly determined a byproduct transportation allowance 
authorized by this section, then:
    (1) You must pay any additional royalties plus interest determined 
in accordance with 30 CFR 218.302; or
    (2) You are entitled to a refund or credit without interest.
    (g) If you commingled byproducts produced from Federal and non-
Federal leases for transportation, you may not disproportionately 
allocate transportation costs to Federal lease production.
    (h) If MMS reviews or audits your royalty payments, you must make 
available to authorized MMS representatives or to other authorized 
persons all transportation contracts and all other information as may 
be necessary to support a byproduct transportation allowance.


Sec.  206.359  How do I determine byproduct transportation allowances?

    (a) For transportation costs you incur under an arm's-length 
contract, the transportation allowance shall be the reasonable, actual 
costs you incurred for transporting the byproducts under that contract, 
subject to monitoring, review, audit, and possible future adjustments. 
You may deduct costs incurred under an arm's-length transportation 
contract without prior MMS approval.
    (1) In conducting reviews and audits, MMS will examine whether the 
contract reflects more than the consideration actually transferred 
either directly or indirectly from you to the transporter for the 
transportation. If the contract reflects more than the total

[[Page 41539]]

consideration you paid, MMS may require you to determine the byproduct 
transportation allowance under paragraph (b) of this section.
    (2) If MMS determines that the consideration you paid under an 
arm's-length byproduct transportation contract does not reflect the 
reasonable value of the transportation because of misconduct by or 
between the contracting parties, or because you otherwise have breached 
your duty to the lessor to market the production for the mutual benefit 
of the lessee and the lessor, MMS will require you to determine the 
byproduct transportation allowance under paragraph (b) of this section. 
When MMS determines that the value of the transportation may be 
unreasonable, MMS will notify you and give you an opportunity to 
provide written information justifying your transportation costs.
    (3) Where your payments for transportation under an arm's-length 
contract are not established on a dollars-per-unit basis, you must 
convert whatever consideration you paid to a dollar value equivalent 
for the purposes of this section.
    (b) For transportation costs you incur; i.e., where you perform 
transportation services for yourself, you must base the byproduct 
transportation allowance on your reasonable actual costs.
    (1) All byproduct transportation allowances deducted under this 
paragraph are subject to monitoring, review, audit, and possible future 
adjustment. You may deduct transportation costs incurred under this 
paragraph without prior MMS approval.
    (2) You must base the byproduct transportation allowance on your 
reasonable actual costs for transportation during the reporting period, 
including:
    (i) Operating and maintenance expenses under paragraphs (d) and (e) 
of this section;
    (ii) Overhead under paragraph (f) of this section; and either
    (iii) Depreciation under paragraphs (g) and (h) of this section and 
a return on undepreciated capital investment under paragraphs (g) and 
(i) of this section; or
    (iv) a return on capital investment in the transportation system 
under paragraphs (g) and (j) of this section.
    (c)(1) Allowable capital costs under paragraph (b) of this section 
are generally those for depreciable fixed assets (including costs of 
delivery and installation of capital equipment) which are an integral 
part of the transportation system.
    (2)(i) You may include a return on capital you invested in the 
purchase of real estate to locate the byproduct transportation 
facilities if:
    (A) The purchase is necessary; and
    (B) The surface is not part of a Federal lease.
    (ii) The rate of return shall be the same rate determined in 
paragraph (k) of this section.
    (3) You may not deduct the costs of gathering systems and other 
production-related facilities.
    (d) Allowable operating expenses include:
    (1) Operations supervision and engineering;
    (2) Operations labor;
    (3) Fuel;
    (4) Utilities;
    (5) Materials;
    (6) Ad valorem property taxes;
    (7) Rent;
    (8) Supplies; and
    (9) Any other directly allocable and attributable operating expense 
which you can document.
    (e) Allowable maintenance expenses include:
    (1) Maintenance of the transportation system;
    (2) Maintenance of equipment;
    (3) Maintenance labor; and
    (4) Other directly allocable and attributable maintenance expenses 
which you can document.
    (f) Overhead directly attributable and allocable to the operation 
and maintenance of the transportation system is an allowable expense. 
State and Federal income taxes and severance taxes and other fees, 
including royalties, are not allowable expenses.
    (g) To compute costs associated with capital investment, a lessee 
may use either paragraphs (h) and (i) or paragraph (j) of this section. 
After a lessee has elected to use either method for a transportation 
system, the lessee may not later elect to change to the other 
alternative without MMS approval.
    (h) To compute depreciation, you may elect to use either a 
straight-line depreciation method based on the life of the 
transportation system, the life of the reserves which the transmission 
system services, or a unit-of-production method. After you make an 
election, you may not change methods without MMS approval. You may not 
depreciate equipment below a reasonable salvage value. With or without 
a change in ownership, you may depreciate a transportation system only 
once.
    (i) To calculate a return on undepreciated capital investment, 
multiply the remaining undepreciated capital balance as of the 
beginning of the period for which you are calculating the 
transportation allowance by the rate of return provided in paragraph 
(k) of this section.
    (j) To compute a return on capital investment in the transportation 
system, the allowed cost shall be the amount equal to the allowable 
capital investment in the transportation system multiplied by the rate 
of return determined pursuant to paragraph (k) of this section. There 
is no allowance for depreciation.
    (k) The rate of return must be the industrial rate associated with 
Standard & Poor's BBB rating. The BBB rate must be the monthly average 
rate as published in Standard & Poor's Bond Guide for the first month 
for which the allowance is applicable. You must redetermine the rate at 
the beginning of each subsequent calendar year.
    (l) Other transportation cost determinations. Use this section when 
calculating transportation costs to establish value using a netback 
procedure or any other procedure that requires deduction of 
transportation costs.


Sec.  206.360  What records must I keep to support my calculations of 
royalty or fees under this subpart?

    If you determine royalties or fees for your geothermal resource 
under this subpart, you must retain all data relevant to the 
determination of the royalty value or the fee you paid. Recordkeeping 
requirements are found at part 212 of this chapter.
    (a) You must be able to show:
    (1) How you calculated the royalty value or fee you reported, 
including all allowable deductions; and
    (2) How you complied with this subpart.
    (b) Upon request, you must submit all data to MMS.


Sec.  206.361  How will MMS determine whether my royalty value, gross 
proceeds, or fees are correct?

    (a)(1) The royalties or fees that you report are subject to 
monitoring, review and audit. The MMS may review and audit your data, 
and MMS will direct you to use a different measure of royalty value, 
gross proceeds or fee, whichever is applicable, if it determines that 
the reported value, gross proceeds, or fee is inconsistent with the 
requirements of this subpart.
    (2) If MMS directs you to use a different royalty value, measure of 
gross proceeds, or fee under paragraph (a)(1) of this section, then the 
following table applies:

[[Page 41540]]



------------------------------------------------------------------------
  If the royalty or fee you paid . . .              Then . . .
------------------------------------------------------------------------
(i) Is less than the royalty or fee      you must pay the difference
 based upon the royalty value or fee      plus interest on that
 established by MMS.                      difference computed under 30
                                          CFR 218.302.
(ii) Is more than the royalty or fee     you are entitled to a refund or
 owed based upon the royalty value,       credit without interest.
 gross proceeds, or fee established by
 MMS.
------------------------------------------------------------------------

    (b) When the provisions in this subpart refer to gross proceeds 
either for the sale of electricity or the sale of a geothermal 
resource, in conducting reviews and audits MMS will examine whether 
your sales contract reflects the total consideration actually 
transferred, either directly or indirectly, from the buyer to you for 
the geothermal resource or electricity. If MMS determines that a 
contract does not reflect the total consideration, or the gross 
proceeds accruing to you under a contract do not reflect reasonable 
consideration because of misconduct by or between the contracting 
parties, or because you otherwise have breached your duty to the lessor 
to market the production for the mutual benefit of the lessee and the 
lessor, MMS may require you to increase the gross proceeds to reflect 
any additional consideration. Alternatively, for Class I leases, MMS 
may require you to use another valuation method in the regulations 
applicable to dispositions other than under an arm's-length contract. 
The MMS will notify you to give you an opportunity to provide written 
information justifying your gross proceeds.
    (c) For arm's-length sales, you have the burden of demonstrating 
that your contract is arm's length.
    (d) The MMS may require you to certify that the provisions in your 
sales contract include all of the consideration the buyer paid you, 
either directly or indirectly, for the electricity or geothermal 
resource.
    (e) Notwithstanding any other provision of this subpart, under no 
circumstances shall the value of production for royalty purposes under 
a Class I lease where the geothermal resources are sold before use be 
less than the gross proceeds accruing to you.
    (f) Gross proceeds for the sale of electricity or for the sale of 
the geothermal resource shall be based on the highest price a prudent 
lessee can receive through legally enforceable claims under its 
contract.
    (1) Absent contract revision or amendment, if you fail to take 
proper or timely action to receive prices or benefits to which you are 
entitled, you must pay royalty based upon that obtainable price or 
benefit.
    (2) Contract revisions or amendments you make must be in writing 
and signed by all parties to the contract.
    (3) If you make timely application for a price increase or benefit 
allowed under your contract, but the purchaser refuses and you take 
reasonable measures, which are documented, to force purchaser 
compliance, you will owe no additional royalties unless or until you 
receive additional monies or consideration resulting from the price 
increase. This paragraph (f)(3) shall not be construed to permit you to 
avoid its royalty payment obligation in situations where a purchaser 
fails to pay, in whole or in part or timely, for a quantity of 
geothermal resources or electricity.


Sec.  206.362  What are my responsibilities to place production into 
marketable condition and to market production?

    You must place geothermal resources and byproducts in marketable 
condition and market the geothermal resources or byproducts for the 
mutual benefit of the lessee and the lessor at no cost to the Federal 
Government. If you use gross proceeds under an arm's-length contract in 
determining royalty, you must increase those gross proceeds to the 
extent that the purchaser, or any other person, provides certain 
services that the seller normally would be responsible to perform to 
place the geothermal resources or byproducts in marketable condition or 
to market the geothermal resources or byproducts.


Sec.  206.363  When is an MMS audit, review, reconciliation, 
monitoring, or other like process considered final?

    Notwithstanding any provision in these regulations to the contrary, 
no audit, review, reconciliation, monitoring, or other like process 
that results in a redetermination by MMS of royalty or fees due under 
this subpart is considered final or binding as against the Federal 
Government or its beneficiaries until MMS formally closes the audit 
period in writing.


Sec.  206.364  How do I request a value or gross proceeds 
determination?

    (a) You may request a value determination from MMS regarding any 
geothermal resources produced from a Class I lease or for byproducts 
produced from a Class I, II, or III lease. You may also request a gross 
proceeds determination for a Class II or III lease. Your request must:
    (1) Be in writing;
    (2) Identify specifically all leases involved, the record title or 
operating rights owners of those leases, and the designees for those 
leases;
    (3) Completely explain all relevant facts. You must inform MMS of 
any changes to relevant facts that occur before we respond to your 
request;
    (4) Include copies of all relevant documents;
    (5) Provide your analysis of the issue(s), including citations to 
all relevant precedents (including adverse precedents); and
    (6) Suggest your proposed gross proceeds calculation method.
    (b) The MMS will reply to requests expeditiously. MMS may either:
    (1) Issue a determination signed by the Assistant Secretary, Land 
and Minerals Management; or
    (2) Issue a determination by MMS; or
    (3) Inform you in writing that MMS will not provide a 
determination. Situations in which MMS typically will not provide any 
determination include, but are not limited to:
    (i) Requests for guidance on hypothetical situations; and
    (ii) Matters that are the subject of pending litigation or 
administrative appeals.
    (c)(1) A determination signed by the Assistant Secretary, Land and 
Minerals Management, is binding on both you and MMS until the Assistant 
Secretary modifies or rescinds it.
    (2) After the Assistant Secretary issues a determination, you must 
make any adjustments in royalty payments that follow from the 
determination and, if you owe additional royalties, pay late payment 
interest under 30 CFR 218.302.
    (3) A determination signed by the Assistant Secretary is the final 
action of the Department and is subject to judicial review under 5 
U.S.C. 701-706.
    (d) A determination issued by MMS is binding on MMS and delegated 
States, but not on you, with respect to the specific situation 
addressed in the determination unless the MMS (for MMS-issued 
determinations) or the Assistant Secretary modifies or rescinds it.
    (1) A determination by MMS is not an appealable decision or order 
under 30 CFR part 290 subpart B.

[[Page 41541]]

    (2) If you receive an order requiring you to pay royalty on the 
same basis as the determination, you may appeal that order under 30 CFR 
part 290 subpart B.
    (e) In making a determination, MMS or the Assistant Secretary may 
use any of the applicable criteria in this subpart.
    (f) A change in an applicable statute or regulation on which any 
determination is based takes precedence over the determination, 
regardless of whether the MMS or the Assistant Secretary modifies or 
rescinds the determination.
    (g) The MMS or the Assistant Secretary generally will not 
retroactively modify or rescind a determination issued under paragraph 
(d) of this section, unless:
    (1) There was a misstatement or omission of material facts; or
    (2) The facts subsequently developed are materially different from 
the facts on which the guidance was based.
    (h) The MMS may make requests and replies under this section 
available to the public, subject to the confidentiality requirements 
under Sec.  206.365.


Sec.  206.365  Does MMS protect information I provide?

    Certain information you submit to MMS regarding royalties or fees 
on geothermal resources or byproducts, including deductions and 
allowances, may be exempt from disclosure. To the extent applicable 
laws and regulations permit, MMS will keep confidential any data you 
submit that is privileged, confidential, or otherwise exempt from 
disclosure. All requests for information must be submitted under the 
Freedom of Information Act regulations of the Department of the 
Interior at 43 CFR part 2.


Sec.  206.366  What is the nominal fee that a state, tribal, or local 
government lessee must pay for the use of geothermal resources?

    If a state, tribal, or local government lessee uses a geothermal 
resource without sale and for public purposes--other than commercial 
generation of electricity--the state, tribal, or local government 
lessee must pay a nominal fee. A nominal fee means a slight or de 
minimis fee. MMS will determine the fee on a case-by-case basis.

PART 210--FORMS AND REPORTS

    7. The authority for part 210 continues to read as follows:

    Authority: 5 U.S.C. 301 et seq.; 25 U.S.C. 396, 2107; 30 U.S.C. 
189, 190, 359, 1023, 1751(a); 31 U.S.C. 3716, 9701; 43 U.S.C. 1334, 
1801 et seq.; and 44 U.S.C. 3506(a).

Subpart H--Geothermal Resources


Sec.  210.352  [Removed]

    8. Remove Sec.  210.352.

PART 218--COLLECTION OF ROYALTIES, RENTALS, BONUSES AND OTHER 
MONIES DUE THE FEDERAL GOVERNMENT

    9. The authority for part 218 continues to read as follows:

    Authority: 25 U.S.C. 396 et seq., 396a et seq., 2101 et seq.; 30 
U.S.C. 181 et seq., 351 et seq., 1001 et seq.; 1701 et seq.; 31 
U.S.C. 3335; 43 U.S.C. 1301 et seq.; 1331 et seq., and 1801 et seq.

    10-11. Add Sec. Sec.  218.303, 218.304, 218.305, 218.306, and 
218.307 to subpart F to read as follows:


Sec.  218.303  May I credit rental towards royalty?

    (a) If you pay your annual rental for your lease before the first 
day of the year for which the annual rental is owed, the provisions in 
the following table apply.

------------------------------------------------------------------------
 If the annual rental you paid is . . .             Then . . .
------------------------------------------------------------------------
(1) Less than or equal to the royalty    you may credit the annual
 you are required to pay that year.       rental that you paid toward
                                          the royalty due for that lease
                                          year at any time during that
                                          lease year.
(2) More than the royalty you are        (i) You will not pay royalty
 required to pay that year.               during that lease year; and
                                         (ii) 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.
------------------------------------------------------------------------

    (b) If portions of your lease are located both within and outside 
of a participating area, you may only credit the rental you paid for 
the portion of the lease within the participating area on a per-acre 
basis.


Sec.  218.304  May I credit rental towards direct use fees?

    You may not credit annual rental toward direct use fees you are 
required to pay that year under 30 CFR 206.356(b). You must pay the 
direct use fees in addition to the annual rental due.


Sec.  218.305  How do I pay advanced royalties I owe under BLM 
regulations?

    If you are required to pay advanced royalties under 43 CFR 
3212.15(a) to retain your lease:
    (a) You must 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 use the average monthly royalty payment for the 
entire period your lease has been producing continuously;
    (b) MMS must receive your advanced royalty payment prior to the 
first day of each month for which production has ceased;
    (c) You may credit any advanced royalty you pay against your future 
production royalties recouped after your lease resumes production. You 
may not reduce the amount of any production royalty paid for any year 
below zero.


Sec.  218.306  May I receive a credit against production royalties for 
in-kind deliveries of electricity I provide under contract to a state 
or county government?

    (a) You may receive a credit against production royalties for in-
kind deliveries of electricity you provide under contract to a state or 
county government if:
    (1) The state or county to which you provide electricity would 
receive a portion of the royalties you paid in money for the lease 
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 their proportionate shares of 
the total acres in the lease;
    (2) MMS approves in advance your contract with the state or county 
to which you are providing in-kind electricity; and
    (3) Your contract provides 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; and
    (b) The maximum credit you may take under this section is equal to 
the portion of the royalty revenue that MMS would have paid to the 
state or county that is

[[Page 41542]]

a party to the contract had you paid royalty in money on all of the 
electricity you delivered to the state or county based on the wholesale 
value of the electricity. You must 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.
    (c) The electricity the state or county government receives from 
you satisfies the Secretary's payment obligation to the state or county 
under 30 U.S.C. 191 or 30 U.S.C. 1019.


Sec.  218.307  How do I pay royalties due for my existing leases that 
qualify for near-term production incentives under BLM regulations?

    If you qualify for a production incentive under BLM regulations at 
43 CFR part 3212, your royalty due on the production BLM determines to 
be qualified for a production incentive is 50 percent of the amount of 
the total royalty that would otherwise be due under 30 CFR part 206, 
subpart H.

[FR Doc. 06-6219 Filed 7-20-06; 8:45 am]
BILLING CODE 4310-MR-P