Federal Register

[Federal Register: May 2, 2007 (Volume 72, Number 84)]
[Rules and Regulations]               
[Page 24357-24446]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02my07-8]                         


[[Page 24357]]

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Part II





Department of the Interior





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Bureau of Land Management



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43 CFR Parts 3000, 3200, and 3280



Geothermal Resource Leasing and Geothermal Resources Unit Agreements; 
Final Rule


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DEPARTMENT OF THE INTERIOR

Bureau of Land Management

43 CFR Parts 3000, 3200, and 3280

[W0-310 9131 PP]
RIN 1004-AD86

 
Geothermal Resource Leasing and Geothermal Resources Unit 
Agreements

AGENCY: Bureau of Land Management, Interior.

ACTION: Final rule.

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

DATES: This rule is effective June 1, 2007.

ADDRESSES: Further information or questions regarding this final rule 
should be addressed in writing to the Director (WO-300), Bureau of Land 
Management, 1849 C St., NW., Washington DC 20240.

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

SUPPLEMENTARY INFORMATION:

I. Background
II. Discussion of Final Rule and Responses to Comments on Proposed 
Rule
III. Procedural Matters

I. Background

    On July 21, 2006, the Bureau of Land Management (BLM) published a 
proposed rule to amend existing geothermal resources leasing and unit 
agreement regulations (71 FR 41542). This final rule adopts most of the 
provisions of the proposed rule and in so doing implements the 
geothermal energy provisions of the Energy Policy Act of 2005 (Pub. L. 
109-58) (Energy Policy Act), which became law on August 8, 2005. 
Sections 221 through 236 of this Act address geothermal development and 
substantially amend the Geothermal Steam Act of 1970. The Geothermal 
Steam Act of 1970, as amended, 30 U.S.C. 1001-1028, provides the 
authority for the BLM to allow for the exploration, development, and 
utilization of geothermal resources on BLM-managed public lands, as 
well as geothermal resources on lands managed by other surface 
management agencies, such as the United States Forest Service.
    One of the more significant changes in the Energy Policy Act is the 
general requirement, with a few exceptions, for geothermal resources to 
be offered through a competitive leasing process. Lands not 
successfully sold in the competitive process can be leased 
noncompetitively.
    The Energy Policy Act also made significant changes in the way 
royalties are assessed on Federal leases. As discussed in the preamble 
to the proposed rule (71 FR at 41543), these changes were similar to, 
and in some cases identical to, recommendations in a 2005 report from 
the Geothermal Valuation Subcommittee (Subcommittee) of the Minerals 
Management Service's (MMS) Royalty Policy Committee (RPC). To simplify 
the valuation methodology for royalty purposes, the Energy Policy Act 
requires a royalty based on the ``gross proceeds'' from the sale of 
electricity from Federal geothermal leases issued after August 8, 2005 
(other than leases issued in response to applications that were pending 
on that date for which the lessee does not elect to be subject to the 
royalty regulations required by the Energy Policy Act) multiplied by a 
royalty rate established by the BLM, rather than on the ``net back'' 
system that was used prior to the Energy Policy Act. Lessees who use 
geothermal resources directly will pay fees according to a fee schedule 
established by the MMS. Under the new law, existing lessees have the 
opportunity to convert the royalty provisions in their leases to those 
of the Energy Policy Act. The MMS is publishing a final rule to 
implement the changes in the Energy Policy Act simultaneously with 
BLM's final rule. The BLM and the MMS have worked together to 
coordinate their regulations.
    References to the MMS regulations appear throughout the BLM's final 
rule because the BLM and the MMS share responsibility with regard to 
the geothermal program. The BLM holds lease sales, issues geothermal 
leases, and generally administers the leases. The BLM establishes the 
terms of the leases, including royalty rates, and enforces the lease 
terms. The MMS is responsible for collecting rents (other than the 
first year's rent) and royalties, and for enforcing the royalty 
obligations. The MMS regulations contain provisions that carry out its 
responsibilities. Appropriate cross-references are contained both in 
the BLM and the MMS regulations.
    Other changes made by the Energy Policy Act include restructured 
lease terms (length of time a lease is in effect) and lease term 
extensions, and provisions for leases for exclusive direct use of 
geothermal resources, without sale, that may be issued 
noncompetitively. The Act also increases the maximum acreage of an 
individual lease and gives the Secretary of the Interior greater 
authority to require lessees to commit to unit agreements to conserve 
geothermal resources.
    Most of the changes in the regulations of this part implement the 
new provisions of the Energy Policy Act. Other changes in sections 
unaffected by changes in the statute clarify existing procedures, 
improve grammatical construction, conform the regulations to new 
administrative or regulatory standards, and correct existing errors. 
Changes based on the Energy Policy Act and substantive changes 
unrelated to the change in statute were discussed in detail in the 
preamble to the proposed rule. Both the preamble to the proposed rule 
and this preamble set out the basis and purpose of this final rule. In 
this preamble, we explain how the final rule differs from the proposed 
rule and discuss comments received on the proposed rule and our 
responses. References in this preamble to the previous rule mean the 
rule that is currently codified in 43 CFR and not the proposed 
regulations.

II. Discussion of Final Rule and Responses to Comments on Proposed Rule

    The BLM received nine comments on the proposed rule published in 
the Federal Register on July 21, 2006 (71 FR 41542). In this section of 
the preamble, we respond to the substantive comments by subpart and/or 
section number. To facilitate understanding, we have also generally 
included a brief summary of what the subpart or section

[[Page 24359]]

provides. For additional explanation of the changes made to each 
section, please refer to the proposed rule at 71 FR 41543-41565.
    Many of the comments received addressed both the BLM proposed rule 
and the MMS proposed rule. The BLM referred to the MMS any comments it 
received regarding the MMS rule. For responses to those comments, 
please see the MMS final rule being published simultaneously with this 
final rule.

Subpart 3200--Geothermal Resources Leasing

    In subpart 3200, we changed the definitions section and added three 
sections to the end of the subpart.
Definitions
    Section 3200.1 contains definitions of terms used throughout parts 
3200 and 3280. As explained in the proposed rule, we removed the 
definitions of terms and concepts that are no longer used or were not 
used previously, added new definitions for terms or concepts that are 
new in this rule, and clarified other terms. The definitions we deleted 
were: ``additional term,'' ``cooperative agreement,'' ``extended 
term,'' and ``pay instead of produce in commercial quantities.'' The 
new terms defined are: ``initial extension,'' ``additional extension,'' 
``direct use,'' ``direct use lease,'' ``gross proceeds,'' ``commercial 
production or generation of electricity,'' and ``commercial 
production.'' Terms clarified are: ``geothermal exploration permit'' 
and ``geothermal steam and associated geothermal resources.''
    In this final rule, we revise the definition of ``commercial 
production or generation of electricity,'' by adding language to 
clarify that the term includes electricity or energy that is required 
to produce the resource, as well as that required to convert the 
resource into electrical energy for sale. This was the BLM's intent in 
the proposed rule. We also specify that the use of resources in this 
manner must be reasonable in order to discourage waste of the resource 
and to conform to the parallel MMS provision at 30 CFR 
202.351(b)(2)(ii). As explained in the preamble to the proposed rule 
(71 FR 41543), the definition of this term is important in determining 
whether geothermal resource production is subject to royalties or 
direct use fees, as referenced in 30 U.S.C. 1004(b), or neither. The 
BLM believes it is more appropriate to consider these components as 
part of the electrical generation process, both: (1) To encourage the 
production of geothermal resources (by not imposing a fee for a 
necessary cost of electricity generation); and (2) Because measurement 
of such usage would be difficult and expensive and the amount of moneys 
generated through the collection of fees would be quite small relative 
to the measurement effort. The BLM expects that an initial evaluation 
will occur at the permitting stage of whether the amount of the 
electricity used to produce the resource and to convert the resource 
into electricity is likely to be reasonable.
    In reviewing subpart 3205 of the proposed rule (Direct Use 
Leasing), we concluded that, in accordance with the statutory 
provisions at 30 U.S.C. 1003(f), the definition of a ``direct use 
lease'' should include that such a lease is issued noncompetitively. 
Section 3205.6 of the proposed (and final) rule provides, mirroring the 
statute, that the BLM may issue a direct use lease only if, among other 
things, it ``determines there is no competitive interest in the 
resource * * *.'' If the BLM determines that land for which an 
applicant applied for a direct use lease is open for geothermal leasing 
and is appropriate for exclusive direct use operations (see definition 
of ``direct use''), and that there is competitive interest, it will 
include the land in a competitive lease sale with lease stipulations 
limiting operations to exclusive direct use. Unlike a direct use lease 
that is issued noncompetitively, under a competitive lease that is 
limited to exclusive direct use, the resource may be sold (but it may 
not used by the operator or a purchaser for the commercial generation 
of electricity), and the acreage restrictions will be those applicable 
to competitive leases rather than direct use leases. We have thus 
revised the definition of ``direct use lease'' to read as follows: 
``Direct use lease means a lease issued noncompetitively in an area BLM 
designates as available exclusively for direct use of geothermal 
resources, without sale, for purposes other than commercial generation 
of electricity.''
    We received no comments on this section and, except for revising 
the definition of ``direct use lease'' as discussed above, have adopted 
it as proposed.
Types of Leases
    Final section 3200.6 provides general information about the two 
types of geothermal leases that are issued under this rule: (1) Leases 
that may be used for any type of geothermal use, such as commercial 
generation of electricity or direct use of the resource, issued either 
competitively under subpart 3203 or noncompetitively under subpart 
3204; and (2) Leases that may only be used for direct use without sale, 
i.e., direct use leases issued under proposed subpart 3205. We received 
no comments on this section and have adopted it as proposed. We discuss 
permitted uses under different types of leases in more detail in the 
discussion of subpart 3205 (Direct Use Leasing), below.
Transition Rules
    The Energy Policy Act at 30 U.S.C. 1005(d), directed that the 
Secretary by regulation establish transition rules for leases issued 
before August 8, 2005. The only transition requirement in that section 
was that leases nearing the end of their terms on August 8, 2005, must 
be allowed 2-year extensions under certain circumstances.
    Under the authority of 30 U.S.C. 1005(d), final sections 3200.7 and 
3200.8 contain transition rules, addressing how this final rule applies 
to: (1) Leases issued before August 8, 2005, the enactment date of the 
Energy Policy Act; and (2) Leases issued on or after August 8, 2005, 
but based on lease applications pending on August 8, 2005.
    Final section 3200.7(a)(1) makes leases issued before August 8, 
2005, generally subject to parts 3200 and 3280, except they are subject 
to the regulations in effect on August 8, 2005 (43 CFR parts 3200 and 
3280 (2004)), with regard to regulatory provisions relating to 
royalties, minimum royalties, rentals, primary term and lease 
extensions, diligence and annual work requirements, and renewals. Final 
section 3200.7(a)(1) and 3200.8(a) include a citation to 43 CFR parts 
3200 and 3280 (2004) to clarify that these were the regulations in 
effect on August 8, 2005. The substance of the 2004 edition of 43 CFR 
parts 3200 and 3280 is the same as the 2005 and 2006 editions of the 
CFR for those parts.
    Final section 3200.7(a)(2) provides that the lessee of a lease 
issued before August 8, 2005, may elect generally to be subject to all 
of the new regulations in parts 3200 and 3280, so long as the lessee 
makes such an election no later than 18 months after the effective date 
of this rule, i.e., no later than December 1, 2008. The provision notes 
that changes relating to royalty terms are possible only under the 
royalty conversion rules of final section 3212.25. As explained in the 
preamble to the proposed rule (71 FR 41544), this provision allowing an 
existing lessee to elect to be governed by the new regulations is 
within the BLM's authority under 30 U.S.C. 1005(d), and was prompted by 
the statutory provision at 30 U.S.C. 1003(d)(2) allowing such an 
election to lessees whose lease applications were pending on August 8, 
2005.

[[Page 24360]]

    In reviewing this section during drafting of the final rule, we 
became aware that the language was confusing regarding whether a lessee 
could make an election under section 3200.7(a)(2) without also 
obtaining a conversion of royalty terms under section 3212.25. We have 
therefore added a sentence to this section clarifying that a lessee 
seeking to make an election under section 3200.7(a)(2) must also obtain 
a royalty rate conversion under section 3212.25 to make the election 
under section 3200.7(a)(2) effective. This section alternatively allows 
a lessee to convert only the royalty rate terms of the lease under 
subpart 3212.
    Section 3200.7 provides that a lessee that does not convert lease 
terms relating to royalties may apply for a production incentive under 
final subpart 3212 (if eligible under that subpart). In addition, the 
section provides that the lessee of a lease issued before August 8, 
2005, that was within 2 years of the end of its term on that date, may 
apply to extend the lease for up to 2 years, to allow achievement of 
production under the lease or to allow the lease to be included in a 
producing unit.
    Final section 3200.8 addresses geothermal lease applications 
pending on August 8, 2005, and the status of leases issued pursuant to 
such applications. The section provides that such leases are subject to 
parts 3200 and 3280, except that they are subject to the regulations in 
effect on August 8, 2005 (43 CFR parts 3200 and 3280 (2004)), with 
regard to regulatory provisions relating to royalties, minimum 
royalties, rentals, primary term and lease extensions, diligence and 
annual work requirements, and renewals. However, such lessees may elect 
to be subject to the new regulations in their entirety. Under such an 
election, the royalty rate for such leases will convert to those 
specified in sections 3211.17(a) and 3211.18(a) and not under the 
process in section 3212.25.
    One commenter asked whether someone could top-file over a lease 
application that was pending on August 8, 2005, and whether the BLM 
could convert the land to a KGRA (Known Geothermal Resource Area).
    The informal answer given to this question at a public meeting in 
Reno, Nevada on August 31, 2006, was that a noncompetitive lease 
application pending on August 8, 2005, would have priority. However, if 
two or more noncompetitive lease applications filed before August 8, 
2005, overlap in area, it is possible that the BLM, in processing the 
applications under the previous regulations, may reclassify the area as 
a KGRA and require a competitive sale.
    Another comment addressing proposed sections 3200.7 and 3200.8 
noted that in referencing the transition provisions that also apply in 
the MMS rules, the BLM does not define or use the same transition terms 
(i.e., Class I, Class II, and Class III leases) as does the MMS (see 
the MMS final rule, 30 CFR 206.351). The commenter suggested that it 
might provide clarity if the BLM regulations utilized the same 
terminology as the MMS since the two rules have interrelated 
provisions.
    We did not change the proposed rule in response to this comment. 
The MMS's classification system was designed to describe types of 
leases for royalty purposes only. In its final rule the MMS has revised 
its lease class definitions, but neither the proposed nor the final MMS 
class definitions fully describe the categories of leases for the BLM's 
purposes. For example, the MMS:
    (1) Class I leases include both: (a) Leases existing on August 8, 
2005 (existing leases), for which the lessee has not converted the 
royalty terms under section 3212.25; and (b) Leases issued pursuant to 
lease applications pending on August 8, 2005 (pending applications), 
for which the lessee has not made an election under section 3200.8(b). 
The BLM must, however, distinguish between these two sub-categories 
because non-converting existing leases are eligible for production 
incentives under section 3212.18, whereas leases issued pursuant to 
pending applications that do not elect to be subject to the new 
regulations are not eligible for production incentives;
    (2) Class II leases do not distinguish between direct use leases 
under subpart 3205, which are restricted to direct use of the resource, 
and regular leases under subparts 3203 or 3204, which may have direct 
use. Nor does the Class II designation distinguish between leases 
issued pursuant to application or competitive sale after August 8, 
2005, and those issued in response to pending applications where the 
lessee elects to be subject to the new regulations under section 
3200.8(b); and
    (3) Class III leases do not distinguish between: (a) Existing 
leases that convert only under section 3212.25 (royalty conversion 
only); and (b) Existing leases that convert under section 3200.7(a)(2) 
(electing to be subject to all new regulations, which must include a 
conversion under section 3212.25).
    None of the foregoing distinctions is necessary for the MMS royalty 
purposes, but the BLM must make these distinctions in explaining to 
different categories of lessees what options Congress made available to 
them. For these reasons, the BLM did not use the MMS classification 
system in its proposed rule. We did not change the rule in response to 
this comment.

Subpart 3201--Available Lands

    Subpart 3201 addresses which lands are available for geothermal 
leasing and which lands are not available for geothermal leasing. It is 
substantively unchanged from the previous subpart. We made one minor 
change to section 3201.10 to make it clear that public lands and 
acquired lands that are administered by the Department of the Interior 
are available for leasing unless they are withdrawn from such use. We 
received no comments on this subpart.

Subpart 3202--Lessee Qualifications

    Subpart 3202 addresses who may hold geothermal leases, 
qualifications to hold a geothermal lease, whether other persons are 
allowed to act on an applicant's behalf, and what happens if an 
applicant for a lease dies. The subpart is substantively unchanged from 
the previous subpart. We received no comments on this subpart and have 
adopted it as proposed.

Subpart 3203--Competitive Leasing

    Subpart 3203 explains the new process for competitive leasing, 
which requires competitive leasing to the highest responsible qualified 
bidder except as otherwise specified. This differs from the previous 
process, which provided for competitive bidding only for lands within a 
KGRA or lands from terminated, expired, or relinquished leases, or at 
the BLM's discretion when there was public interest.
    One commenter objected to ``leasing the geothermal resource for 
free.'' The BLM disagrees that the geothermal resource will be leased 
for free. In accordance with the statute, final subpart 3203 provides 
that companies will pay bonus bids for competitive leases, and final 
subpart 3211 provides that lessees will pay rentals and either 
royalties or fees. Regarding the costs the government incurs, final 
section 3203.12, discussed below, provides that nominators of lands 
must pay a fee of $100 per nomination plus $.10 per acre, and final 
sections 3203.17 and 3204.10 provide that lease applicants must pay a 
processing fee to reimburse the government's processing costs.
    One commenter stated that geothermal development is more akin to 
minerals development than to oil and gas development in that the rights 
to develop the land need to be secured before significant exploration 
can occur

[[Page 24361]]

because of the risk and capital cost involved. To facilitate leasing 
and exploration within shorter timeframes, the commenter recommended 
categorical exclusions to expedite exploration permits and greater use 
of lease stipulations to address environmental or other issues, even if 
such stipulations made future development of the leasehold contingent 
on subsequent permitting and National Environmental Policy Act (NEPA) 
processes. Another commenter indicated that the timeframes for 
compliance with the NEPA slow down the overall process and suggested 
that a developer could do an environmental assessment to comply with 
the NEPA after the developer has been issued a lease.
    We did not change the rule in response to these comments. The 
Energy Policy Act did not address requirements under the NEPA with 
regard to geothermal leasing, and the suggested changes are beyond the 
scope of these regulations and the July 2006 proposed rule.
    Final section 3203.5 explains the three stages of the competitive 
leasing process and summarizes the four specific circumstances in which 
leases would be issued on a non-competitive basis that are addressed in 
detail at subparts 3204 and 3205.
    One commenter submitted an article entitled ``What We Have Lost,'' 
authored and endorsed by numerous individuals in the geothermal 
industry. The article contends that competitive leasing will remove the 
incentive for companies, large or small, to invest in pre-lease 
exploration and project assessments, and maintains that an all-
competitive leasing process does not fit geothermal resource 
development.
    As the commenter realizes, the statute mandates competitive 
leasing. Any revision of the system prescribed by the statute would 
have to occur through Congressional action.
    One commenter asked if land can be included in a competitive lease 
sale only through the nomination process. In considering this question, 
the BLM concluded that there may be instances where it would be in the 
public interest to include land in a competitive sale that has not been 
nominated. In response to this comment, we have revised the language of 
sections 3203.5 and 3203.10 to clarify that the BLM may include land in 
a competitive lease sale on its own initiative. We have also revised 
the language of section 3203.13 to provide that the BLM may hold a 
competitive lease sale on its own initiative even in a state where no 
nominations are pending. Examples of when competitive sale of lands 
that have not been nominated might be in the public interest include 
adding to a lease sale parcels which might otherwise be drained by 
wells on adjacent acreage, or putting up for competitive sale land for 
which the BLM received an application for a direct use lease where the 
BLM determines that there is competitive interest.
    Final section 3203.10 describes the process for nominating lands 
for competitive sale. In accordance with the statutory amendments, it 
increases to 5,120 acres (from the previous 2,560 acres) the maximum 
size of a lease, unless the area to be leased includes an irregular 
subdivision. This section also explains how a nominator must describe 
the lands nominated. These land description provisions were previously 
found at section 3204.11. The only change from those provisions is a 
clarification that lands surveyed under the public land rectangular 
survey system are to be described to the nearest aliquot part. This 
section also makes clear that a nominator may submit more than one 
nomination, as long as each nomination satisfies the acreage and land 
description requirements and includes the required filing fee, and that 
the BLM may reconfigure lands to be included in each parcel offered for 
sale.
    Two commenters stated that the proposed rule did not address the 
situation of geothermal projects that contain both Federal and non-
federal lands, which one commenter said constituted the majority of its 
projects. These commenters were concerned that a competitive leasing 
system could result in a developer having to wait up to 2 years to find 
out whether it is able to acquire a lease to Federal land parcels 
adjacent to or intermixed with non-federal lands on which leases could 
be speedily acquired. They stated that if a developer cannot control 
the entire resource, it cannot secure financial backing to build a 
power plant. They recommended revising the regulations to provide for 
``direct''--by which they apparently meant ``non-competitive'' but not 
exclusive direct use--leasing of Federal lands in a number of scenarios 
which would provide effective control to a holder of non-federal 
interests.
    The commenters appear to be suggesting that an entity that already 
controls the majority of leases overlying a geothermal resource area 
should have the right to acquire a lease on any contiguous Federal 
lands. We did not change the rule in response to these comments because 
the statute requires a competitive leasing process except in specific 
circumstances. The circumstances under which Congress decided to allow 
noncompetitive leasing do not include the leasing of adjacent or 
intermixed Federal lands. Implementing this suggestion would require 
statutory change. We note that once all of the Federal and private 
lands are leased, control of the resource can be achieved through 
commitment of all the lands, both Federal and private, to a unit. The 
unit provisions are in subpart 3280 and are discussed below.
    The commenters also suggested that a less-favored alternative to 
noncompetitive leasing of adjacent or intermixed lands would be to 
grant the ``contiguous resource owner'' a right of first refusal in a 
competitive lease sale. In informal discussions at the public meeting 
on the proposed geothermal rule in Reno, a BLM representative may have 
indicated agreement with the suggestion that a contiguous resource 
owner might be able to obtain a right of first refusal. A careful 
reading of the statute, however, makes it clear that it does not 
provide a right of first refusal as an option to any bidder in a 
competitive lease sale. The language of the statute is: ``Except as 
otherwise specifically provided by this Act, all land to be leased that 
is not subject to leasing under subsection (c) [noncompetitive leasing 
when no bids are received in a competitive lease sale] shall be leased 
* * * to the highest responsible qualified bidder * * *.'' 30 U.S.C. 
1003(b)(1). The specific exceptions to including land in a competitive 
lease sale involve lands subject to mining claims, leases issued 
pursuant to applications pending when the statutory amendments were 
enacted, and direct use leases. Because Congress did not provide an 
exception for resource owners of contiguous or intermixed lands, the 
Department has no authority to make such an exception.
    One commenter asked how lease nominations would be prioritized in 
terms of processing under the NEPA, and whether all of the pending 
lease applications would be administered before the BLM began working 
on nominated lands.
    As explained at the public meeting in Reno, prioritization in terms 
of NEPA processing is not within the scope of these regulations. In 
general, nominations are processed on a ``first-in, first-out'' basis. 
However, the BLM may establish priorities based on the adequacy of 
existing NEPA documents in order to issue leases as efficiently as 
possible. In such circumstances, it is possible that newer nominations 
could be processed ahead of older ones. The BLM will begin processing 
nominated lands as the nominations are received.

[[Page 24362]]

    Final section 3203.11 implements the new statutory provision, at 30 
U.S.C. 1003(e), that the BLM may offer parcels as a block at a 
competitive sale when it is reasonable to expect that a geothermal 
resource that can be produced as one unit underlies those parcels.
    One commenter inquired ``who, when and how'' it will be determined 
that leases should be issued as a block to avoid the ``checkerboard'' 
ownerships often arising through the competitive process. In response 
to this comment, we have revised the language of section 3203.11(a) to 
clarify that a nominator may request that leases be issued as a block 
or the BLM may offer leases as a block on its own initiative, and that, 
in either case, the BLM will offer parcels as a block only if 
information is available indicating that a geothermal resource that 
could be produced as one unit can reasonably be expected to underlie 
such parcels. The timing of block requests would be at the time of 
nomination by the nominator, or by the time of the sale notice if by 
the BLM's initiative. At the time of nomination, a nominator could 
bring to the BLM's attention any concerns it may have that checkerboard 
ownership of the parcels could impede development of the geothermal 
resource. The BLM may take that into consideration in deciding whether 
to offer the nominated lands as a block or as individual parcels.
    One commenter suggested that proposed section 3203.11 be 
strengthened by requiring that block nominations be accompanied by 
geologic and scientific data sufficient to show that the nominated 
lands will most likely contain geothermal resources from the same pool 
or structure, and not rely solely on the BLM's general knowledge of the 
area. We believe that proposed section 3203.11 already addresses the 
commenter's concern by requiring that a nominator submit information to 
support its request. In response to this comment, however, we moved the 
language in section 3203.11(b) of the proposed rule, that ``BLM may 
request that you provide additional information'' to section (a) to 
clarify that it pertains to nomination block requests, and we 
strengthened it by replacing ``request'' with ``require'' so that it 
reads: ``BLM may require that you provide additional information.'' The 
BLM will not offer parcels as a block unless it determines that a 
geothermal resource that could be produced as one unit can reasonably 
be expected to underlie such parcels, and will consider available 
information to make that determination.
    Final Sec.  3203.12 provides for a filing fee for nominations of 
lands. In this final rule, the amount of the fee--$100 per nomination 
plus $0.10 per acre of lands nominated--was moved from proposed section 
3203.12 to the fee schedule at section 3000.12 as explained in the 
preamble to the proposed rule (71 FR 41545). We also made a conforming 
amendment to section 3000.12. As with all fees in the fee schedule in 
section 3000.12, these amounts will be adjusted annually according to 
the change in the Implicit Price Deflator for Gross Domestic Product by 
way of publication of a final rule in the Federal Register, and will 
subsequently be posted on the BLM Web site (http://www.blm.gov) (see 

section 3000.12(a)).
    One commenter stated that government agencies incur costs with 
leasing operations and those costs should be covered. The commenter 
wrote that the BLM and others agencies need these funds to monitor 
nearby springs and monitor the effects of the extraction.
    The BLM agrees that the costs it incurs as a result of leasing 
operations should be reimbursed by the lessees. For this reason, final 
section 3203.12 requires a filing fee for nominations of land, as 
further discussed below, and final sections 3203.17, 3204.10, 3205.10, 
and 3211.10 provide that lease applicants must pay a processing fee to 
reimburse the government's processing costs. We did not change the rule 
in response to this comment. We discuss monitoring below in connection 
with final section 3206.11 in response to another part of this 
commenter's comments.
    Two commenters opposed the concept of nomination fees. One 
commenter stated that the nomination process gives the BLM the benefit 
of a company's exploration expertise, providing the BLM and the public 
with valuable insights for which the BLM should not charge a fee. The 
commenter asked at the public meeting in Reno whether a nomination was 
limited in acreage, that is, whether the $100 filing fee was per lease, 
and in later written comments stated that the fee ``is `per parcel,'' 
which has apparently been interpreted as `per lease.' '' The commenter 
suggested that charging a nomination fee further discourages geothermal 
development on Federal lands. Another commenter suggested that the 
nomination fee should only cover administrative costs, and that these 
funds should be retained by the local BLM office for that specific 
purpose.
    We did not change the rule in response to these comments. As 
explained in the preamble to the proposed rule, the BLM is authorized 
to charge reasonable filing fees under Section 304(a) of the Federal 
Land Policy and Management Act of 1976, 43 U.S.C. 1734(a) (71 FR 
41545). Congress gave no indication in its amendments to the Geothermal 
Steam Act that it intended to insulate geothermal nominators from fees. 
The general Federal policy regarding fees, also discussed in the 
preamble to the proposed rule, is to charge a processing fee that 
recovers the agency's reasonable processing costs, which corresponds to 
the suggestion by the second commenter just cited. The BLM does not at 
this time have the data necessary to determine its actual costs of 
processing nominations, but our experience indicates that those costs 
far exceed $100 per nomination and $0.10 per acre. In order to 
discourage frivolous nominations, we proposed this nominal filing fee 
(see Solicitor's M--Opinion No. M-36987, ``BLM's Authority to Recover 
Costs of Minerals Document Processing,'' at n.6). We will collect data 
on the actual costs of processing these nominations and expect to 
propose a processing fee to cover reasonable agency costs in the 
future.
    One commenter at the August 31, 2006, public meeting in Reno asked 
whether a nomination of lands for a competitive sale is limited in 
acreage. The response correctly noted that, as provided in proposed and 
final section 3203.10(b), a nomination may not exceed 5,120 acres 
(unless the area to be leased includes an irregular subdivision), which 
is the maximum size of a lease (see section 3206.12). We want to 
clarify, however, that the nomination fee is per nomination, not per 
lease. Proposed and final section 3203.12 states that a nominator must 
submit the filing fee ``with your nomination.'' While each nomination 
is limited to the maximum acreage of a lease, in ``parceling'' the land 
before the lease sale (see explanation below) BLM may decide to offer 
the nominated lands as more than one lease. Thus, the $100-per-
nomination filing fee could cover more than one eventual lease, but 
cannot cover more than 5,120 acres (with the exception noted).
    There also appears to be some confusion regarding the terminology 
of ``nomination,'' ``lease,'' and ``parcel.'' After nomination, but 
prior to the lease sale, the BLM will prepare the nominated lands for 
competitive sale. This process, often referred to as ``parceling,'' 
involves: subdividing nominated areas into areas that do not

[[Page 24363]]

exceed the maximum allowed size for a lease; accurately describing the 
lands in conformance with the legal land system; and attaching 
appropriate stipulations from the land use plans. Thus, the fee is 
neither ``per parcel'' nor ``per lease,'' but ``per nomination.'' It is 
possible that after parceling, lands offered in a competitive sale may 
not be configured as originally nominated. In general, the BLM refers 
to lease offerings as parcels.
    Regarding the comment that fees collected should be retained by the 
local BLM office, we explained in the preamble to the final minerals 
cost recovery rule (70 FR 58861, October 7, 2005) that the ``BLM 
intends to structure its budget processes to return fees collected to 
the BLM office which processes the actions.'' Thus, the BLM has already 
addressed future implementation of this suggestion.
    Final section 3203.13 provides that the BLM will hold a competitive 
lease sale at least once every 2 years in states where nominations are 
pending, and allows for a sale to include lands in more than one state. 
As explained above, we have also added language to clarify that the BLM 
may include land in a competitive lease sale on its own initiative. As 
explained in the preamble to the proposed rule (71 FR 41545), we 
deleted the provision at previous section 3205.13 regarding the fair 
market value of bids because we concluded that the competitive bidding 
process itself is a reflection of the fair market value of the lease. 
Moreover, eliminating this bidding floor may encourage more competitive 
bidding, which both serves the Energy Policy Act policy of encouraging 
development of geothermal resources and is economically beneficial to 
the United States to the extent leases are issued competitively, 
because competitive leases are issued with bonus bids and have higher 
rental rates.
    A number of commenters urged that proposed section 3203.13 be 
revised to require more frequent lease sales. These commenters noted 
that the statute requires that lease sales be held at minimum every 2 
years and does not establish a cap that would prevent more frequent 
leasing. Various reasons were cited in support of holding lease sales 
more frequently, e.g.: Long delays in the leasing process would make 
financing difficult or impossible and stunt development; The geothermal 
production tax credit has only a 2-year window; Leasing only every 2 
years would not accomplish the goals of the Energy Policy Act; and 
Competitors could spend the time waiting for a lease sale proving up 
the resource to know how to outbid the nominator. Some commenters 
suggested that the regulations should require the BLM to hold quarterly 
lease sales, as in the oil and gas program, in any state where there 
are nominations pending, and require that the BLM process all lease 
nominations within 6 months. One commenter suggested that geothermal 
lease sales be held in conjunction with quarterly oil and gas lease 
sales. A commenter also recommended that the BLM require quarterly 
publication of the status of pending lease nominations and the reason 
for further delay if the tract has not been put forward for leasing 
after 6 months. One commenter suggested that the rule provide that 2 
years is the maximum, but that the BLM will attempt to hold a lease 
sale every 60 days.
    We did not change the rule in response to these comments. As the 
commenters noted, section 3203.13 provides the same time frame as the 
statute at 30 U.S.C. 1003(b). As the commenters also acknowledged, 
nothing in the statute or the regulations precludes more frequent lease 
sales. The quarterly competitive sales for oil and gas are mandated by 
statute. Congress made the decision not to impose a similar mandate for 
geothermal leasing, and we decline to add such a mandate in these 
regulations. We recognize that more frequent lease sales may benefit 
geothermal development and we expect that BLM state offices will 
schedule sales as frequently as feasible when lands are available for 
leasing. The decision whether to hold geothermal lease sales in 
conjunction with some oil and gas lease sales will be made on a state-
by-state basis. Regarding the comment that competitors could spend time 
before a lease sale exploring the potential resource, we note that pre-
leasing exploration is available to the nominator as well as to 
competitors.
    Final sections 3203.14 and 3203.15 describe how the BLM will notify 
the public of competitive lease sales, the types of information the BLM 
will include in a notice of sale, and how the BLM will conduct the 
sale. Unlike the previous regulations at subpart 3205, this final rule 
does not restrict the competitive sale process to sealed bids, but is 
flexible enough to allow other competitive sale formats, such as oral 
auctions. We anticipate that most sales will be conducted through oral 
auctions.
    In order to protect the bidding process, we added at section 
3203.15(c) a standard auction requirement that a bid may not be 
withdrawn and that a bid constitutes a legally binding commitment. This 
is current BLM practice both in the geothermal and oil and gas leasing 
programs.
    We received no comments on sections 3203.14 and 3203.15 and have 
adopted them as proposed.
    Final section 3203.17 provides information related to the payment 
obligations of a successful bidder. Because the proposed competitive 
sale process is no longer restricted to sealed bids, a bidder will not 
have to submit any payments unless at the end of the sale it is the 
high bidder. This section provides that a successful bidder must pay 
twenty percent of the bid, the total first year's rental, and the 
processing fee by close of business on the day of the sale or such 
other time as the BLM may specify. While the general expectation is 
that these payments will be made on the day of the sale, the section 
allows the BLM to specify another time for payments to be made if 
circumstances so require, such as, for example, the following business 
day. This section also adds personal checks to the list of financial 
instruments that may be used to make it easier for the successful 
bidder to make payments immediately after the sale. Final section 
3203.17(c), like previous section 3205.16, requires that the balance of 
the bid be submitted within 15 calendar days after the sale.
    Two commenters objected that same day payment is not practical, nor 
possible in some cases, since the amount of the successful bid is not 
known prior to auction. One suggested that provision should be made for 
a 5-business-day settlement period for bids.
    We did not change the rule in response to these comments. The 
regulations at section 3203.17 provide that payment may be made by 
personal check, as well as other specified means, and that the BLM may 
specify another time for payment. We believe that these provisions 
provide ample opportunity for a lessee to make payment as directed 
under the regulation. We note that the regulations for oil and gas 
lease sales require payment by close of business on the day of sale, 
and experience shows that companies are able to comply with this 
provision.
    Final section 3203.18 cross-references subpart 3204, which 
addresses noncompetitive leasing other than direct use leases.

Subpart 3204--Noncompetitive Leasing Other Than Direct Use Leases

    Final subpart 3204 describes when and how the BLM will issue 
noncompetitive geothermal leases. The most common method of obtaining 
noncompetitive leases under this subpart will be applying for parcels 
of land that did not receive bids in a competitive sale. This subpart 
does not address noncompetitive leases for lands

[[Page 24364]]

available exclusively for direct use of geothermal resources, which are 
covered in final subpart 3205.
    Final section 3204.5 lists the four types of lands available for 
noncompetitive leasing: (1) Parcels of land that did not receive bids 
in a competitive sale; (2) Lands available exclusively for direct use, 
addressed at final subpart 3205; (3) Lands subject to mining claims, 
addressed at final section 3204.12; and (4) Lands for which a lease 
application was pending on August 8, 2005, if the applicant so chooses.
    One commenter suggested that oil and gas leases be allowed to 
include the rights to geothermal resources underlying their oil and gas 
leases, at least for a grandfathered period. The commenter expressed 
concern that if the geothermal rights were put up for competitive bid, 
someone else could acquire them and drill geothermal wells among the 
oil and gas wells, interfering with oil and gas production.
    Oil and gas leases do not include the right to develop the 
geothermal resources; they are authorized under separate statutes and 
processes and a separate geothermal lease would have to be obtained. 
The commenter may have meant to suggest that oil and gas lessees be 
allowed to acquire geothermal leases for underlying resources on a 
noncompetitive basis. However, the statute allows noncompetitive 
leasing only in the four situations listed above. An oil and gas 
operator could apply for a noncompetitive direct use lease for the 
underlying geothermal resources, but if the BLM determined that there 
was competitive interest in a direct use lease, or that the area was 
appropriate for commercial generation of electricity from the 
geothermal resources, it would hold a competitive lease sale. It is 
thus possible that another entity could acquire a lease for the 
geothermal resources underlying the oil and gas lease. It is possible 
that lease stipulations could be inserted to avoid interference with a 
senior oil and gas lease. The statute at 30 U.S.C. 1016 contains 
requirements to avoid interference to protect both geothermal interests 
and other uses.
    Final section 3204.10 requires an applicant for a noncompetitive 
lease to submit a processing fee and advance rent. The advance rent 
will be refunded if the application is rejected or withdrawn. These 
provisions are substantively the same as previous section 3204.12. We 
received no comments on this section and have adopted it as proposed.
    Final section 3204.11 explains the procedures for noncompetitive 
leasing of lands for which no bid is received in a competitive lease 
sale. This implements the statutory requirement at 30 U.S.C. 1003(c). 
For efficiency of administration, in the first 30 days following the 
competitive sale, applications will be accepted only for parcels as 
configured in the sale notice. To provide equal opportunity during the 
first 24 hours after the lease sale, all applications received for a 
particular parcel on the first business day after the competitive sale 
will be considered as simultaneously filed, and the BLM will select one 
at random to receive a lease offer. A fair market value bid is not 
required for a noncompetitive lease. It would be difficult for the BLM 
to determine what an appropriate bid should be in a noncompetitive 
situation; moreover, allowing leases to be obtained without a bid 
should encourage additional geothermal exploration and development. We 
received no comments on section 3204.11 and have adopted it as 
proposed.
    Final section 3204.12 implements the statutory provision at 30 
U.S.C. 1003(b)(3) that allows a mining claimant with an approved plan 
of operations to apply for a noncompetitive geothermal lease. One 
commenter asked if a developer has a mining claim on acreage with an 
approved plan of operations, whether there is the same required 2-year 
waiting period following a competitive lease sale as lands that do not 
have a mining claim.
    We did not change the rule in response to this comment. Under final 
section 3204.12, the 2-year noncompetitive window following a 
competitive lease sale does not apply to a mining claimant with an 
approved plan of operations. A mining claimant with an approved plan of 
operations may file a noncompetitive lease application at any time up 
to the point that the BLM has accepted a bid for a lease on those 
lands.
    Final section 3204.13 implements a portion of the statutory 
provision at 30 U.S.C. 1003(d)(2) that allows lease applications 
pending on August 8, 2005, to be processed under then-existing policies 
and procedures unless the applicant elects for the lease to be subject 
to the new leasing procedures. We received no comments on this section 
and have adopted it as proposed.
    Final section 3204.14 governs the amendment of noncompetitive lease 
applications. It provides that an applicant may amend an application at 
any time before the BLM issues a lease if the amended application meets 
the requirements in this subpart and does not add lands not included in 
the original application. To add lands, an applicant must file a new 
application. (The withdrawal of lands from noncompetitive lease 
applications is covered by final section 3204.15, discussed below.) 
This is a change from the previous regulations, as discussed in the 
preamble to the proposed rule, because the BLM decided that adding 
lands to an application was equivalent to submitting a new application, 
requiring a change in the priority date. We received no comments on 
this section and have adopted it as proposed.
    Final section 3204.15 provides that for 30 days after a competitive 
lease sale, the BLM will not accept partial withdrawals of 
noncompetitive lease applications, but will only accept withdrawals of 
entire noncompetitive lease applications. As explained in the preamble 
to the proposed rule, this is a change from previous section 3204.17, 
and is parallel to the provision at final section 3204.11 restricting 
noncompetitive applications for reconfigured lease parcels for the 
first 30 days following a competitive sale. After 30 days, partial and 
whole withdrawals will be allowed at any time before the BLM issues the 
lease. Final section 3204.15 also provides (as did section 3204.17 of 
the previous regulations) that if a partial withdrawal results in 
failure to meet the minimum acreage required for a lease in final 
section 3206.12, the BLM will reject the lease application.

Subpart 3205--Direct Use Leasing

    The Energy Policy Act provides the authority for the BLM to issue 
noncompetitive leases solely for the direct use of geothermal resources 
under certain conditions. Subpart 3205 is a new subpart added to 
describe these conditions and the process for applying for a direct use 
lease. This subpart implements the provisions of 30 U.S.C. 1003(f). 
``Direct use lease'' as used in this subpart has a specific meaning. As 
discussed above in relation to section 3200.1 (Definitions), we have 
revised the definition of ``direct use lease'' to clarify that such a 
lease is issued noncompetitively. The new definition of ``direct use 
lease'' is ``a lease issued noncompetitively in an area BLM designates 
as available exclusively for direct use of geothermal resources, 
without sale, for purposes other than commercial generation of 
electricity.'' Competitive leases also allow direct use, but they are 
not direct use leases. Unlike a direct use lease, under a competitive 
lease that the BLM has decided to limit to exclusive direct use, the 
resource may be sold (but it may not be used by the

[[Page 24365]]

operator or a purchaser for the commercial generation of electricity), 
and the acreage restrictions will be those applicable to competitive 
leases rather than direct use leases.
    Thus, permitted uses under different types of leases are as 
follows: (1) A lessee with a direct use lease may only use the resource 
directly itself; (2) A lessee with a competitive lease that is 
restricted to exclusive direct use may either use the resource directly 
itself or sell the resource to a purchaser who will use it only for 
direct use; (3) A lessee with either a competitive lease or a 
noncompetitive lease obtained following a sale that is not restricted 
to exclusive direct use may use the resource directly itself, sell the 
resource for direct use, use the resource for the commercial generation 
of electricity, or sell the resource for the commercial generation of 
electricity.
    Final section 3205.6 addresses the conditions under which the BLM 
issues direct use leases. This section explains that a direct use lease 
may be issued to the first qualified applicant only for lands that: (1) 
Are open for geothermal leasing; (2) Are appropriate for exclusive 
direct use, without sale, for purposes other than commercial generation 
of electricity; (3) Do not include more acreage than reasonably 
necessary for the proposed use; (4) Have been the subject of a 
published notice that did not result in a nomination; and (5) Are of no 
competitive interest, as determined by the BLM. The BLM will make the 
determination of whether the lands are appropriate for a direct use 
lease on a case-by-case basis at the time of application. The advantage 
of a direct use lease is that it may be issued noncompetitively to the 
first qualified applicant and may allow additional lands to be made 
available for geothermal leasing that would not be available, for 
environmental or other reasons, if the geothermal resource could be 
used for the commercial generation of electricity.
    We revised the title of section 3205.6 from that in the proposed 
rule, to read ``When may BLM issue a direct use lease to an 
applicant?'', instead of ``When will'', to reflect the statutory 
language and the language of the regulatory text. We also added a 
paragraph (b) to the section to clarify that if the BLM determines that 
land for which an applicant has applied under this subpart is open for 
geothermal leasing and is appropriate only for exclusive direct use 
operations (see definition of ``direct use''), but determines that 
there is competitive interest in the resource, it will include the land 
in a competitive lease sale with lease stipulations limiting operations 
to exclusive direct use.
    Numerous comments were received opposing direct use leasing. One 
commenter predicted that direct use leasing could cause ``major 
headaches and legal entanglements down the road'' because improved 
technology or discovery of high-temperature resources would cause a 
direct use lessee to wish to produce electricity from the lease for 
sale offsite. The commenter suggested that because the statute permits, 
but does not require, direct use leasing, the BLM should ``just say 
no'' to such leasing. Another commenter agreed, asking what the BLM 
would do if a direct use lessee wanted to generate electricity, 
hypothesizing that if a direct use lessee found the resource was 
electrical grade, others would know and would want to file a nomination 
for a lease for electrical generation on the lease which the lessee had 
spent a great deal of money to obtain. The commenter also asked what 
the BLM would do if a lessee were generating electricity and wanted to 
drill wells for a greenhouse or other direct use.
    Congress provided a detailed process for the Secretary to allow 
limited noncompetitive direct use leasing in certain areas. We have 
interpreted the statutory provisions to allow for limited direct use 
leasing on certain lands which: (1) Would otherwise not be open to 
geothermal development at all due to potential impacts to other 
resource values; or (2) The BLM determines do not have potential for 
commercial electrical generation. We agree that it is possible that 
improved exploration, technology, or energy economics could cause a 
direct use lease to have the potential for commercial generation of 
electricity. However, the statute is clear that Congress intended that 
leases permitting commercial generation of electricity are to be 
offered through competitive lease sales. We would therefore not allow 
commercial electrical generation on a direct use lease. If a direct use 
lessee found an electrical grade resource, it would continue to have 
the right to develop the resource for direct use for the duration of 
its lease. As was pointed out at the public meeting in Reno, nothing 
prevents a lessee with an unrestricted competitive lease from using the 
resource for direct use as well as for electrical generation. We 
envision direct use leases as providing a streamlined, simpler 
noncompetitive process for development of geothermal areas that would 
otherwise not be developed.
    One commenter expressed concern regarding the administration of 
units that contain both regular and direct use leases.
    The BLM, in determining what areas are appropriate for direct use 
leases, will make every effort to avoid issuing direct use leases in 
areas with electrical generation potential. We would avoid including a 
direct use lease in a unit with leases that generate commercial 
electricity, because a direct use lease does not convey the rights to 
develop the resource commercially. It is possible that a unit could be 
formed entirely of direct use leases.
    One commenter believed there were two problems that direct use 
leasing and a direct use fee schedule were designed to address, and 
that both could have been resolved without direct use leasing. First, 
the commenter suggested that direct use leasing would not solve the 
problem of undesirable features being built (i.e., power plants and 
transmission lines), because direct use itself could involve 
undesirable features (e.g., a direct use meat packing plant with 
feedlots, holding pens, and traffic). Second, the commenter suggested 
that the perceived problem of an overly-burdensome royalty rate for 
direct use under the previous system was created by the institution of 
all-competitive leasing, and could have been solved by retaining the 
prior leasing system and providing for a fee on all direct use and a 
royalty on power generation, keeping noncompetitive rentals at $1 per 
acre.
    Regarding the second part of this comment, it appears that the 
commenter may be confused regarding when the direct use fee schedule 
applies. In fact, as the commenter suggested was appropriate, the fee 
schedule applies to all direct use of the resource regardless of the 
type of lease. We also note that the rental for noncompetitive leases 
under these new regulations remains at $1 per acre for the first 10 
years. The first part of the comment, and arguments that the new 
competitive leasing system should be revised, should, as the commenter 
recognized, be addressed by Congress.
    We did not change the rule in response to these comments.
    Final section 3205.7 addresses the statutory acreage restrictions 
applicable to a direct use lease, which must not cover more than the 
quantity of acreage reasonably necessary for the proposed use, and in 
no case may exceed 5,120 acres, except in the case of an irregular 
subdivision. We received no comments on this section and have adopted 
it as proposed.
    Final section 3205.10 explains the procedures for applying for a 
direct use lease and the types of information to be submitted with an 
application. The

[[Page 24366]]

information that is submitted is used by the BLM to determine if the 
requested acreage is necessary for the intended operation as described 
in section 3205.7. This section would also require the submission of a 
nonrefundable processing fee for noncompetitive lease applications, as 
required by section 3204.12 of the current regulations.
    One commenter stated that newcomers to the industry may not 
understand that, under section 3205.10, a direct use lessee is 
permitted to produce electricity on the lease, but only to serve the 
load of the direct use facility, and suggested that this should be 
spelled out.
    To clarify the rule in response to this comment, we revised the 
last sentence of section 3205.10(a) to utilize the defined phrase 
``commercial generation of electricity,'' instead of the proposed 
language ``to commercially generate electricity.'' The sentence now 
reads: ``You may not sell the geothermal resource and you may not use 
it for the commercial generation of electricity.'' The definition of 
``commercial generation of electricity'' is ``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.'' Electricity that is produced on a direct use lease only to 
serve the load of the direct use facility does not fall within this 
definition and, as the commenter correctly pointed out, such use is 
permitted.
    A commenter stated that precluding the sale of the geothermal 
resource from a direct use lease seems counterproductive, because a 
purchaser might also use the resource for direct use and not for the 
commercial generation of electricity. The commenter asked whether, for 
example, a lessee could produce the resource and sell it to a direct 
use or power generation facility if it served only those facilities and 
was not sold into the power grid, or whether a lessee could use the 
resource directly itself, then sell the effluent to a third party for 
use in an adjacent district heating system not owned by the production 
lessee. The answer to these questions is no; a direct use lessee may 
not sell the resource even if it would not be used for commercial 
generation of electricity after sale. The BLM is constrained in 
drafting its regulations by the language of the statute, which provides 
that direct use leasing must be ``exclusively for direct use of 
geothermal resources, without sale for purposes other than commercial 
generation of electricity * * *.'' 30 U.S.C. 1003(f). Please note the 
use of the phrase ``without sale'' in the statutory language. The BLM 
does not have discretion to allow sale of the resource by a direct use 
lessee. A potential lessee who is interested in selling the resource 
for any purpose should nominate the lands for a competitive lease sale. 
We did not change the rule in response to this comment.
    One commenter was concerned that a direct use lessee would be 
prohibited from selling the business or property that uses the resource 
that is produced or producible from the lease, or would be prohibited 
from transferring the lease and the resource producible therefrom.
    A direct use lessee may assign (transfer) the lease. However, the 
lease and the business to which it supplies the geothermal resource 
must be transferred together to the same entity. This is because the 
statute prohibits sale of the resource from a direct use lease. We did 
not change the rule in response to this comment.
    One commenter expressed concern that information required by 
section 3205.10(b) to apply for a direct use lease would not be 
available until after the lease was issued and the lessee could drill 
wells. The BLM disagrees. Because the statute limits a direct use 
geothermal lease to the quantity of acreage reasonably necessary for 
the proposed use, the BLM must obtain the information necessary to make 
this determination in advance of lease issuance. The BLM expects that 
the applicant will be able to explain the nature and scope of the 
intended use, which is what this section requires. The language of the 
regulation recognizes that the information provided is not necessarily 
complete or final, but will be based on anticipated production and 
development. We did not change the rule in response to this comment.
    Final section 3205.12 addresses direct use lease applications for 
lands managed by an agency other than the BLM. The BLM will forward a 
copy of such an application to the other agency. If that agency 
consents to leasing and recommends that the lands are appropriate for a 
direct use lease, the BLM will consider that consent and recommendation 
in determining whether to issue the lease. This section requires that 
the BLM obtain the consent of the surface management agency before 
issuing a direct use lease. We received no comments on this section and 
have adopted it as proposed.
    Final sections 3205.13 and 3205.14 allow an applicant for a direct 
use lease to withdraw its application at any time or amend its 
application, without adding new lands, prior to lease issuance. To add 
new lands, an applicant must file a new application (see discussion of 
final section 3204.14, above). We received no comments on these 
sections and have adopted them as proposed.
    Final section 3205.15 discusses how the BLM will inform an 
applicant of its decision to approve or deny a direct use lease 
application. We received no comments on this section and have adopted 
it as proposed.

Subpart 3206--Lease Issuance

    Final subpart 3206 addresses lease issuance in general.
    Final section 3206.10 is nearly identical to previous section 
3206.10, with the addition of a provision notifying applicants that all 
payments must be made before the BLM will issue a lease. This addition 
reflects current BLM practice. We received no comments on this section 
and have adopted it as proposed.
    Final section 3206.11 discusses what the BLM must do before issuing 
a lease. The section is unchanged from the previous regulations except 
for changing the words ``will not significantly impact'' at the 
beginning of paragraph (b), to ``will not have a significant adverse 
impact on,'' which more closely tracks the language of 30 U.S.C. 
1026(c).
    One commenter voiced a concern regarding safeguarding thermal 
features of national parks.
    Both the Geothermal Steam Act and the regulations already provide 
safeguards for thermal features of national parks. Final section 
3206.11(b), in accordance with 30 U.S.C. 1026(a), provides that before 
issuing a lease, the BLM must determine that lease development will not 
have a significant adverse impact on any significant thermal feature of 
National Park System units. Moreover, the Geothermal Steam Act at 30 
U.S.C. 1026(b) provides that the Secretary must maintain a monitoring 
program for significant thermal features within units of the National 
Park System. We did not change the rule in response to this comment.
    Final section 3206.12 addresses minimum and maximum lease sizes, 
which were addressed in the previous regulations at section 3204.14. 
The maximum lease size increased from 2,560 acres to 5,120 acres, as 
provided at 30 U.S.C. 1006. We received no comments on this section and 
have adopted it as proposed.
    Final section 3206.13 addresses the maximum acreage that one lessee 
may hold, which was addressed in the previous regulations at section 
3206.12. This section is identical to the first sentence of previous 
section 3206.12

[[Page 24367]]

and implements 30 U.S.C. 1006, which sets the limit at 51,200 acres in 
any one State. The remainder of section 3206.12 of the previous 
regulations was deleted because the Energy Policy Act amendments 
deleted those provisions in the statute. We received no comments on 
this section and have adopted it as proposed.
    Final section 3206.14 explains how the BLM computes acreage 
holdings. This section is identical to previous section 3206.13, except 
for minor editorial changes. We received no comments on this section 
and have adopted it as proposed.
    Final section 3206.15, explaining how the BLM will charge acreage 
holdings if the United States owns only a fractional interest in the 
geothermal resources, is identical to previous section 3206.14, except 
for minor editorial changes. We received no comments on this section 
and have adopted it as proposed.
    Final section 3206.16 explains that acreage is not chargeable 
against the acreage limitations if it is included in any approved unit 
agreement or development or drilling contract. These exclusions 
implement 30 U.S.C. 1017(d) and (g)(2) and were addressed at section 
3206.15 in the previous regulations. The reference in the previous 
regulations to cooperative agreements was deleted because they are no 
longer mentioned in this part. We received no comments on this section 
and have adopted it as proposed.
    Final section 3206.17 addresses what the BLM does if a lessee's 
holdings exceed the maximum acreage limits set in final section 
3206.13. This section is identical to section 3206.16 of the previous 
regulations. We received no comments on this section and have adopted 
it as proposed.
    Final section 3206.18 addresses when the BLM issues a lease. It is 
identical to section 3206.18 of the previous regulations, except for a 
minor editorial change. We received no comments on this section and 
have adopted it as proposed.

Subpart 3207--Lease Terms and Extensions

    Final subpart 3207 explains the new system of lease terms and 
extensions provided at 30 U.S.C. 1005.
    Final section 3207.5 summarizes the new lease terms (length of time 
a lease is in effect) and lease term extensions, which include: (1) A 
10-year primary term and two 5-year extensions of the primary term; (2) 
A five-year drilling extension; (3) A production extension of up to 35 
years; and (4) A renewal term of up to 55 years. We received no 
comments on this section and have adopted it as proposed.
    Final sections 3207.10, 3207.11, and 3207.12 address the primary 
term of a lease and explain the requirements for obtaining and 
continuing extensions of the primary term. As explained in the preamble 
to the proposed rule (71 FR 41547), we interpret the statute as giving 
the BLM authority to prescribe work requirements that must be completed 
by the end of the 10th lease year, in accord with the statutory 
language relating to work requirements and in order to give effect to 
the statutory 10-year primary term, and to provide a basis for deciding 
whether the BLM will grant the initial 5-year extension. We note that 
work requirements relating to the initial and additional extensions of 
the primary term are addressed in different paragraphs of 30 U.S.C. 
1005. Paragraph (a)(2) of section 1005 mandates that for each year of 
an initial 5-year extension lessees must satisfy work requirements 
under paragraph (b) or make payments in lieu of minimum work 
requirements under paragraph (c). Paragraph (a)(3) provides that a 
lessee must be granted an additional 5-year extension if it satisfied 
the requirements of the initial extension; paragraph (b) then mandates 
minimum work requirements for each year after the 10th year of the 
lease.
    Final section 3207.11 establishes work requirements that a lessee 
must meet within the 10-year primary term for a lessee to be eligible 
for the initial 5-year extension of the primary term. The BLM 
formulated its list of potential types of work that could be performed 
to meet the work requirements based on the statutory provision, at 30 
U.S.C. 1005(b)(2). The provisions require that the work should 
establish a geothermal potential or, if that potential has been 
established, should confirm the existence of producible geothermal 
resources. The amount of work that must be performed is quantified as a 
minimum dollar expenditure per acre, as it was in the previous 
regulations (see previous sections 3210.13 (diligent exploration 
requirements) and 3208.14 (significant expenditures)).
    For the work requirements that must be completed by the end of the 
10th year of the lease, final section 3207.11(a) requires a $40 per 
acre expenditure over the 10-year period of the primary term of the 
lease, which is the same expenditure that was required at section 
3210.13 of the previous regulations for diligent exploration during the 
primary term. For work requirements for each year of the initial 5-year 
extension, final section 3207.12(a) requires an annual dollar 
expenditure of $15 per acre, which is the same as was required at 
section 3208.14 of the previous regulations for significant 
expenditures during a first lease extension. For work requirements for 
years 16 through 19 of the additional 5-year extension, final section 
3207.12(c) requires an annual dollar expenditure of $25 per acre. No 
work is required for the 20th year because the lessee must obtain 
either a drilling extension (section 3207.14) or a production extension 
(section 3207.15) to hold the lease beyond the 20th year. We determined 
that the dollar expenditure for work requirements should increase 
enough during an additional extension to motivate a lessee to put a 
lease into production if it is not already producing in commercial 
quantities by the end of the 15th year. As the annual expenditure 
requirement increases $11 per acre after the 10th lease year (from $40 
over a 10-year period, or an average of $4 per acre per year, to $15 
per acre per year), we require in final section 3207.12(c) that the 
expenditure increase by a nearly equivalent amount--$10 per acre--after 
the 15th lease year (from $15 to $25 per acre per year). We believe 
this level of increase serves the purpose of encouraging diligent 
development of the resource.
    One commenter asked whether a lessee's own work on a lease would 
count toward satisfaction of the work requirement if the lessee was a 
geologist qualified to do valuable work on a lease.
    As was true under the previous regulations, a lessee's work on a 
lease may count toward satisfaction of the work requirement as long as 
it is engaged in activities that establish a geothermal potential or 
confirm the existence of producible geothermal resources. A lessee's 
geologic work on a lease may count if it results in original, 
independent data, for example, mapping or preparing geological cross-
sections of the lease area. The dollar expenditure under such 
circumstances would be calculated by the equivalent cost of paying a 
professional geologist for similar maps or cross-sections.
    Final sections 3207.11(b) and 3207.12(d) allow a lessee to make 
minimum annual payments instead of performing the work requirements, as 
provided in the statute at 30 U.S.C. 1005(c). These sections provide 
that a lessee may make a payment equivalent to the required work 
expenditure, such that the total of the payment and the value of the 
work performed equals the dollar value of the expenditure that would 
otherwise be required. As provided in the statute, these sections also 
allow the BLM to limit the number of years that it accepts such 
payments, if it determines that payments in lieu of

[[Page 24368]]

work requirements will impair achievement of diligent development of 
the geothermal resource. We concluded that such impairment 
determinations are more appropriately made on a case-by-case basis and 
therefore we did not include in the rule a specific limit on the number 
of years that the BLM will accept such payments.
    The final rule takes a different approach than the previous rule 
regarding the amount of payments that are allowable in lieu of work 
performance, in that it does not allow payments in a lesser amount than 
the value of the required work. We believe this change furthers the 
statutory purpose of encouraging the development of geothermal 
resources.
    The final rule also includes an automatic inflation adjustment for 
the minimum work requirements and for monetary payments in lieu of the 
work performance. Final sections 3207.11(f) and 3207.12(i) provide that 
the dollar amount of the requirements will be adjusted automatically 
every three calendar years based on the Implicit Price Deflator for 
Gross Domestic Product that is published annually by the U.S. 
Department of Commerce. Because the adjustments will simply be based on 
a mathematical formula, the adjustments will be made in succeeding 
final rules without notice and comment, which is the procedure that the 
BLM used in its cost recovery rule published on October 7, 2005 (70 FR 
58872).
    One commenter objected to the inclusion of an inflation adjustment 
for these payments, suggesting that such an adjustment is not 
authorized by law. We disagree with the comment. The statute authorizes 
the Secretary of the Interior to set reasonable work requirements 
(``The Secretary shall issue regulations prescribing minimum work 
requirements for geothermal leases * * *.'') and in lieu payments (``In 
lieu of the minimum work requirements * * * the Secretary shall by 
regulation establish minimum annual payments * * *'') 30 U.S.C. 
1005(b)(2) and (c). It is within the Secretary's discretion to choose a 
reasonable approach to setting such requirements and payments. Nothing 
in the statute precludes the inclusion of an inflation adjustment, 
which is a widely-used and generally accepted approach. We did not 
change the rule in response to this comment.
    Final sections 3207.11(b) and 3207.12(d) provide that a lessee is 
exempt from work requirements if it submits documentation to the BLM 
showing that it has produced or utilized geothermal resources in 
commercial quantities. This implements 30 U.S.C. 1005(f), which 
provides that minimum work requirements do not apply after the date on 
which the geothermal resource is utilized in commercial quantities.
    Final sections 3207.11(c) and (e) and 3207.12(f) and (g) provide 
timeframes for a lessee to submit information to the BLM showing that 
it has met the work requirements or paid or produced in lieu thereof, 
explain the type of information that must be submitted, and explain the 
BLM's approval process.
    Final section 3207.12(e) provides that if a lessee expends an 
amount greater than the dollar expenditure required in that year on 
suitable development activities, the lessee may apply any excess 
payment to any subsequent year within that same 5-year extension 
period. This is similar to section 3208.14(a) of the previous 
regulations.
    Except for the comment regarding inclusion of an inflation 
adjustment discussed above, we received no comments on sections 
3207.10, 3207.11, and 3207.12 and have adopted them as proposed.
    Final section 3207.13 exempts from the work requirements a lessee 
whose lease overlies a mining claim when: (1) The mining claim has a 
plan of operations approved by the appropriate Federal land management 
agency; and (2) Development of the geothermal resource would interfere 
with the mining operations. This implements 30 U.S.C. 1005(e). We 
received no comments on this section and have adopted it as proposed.
    Final sections 3207.14 and 3207.15 implement the 5-year drilling 
and 35-year production extensions provided for in the statute at 30 
U.S.C. 1005(g). As explained in the preamble to the proposed rule (71 
FR 41548), we conclude that the language in the statute supports 
applying the 5-year drilling and 35-year production extensions to 
individual leases, as well as to leases under cooperative or unit 
agreements. We received no comments on these sections and have adopted 
them as proposed.
    Final section 3207.14 addresses qualifications for a drilling 
extension. As explained in the preamble to the proposed rule (71 FR 
41548-41549), a lessee who submits information showing that it has met 
the applicable requirements (work activities or payment or production 
in lieu thereof) will continue in the primary term through the 20th 
year. Because the statute provides for a drilling extension only if a 
lessee is engaged in qualifying drilling operations at the time the 
primary term ends (see 30 U.S.C. 1005(g)), final section 3207.14 allows 
the drilling extension only if: (1) A lessee was drilling over the end 
of the 20th lease year (when the primary term would end due to lease 
expiration); or (2) A lessee had failed to submit information showing 
that it had met the requirements for an extension of the primary term 
and was drilling over the end of a year subsequent to the 10th year (in 
which case the primary term would terminate due to a failure to comply 
with requirements). The section further specifies that to qualify for 
the drilling extension, the lessee must be drilling a well for the 
purposes of commercial production to a target that the BLM determines 
is adequate, based on the local geology and type of proposed 
development. The lease will expire if, at the end of the 5-year 
drilling extension, the lessee does not qualify for a production 
extension (i.e., if the lessee is not producing or utilizing the 
geothermal resource in commercial quantities--see discussion of final 
section 3207.15, below). We received no comments on this section and 
have adopted it as proposed.
    Final section 3207.15 provides a production extension of up to 35 
years for a lease that is: (1) Actually producing geothermal resources 
in commercial quantities; or (2) Has a well capable of producing 
geothermal resources in commercial quantities and the lessee is making 
diligent efforts to utilize the resource. This reflects the definition 
at 30 U.S.C. 1005(h) of ``produced or utilized in commercial 
quantities,'' which is also defined at section 3200.1. The section also 
specifies the types of information a lessee must provide to the BLM for 
the BLM to determine whether to grant a production extension. A lessee 
with a BLM-approved utilization plan allowing for seasonal operation 
would be eligible for the production extension as long as it was 
producing or utilizing the geothermal resource in commercial quantities 
during the periods that the utilization plan provided for operations. 
We received no comments on this section. In the final rule we added a 
cross-reference to section 3212.15 to make it clear that a lease will 
not terminate if it satisfies the conditions in that section.
    Final section 3207.16 provides for a preferential right of renewal 
of a lease for a second term that is equal to the length of the primary 
term including the initial and additional extensions (a total of 20 
years) plus the length of the production extension (up to 35 years) for 
a total renewal period of up to 55 years. A renewal could be granted 
under such terms and conditions as the BLM deems appropriate, if at the 
end of the production extension, the lessee is

[[Page 24369]]

producing or utilizing geothermal resources in commercial quantities 
and the lands are not needed for any other purpose. This provision 
implements 30 U.S.C. 1005(g). This section also specifies that the 
renewal term continues only so long as the lessee is producing or 
utilizing geothermal resources in commercial quantities. The term 
``produced or utilized in commercial quantities'' is defined in 
proposed section 3200.1. We received no comments on this section and 
have adopted it as proposed.
    Final section 3207.17 provides that leases committed to a unit 
agreement that would expire before the unit term would expire may be 
extended to match the term of the unit if unit development has been 
diligently pursued. Paragraph (a) of this section is virtually 
identical to the previous regulation at section 3208.10(a)(4), with a 
slight change in wording to remove any implication that the holder of 
the expiring lease must be the one to have diligently pursued unit 
development. Final sections 3207.17 (b) and (c) establish procedures 
for these circumstances. Under final section 3207.17 (b), to extend the 
term of a lease committed to a unit, the unit operator must send to the 
BLM a request for lease extension at least 60 days before the lease 
expires showing that unit development has been diligently pursued. In 
the final rule we amended the paragraph (b) to make it clear that BLM 
may require the operator to submit additional information prior to 
approving the application. Final section 3207.17 (c) provides that 
within 30 days after receiving your complete extension request, the BLM 
will notify the unit operator whether it approves the request. Under 
final paragraph (c), the 30 days will begin running after BLM has 
received all information necessary to act on the application.
    Final section 3207.18 provides that a lease that is eliminated from 
a unit is eligible for an extension if it meets the requirements for 
such extensions. We received no comments on this section. In the final 
rule we removed the references to drilling and production extensions 
because lands eliminated from a unit may also be eligible for an 
initial or additional extension of the primary term.

Previous Subpart 3208--Extending the Primary Lease Term

    Previous subpart 3208 is removed because under this final rule the 
subject of extensions of lease terms is addressed in subpart 3207 for 
leases issued: (1) After August 8, 2005 (other than for leases issued 
in response to applications that were pending on that date for which no 
election is made under section 3200.8(b)(1)); and (2) Before August 8, 
2005, for which an election is made under section 3200.7(a)(2). 
Although removed from the CFR, the substance of previous subpart 3208 
(43 CFR subpart 3208 (2004)) will continue to have vitality for leases 
issued before August 8, 2005, for which no election is made under 
section 3200.7(a)(2), and for leases issued in response to applications 
pending on that date for which no election is made under section 
3200.8(b)(1). As discussed in an earlier section of this preamble, 
leases in these two categories continue to operate under certain 
provisions of the rules in effect on August 8, 2005, unless they elect 
otherwise.
    We received no comments on the removal of this subpart.

Previous Subpart 3209--Conversion of Lease Producing Byproducts

    Previous subpart 3209 is removed because lease conversions that 
subpart covered are no longer allowable under the Energy Policy Act. We 
received no comments on the removal of this subpart.

Subpart 3210--Additional Lease Information

    Final sections 3210.10 and 3210.11 on lease segregation remain 
substantively unchanged from the previous sections. We received no 
comments on these sections and have adopted them as proposed.
    Final section 3210.12 references new lease size limits. In other 
respects, it is substantively unchanged from the previous section. The 
preamble to the proposed rule mistakenly implied that the processing 
fee for lease consolidations was new in this rule. In fact, that fee 
had been previously added by the minerals cost recovery rule (see 70 FR 
58854 (October 7, 2005)). We received no comments on this section and 
have adopted it as proposed.
    This final rule removes previous sections 3210.13, 3210.14, 
3210.15, and 3210.16, all of which pertained to the previous diligent 
exploration requirements. Work requirements are addressed in the final 
rule in subpart 3207 for leases issued: (1) After August 8, 2005 (other 
than for leases issued in response to applications that were pending on 
that date for which no election is made under section 3200.8(b)(1)); 
and (2) Before August 8, 2005, for which an election is made under 
section 3200.7(a)(2). Despite the removal of these sections, the 
substantive terms of the cited sections (in the 2004 edition of the 
CFR) continue to apply to leases in effect before August 8, 2005, and 
leases issued on or after August 8, 2005, in response to applications 
pending on that date, unless the lessees elect under section 
3200.7(a)(2) or section 3200.8(b)(1) to be subject to the regulatory 
requirements of this final rule. We received no comments on the removal 
of these sections.
    Final section 3210.13 on leasing or locating minerals on a 
geothermal lease remains substantively unchanged from previous section 
3210.17. We received no comments on this section and have adopted it as 
proposed.
    Final section 3210.14, which provides that the BLM may readjust the 
terms and conditions of a lease, replaces previous sections 3210.18, 
3210.19, and 3210.20 that related to the same topic. It implements 30 
U.S.C. 1007, as revised.
    One commenter objected to allowing the BLM to readjust the terms 
and conditions of a lease. The commenter stated that allowing such 
changes after the lease is issued creates uncertainty for the developer 
and could create financing issues.
    We did not change the rule in response to this comment. As 
discussed below, these provisions are not substantively changed from 
the previous regulations (see previous sections 3210.18 and 3210.20). 
The statutory provision providing that the Secretary may readjust lease 
terms and conditions at not less than 10-year intervals and may 
readjust rentals and royalties at not less than 20-year intervals 
beginning 35 years after production (30 U.S.C. 1007) was not changed by 
the Energy Policy Act amendments, except for the removal of the 22.5 
percent royalty cap previously included in 30 U.S.C. 1007(b). The final 
rule implements the new statutory provision.
    Final section 3210.14(a) addresses readjustment of lease terms and 
conditions other than rentals and royalties; it replaces previous 
section 3210.18. With one exception, paragraph 3210.14(a) is 
substantively unchanged from previous section 3210.18. Previous section 
3210.18 provided that once the BLM and the other agency reached 
agreement, the BLM would readjust the terms of the lease. It did not 
state, as the statute requires at 30 U.S.C. 1007(c), that the other 
agency must approve the readjustment. Final section 3210.14(a)(2) 
clarifies that the other agency must approve the proposed readjustment.
    Final section 3210.14(b) addresses readjustment of rentals and 
royalties; it replaces previous section 3210.20(a). The previous 22.5 
percent royalty cap for readjusted leases was removed from

[[Page 24370]]

the rules because that cap is no longer in the statute.
    Final sections 3210.14(c), (d), and (e) implement the procedures of 
30 U.S.C. 1007(b), and are somewhat different than the procedures in 
previous sections 3210.19 and 3210.20. Under previous sections 
3210.19(a) and 3210.20(b), the BLM notified lessees in writing of 
proposed readjustments and provided the lessee 30 days to object in 
writing to the new terms. The previous rules provided further that if a 
lessee: (1) Did not object, the proposed new terms would become part of 
the existing lease; or (2) Did object, the BLM would issue an 
appealable final decision on the new terms and conditions. The previous 
rules, however, did not expressly mention certain concepts contained in 
the statute that are described below.
    Under final sections 3210.14(c) and (d), the BLM will give a lessee 
a written proposal to readjust the rentals, royalties, or other terms 
and conditions of its lease. The lessee will have 30 days after 
receiving the proposal to file with the BLM an objection in writing to 
the proposed new terms and conditions. If the lessee does not object in 
writing or relinquish its lease, it will conclusively be deemed to have 
agreed to the proposed new terms and conditions. This concept, implied 
but not expressly stated in the previous rules, is taken directly from 
the statute. The BLM will then issue a written decision under final 
section 3210.14(d), setting the date that the new terms and conditions 
become effective as part of the lease. This decision will be in full 
force and effect under its own terms, and the lessee is not authorized 
to appeal the decision to the Department's Office of Hearings and 
Appeals.
    We made a minor revision to proposed section 3210.14(c), changing 
the word ``adjust'' to ``readjust,'' to be consistent with language of 
the statute at 30 U.S.C. 1007 and the language of the other paragraphs 
of section 3210.14.
    Final section 3210.14(e) establishes procedures for the situations 
where a lessee files a timely objection to the proposed readjustment, 
and is intended to implement a portion of 30 U.S.C. 1007(b) that was 
not addressed in previous regulations.
    We revised the language of proposed section 3210.14(e)(1) in this 
final rule to correct an error in the proposed rule. The section as 
proposed referred only to ``readjusted rental and royalty terms'':

    If you file a timely objection in writing, BLM may issue a 
written decision making the readjusted rental and royalty terms 
effective no sooner than 90 days after we receive your objections, 
unless we reach an agreement with you as to the readjusted terms of 
your lease that makes such terms effective sooner.

    However, the intent, as was clear from proposed paragraphs (c), 
(d), and (e) taken as a whole, was to refer to not just readjusted 
rental and royalty terms, but to all readjusted terms and conditions. 
Therefore, in this final rule we substituted the words ``readjusted 
terms and conditions'' for ``readjusted rental and royalty terms,'' and 
for clarity also revised the end of the sentence to refer to 
``readjusted terms and conditions'' rather than the shorthand 
``readjusted terms.'' Final section 3210.14(e)(1) thus reads:

    If you file a timely objection in writing, BLM may issue a 
written decision making the readjusted terms and conditions 
effective no sooner than 90 days after we receive your objections, 
unless we reach an agreement with you as to the readjusted terms and 
conditions of your lease that makes them effective sooner.

    Under final section 3210.14(e)(2), if the BLM does not reach an 
agreement with the lessee by 60 days after receiving the lessee's 
objections, then either the lessee or the BLM may terminate the lease, 
upon giving the other party 30 days' notice in writing. This provision 
is contained in 30 U.S.C. 1007(b), but did not appear in the previous 
regulations. The final rule clarifies that a lease termination under 
paragraph (e)(2) does not affect a lessee's obligations that accrued 
under the lease when it was in effect, including those specified in 
section 3200.4.
    Unlike a BLM decision under final section 3210.14(d), a lessee may 
appeal a BLM readjustment decision under final section 3210.14(e)(1). 
Final section 3210.15 addresses such appeals.
    For consistency, we revised the language of proposed section 
3210.15, which referred to ``lease terms and conditions, or rental or 
royalty rate'' to use the same phrase used in final section 3210.14(c): 
``rentals, royalties, or other terms and conditions of your lease.''
    Final section 3210.15 provides that if a lessee appeals the BLM's 
decision under section 3210.14(e)(2) to readjust rentals, royalties, or 
other terms and conditions of its lease, the decision will be effective 
during the appeal. If the lessee wins its appeal and the BLM must 
change its decision, the lessee will receive a refund or credit for any 
overpaid rents or royalties.
    In summary, the BLM will provide a lessee 30 days to object to a 
proposed readjustment decision. If the lessee objects, the BLM may 
issue a written decision making the readjusted terms and conditions 
effective no sooner than 90 days after receiving the objection. A 
lessee will have 30 days to appeal that decision under Office of 
Hearings and Appeals regulations. In addition to the appeal process, 
the BLM and the lessee can attempt to negotiate an agreement within 60 
days after the BLM receives the objection. If an agreement is reached, 
the appeal will be withdrawn. If an agreement is not reached, either 
the lessee or the BLM may terminate the lease on 30 days' notice in 
writing, even if an appeal is pending.
    We revised sections 3210.14 and 3210.15 as discussed above to 
correct an error in the proposed rule and to make the wording 
consistent.
    Final sections 3210.16 and 3210.17, relating to drainage of 
geothermal resources, are substantively unchanged from previous 
sections 3210.22 and 3210.23. We received no comments on these sections 
and have adopted them as proposed.

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

    Final subpart 3211 incorporates changes made by the Energy Policy 
Act to lease rental rates, royalty rates, and minimum royalty 
requirements.
    Final section 3211.10 addresses processing and filing fees. 
Paragraph (b) references existing 43 CFR 3000.12 for the amount of the 
fees. The BLM expects to update section 3000.12 from time to time to 
reflect actual costs associated with these activities. We received no 
comments on this section and have adopted it as proposed.
    Final section 3211.11 establishes rental rates for geothermal 
leases. The new lease rental rates are taken directly from 30 U.S.C. 
1004(a)(3)(A) and (B). The Energy Policy Act significantly changed 
rental rates from those in the previous regulations. The rental for new 
noncompetitive leases (that is, leases issued on or after August 8, 
2005, other than leases issued in response to applications that were 
pending on that date for which no election is made under section 
3200.8(b)(1)) remains at $1 per acre per year for the first 10 years; 
the rental for new competitive leases is $2 per acre the first year and 
increases from $2 per acre per year to $3 per acre per year from years 
2 through 10. Starting with the eleventh year, the rental rate for all 
new leases increases to $5 per acre per year. Final section 3211.11(e) 
addresses fractional mineral interests in the same way as did previous 
section 3211.13.
    Although we received no comments on proposed section 3211.11, we 
restructured it and added language to

[[Page 24371]]

clarify that for leases issued before August 8, 2005, for which no 
election is made under section 3200.7(a)(2), and for leases issued in 
response to applications pending on August 8, 2005, for which no 
election is made under section 3200.8(b)(1), the rental rate is the 
rate prescribed in the regulations in effect on August 8, 2005 (43 CFR 
3211.10 (2004)). This is not a substantive change from the proposal, 
but is added as a convenience for persons trying to understand the 
rental structure for existing and new leases.
    Final section 3211.12 is virtually the same as previous section 
3211.12. The Energy Policy Act did not make any changes regarding to 
whom the rent is paid for the first year and subsequent years. We 
received no comments on this section and have adopted it as proposed.
    Final section 3211.13 addresses when rental payments are due and 
replaces previous section 3211.11. The rule provides that rent is 
always due in advance. The MMS must receive annual rental payments for 
the upcoming year by the anniversary date of each lease year. If less 
than a full year remains on a lease, a lessee must still pay a full 
year's rent by the anniversary date of the lease. The payment of rent 
in advance is required by 30 U.S.C. 1004(a)(3). As this was also 
required in the original Geothermal Steam Act of 1970, there are no 
substantial changes to this portion of the provision. The reference in 
previous section 3211.11 to the automatic termination of leases by 
operation of law is not included in the new section because the statute 
has changed in this regard. Lease termination for non-payment of rental 
is addressed in final section 3213.14 of this rule and is discussed 
later in this preamble and in the preamble to the proposed rule at 71 
FR 41557-41558.
    One commenter requested a clarification of how rent will be 
credited towards royalty, as provided in section 3211.15, in light of 
the requirement of section 3211.13 that rent is due in advance. The 
commenter is referred to the MMS rule at 43 CFR 218.303 for this 
clarification. In addition to the explanation in the MMS rule text, the 
preamble to the proposed MMS rule provided a thorough explanation of 
the process, including examples (71 FR 41522). We did not change the 
rule in response to this comment.
    Final section 3211.14 addresses whether a lessee must always pay 
rent on a lease. Although we received no comments on proposed section 
3211.14, we restructured it and added language to clarify that only 
leases issued on or after August 8, 2005 (other than leases issued in 
response to applications that were pending on that date for which no 
election is made under section 3200.8(b)(1)), and leases issued before 
August 8, 2005, for which an election is made under section 
3200.7(a)(2), will always pay rental. As explained in the preamble to 
the proposed rule (71 FR 41550), the Energy Policy Act does not provide 
for payment of royalties in lieu of rent, or for minimum royalties 
during production. It provides that lessees will pay rental every year, 
and allows a credit of rents against royalties, as provided in this 
rule at section 3211.15.
    The language we added to section 3211.14 explains that leases 
issued before August 8, 2005, for which no election is made under 
section 3200.7(a)(2), and leases issued in response to applications 
pending on that date for which no election is made under section 
3200.8(b)(1), continue to be subject to the rental and minimum royalty 
provisions of the previous regulations (43 CFR subpart 3211 (2004)). 
While final sections 3200.7(a) and 3200.8(a) already provide that such 
leases are subject to the previous regulations in this regard, for 
clarity we included specific information in subpart 3211 as well. The 
previous regulations provided that the lessee pays rent until the lease 
achieves production in commercial quantities, or until lands in the 
lease are within the participating area of a unit agreement or 
cooperative plan, at which time the lessee pays royalties for lands 
within the participating area and rent for lands outside the 
participating area (see 43 CFR 3211.14, 3211.15, and 3211.17 (2004)).
    Final section 3211.15, together with applicable MMS regulations, 
implement 30 U.S.C. 1004(e), which requires that the advance rental 
payments on new leases be credited towards royalty due on production in 
that lease year. The rule provides that a lessee may credit rental 
towards royalty under the MMS proposed regulations at 30 CFR 218.303. 
Under the statute the rental credit against royalty is allowed only for 
rent paid before the first day of the year for which the rental is 
owed. In other words, no credit is allowable for rent paid after the 
lease anniversary date, even if the lease is not terminated. Thus, 
although lessees are allowed to maintain their leases by paying rent 
plus a late fee within 45 days of the lease anniversary date, they may 
not credit such late rental payments against royalties.
    Also, the Energy Policy Act does not provide for rental paid in 
excess of royalty to be carried over from one lease year as a credit 
against royalty for production in another year. Because rental is 
always due on a lease, the rental payment effectively becomes the 
equivalent of a minimum royalty payment that was required prior to the 
Energy Policy Act.
    Final section 3211.16 provides that rental paid cannot be credited 
against fees owed for direct use of geothermal resources. This 
provision also appears in the final MMS regulations at 30 CFR 218.304. 
This section is based on the Energy Policy Act, which provides at 30 
U.S.C. 1004(e) that annual rentals ``shall be credited to the amount of 
royalty that is required to be paid under the lease for that year.'' 
Please note the use of the word ``royalty'' in this provision of the 
statute.
    Two commenters objected to the BLM's interpretation of 30 U.S.C. 
1004(e) as providing for crediting rentals only against royalties and 
not against direct use fees. These commenters asserted that the 
statutory language was discretionary, that the BLM had chosen an 
unnecessarily strict and ``nit picking'' interpretation, and that the 
BLM's interpretation runs counter to the Energy Policy Act's goal of 
encouraging direct use development.
    We did not change the proposed rule in response to these comments 
because we do not believe that Congress intended the word ``royalty'' 
at 30 U.S.C. 1004(e) to include direct use fees. As explained in the 
preamble to the proposed rule (71 FR 41551), a clear distinction exists 
in the statute between ``royalties'' and ``fees.'' Congress provided at 
30 U.S.C. 1004(b) that fees are ``in lieu of royalties,'' thus 
differentiating the two. Direct use fee payments are different from 
royalty payments, and are therefore not included in the statutory 
provision for rental credits.
    Final section 3211.17 establishes royalty rates on geothermal 
resources that are used in the commercial generation of electricity 
from or attributable to a geothermal lease. The Energy Policy Act (30 
U.S.C. 1004(a)(1)(A) and (B)) provides for a royalty on the sale of 
electricity produced from geothermal resources ranging from 1 percent 
to 2.5 percent of gross proceeds for the first 10 years of production, 
and from 2 percent to 5 percent of gross proceeds thereafter (the MMS 
defines ``gross proceeds'' in 30 CFR part 206, subpart H.). The BLM 
interprets this section of the Energy Policy Act to apply to situations 
in which the lessee or its affiliate sells electricity generated by use 
of geothermal resources produced from or attributed to the lease. 
Although the statute establishes an allowable royalty range, actual 
royalty rates are to be

[[Page 24372]]

established by regulation (30 U.S.C. 1004(c)).
    The royalty rates established under final sections 3211.17(a)(1)(i) 
and (ii), for geothermal resources that a lessee or its affiliate uses 
to generate electricity that it sells, are the same as the proposed 
rates: (1) 1.75 percent for the first 10 years of production from a 
lease; and (2) 3.5 percent for production in subsequent years. Final 
section 3211.17(a)(1)(iii) reiterates the language in the Energy Policy 
Act that the percentages in paragraphs (a)(1)(i) and (a)(1)(ii) must be 
applied to the gross proceeds from the sale of electricity, and 
specifies that gross proceeds must be determined in accordance with 
applicable MMS regulations.
    Final section 3211.17(a) applies to leases issued on or after 
August 8, 2005, except for leases issued in response to lease 
applications that were pending on that date for which the lessee does 
not make an election under section 3200.8(b) to be subject to these new 
regulations. In this final rule, we changed the wording of proposed 
section 3211.17(a) to clarify that the election such a lessee may make 
is to be subject to all of the new rules; if no election is made, the 
lessee will be subject to the regulations in effect on August 8, 2005, 
with regard to the provisions specified at section 3200.8(a), including 
royalties.
    The methodology for establishing royalty prescribed in 30 U.S.C. 
1004(a)(1)(A) and (B) represents a significant change from the way 
royalty was previously determined. For leases issued before August 8, 
2005, that do not convert royalty terms under section 3212.25, and for 
leases issued in response to applications that were pending on August 
8, 2005, that do not make an election under section 3200.8(b)(1), a 
royalty rate in the range from 10 percent to 15 percent of the value of 
the geothermal resource will apply. Historically, arm's-length sales of 
geothermal resources from a lessee to a third party utility were common 
and the arm's-length transaction established the value of the resource. 
For most situations where there was no sale of geothermal resources (as 
is the case for virtually all existing leases), the value of the 
geothermal resource was artificially derived using the ``netback'' 
method developed by the MMS, a method that in practice has often 
resulted in almost no royalty being paid and has been cumbersome for 
both the MMS and the lessees. For example, the Geysers Geothermal Field 
lessees informed the MMS that the netback method was unworkable, and 
negotiated with the MMS to adopt a simpler ``percent of gross 
proceeds'' method instead.
    The Energy Policy Act simplifies the way in which royalty is valued 
by basing royalties on a percentage of gross proceeds derived from the 
sale of electricity. Section 1004(c) of the Act requires that in 
establishing royalty rates the Secretary must seek to provide a 
simplified administrative system, encourage new development, and 
achieve revenue neutrality for a period of 10 years when compared to 
the valuation methods in the previous regulations. The BLM has 
interpreted the revenue-neutrality requirement to require the 
calculation of a royalty rate that achieves program-wide revenue 
neutrality for the first 10 years of production when compared to 
royalty revenues that would have been received during those 10 years 
under the previous netback system. Under this interpretation, this 
revenue-neutrality requirement does not apply to the royalty rate after 
the first 10 years of production.
    In establishing the proposed royalty rates, the BLM relied on the 
rates recommended by the MMS RPC Subcommittee. The RPC, established 
under the Federal Advisory Committee Act, makes recommendations on 
issues related to royalties on Federal resources and consists of 
representatives from Federal and state governments, industry, and the 
public at large. The Subcommittee was formed to address the MMS's 
geothermal royalty valuation regulations in an effort to simplify the 
language and reduce administrative costs to the geothermal industry. 
The Subcommittee was composed of members from one industry association, 
several geothermal producers, and two of the major states affected. The 
MMS and BLM representatives served as technical advisors to the 
Subcommittee.
    The Subcommittee asked the MMS to calculate the equivalent gross 
proceeds rates for all geothermal plants paying royalties under the 
netback method in 2003 and 2004. The MMS determined that the equivalent 
gross proceeds rate was 3.64 percent in 2003, and 3.94 percent in 2004, 
with an average of 3.79 percent for the 2 years (Royalty Policy 
Committee, Geothermal Valuation Subcommittee Report, May 2005 (``RPC 
Report''), page 10).
    The Subcommittee recommended rates of 1.75 percent for the first 10 
years of production, and 3.5 percent thereafter. The Subcommittee 
reported that, ``[u]nder the netback method, historically during the 
beginning years of an electrical generation project (between 1-10 
years), lessees pay a very low percentage of the gross proceeds from 
the sale of electricity and in later years of the project (after 10 
years), the percentage increases * * *. The recommended proposal [1.75 
percent and 3.5 percent] * * * attempts to replicate this historical 
trend under the netback method over the long term.'' (RPC Report, page 
10). The report stated that ``[f]or new leases, the proposal is 
expected to increase revenues over the next 10 years and may be revenue 
neutral over the long run.'' (RPC Report, page 11). However, it went on 
to state that there was ``[r]isk of a negative revenue impact for the 
government if electricity prices are higher and/or costs are lower than 
anticipated; and risk of negative impact on companies if prices are 
lower and/or costs higher than anticipated.'' (RPC Report, page 12).
    The BLM retained a contractor, Advanced Resources International, 
Inc. (ARI), to assess whether the proposed 1.75 percent royalty rate 
was consistent with the statutory requirement for revenue neutrality 
over a 10-year period. ARI recently completed for the BLM a technical 
memorandum entitled ``Geothermal Development on Federal Lands: 
Projection of Royalty Impacts Resulting from the Energy Policy Act of 
2005'' (ARI Report). The ARI Report is publicly available and has been 
included in the Administrative Record for this rulemaking. A summary of 
the ARI Report follows, much of it derived from the ARI Report 
Executive Summary.
    The ARI developed an analysis to compare the Energy Policy Act 
gross proceeds royalty rate method with the netback method to determine 
under what conditions the two would be revenue neutral. Focusing on the 
western states of California, Nevada, Utah, and Idaho, the analysis 
considered technology (binary and flash plants), potential areas of 
development, electricity prices and markets, plant sizes relative to 
the technology used, and financial parameters such as capital costs, 
operating and maintenance costs, and discount rate. The analysis 
assumed a 30-year project life. ``Type'' projects were developed based 
on these parameters. To obtain a programmatic view, the various states 
were weighted based on where development might occur (California was 
divided into two domains). ARI calibrated (checked) the analysis using 
historical data.
    The ARI modeled nine programmatic cases for analysis to capture a 
spectrum of potential development on BLM lands. The differences between 
the various cases derive from adjusting those parameters to which the 
model was most sensitive, i.e., the relative amount of binary plant 
development (as

[[Page 24373]]

compared to the total of binary plus flash plant development), future 
electricity prices, and capital costs. Scenarios modeled include 
``base,'' ``low,'' ``intermediate,'' ``targeted'' (to achieve a 1.75 
percent royalty rate during the first 10 years of production) and 
``high'' cases. For each case, the model derived a revenue-neutral 
royalty rate for the first 10 years of production (or, for the targeted 
cases, adjusted appropriate parameters that would result in the 
targeted rate), as well as an accompanying revenue-neutral royalty rate 
for production after the first 10 years. All parameters used in the 
modeling were based on empirical data. The ARI Report did not recommend 
any particular set of royalty rates, but concluded instead that ``[i]t 
is reasonable to expect that all scenarios modeled in the cases could 
be achievable (including targeted scenarios) depending upon geothermal 
resources, future market conditions and technology'' (ARI Report, page 
1).
    The ARI Report base case assumes: (1) 65 percent of future 
geothermal development will use binary technology; (2) future 
electricity prices will remain flat (incorporating price supports in 
the applicable geographic domains under the California Renewable Energy 
Program); and (3) capital expenditures for plant construction (CAPEX) 
will be an average of data published by the Geothermal Energy 
Association (explained in ARI report, section 2.2.7, page 7). The ARI 
Report includes an explanation of all the parameters the model uses.
    The ARI also performed an historical analysis of a sample of 
existing geothermal leases paying royalties under the netback system to 
determine the equivalent royalty they paid during the first 10 years of 
their production (see the ARI Report, Section 2.3 on p. 8). The BLM and 
the MMS supplied electricity sales and royalty revenue data to the 
contractor for nine non-Standard Offer 4 contracts for Nevada. 
(Standard Offer 4 contracts had a unique price structure, and would not 
be applicable to future geothermal leases.) This sample was based on 
the data that was readily available to the BLM. ARI examined this data 
for the first 10 years of the project lives to determine the actual 
effective netback royalty rate. The binary plants showed an effective 
royalty rate of 0.61 percent; for flash technology, the effective 
royalty rate was 3.52 percent. For this portfolio of binary and flash 
technologies, the effective royalty rate for the first 10 years of 
project lives was 1.11 percent as a weighted average. ARI compared 
these historical percentages to the percentages derived when the same 
data was run in its model and found that the percentages were very 
close.
    After thorough consideration of both the RPC Report and the ARI 
Report, the BLM determined that its proposed royalty rate of 1.75% for 
the first 10 years of production meets the statutory requirement for 
revenue neutrality. Both the RPC Report and the ARI Report support the 
conclusion that estimates of revenue neutrality are extremely sensitive 
to potential changes in electricity prices and capital expenditures, 
and the ARI Report indicated that the estimates are also very sensitive 
to the relative mix of geothermal technology that will be employed in 
the future. None of these variables can be predicted with absolute 
accuracy. Based on the professional judgment of the BLM geothermal 
program staff, the model assumed that binary technology would account 
for no less than 50% of new geothermal plants; the assumed percentage 
of binary plants in the cases analyzed in the model ranged from 50% to 
65%. Regarding capital costs, while the model's base case based its 
capital expenditures estimate on an average of published data, the data 
showed that actual capital expenditures varied from that average by up 
to a third or more (ARI Report, page 16 n.17). The assumed capital 
expenditures in the cases analyzed in the model deviated from the base 
case by no more than 12%. The ARI Report cited to a recent article on a 
geothermal operation in Alaska that provides some evidence that 
geothermal capital costs could decline if operators begin substituting 
mass-produced parts (ARI Report, page 16 n. 24). Electricity prices, 
too, cannot be predicted with accuracy, especially considering the 
increasing prevalence of government-mandated use of renewable energy 
sources such as geothermal energy. As noted, California already has a 
Renewable Energy Program that contains price support provisions (which 
the model took into account), and Nevada is considering draft 
legislation that could enhance prices for renewable energy in the 
future.
    The ARI Report demonstrates the impact of potential changes in any 
of these variables. For example, Targeted Case A (ARI Report, page 1, 
Table, column 5), changed predictions for two of the three parameters 
just discussed: It changed the binary plant proportion from 65% to 50%, 
and lowered the capital expenditures prediction by 8%. It used the same 
electricity price prediction as the base case. If future geothermal 
production met those parameters, the model shows that the revenue-
neutral royalty rate for the first 10 years of production would be 
1.76% and the revenue-neutral rate for years 11-30 would be 3.57%. 
These rates are nearly identical to the rates recommended by the RPC 
and proposed by the BLM in its proposed rule.
    The modeling exercise makes clear that a revenue-neutral royalty 
rate is not simply one number that can be determined with mathematical 
certainty, but instead could be within a range of rates, depending on 
reasonable assumptions as to what the future holds. The ARI Report 
shows that other changes in the parameters, corresponding to other 
potential scenarios for future development, result in different 
revenue-neutral royalty rates, some higher and some lower than the 
BLM's proposed rates. The four targeted scenarios show that the 1.75% 
royalty rate for the first 10 years of production could result in 
revenue-neutrality in a number of different future scenarios. As noted 
above, all parameter variations used in the model were based on 
empirical data, and the ARI report concluded that ``[i]t is reasonable 
to expect that all scenarios modeled in the cases could be achievable 
(including targeted scenarios) depending upon geothermal resources, 
future market conditions and technology'' ARI Report, page 1.
    The 1.75% rate is clearly within the reasonable range of rates that 
would meet the statutory mandate to seek revenue neutrality for the 
first 10 years of production. While the BLM's interpretation of the 
statute is that there is no mandate of revenue-neutrality after the 
10th year, the 3.5% rate