Geothermal Energy
Information on the Navy's Geothermal Program Gao ID: GAO-04-513 June 4, 2004Geothermal energy is heat from the earth that can be used to generate electricity. The Department of the Interior's Bureau of Land Management (BLM) has the primary responsibility for leasing public lands to private companies for geothermal development. In addition, the Secretary of each military department has the authority to develop geothermal resources on military lands and to keep the proceeds from the sale of electricity generated from those resources for use by the Department of Defense. The Navy's Geothermal Program Office, located at the China Lake Naval Air Weapons Station in California, manages and develops geothermal resources for the military. Currently, two geothermal power plants at China Lake are the only ones on military lands. A private company, which built, owns, and operates the power plants at China Lake, sells the electricity to a utility company and pays the Navy royalties on these sales as well as other types of compensation. GAO was asked to provide information on (1) the Navy's annual revenues from the geothermal facility at China Lake, (2) how the Navy uses the revenues it collects from the geothermal facility, (3) the budget oversight the Navy provides programs funded from geothermal revenues, and (4) how the Navy's geothermal program differs from BLM's program.
The Navy received three types of payments from the geothermal power plant operator at China Lake that totaled, on average, $14.7 million annually between 1987 and 2003. During these years, the average annual royalty payment on the sale of electricity was about $11.5 million, payments toward the base's electricity bill were about $2.7 million annually, and bonus payments to the base for using less electricity than it had projected averaged about $500,000 annually. The Navy spent about two-thirds of its geothermal revenues on a variety of energy conservation projects, including solar energy systems and updated climate control systems, as well as other energy conservation programs. The Navy spent the other one-third of its geothermal revenues on its Geothermal Program Office, which oversees the activities of the power plant operator and assesses other military sites for geothermal development. The Navy's Shore Energy Policy Board, which includes representatives of the Secretary of the Navy and the Chief of Naval Operations, oversees the budget for most of the programs funded from the geothermal revenues. Typically, at its annual meeting, the board reviews the draft budget for energy conservation programs, determines whether the funding levels are appropriate, and agrees on final allocations. The China Lake base's Renewable Energy Program office oversees the budget for the remaining geothermal revenues. The Navy's geothermal program differs from BLM's program in significant ways. The Navy makes case-by-case decisions regarding geothermal development, invests in the initial exploration to identify geothermal resources, provides close oversight over geothermal production, and keeps all revenues for use by the military. In contrast, BLM uses a standard approach to geothermal development, does not invest in exploration, and does not provide the same level of oversight over resources in production. Also, 50 percent of BLM's geothermal revenues are shared with the state of origin, with the remainder paid to the Department of the Treasury. The Department of Defense provided technical comments on a draft of the report, which GAO addressed as appropriate. BLM said that the report implies that its program is not properly managed. GAO's report is focused on the Navy's program and does not evaluate BLM's program.
GAO-04-513, Geothermal Energy: Information on the Navy's Geothermal Program
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Report to Congressional Requesters:
June 2004:
GEOTHERMAL ENERGY:
Information on the Navy's Geothermal Program:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-513]:
GAO Highlights:
Highlights of GAO-04-513, a report to congressional requesters
Why GAO Did This Study:
Geothermal energy is heat from the earth that can be used to generate
electricity. The Department of the Interior‘s Bureau of Land Management
(BLM) has the primary responsibility for leasing public lands to
private companies for geothermal development. In addition, the
Secretary of each military department has the authority to develop
geothermal resources on military lands and to keep the proceeds from
the sale of electricity generated from those resources for use by the
Department of Defense. The Navy‘s Geothermal Program Office, located at
the China Lake Naval Air Weapons Station in California, manages and
develops geothermal resources for the military. Currently, two
geothermal power plants at China Lake are the only ones on military
lands. A private company, which built, owns, and operates the power
plants at China Lake, sells the electricity to a utility company and
pays the Navy royalties on these sales as well as other types of
compensation.
GAO was asked to provide information on (1) the Navy‘s annual revenues
from the geothermal facility at China Lake, (2) how the Navy uses the
revenues it collects from the geothermal facility, (3) the budget
oversight the Navy provides programs funded from geothermal revenues,
and (4) how the Navy‘s geothermal program differs from BLM‘s program.
What GAO Found:
The Navy received three types of payments from the geothermal power
plant operator at China Lake that totaled, on average, $14.7 million
annually between 1987 and 2003. During these years, the average annual
royalty payment on the sale of electricity was about $11.5 million,
payments toward the base‘s electricity bill were about $2.7 million
annually, and bonus payments to the base for using less electricity
than it had projected averaged about $500,000 annually.
The Navy spent about two-thirds of its geothermal revenues on a variety
of energy conservation projects, including solar energy systems and
updated climate control systems, as well as other energy conservation
programs. The Navy spent the other one-third of its geothermal revenues
on its Geothermal Program Office, which oversees the activities of the
power plant operator and assesses other military sites for geothermal
development.
The Navy‘s Shore Energy Policy Board, which includes representatives of
the Secretary of the Navy and the Chief of Naval Operations, oversees
the budget for most of the programs funded from the geothermal
revenues. Typically, at its annual meeting, the board reviews the
draft budget for energy conservation programs, determines whether the
funding levels are appropriate, and agrees on final allocations. The
China Lake base‘s Renewable Energy Program office oversees the budget
for the remaining geothermal revenues.
The Navy‘s geothermal program differs from BLM‘s program in significant
ways. The Navy makes case-by-case decisions regarding geothermal
development, invests in the initial exploration to identify geothermal
resources, provides close oversight over geothermal production, and
keeps all revenues for use by the military. In contrast, BLM uses a
standard approach to geothermal development, does not invest in
exploration, and does not provide the same level of oversight over
resources in production. Also, 50 percent of BLM‘s geothermal revenues
are shared with the state of origin, with the remainder paid to the
Department of the Treasury. The Department of Defense provided
technical comments on a draft of the report, which GAO addressed as
appropriate. BLM said that the report implies that its program is not
properly managed. GAO‘s report is focused on the Navy‘s program and
does not evaluate BLM‘s program.
www.gao.gov/cgi-bin/getrpt?GAO-04-513.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim Wells at (202)
512-3841 or wellsj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Navy's Revenues from Geothermal Energy Production Averaged about $14.7
Million Annually between 1987 and 2003:
Navy Has Spent Its Geothermal Revenues on Energy Conservation Programs
and Oversight and Development of Geothermal Resources:
Navy's Internal Energy Policy Board Oversees Budgeting of Most
Geothermal Funds:
Navy's Geothermal Program Differs from BLM's Program in its Approach
and in Some Key Contractual Provisions:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Bureau of Land Management:
GAO Comments:
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Staff Acknowledgments:
Tables:
Table 1: Navy Royalty Revenue from China Lake Geothermal Operations,
Calendar Years 1987-2003:
Table 2: Schedule of Royalty Rates for China Lake Power Plants:
Table 3: Conserved Power Credit Payments to the Navy, Calendar Years
1987-2003:
Table 4: Navy's Energy Conservation Programs Receiving the Highest Level
of Funding from Geothermal Revenues, October 1, 1989, through December
31, 2003:
Figures:
Figure 1: Location of the China Lake Naval Air Weapons Station and the
Fallon Naval Air Station:
Figure 2: Diagram of a Geothermal Power Plant:
Figure 3: Navy Geothermal Revenue by Source, Calendar Years 1987-2003:
Figure 4: Comparison of Power Plant Operator and Navy Revenue, Calendar
Years 1987-2003:
BLM: Bureau of Land Management:
KGRA: Known Geothermal Resource Area:
Letter June 4, 2004:
The Honorable Richard Pombo:
Chairman:
Committee on Resources:
House of Representatives:
The Honorable Barbara Cubin:
Chairman, Subcommittee on Energy and Mineral Resources:
Committee on Resources:
House of Representatives:
The Honorable Jim Gibbons:
House of Representatives:
Geothermal energy is heat from the earth that is captured by drilling
wells, brought to the surface as hot water or steam, and used to drive
turbines to generate electricity, among other things. It is a renewable
resource that produces very few emissions compared with energy
generated from coal, natural gas, or oil. Geothermal electricity
production is currently concentrated in California and Nevada, although
production potential exists in several other states. The Geothermal
Steam Act of 1970 gives the Secretary of the Interior the authority to
lease public lands and certain other federal lands, including national
forest lands, for geothermal development. The Secretary has delegated
this responsibility to the Bureau of Land Management (BLM).
Beginning in 1978, Congress passed laws that also gave the Secretary of
each military department the authority to develop geothermal resources
on lands under his jurisdiction and to keep the proceeds from the sale
of electricity generated from those resources for use by the Department
of Defense. The Navy's Geothermal Program Office is responsible for
managing and developing geothermal resources on all military lands for
the Department of Defense. Currently, this office has contracted with a
private company to produce electricity from geothermal energy at one
military installation--the China Lake Naval Air Weapons Station in
California. The Navy is also currently considering contractors to
develop a geothermal power plant at the Fallon Naval Air Station in
Nevada. The private company, which built, owns, and operates the two
power plants at China Lake, sells the electricity to a utility company
and pays the Navy royalties on these sales as well as other types of
compensation. The Navy first received royalties in 1988 but began
receiving other forms of revenue from the power plant operator in 1987.
As agreed with your offices, this report provides information on (1)
the Navy's annual revenues from the geothermal facility at China Lake,
(2) how the Navy uses the revenues it collects from the geothermal
facility, (3) the budget oversight the Navy provides programs funded
from geothermal revenues, and (4) how the Navy's geothermal program
differs from BLM's program. To address these issues, we obtained and
assessed the reliability of the Navy's geothermal revenue and
expenditure data and determined that the data were sufficiently
reliable for the purposes of this report. We did not evaluate the
quality of the Navy's budget oversight because doing so was outside the
scope of this review. In addition, while the report describes the
differences between the Navy's and BLM's geothermal programs, it does
not compare their respective advantages and disadvantages or their
costs and benefits. Finally, we did not conduct an assessment of the
Navy's internal controls over its geothermal program, such as its
procedures for planning and controlling program activities or measuring
and reporting program performance, because doing so was outside the
scope of this review. We conducted our review from August 2003 through
May 2004 in accordance with generally accepted government auditing
standards. Complete information on the scope and methodology of our
review can be found in appendix I.
Results in Brief:
The Navy received three different types of revenue from the geothermal
facility at China Lake that totaled, on average, about $14.7 million
annually from 1987 through 2003. The three types of geothermal revenues
are: (1) royalty payments on the sale of electricity, (2) payments
toward the base's electricity bill, and (3) payment for conserving
electricity use at the base. The average annual royalty payment the
Navy received between 1987 and 2003 was about $11.5 million--a payment
that ranged from a low of less than $100,000 to a high of more than $20
million. The company operating the power plants also directly paid
about $2.7 million a year toward the China Lake base's electricity bill
under the terms of its contract with the Navy. Finally, the company
paid the base, on average, about $500,000 annually under a contract
provision that rewards the base when it uses less electricity than it
was projected to use. Between 1987 and 2003, the Navy received a total
of about $249 million in geothermal revenues, or about 11 percent of
the total electricity revenues of $2.3 billion received by the power
plant operator. In addition to annual revenues, the contract calls for
the Navy to receive a $25 million payment from the power plant operator
at the end of the contract in 2009.
Between October 1, 1989, when the Navy first began spending its
geothermal revenue, and December 31, 2003, it used the majority of its
revenues--about two-thirds--to fund energy conservation activities,
such as funding staff to identify and develop potential energy savings
projects and providing the initial funding for base commanders to begin
implementing energy savings ideas. The Navy estimates its investments
in energy efficiency have resulted in significant energy cost savings,
and in 2003 the Navy's Energy Program received the Presidential Award
for Leadership in Federal Energy Management. The remaining one-third of
the Navy's geothermal expenditures went to its Geothermal Program
Office, which manages the geothermal resource at China Lake and
develops new geothermal resources on other military facilities. The
Navy's resource management efforts included monitoring the activities
of the private company that operates the power plants as well as
monitoring other key aspects of the geothermal resource to help prolong
its productive life. Most of the Navy's resource development efforts
have focused on identifying and characterizing the quality of
geothermal resources at other military installations, including the
Fallon Naval Air Station in Nevada.
An internal Navy board provides the budget oversight for most of the
programs funded from geothermal revenue, and an office at the China
Lake base oversees the budget for the remaining revenue. The Navy's
Shore Energy Policy Board, which includes representatives of the
Secretary of the Navy and the Chief of Naval Operations, oversees the
budgeting of the Navy's about $11.5 million in average annual
geothermal royalties. These funds may be used to pay for energy costs
and energy conservation projects without further approval by external
entities, such as the Office of Management and Budget or Congress.
Given this authority, the Navy's Energy Program manager, who reports to
the Shore Energy Policy Board, prepares a budget proposal by
synthesizing the funding requests from the Geothermal Program Office
and the managers of the energy conservation programs funded by the
geothermal revenue. The budget process typically culminates in an
annual board meeting at which the budget is reviewed and approved. The
China Lake base's Renewable Energy Program office oversees the budget
for the revenues it received because the base used less electricity
than it was projected to use. The office determines which projects to
fund based on an assessment of multiple criteria, including the
project's cost, available funds, and impact on energy savings goals,
among others.
The Navy uses a fundamentally different approach to geothermal
development and management than BLM. The Navy makes case-by-case
decisions regarding geothermal development. As a result, the terms of
its future development contracts could differ from those of the current
contract at China Lake. BLM, on the other hand, in accordance with its
regulations, uses a standard approach to geothermal development, with
lease provisions that are largely consistent for all leases. In
addition, at the China Lake and Fallon bases, the Navy has conducted
the initial work to identify developable geothermal resources. In
contrast, BLM does not invest in exploratory work to identify
developable geothermal resources on the lands it administers. In
addition, the Navy provides closer and more frequent oversight of
geothermal resources in production than BLM. The Navy's approach also
involves keeping all geothermal revenues for use by the military,
whereas 50 percent of the royalties paid on BLM's leases are returned
to the state of origin, with the remainder paid to the Department of
the Treasury. Beyond the differences in overall approach to geothermal
development, the agencies have different contract and lease terms. In
particular, the Navy's contract at China Lake includes royalty rates
that are, on average, higher than BLM's royalty rate. According to the
Navy, it was able to negotiate a higher royalty rate, in part, due to
its initial investment in identifying the resource, which reduced the
risk and cost for the developer. In addition, extensions to the power
plant operator's 30-year contract at China Lake are at the Navy's
discretion, whereas BLM's original 10-year leases will be routinely
renewed for up to an additional 40 years as long as commercial
geothermal production continues or other conditions are met.
We provided the Department of Defense and the Department of the
Interior's Bureau of Land Management (BLM) a draft of our report for
review and comment. The Department of Defense provided technical
comments, which we addressed as appropriate. In written comments, BLM
said that our report implies its geothermal program is not properly
managed or overseen. Our report is focused on the Navy's program and
does not evaluate BLM's program.
Background:
The process of geothermal energy development begins with identifying a
likely source of geothermal energy through exploration. Identifying
geothermal energy sources that can be competitive with other fuels
involves obtaining and analyzing a complex variety of geologic
(characteristics of rocks), geophysical (variation in magnetic and
gravity fields), and geochemical (chemical characteristics of water)
data. Although a wide variety of data can be used to identify an area
with a high likelihood of containing a geothermal resource, positively
identifying and defining the nature of the resource requires drilling a
well though the earth's surface. According to the Department of Energy,
exploration can account for as much as 60 percent of the cost of a
geothermal power project, and most of the cost of exploration is
associated with drilling wells. After wells have been drilled, they can
be used to pump hot water or steam to the surface and for returning
fluids to the reservoir after they have been used to generate
electricity.
According to a BLM official, geothermal energy from both public and
private land provides about 2,200 megawatts of electric power
nationwide. In 2003, geothermal electricity represented less than 1
percent of the nation's total electricity output. According to data
compiled by the Geothermal Energy Association, about 70 percent of the
existing geothermal power plants came on line in the 1980s. Geothermal
power plant construction has declined significantly in the 1990s
because of several factors, including loss of government incentives and
the introduction of low-cost electricity generated from natural gas.
BLM reviews and approves leases and permits to explore, develop, and
produce geothermal energy on public land and certain other federal
lands, including national forest lands. The agency is also responsible
for ensuring that leaseholders' geothermal operations comply with BLM's
regulations. In 2003, BLM's geothermal program had six full-time and
seven part-time staff, most of who were located in BLM field offices in
the western United States, including California, Nevada, Oregon, Utah,
and Idaho, among others. The program's budget was $1.35 million in
fiscal year 2003, which included a targeted amount of $600,000 for one
year only to be spent on processing a backlog of lease applications in
Nevada. The program's fiscal year 2004 budget is $1.24 million, which
does not include any funds targeted for special projects. There are 34
power plants that use geothermal energy from BLM leases in three states
(California, Nevada, and Utah). These power plants have a total
electricity production capacity of about 1,200 megawatts, according to
BLM.
Although BLM has the primary responsibility for leasing public and
certain other federal lands for geothermal development, on several
occasions, Congress has passed laws that have given the Department of
Defense the authority to develop geothermal resources on lands under
its jurisdiction. In 1978, Public Law 95-356 authorized the Secretary
of each military department to develop, for the use or benefit of the
Department of Defense, any geothermal energy source within lands under
the department's jurisdiction, other than public lands administered by
the Secretary of the Interior. The law specified that the military
could contract for a period not to exceed 30 years "for the provision
and operation of energy production facilities." In 1982, Public Law 97-
214 expanded the military's ability to develop and use geothermal
resources by extending its authority to public lands set aside for
military purposes. In 1984, Public Law 98-407 authorized the Secretary
of a military department to sell electricity produced from alternative
energy projects, which include geothermal projects, and to credit the
proceeds to the account it uses to fund its supply of electricity.
The Navy's geothermal program consists of overseeing the operations of
the two power plants at China Lake, known as Navy I and Navy II, and
developing geothermal resources at other military facilities, most
prominently the Fallon Naval Air Station in Nevada. See figure 1 for
the location of the China Lake base in California and the Fallon base
in Nevada.
Figure 1: Location of the China Lake Naval Air Weapons Station and the
Fallon Naval Air Station:
[See PDF for image]
[End of figure]
In 2003, the Navy's Geothermal Program Office had a budget of about
$6.2 million and a staff of 12, which included a program manager, a
geologist, 2 geophysicists, other technical professional staff, a
business manager, and clerical staff. The power plants at China Lake
convert high temperature water into steam through a process called
"flashing" and then use the steam to drive turbines that generate
electricity. Each of the two plants contains three turbines. Each
turbine has a production capacity of 30 megawatts, making the total
production capacity 180 megawatts. See figure 2 for a diagram of how a
power plant taps underground heat to produce geothermal electricity.
Figure 2: Diagram of a Geothermal Power Plant:
[See PDF for image]
[End of figure]
Geothermal resources have not yet been fully utilized. In 1979, the
U.S. Geological Survey estimated that known geothermal resources could
provide 23,000 megawatts of power and that undiscovered resources might
provide five times that amount. However, a comprehensive assessment of
the nation's geothermal energy generation potential has not been
conducted since 1979, and there is no current detailed information on
the extent and location of geothermal resources in the United States.
In a 2003 study by the Departments of Energy and Interior, the lead
geothermal staff from each of BLM's state offices identified, based on
their expert judgment, the best sites for future near term geothermal
power development within their states. The BLM officials identified a
total of 35 sites, including 10 in Nevada, 9 in California, 7 in
Oregon, and the remainder in New Mexico, Utah, and Washington.[Footnote
1] Also, in 2003, a Navy contractor assessed the geothermal energy
potential on military lands. The contractor assessed sites at 18
military bases and concluded that only 5 sites had a high potential for
producing electricity from geothermal resources: the Nellis Air Force
Base and the Fallon Naval Air Station/Dixie Valley Range in Nevada, the
Naval Air Facility El Centro/Parachute Test Range in California, Fort
Bliss in Texas, and the White Sands Missile Range in New
Mexico.[Footnote 2]
Navy's Revenues from Geothermal Energy Production Averaged about $14.7
Million Annually between 1987 and 2003:
The Navy collected, on average, $14.7 million annually in royalties and
other revenues from geothermal operations at its China Lake base
between 1987 and 2003. A contract between the Navy and the power plant
operator has established three sources of annual revenue to the Navy:
(1) royalty payments on the sale of electricity, (2) payments toward
the base's electricity bill, and (3) bonus payments for voluntarily
conserving electricity usage at the base. In total, the power plant
operator received about $2.3 billion from the sale of electricity
produced by the China Lake power plants between 1987 and 2003 and has
paid approximately $249 million, or about 11 percent, to the Navy.
The largest payment the Navy collects is a royalty on the power plant
operator's gross revenue from selling electricity produced at China
Lake. The Navy collected, on average, $11.5 million annually in
royalties between 1987 and 2003.[Footnote 3] Royalties ranged from a
low of less than $100,000 in 1988 to a high of more than $20 million in
1996. The two power plants at China Lake each have three turbine units-
-units 1, 2, and 3 in Navy I and units 4, 5, and 6 in Navy II. The Navy
assessed royalties on all power produced and sold from units 2 through
6 but not on power produced and sold from unit 1. Other arrangements,
including payments toward the base's electricity bill, which are
discussed later in this report, compensate the Navy for power sold from
unit 1. Table 1 shows the annual royalties the Navy received from
geothermal operations at China Lake.[Footnote 4]
Table 1: Navy Royalty Revenue from China Lake Geothermal Operations,
Calendar Years 1987-2003:
Dollars in millions.
1987; Royalty amount: $0.
1988; Royalty amount: $0.1.
1989; Royalty amount: $1.6.
1990; Royalty amount: $4.3.
1991; Royalty amount: $5.2.
1992; Royalty amount: $8.3.
1993; Royalty amount: $9.7.
1994; Royalty amount: $10.8.
1995; Royalty amount: $18.4.
1996; Royalty amount: $20.3.
1997; Royalty amount: $18.3.
1998; Royalty amount: $16.9.
1999; Royalty amount: $19.1.
2000; Royalty amount: $17.5.
2001; Royalty amount: $17.7.
2002; Royalty amount: $12.9.
2003; Royalty amount: $13.9.
Total; Royalty amount: $194.9[A].
Source: GAO analysis of Navy data.
[A] Figures do not add up to the total because of rounding.
[End of table]
The Navy has established royalty rates in its contract with the power
plant operator that increase incrementally from a low of 4 percent to a
high of 20 percent. The Navy I and Navy II power plants have different
royalty rates that increase in different years of the contract. Table 2
shows the schedule of royalty rates for the Navy I and Navy II power
plants. The royalty rate for Navy I was first applied in 1988 and for
Navy II in 1990.
Table 2: Schedule of Royalty Rates for China Lake Power Plants:
Navy I power plant (units 2 and 3): Years: 1-3;
Navy I power plant (units 2 and 3): Percentage: 4%;
Navy II power plant (units 4- 6): Years: 1-5;
Navy II power plant (units 4-6): Percentage: 4%.
Navy I power plant (units 2 and 3): Years: 4-10;
Navy I power plant (units 2 and 3): Percentage: 10%;
Navy II power plant (units 4- 6): Years: 6-10;
Navy II power plant (units 4-6): Percentage: 10%.
Navy I power plant (units 2 and 3): Years: 11-15;
Navy I power plant (units 2 and 3): Percentage: 15%;
Navy II power plant (units 4- 6): Years: 11-15;
Navy II power plant (units 4-6): Percentage: 18%.
Navy I power plant (units 2 and 3): Years: 16-30;
Navy I power plant (units 2 and 3): Percentage: 20%;
Navy II power plant (units 4- 6): Years: 16-30;
Navy II power plant (units 4-6): Percentage: 20%.
Source: GAO presentation of Navy data.
[End of table]
The Navy's royalty revenues rose consistently between 1988 and 1996
based on the 10-year contract price of electricity the power plant
operator agreed to with the local utility (see table 1). However, since
the mid-1990s these revenues have fallen from a high of $20.3 million
in 1996 to $13.9 million in 2003, the most recent year for which
complete data are available. This drop occurred because the price that
the utility had agreed to pay for electricity from Navy I fell sharply
in 1997 after the 10-year contract price expired. Similarly, the power
plant operator's contract price for power sold from Navy II expired in
2000. The contract prices, while competitive when they were negotiated,
were much higher than the market price for electricity when the
contract prices expired. Since the Navy's royalties are directly
related to the power plant operator's proceeds, when they dropped, the
Navy's revenues also decreased. However, about the time the power plant
operator's contract prices expired, the Navy's royalty rates increased
from 10 percent to 15 and 18 percent, respectively, for electricity
sold from each power plant. The increased royalty rates caused the
Navy's royalty revenue to decline less dramatically than the power
plant operator's proceeds from electricity sales.
The second largest Navy revenue source is the payment made by the power
plant operator toward the China Lake base's electricity bill. The power
plant operator paid, on average, $2.7 million annually toward the
Navy's electricity bill between 1987 and 2003. These payments, which
were made directly to the utility, lowered the base's electricity costs
by about 26 percent annually. This arrangement compensates the Navy for
some of the power produced and sold from unit 1 of the Navy I power
plant, for which royalties do not apply. Unit 1 is different because
the Navy originally intended that electricity produced from this unit
would directly support the electricity needs of Navy bases in southern
California through electric lines connecting the power plant and Navy
facilities. However, the Navy changed its plans and instead decided to
allow its contractor to sell all electricity from unit 1 to the
electric power grid and established a means of compensation that
directly benefits the base at China Lake.
The third source of the Navy's geothermal revenues is the bonus payment
for conserving electricity, known as the conserved power credit. These
payments, which are another part of the Navy's compensation package for
power sold from unit 1, averaged about $500,000 annually, for a total
of $8.6 million from 1987 to 2003.[Footnote 5] As shown in table 3, the
Navy received the majority of the conserved power credit funds between
2001 and 2003.
Table 3: Conserved Power Credit Payments to the Navy, Calendar Years
1987-2003:
Year: 1987; Conserved power credit amount: $142,947.
Year: 1988; Conserved power credit amount: $88,031.
Year: 1989; Conserved power credit amount: $93,503.
Year: 1990; Conserved power credit amount: $98,497.
Year: 1991; Conserved power credit amount: $120,889.
Year: 1992; Conserved power credit amount: $134,698.
Year: 1993; Conserved power credit amount: $97,498.
Year: 1994; Conserved power credit amount: $123,482.
Year: 1995; Conserved power credit amount: $140,071.
Year: 1996; Conserved power credit amount: $79,373.
Year: 1997; Conserved power credit amount: $147,689.
Year: 1998; Conserved power credit amount: $245,250.
Year: 1999; Conserved power credit amount: $412,515.
Year: 2000; Conserved power credit amount: $389,528.
Year: 2001; Conserved power credit amount: $1,839,185.
Year: 2002; Conserved power credit amount: $2,519,103.
Year: 2003; Conserved power credit amount: $1,919,549.
Total; Conserved power credit amount: $8,591,808.
Source: GAO analysis of Navy data.
[End of table]
Under the conserved power credit agreement, the power plant operator
pays the Navy a bonus if the China Lake base uses less electricity than
predicted, based on an expected growth rate of 3 percent annually if
the Navy took no steps to conserve energy. For example, if the contract
projected the Navy's electricity needs at China Lake to be 100 kilowatt
hours in 2004 and it uses 70 kilowatt hours, the Navy would receive a
bonus payment for the 30 kilowatt hours it did not use. Since the power
plant operator is partially responsible for paying the electricity
costs of the base, this contract provision serves to limit its
financial risk by providing an incentive for the Navy to lower its
electricity use. Despite the intent of these payments to reward energy
conservation at the base, the conserved power credit largely reflects
the fact that the base has not grown as predicted and, therefore, its
energy consumption has not grown significantly.
As shown in figure 3, the conserved power credit has become a more
significant portion of the Navy's geothermal revenues since 2001.
Figure 3: Navy Geothermal Revenue by Source, Calendar Years 1987-2003:
[See PDF for image]
[End of figure]
This increase is the result of the formula used to calculate the price
the Navy is paid for every kilowatt hour of electricity it saves. When
the market price for electricity increases, as it did during the
California energy crisis from 2000 to 2002, the price the Navy is paid
for the electricity it conserves also increases. Payments the Navy
received under this contract provision, as well as reductions in the
base's electricity bill, have helped keep its total geothermal revenues
fairly constant since the mid-1990s. During this same time period,
revenue to the power plant operator declined significantly (see fig.
4).
Figure 4: Comparison of Power Plant Operator and Navy Revenue, Calendar
Years 1987-2003:
[See PDF for image]
[End of figure]
In addition to the three sources of annual revenue the Navy receives,
the Navy will get a $25 million lump sum payment at the expiration of
its contract with the power plant operator in 2009. This arrangement is
the final part of the compensation package tied to unit 1 of the Navy I
power plant. The Navy negotiated the $25 million payment because it
calculated that the revenues it received from the electricity bill
savings and the conserved power credit were less than the revenues it
would have received if a royalty provision had been applied to unit 1.
Navy Has Spent Its Geothermal Revenues on Energy Conservation Programs
and Oversight and Development of Geothermal Resources:
Since fiscal year 1990, the first year the Navy spent geothermal
revenues, most of the Navy's revenues have been used to develop and
implement energy savings projects throughout the Navy and the Marine
Corps and at the China Lake base. The Navy also funded its Geothermal
Program Office, which manages the geothermal resource at China Lake and
assesses other military sites for geothermal development. By the end of
December 2003, the Navy had received a total of $197 million in cash
geothermal revenues from royalties and the conserved power
credit.[Footnote 6] The Navy had spent about $182.3 million of its
geothermal revenues and had an unspent balance of about $14.7 million.
Navy Has Spent Most of Its Geothermal Revenues on Energy Conservation
Programs:
Between October 1, 1989, and December 31, 2003, the Navy spent
approximately $125.7 million, or about two-thirds of its expenditures
of geothermal revenues, on 27 energy conservation programs, although
not every program received funding every year.[Footnote 7] The two
largest Navy energy conservation programs funded with geothermal
revenues are the Project Development and Execution program and the
Utility Incentive program. Project Development and Execution program
funds are used to identify energy savings projects throughout the Navy
and Marine Corps, obtain proposals from contractors to execute the
projects, review the financial and technical assumptions of their
proposals, and execute the selected projects. Utility Incentive program
funds enable base commanders to make down payments on contracts to
implement energy savings projects and to review designs and oversee
construction during the execution phase of the project. Funds from
these two programs have been used to develop a project to install a
large solar energy system and other energy technology at the Marine
Corps' Twentynine Palms facility in California that, according to the
Navy, effectively removed the facility's dependence on the power grid.
The Navy also installed geothermal heat pumps that heat and cool a
Marine Corps Air Station in Beaufort, South Carolina, as well as
irrigation improvements by the Public Works Center in San Diego and at
the Lemoore Naval Air Station in California, among other projects.
Among the other energy conservation programs the Navy funds from
geothermal revenues are the Energy and Water Projects program, the
Training program, and the Awareness program. Under the Energy and Water
Projects program, the Navy installed energy efficient lighting systems
in its buildings, such as sensors that detect movement and
automatically turn on and off lights, as well as updated climate
control systems. The Navy also installed metering upgrades that allow
it to obtain energy consumption data for individual buildings, instead
of for an entire base. Under its Training program, the Navy trains Navy
and Marine Corps staff to be effective energy managers and to develop
and finance energy savings projects, among other things. The Navy's
Awareness program pays a public relations firm to emphasize the
benefits of energy efficiency to Navy personnel. To help change
attitudes and behaviors regarding energy conservation, the public
relations firm produces a newsletter; writes speeches and reports; and
disseminates promotional items, such as pads of paper with an energy
efficiency message.
The Navy funded 22 other energy conservation programs between October
1, 1989, and December 31, 2003, using geothermal revenues, such as
collecting and managing the Navy's energy consumption data,
establishing an office to test and validate new energy savings
technologies, creating a program to showcase energy savings features at
Navy installations, and developing an awards program. Table 4 shows the
Navy's energy conservation programs that received the highest levels of
funding from geothermal revenues between October 1, 1989, and December
31, 2003.
Table 4: Navy's Energy Conservation Programs Receiving the Highest
Level of Funding from Geothermal Revenues, October 1, 1989, through
December 31, 2003:
Dollars in millions.
Program: Project development and execution;
Funding level: $30.3.
Program: Utility incentive program;
Funding level: $26.4.
Program: Energy and water projects;
Funding level: $14.8.
Program: Training;
Funding level: $8.8.
Program: Awareness;
Funding level: $7.0.
Program: Other;
Funding level: $38.5.
Total;
Funding level: $125.7[A].
Source: GAO analysis of Navy data.
[A] Figures do not add up to the total because of rounding.
[End of table]
According to the Navy, its energy conservation efforts have resulted in
significant energy savings. The Navy estimates that, since 1999, its
geothermal revenues funded energy conservation projects that will save
the Navy approximately $449 million over the life of the projects. In
2003, the Department of Energy presented the Navy the Presidential
Award for Leadership in Federal Energy Management for its overall
performance in energy management and energy savings, installation of
renewable energy technologies, and development of reporting tools to
better track energy use and cost. That same year, the Navy also
received the Star of Energy Efficiency Award from the Alliance to Save
Energy in recognition of the Navy's leadership in developing renewable
energy, including the geothermal power plants at China Lake, two solar
energy systems, and technology that uses wind and wave energy.[Footnote
8]
The Navy has not spent all its geothermal revenues from China Lake. As
of December 31, 2003, the Navy had about $14.7 million in unspent
geothermal revenues. According to the Navy's Energy Program manager,
the Navy carries over about $4 to $5 million from year to year to pay
for expenses in the first month of the fiscal year. In addition, the
Navy carries over funds that it was unable to obligate to programs
before the end of the fiscal year.[Footnote 9]
Navy Has Also Spent Its Geothermal Revenues to Oversee the China Lake
Project and to Develop New Geothermal Resources:
Between October 1, 1989, and December 31, 2003, the Navy spent about
$56.6 million, or about the remaining one-third of its expenditures
from geothermal revenues, on the Geothermal Program Office at China
Lake. This office spent, on average, about $2.4 million annually to
manage geothermal operations at China Lake and about $1.6 million to
develop new geothermal resources at other military locations, for a
total annual budget of about $4 million.[Footnote 10]
The Navy's geothermal resource management activities include (1)
monitoring key aspects of the China Lake geothermal reservoir, (2)
overseeing the activities of the power plant operator, and (3)
preserving historic and natural resources. The Navy's monitoring
activities include testing how fluid moves underground and the
temperature and pressure of subsurface water to help ensure the
longevity of the geothermal resource. In addition, the Navy takes
pressure and temperature readings from wells to understand the effects
of withdrawing fluids from and injecting them into the reservoir. As a
result of these monitoring activities, the Navy noticed a decrease in
the volume of steam available to one of its power plants and worked
with the power plant operator to correct it.
The Navy also oversees the activities of the power plant operator at
China Lake to ensure the safety and security of power plant operations,
as well as the operator's compliance with environmental laws and the
agreements it entered into with the Navy. The Navy requires the power
plant operator to prepare a resource management plan that details its
plans for drilling wells, extracting steam, injecting fluids, and other
aspects of resource management. To assess the power plant operator's
compliance with the plan, the Navy inspects the power plants and
reviews reports submitted by the operator. For example, the Navy
reviews weekly reports on the amount of steam withdrawn from the
reservoir, as well as the amount of electricity produced, sold, and
lost.
Finally, the Navy takes actions to preserve natural and cultural
resources on its lands. In the vicinity of the power plants at China
Lake, there are natural resources, such as fumaroles (holes in the
ground that emit volcanic gases) and bubbling mud pots, and cultural
resources, such as an abandoned hot springs resort and a site with
cultural significance to Native Americans. To help preserve these
resources, the Navy has agreed to minimize surface disturbance; limit
access to historic sites to only those with a need to be there; monitor
and report on surface thermal features, such as fumaroles; and conduct
a cultural resources site restoration study, among many other things.
The Navy's resource development activities involve identifying and
quantifying the extent of geothermal resources at Army, Navy, Air
Force, and Marine Corps bases. Specifically, the Geothermal Program
Office (1) studies land density to detect the presence of water under
the surface; (2) tests the physical and chemical makeup of the land and
subsurface water; (3) conducts seismic surveys to identify fractures
under the surface where hot water or steam could be accessible to
drilling; and (4) drills shallow wells, fills them with water, and
measures the temperature to detect the presence of underground heat. On
the basis of information gathered from these activities, the Navy
contracts with private companies to drill exploratory wells, which can
be between 4,000 and 10,000 feet below the surface, to confirm the
location and quality of geothermal resources. Labor costs for the
Geothermal Program Office and for contracts with companies to perform
additional work account for the vast majority of the Navy's geothermal
resource development costs.
The Navy's resource development efforts have uncovered a developable
geothermal resource at the Fallon Naval Air Station in Nevada. As of
March 2004, the Navy was considering companies to develop a power plant
on the base to produce electricity. According to the Navy, other
locations where it has explored geothermal resources between 1987 and
2003 include the Fort Irwin Army base, the Twentynine Palms Marine
Corps base, the Naval Air Field El Centro, and the Sierra Army Depot,
all in California, the Hawthorne Army Ammunition Depot in Nevada, and
the Lajes Air Force Base in the Azores.
Navy's Internal Energy Policy Board Oversees Budgeting of Most
Geothermal Funds:
The Navy's Shore Energy Policy Board oversees the budgeting of the
Navy's about $11.5 million in average annual geothermal royalties. The
members of the Navy's Shore Energy Policy Board include representatives
of the Secretary of the Navy, the Chief of Naval Operations, the
Commandant of the Marine Corps, and the Commander of Naval
Installations.[Footnote 11] The goal of the budget review process is to
ensure that the Navy is funding programs that will allow it to meet its
energy conservation obligations under the Energy Policy Act of 1992, as
amended, and Executive Order 13123. The Energy Policy Act established a
number of energy conservation goals and requirements for federal
agencies, including requirements for new technology demonstration
projects and surveys of energy savings potential. Executive Order
13123, which the President signed in 1999, sets goals for federal
agencies to reduce greenhouse gas emissions and encourages agencies to
expand the use of renewable energy by implementing renewable energy
projects and by purchasing electricity from renewable energy sources,
among other things.
Public Law 98-407 gives the Department of Defense authority to use its
geothermal revenues to pay for energy costs and energy conservation
projects. Consequently, the Navy's expenditures of its geothermal
revenues are not subject to additional approval by external entities,
such as the Office of Management and Budget or Congress.[Footnote 12]
However, according to the Navy's Energy Program manager, the Navy has
informed interested members of Congress on an informal basis of the
status of the geothermal program and the projects that are funded with
geothermal revenues.
The annual budget development and review process for the Navy's
geothermal expenditures is coordinated by the Navy's Energy Program
manager. The process typically begins in the spring of each year with
the individual program managers who receive funding from geothermal
revenues identifying the activities they want to fund and the dollar
amount they want to allot to each activity.[Footnote 13] The Navy's
Energy Program manager also receives a projection from the Geothermal
Program Office on the revenues expected from the geothermal facility at
China Lake. The Navy's Energy Program manager then prepares a budget
proposal that is presented to the Shore Energy Policy Board, typically
at its annual meeting in the second half of each year. The board
reviews the amounts allocated to each program in the draft budget,
determines whether the funding levels are appropriate, agrees on final
allocations, and approves the budget. As part of its review process,
board members review data on program accomplishments from the previous
year.
Once the board has agreed to the budget, the Navy's Energy Program
manager submits a budget execution plan to the Controller at the Naval
Facilities Engineering Command. The Navy's Energy Program office
produces and provides to the Controller monthly reports showing how the
geothermal revenues are being spent. The Controller is responsible for
managing the account containing the geothermal revenues, making sure
the money flows properly to the programs funded with these revenues,
and ensuring that expenditures are properly accounted for.
The China Lake base's Renewable Energy Program office oversees the
budget for the geothermal revenues that originate from the conserved
power credit. Staff from the Renewable Energy Program office, working
with the base's Energy Manager, identify potential energy conservation
projects, such as energy efficiency upgrades to buildings or solar
energy production at remote sites. The office determines which projects
to fund on the basis of an assessment of multiple criteria, including
the project's cost, available funds, maintenance requirements, and
impact on energy savings goals.
Navy's Geothermal Program Differs from BLM's Program in its Approach
and in Some Key Contractual Provisions:
The Navy's approach to developing and managing geothermal resources on
military lands involves (1) making case-by-case decisions regarding
development, (2) investing in the initial exploration to identify and
characterize geothermal resources, (3) providing close and frequent
oversight of geothermal resources in production, and (4) keeping all
geothermal revenues for use by the military. This contrasts with BLM's
standard approach, established by law and in regulations, which does
not involve investing in geothermal exploration or provide the same
level of oversight over resources in production. Also, 50 percent of
BLM's geothermal revenues are shared with the states of origin. In
addition to differences in their approaches, the Navy's contract at
China Lake and BLM's leases have different royalty rates and contract
renewal terms.
Navy Makes Case-by-Case Decisions Regarding Geothermal Development; BLM
Uses a Standard Approach:
The Navy and BLM use fundamentally different approaches to geothermal
development. The Navy does not have a set of regulations that guide how
geothermal development will take place on military land. Rather,
according to the manager of the Navy's geothermal program, the Navy has
chosen to make case-by-case decisions regarding geothermal development
on military lands. This means that specific circumstances related to
the nature of the geothermal resource, its location, and the Navy's
energy and security needs, among other factors, will determine how the
Navy chooses to develop the resource and the provisions that will be
included in the development contract. Consequently, standard contract
terms do not exist. Rather, a developer must negotiate with the Navy's
Geothermal Program Office regarding the terms of the development
contract, including the royalty rate, length of contract, and other
provisions. BLM, on the other hand, has a standard approach to
geothermal development with regulations that establish royalty rates,
lease terms, and operational requirements of the leaseholder that are
largely consistent across all geothermal leases.[Footnote 14]
So far, the Navy's case-by-case approach has been completely applied
only at China Lake. This contract was first signed in 1979 and has been
modified over time as conditions have changed. For example, the Navy
originally believed the electricity production potential at the site
was much smaller and that the electricity would be provided only to the
base. The contract was originally based on these assumptions but was
modified when it became clear that additional production potential
existed and that the electricity produced would be sold to a local
utility company rather than supplied directly to the base. The Navy is
currently in the process of developing the geothermal resources at the
Fallon Naval Air Station using the same case-by-case approach. As a
result, the contract provisions that are negotiated with the developer
at Fallon may or may not be similar to those at China Lake.
Navy Invests in Initial Exploratory Work, and BLM Does Not:
One of the most significant differences between Navy's and BLM's
geothermal programs is that the Navy invests in exploratory work to
identify promising geothermal resources, and BLM does not. According to
a BLM official, the agency does not conduct the initial geothermal
exploration on its lands because it has received neither direction nor
funding from Congress to conduct such activities.
The area of highest risk and cost to geothermal developers is the
initial exploration and identification of a high probability
development site. At the China Lake and Fallon bases, the Navy assumed
some of that risk and cost by funding and conducting the initial work
to identify developable geothermal resources on these military
installations. The Navy analyzed the characteristics of the rocks,
variations in soil density, and the chemical characteristics of
subsurface water, among other things, to determine the existence and
characteristics of the geothermal resources at China Lake and Fallon.
In addition, the Navy conducted some exploratory drilling, although it
did not drill any wells that could be used for geothermal electricity
production.
A representative of the company that currently operates the China Lake
power plants told us that he did not believe that the Navy's initial
exploratory work reduced the company's costs and risks significantly.
On the other hand, representatives from the three companies that are
interested in developing the geothermal resources at Fallon told us
that the Navy's development work had reduced their initial risk and
cost. Two of the representatives said they would not have been
interested in being a partner in developing the geothermal resources at
Fallon if they had to bear all of the initial cost and risk.
According to the Navy, it conducts the initial development work because
(1) doing the work itself allows the military to limit access to its
facilities, whose primary mission is national security; (2) the Navy
has funds available for this purpose; and (3) doing its own development
work increases the likelihood that geothermal energy companies will be
interested in the project. The Navy is interested in developing
geothermal resources on military lands only if it can be done in a
manner that does not impinge on its primary mission of national
security. By conducting the initial exploration itself, or by using
hired contractors, the Navy maintains much greater control over access
to military facilities. The Navy is able to use this approach because
it receives geothermal revenues from the China Lake power plants, a
portion of which it spends to develop geothermal potential on other
military facilities.
Navy Provides Closer and More Frequent Oversight of Its Geothermal
Resources Than BLM Does:
With proper management--not withdrawing too much fluid too fast and
reinjecting fluids as needed--a geothermal field can potentially be
productive indefinitely. In the absence of proper management, the
productive life of the resource may be greatly reduced. The Navy has an
interest in ensuring that the geothermal resource at China Lake is
managed so that it will continue to produce electricity indefinitely.
As a result, the Geothermal Program Office spends over one-half of its
annual budget on oversight and management of the geothermal resource at
China Lake.
To provide information to help it manage the geothermal resource, the
Navy's contract with the power plant operator requires the company to
annually submit to the Navy a resource management plan. This plan
discusses how the company will develop the geothermal field and
includes information on the drilling of new wells, changes to existing
wells, and efforts to balance production and injection of fluids to
maximize the field's productive capacity. The Navy also requires the
power plant operator to provide weekly reports on various aspects of
production, including well temperatures, well pressures, and steam
flow. In addition, the Navy conducts some of its own tests of the
geothermal resource to ensure it is being properly managed.
BLM's regulations also include provisions that require the leaseholder
to manage the geothermal resource efficiently. One provision of the
regulations states that a leaseholder's utilization operations must
"result in the maximum ultimate recovery" of the geothermal
resource.[Footnote 15] Although BLM's regulations offer no further
explanation of this concept, a BLM official told us that this means
that leaseholders should engage in prudent management of the geothermal
reservoir so that it will continue to be a viable resource for as long
as possible. BLM performs some oversight activities to ensure that the
leaseholder's operations ensure the longevity of the resource. For
example, BLM's field office staff may check meters that monitor the
pressure and temperature of the resource and compare trends over time,
among other activities, to ensure the resource is not being depleted
too quickly. However, because of its limited number of staff, BLM does
not conduct these activities as frequently as the Navy does.
An official from the company that currently operates the power plants
at China Lake told us that the level of oversight the Navy provides is
burdensome and costly. According to the official, the Navy requires
some reports about the company's management of the geothermal resource
that either are not required by BLM or are required less often. The
official told us that the company incurs approximately $50,000 in
annual costs to comply with these requirements. Navy officials
acknowledge that they require some reports more frequently than BLM and
others BLM does not require at all. Nonetheless, they believe that
these requirements are (1) part of a prudent approach to oversight, (2)
consistent with the resource management principles in BLM's
regulations, and (3) not as costly as the contractor contends. In
addition, these requirements were not imposed unilaterally by the Navy
but rather are included in the contract agreed to by the power plant
operator and the Navy.
Navy Does Not Share Its Geothermal Revenues with State Government, and
BLM Does:
The Navy does not share its geothermal revenues with state or local
governments, whereas the federal government returns half of the
revenues from geothermal leases administered by BLM to the state of
origin. The laws that established the military's authority to develop
geothermal resources on its lands do not require the military to share
any of its geothermal revenues with the state and local governments
where the electricity was produced. In contrast, the Department of the
Interior's Minerals Management Service, which is responsible for
collecting and tracking geothermal royalty payments, is required by law
to share 50 percent of the revenues from geothermal leases administered
by BLM with the state of origin.[Footnote 16]
California, the state which receives the majority of these geothermal
revenues, shares 40 percent with the counties where the geothermal
development took place. In Nevada, the first $7 million in geothermal
revenues received from the Minerals Management Service go into a state
school account, and 75 percent of any funds over this amount are
returned to the county of origin. Between 1987 and 2003, according to
data from the Minerals Management Service, Nevada's geothermal
royalties exceeded the $7 million threshold in only 1 year. Utah puts
its geothermal revenues into a fund that makes grants and loans to
local communities that have been socially or economically affected by
the geothermal development for planning, construction, and maintenance
of public facilities and provision of public services.
Navy's Royalty Rates Are, on Average, Higher Than BLM's Rates, and
Contract Renewal Is at the Navy's Discretion:
Currently, the Navy's only contract for geothermal development is at
China Lake, and it includes royalty rates that are, on average, higher
than BLM's royalty rate. In addition, the China Lake contract includes
additional revenue provisions that are not included in BLM leases. To
date, the average annual royalty rate the contractor has paid has been
about 8 percent of its total revenues from the sale of electricity.
This average rate will increase to 13.3 percent by the end of the
contract because royalty rates are significantly higher at the end of
the contract than at the beginning. The Navy's contract at China Lake
also includes provisions for the developer to pay a portion of the
base's electricity bill, payments if the base uses less electricity
than expected, and an end-of-contract lump sum payment. According to
the Navy, it was able to negotiate these provisions in part because of
its initial investment in identifying the geothermal resource, which
reduced the risk and cost to the developer.
According to an official from the Minerals Management Service, the
royalty charged on BLM's leases is typically between 10 percent and
12.5 percent of the value of the geothermal hot water or steam. To
compute this value, a company is allowed to deduct certain costs
associated with turning the hot water or steam into electricity. The
provisions that allow developers to deduct some of their costs--known
as "netback" provisions--typically reduce the royalty rate paid on the
value of the electricity to less than 12.5 percent. Exactly how much
less is unknown because the Minerals Management Service does not
calculate the average effective royalty rate on the value of
electricity sold from BLM's geothermal leases. However, the lead
official for BLM's geothermal program told us that the effective
royalty rate was probably 4 to 4.5 percent of the value of the
electricity.
Regarding contract extensions, whether the power plant operator's
contract with the Navy at China Lake will be renewed is at the Navy's
discretion, whereas at BLM the lease will be routinely renewed as long
as the leaseholder meets certain conditions. The China Lake power plant
operator's 30-year contract with the Navy expires in 2009. The contract
stipulates that at that time the Navy has the right, with congressional
approval, to extend the contract for an additional 10 years. According
to the power plant operator, uncertainty regarding whether the contract
will be renewed makes it difficult for them to plan, make investments
in plant maintenance, or explore new areas. In contrast, BLM leases
have a primary term of 10 years. If the leaseholder uses geothermal
resources in commercial quantities during this time, the lease will
continue for up to 40 years beyond the initial term as long as
commercial production continues.
Agency Comments and Our Evaluation:
We provided the Department of Defense and the Department of the
Interior's Bureau of Land Management a draft of our report for review
and comment. In commenting for the Department of Defense, the Navy's
Geothermal Program Office provided technical comments that we
incorporated as appropriate.
In commenting for BLM, the Acting Assistant Secretary for Land and
Minerals Management said that the report implies that BLM is not
properly managing its geothermal program or providing an adequate level
of oversight. In support of the view that BLM manages its leases
"responsibly and efficiently," the Acting Assistant Secretary provided
information about the program's budget, oversight, expenses, and
staffing.
In response, we do not believe the report implies BLM is improperly
managing its program. The report is limited to describing key
differences between the two programs and, as noted in the report, does
not compare their respective advantages and disadvantages or their
costs and benefits. As such, the report does not address whether BLM's
management and oversight are, or are not, proper. We made no changes in
response to these comments. BLM also provided other technical comments
which we addressed in appendix II.
We will send copies of this report to the Secretaries of the Navy and
the Interior, the appropriate congressional committees, and other
interested members of Congress. We also will make copies available at
no charge on the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-3841. Key contributors to this report are
listed in appendix III.
Signed by:
Jim Wells,
Director, Natural Resources and Environment:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine the Navy's annual revenues from the geothermal facility at
China Lake, we reviewed the contract between the Navy and the power
plant operator to identify all the forms of revenue to be paid to the
Navy. We obtained and reviewed annual data prepared by the Navy's
Geothermal Program Office on revenues from (1) royalties on the sale of
electricity, (2) payments toward the base's electricity bill, and (3)
payments for conserving electricity use at the base. We obtained
revenue data for calendar years 1987, the first year the Navy collected
geothermal revenues, through 2003, the most recent year for which
complete data are available. We assessed the reliability of the Navy's
revenue data by (1) comparing the annual revenues the Navy reported and
the revenue the power plant operator reported it had paid to the Navy
and (2) interviewing Navy officials knowledgeable about the data. We
determined that the data were sufficiently reliable for the purposes of
this report.
To determine how the Navy uses the revenues it collects from the
geothermal facility, we obtained information from (1) the managers of
the Navy's Energy Program and the Renewable Energy Program office at
China Lake about the principal activities of the energy conservation
programs funded with geothermal revenues and (2) the manager of the
Geothermal Program Office on the principal activities conducted by this
office. In addition, we obtained available annual expense data for
fiscal year 1990, the first year it spent geothermal revenues, through
the end of the first quarter of fiscal year 2004 from the Navy's Energy
Program office, Renewable Energy Program office, and Geothermal Program
Office. We assessed the reliability of the Navy's expenditure data by
obtaining certifications that the Navy's financial system in use at the
China Lake base was in compliance with (1) requirements of the Federal
Financial Management Improvement Act of 1996 designed to improve
federal agencies' financial reporting and (2) core financial system
requirements of the Joint Financial Management Improvement
Program.[Footnote 17] To further assess the reliability of the data, we
obtained descriptions of how financial transactions are approved, paid,
and recorded, and checked records of transactions maintained by the
Geothermal Program Office to determine whether the applicable policies
had been followed. Finally, we interviewed Navy officials knowledgeable
about the data, including the manager of the Navy's Energy Program
office, the program manager of the Renewable Energy Program office at
China Lake, and the manager and business manager of the Geothermal
Program Office. We determined that the data were sufficiently reliable
for the purposes of this report.
To determine the budget oversight that the Navy provides programs
funded from geothermal revenues, we examined federal statutes to
determine the extent of the Navy's authority to use geothermal
revenues. We discussed the Navy's oversight of geothermal funds with
the Navy's Energy Program manager as well as the program manager of the
Renewable Energy Program office at China Lake to determine how the Navy
establishes spending priorities and makes funding decisions. We also
reviewed minutes from meetings of the Navy's Shore Energy Policy Board,
the highest level of oversight for the Navy's geothermal funds, as well
as geothermal program information prepared for the board to determine
the extent of its oversight activities. We did not evaluate the quality
of the Navy's budget oversight because doing so was outside the scope
of this review.
To determine how the Navy's geothermal program differs from BLM's
program, we reviewed the contract between the Navy and its power plant
operator at China Lake that establishes key elements of the Navy's
approach to geothermal development and the law and regulations that
establish BLM's approach. We also discussed the differences between the
Navy's and BLM's geothermal programs with officials from (1) the Navy's
Energy Program office and Geothermal Program Office; (2) BLM's
headquarters, California, and Nevada offices; (3) the company that
operates the power plant at China Lake; (4) other private energy
companies; and (5) the Geothermal Energy Association. In addition, we
visited the Navy's geothermal facility at China Lake to observe the
activities of the Navy and the power plant operator. We also obtained
information from the Navy on its geothermal exploration and development
activities at the Fallon Naval Air Station. To verify the Navy's
oversight requirements, we obtained reports the power plant operator
submits to the Navy. Finally, we reviewed (1) the federal law that
determines the extent to which the Minerals Management Service shares
federal geothermal revenues with states and (2) the state laws for
California, Nevada, and Utah that determine whether and how the states
share geothermal revenues with local governments. We did not compare
the advantages and disadvantages or the costs and benefits of the
Navy's and BLM's geothermal programs because doing so was outside the
scope of this review.
We did not conduct an assessment of the Navy's internal controls over
its geothermal program, such as its procedures for planning and
controlling program activities or measuring and reporting program
performance, because doing so was outside the scope of this review. We
conducted our review from August 2003 through May 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Bureau of Land Management:
United States Department of the Interior:
BUREAU OF LAND MANAGEMENT
Washington, DC 20240
http://www blm.gov:
MAY 5 2004:
In Reply Refer To: 3200 (WO-310):
Mr. Jim Wells:
Director, Natural Resources and Environment
United States General Accounting Office
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. Wells:
Thank you for the opportunity to comment on the General Accounting
Office report entitled, Geothermal Energy - Information on the Navy's
Geothermal Program. Your report's fourth objective was to "provide
information on ... how the Navy's geothermal program differs from the
BLM's program." We found in the comparison, the report implies that the
Bureau of Land Management (BLM) is not properly managing the geothermal
program on public lands. We believe this is not true. The BLM manages
over 400 leases and 34 power plants on Federal lands responsibly and
efficiently. We provide the following comments.
1. The BLM's geothermal budget is developed and overseen at the
Washington Office level, with input from field offices. The Department
of the Interior (DOI), the Office of Management and Budget (OMB), and
Congress provide oversight of the BLM's geothermal budget.
2. The BLM's total expenses to manage the geothermal program for years
1990 through 2003 are estimated at less than $10 million.
3. At the bottom of page 5 and the top of page 6, you indicate that the
BLM's program had nine staff. In fact, the BLM has six employees who
work full time in the geothermal program nationwide, and another seven
employees with co-lateral duties to conduct lease sales, process permit
applications, and conduct post-lease field work. For FY 2003, the BLM
budget was $750,000, plus a one-time add on of $600,000, specifically
directed to Nevada.
4. The Navy manages the China Lake activities out of the Geothermal
Program Office at the Weapons Center, with a 2003 budget of $2.4
million; the BLM Ridgecrest Field Office also manages two power plants
on the same geologic structure, on the military withdrawn area, inside
the boundary fences of the Weapons Center, with a geothermal budget of
under $80,000 (part of the BLM's annual budget of $1.24 million).
5. BLM manages over 400 leases in seven states, and 15 field offices.
The Navy has one field office.
6. The Navy manages two power plants, while the BLM manages 34 power
plants.
7. The Navy manages its inspection program with a system of field visits
by a number of employees (not cited in the report); the BLM
accomplishes its China Lake inspection visits with one Ridgecrest Field
Office employee. The employee inspects a power plant at Mammoth Lakes,
five power plants at East Mesa, and occasionally is assisted by an
engineer from the BLM's Ukiah Field Office.
8. The BLM uses another employee to manage 16 other federal geothermal
power plants within the Geysers, another geothermal field in
California. The Geyers is the largest producing geothermal steam field
in the world.
9. The Navy retains all revenues generated by the China Lake geothermal
facilities. By law, 50 percent of the royalties from production on
public lands administered by the BLM are returned to the State of
California. Over $6 million of these funds have been paid to the local
Inyo County government for schools, court and county buildings, fire
protection, and transportation.
10. Your report neglects to point out that the Navy's geothermal
program had a large budget "to develop new geothermal resources on
other military facilities". No other facilities or power plants have
been built or brought on-line since inception of the program in the
late 1970's.
11. The report incorrectly states on page 4 that the "...BLM does not
conduct any work to identify geothermal resources on the lands it
administers." The BLM identifies lands with high geothermal resource
values as Known Geothermal Resource Areas (KGRAs). The BLM uses its own
geologic expertise supplemented by other information from the U. S.
Geological Survey, Department of Energy, State Government and other
sources. This work, and the analysis which is required to keep this
information current is referenced in the Geothermal Steam Act which
describes KGRAs as areas where the geology, nearby discoveries, or
other indicia would, in the opinion of the Secretary of the Interior,
encourage and support companies with geothermal experience to lease and
develop the lands. Industry has continually expressed the positive
value of the BLM's work, especially when the companies apply for bank
financing.
12. On pages 4 and 21, the report states that, "The Navy makes case-by-
case decisions regarding geothermal development." The report does not
mention that BLM also makes case-by-case decisions for leasing and
development. Similar to the Navy's decision to lease based on
compatibility with military base missions, the BLM makes case-by-case
leasing decisions based on compatibility with public land management
objectives, including the protection and use of other resources. The
leasing contract, which the BLM uses to authorize activities on public
lands for exploration and development, contains many standard
provisions, such as royalty rates and lease terms, which are set by
regulation and statute. However, the BLM also develops and includes
additional stipulations and operational conditions in each
authorization, based on specific conditions that are identified on a
case-by-case basis. These include measures to protect cultural values,
threatened and endangered species, lessen visual impacts and mitigate
other impacts identified during the National Environmental Policy Act
analysis.
13. In several places, including in the introductory Highlights Page,
your report indicates that the BLM does not "provide the same level of
oversight over resources in production." This statement may lead
readers to believe that the BLM's level of oversight is inadequate,
which is not accurate. While the report states that the Navy inspects
operations more frequently than the BLM, the BLM does, and will, adapt
its inspection schedule where situations indicate a need for more
frequent inspections. BLM employs some of the best petroleum engineers
and geothermal experts in the country to ensure that geothermal
production accountability, reservoir management (which includes
measures taken to conserve the productivity of the resource), as well -
as drainage protection, are effectively and efficiently addressed. We
believe that BLM's level of oversight is appropriate, and indeed,
exemplary given limited resources.
In conclusion, we thank you for this opportunity to review this report.
If you have any further questions, please call our Acting BLM Fluid
Minerals Group Manager, Mr. Kermit Witherbee, at 202-452-0385.
Sincerely,
Signed for:
Rebecca W. Watson:
Assistant Secretary:
Land and Minerals Management:
cc: Mr. Steve Secrist
Assistant Director
General Accounting Office
301 Howard Street:
San Francisco, CA 94105:
The following are GAO's comments on three technical areas contained in
the Bureau of Land Management's letter dated May 5, 2004.
GAO Comments:
1. In commenting for BLM, the Acting Assistant Secretary implied that
the Navy spent $2.4 million and BLM spent less than $80,000 in fiscal
year 2003 to perform the same level of work to oversee their respective
power plants at China Lake. To clarify, as we reported, the $2.4
million figure is not the amount the Navy spent in fiscal year 2003,
but the average annual amount it spent over about a 14-year period to
manage geothermal operations at China Lake. In addition, we do not
believe that the budgets of the Navy and BLM for managing oversight
activities at China Lake can be reasonably compared, as BLM suggests,
because the level of oversight performed by each entity is different.
For example, BLM and the Navy entered into a memorandum of
understanding to jointly manage the geothermal resource at China Lake.
This agreement, while not discussed in our report, gives the Navy lead
responsibility for managing the geothermal resource at China Lake. We
made no changes to our report in response to this comment.
2. We clarified our report to make clear that BLM does not invest in
exploratory work to identify the location of developable geothermal
resources. The work BLM performs to identify geothermal resources prior
to offering land for leasing is to analyze data from third parties,
such as universities and research laboratories, to determine whether
broad areas of land can be designated as KGRAs. However, a BLM official
with extensive experience with BLM's geothermal program in California,
told us the data the agency uses to make KGRA designations are not
conclusive as to whether the underlying resource is commercially
viable, a determination that is important to energy developers.
3. We believe that BLM's approach to developing geothermal resources is
fundamentally different than the Navy's approach. BLM's approach is
predominately determined by law and regulations, whereas the Navy's
approach is predominately determined by the specifics of each
individual case. As such, we believe that we have accurately
characterized their respective approaches and made no changes for this
comment.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jim Wells (202) 512-3841:
Staff Acknowledgments:
In addition to the individual named above, Nancy Crothers, Dan Haas,
Steve Secrist, Kathryn Supinski, and Barbara Timmerman made key
contributions to this report.
(360389):
FOOTNOTES
[1] See Barbara C. Farhar and Donna H. Heimiller, Opportunities for
Near-Term Geothermal Development on Public Lands in the Western United
States (Washington, D.C.: U.S. Department of Energy and U.S. Department
of the Interior, April 2003) p. 6.
[2] See Innovative Technical Solutions, Inc., Geothermal Energy
Resource Assessment on Military Lands (October 2003).
[3] Although the Navy did not begin receiving royalty payments until
1988, we averaged royalty payments over the period 1987 through 2003 to
be consistent with our presentation of the other sources of geothermal
revenues that were received throughout that period.
[4] Although the Navy received $194.9 million in royalty revenue, only
about $191.5 million was available to the Navy to spend because it paid
about $3.4 million to the power plant operator as reimbursement for
paying more of the base's electricity bill than its agreement with the
Navy required.
[5] Only about $5.5 million was available to the base to spend because
the Navy paid about $3.1 million to the power plant operator as
reimbursement for paying more of the base's electricity bill than its
agreement with the Navy required between 1996 and 2001.
[6] The third source of the Navy's annual geothermal revenue--the
electricity bill savings--is not paid in cash to the Navy. Rather, the
contractor pays the bill directly to the utility.
[7] The data we used to describe how the Navy spent its revenues from
its geothermal operations represent the amounts the Navy obligated to
programs and not the actual amounts expended. According to the Navy,
tracking the actual expenses would have been prohibitively time-
consuming since its accounting systems are not designed to sort
expenses by program.
[8] The Alliance to Save Energy is a nonprofit coalition of business,
government, environmental, and consumer leaders organized to promote
energy efficiency worldwide.
[9] About $2.6 million of the unspent funds are managed by the
Renewable Energy Program office at China Lake, which is responsible for
identifying and executing renewable energy projects there and at a few
other military installations. These funds originate from the conserved
power credit.
[10] Averages are based on fiscal years 1990 through 2003.
[11] The Secretary of the Navy is the politically appointed, civilian
leader of the Navy responsible for setting policy, and the Chief of
Naval Operations provides the highest level of operational, military
leadership for the Navy.
[12] Geothermal revenue may also be used for certain military-related
construction projects, provided advance notification is given to
Congress. See 10 U.S.C. § 2867(c).
[13] The program managers include those responsible for the Project
Development and Execution program, the Utility Incentive program and
the Geothermal Program Office, among others.
[14] See 43 C.F.R. part 3200.
[15] See 43 C.F.R. § 3270.11.
[16] The one exception to this requirement is Alaska, which receives 90
percent. See 30 U.S.C. § 191.
[17] The Joint Financial Management Improvement Program is a joint
program of GAO, the Office of Management and Budget, the Office of
Personnel Management, and the Department of the Treasury.
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