Summary of geothermal royalty issues

Abstract

DLNR staff has recommended a modified version of the current federal netback method used to calculate geothermal royalties. The principal differences between the DLNR staff method and the Minerals Management Service (MMS) Netback Method is that the staff method reduces the allowable rate of return on invested capital by 25%, and limits the amount of generation and transmission deductions allowed. Assuming that no minimum royalty payment is established by the Board of Land and Natural Resources (Board), the current MMS method when applied to the PGV project results in zero royalty payments for the first 11 years, as opposed to the staff method which forecasts initial royalty payments on the order of $450,000 per year. It would appear that, without any provision for a minimum payment, DLNR staff may have chosen to modify the federal method on the basis that zero royalty payments would be unacceptable. However, setting of an arbitrary reduction in the allowable rate of return and capping allowable deductions are both to the detriment of the developer. Whether DLNR staff made a serious "examination of such factors as the progress of geothermal development taking place in the state at the time of the app1icat ion, the technica1 and financia1 capabi1ities of the applicant to undertake the project, and the need for providing a financial incentive in order for the applicant to proceed" in selecting its recommended method is not known.