The structure of the geothermal industry through 1974
Creators: name: Montgomery, W. David
Publisher: name: California Institute of Technology
Year: 1975

description: The report is divided into four chapters which deal, respectively, with the technical and institutional conditions that shape geothermal development, the factors that determine the value of a geothermal lease, patterns of bidding for geothermal leases offered by the Federal government, and the emerging structure of the geothermal industry. 

The economically most important use of geothermal energy is central station electricity generation. That process is characterized by uncertainty, indivisibilities, and the need for coordinated investment planning between steam developers and power plant owners. The process will be affected by rate regulation of electric utilities and by land-use regulations, especially those affecting Federal lands. 

The value of a geothermal lease will be determined by conditions on three markets: the regulated market in which utilities sell electricity, the complex market in which a small number of utilities buy steam from a potentially large number of suppliers, and the market in which suppliers purchase land rights. If all markets were perfectly competitive, a geothermal lease would sell for the capitalized value of the stream of economic rents generated by the resource. Market power held by some participants in those markets could reduce the rents actually accruing to landowners. Based on 1970 cost estimates, estimates are made of the value of a lease at the Geysers under competitive conditions and under actual selling prices of geothermal leases. The values are sensitive to tax laws and to the rate of return required. 

Bids on Federal leases are analyzed to find a measure of the amount being paid for geothermal leases at the Geysers, which is compared to the values predicted under different market conditions. Difficulties of interpreting this comparison due to the nature of competitive bidding processes are also discussed. In addition, different patterns of bidding behavior among types of geothermal resource areas and among types of bidders are identified. 

In the fourth chapter, some fragmentary data on ownership of geothermal leases are assembled to give a preliminary estimate of concentration ratios in geothermal energy. Factors that could explain the apparently high concentration ratios are suggested. 

The final chapter is a summary of conclusions and recommendations for further research.
description: © 1975 Supported by Energy Research and Development Administration grant ERDA-SAN No. AT(04-3)-1086; formerly NSF AER 75-01748. 

I am indebted to Martin Goldsmith, Roger Noll and James Quirk of Caltech for their comments and suggestions on this manuscript. When I liked their wording better than mine, I unabashedly adopted it, but I tried to be even-handed by arbitrarily ignoring other suggestions. Custom requires, however, that I indicate my full responsibility for errors and omissions. Christopher Stone of the USC Law Center kindly invited me to a conference on Geothermal Energy and the Law, which gave me invaluable background for this study. He and his colleague, Jack McNamara, have also provided me with helpful ideas and discussions. Finally, my thanks to Nora Fort of EQL for her toleration and fast typing.