Geothermal Energy: Information on the Navy's Geothermal Program
Published: 2004-06-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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.
subsections: section_title: Background
paragraphs: 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.
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.
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.  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.
section_title: Navy’s Revenues from Geothermal Energy Production Averaged about $14.7 Million Annually between 1987 and 2003
paragraphs: 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.  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.
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.
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.  As shown in table 3, the Navy received the  majority of the conserved power credit funds between 2001 and 2003.
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.
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).
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.
section_title: Navy Has Spent Its Geothermal Revenues on Energy Conservation Programs and Oversight and Development of Geothermal Resources
paragraphs: 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.  The Navy had spent about  $182.3 million of its geothermal revenues and had an unspent balance of  about $14.7 million.
subsections: section_title: Navy Has Spent Most of Its Geothermal Revenues on Energy Conservation Programs
paragraphs: 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. 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.
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.
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.
section_title: Navy Has Also Spent Its Geothermal Revenues to Oversee the China Lake Project and to Develop New Geothermal Resources
paragraphs: 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.
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.
section_title: Navy’s Internal Energy Policy Board Oversees Budgeting of Most Geothermal Funds
paragraphs: 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. 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. 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. 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.
section_title: Navy’s Geothermal Program Differs from BLM’s Program in its Approach and in Some Key Contractual Provisions
paragraphs: 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.
subsections: section_title: Navy Makes Case-by-Case Decisions Regarding Geothermal Development; BLM Uses a Standard Approach
paragraphs: 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.
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.
section_title: Navy Invests in Initial Exploratory Work, and BLM Does Not
paragraphs: 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.
section_title: Navy Provides Closer and More Frequent Oversight of Its Geothermal Resources Than BLM Does
paragraphs: 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. 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.
section_title: Navy Does Not Share Its Geothermal Revenues with State Government, and BLM Does
paragraphs: 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.
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.
section_title: Navy’s Royalty Rates Are, on Average, Higher Than BLM’s Rates, and Contract Renewal Is at the Navy’s Discretion
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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 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.
section_title: Scope and Methodology
paragraphs: 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. 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.
section_title: Comments from the Bureau of Land Management
paragraphs: The following are GAO’s comments on three technical areas contained in  the Bureau of Land Management’s letter dated May 5, 2004.
subsections: section_title: GAO Comments
paragraphs: 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.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Nancy Crothers, Dan Haas,  Steve Secrist, Kathryn Supinski, and Barbara Timmerman made key  contributions to this report.
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