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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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