Fool Me Once–Energy Legislation Should Include Royalty System for Wind and Solar Projects on Taxpayer Lands

Energy & Natural Resources,
Jun 21, 2010  | 20 min read | Print Article

The Gulf of Mexico oil spill has refocused Congress’ attention on energy and climate legislation. Senate Majority Leader Harry Reid (D-Nev.) has asked several committee chairmen to submit short-term measures in response to the spill to be rolled into an energy package in the coming weeks. President Obama spoke of the need to pass a comprehensive energy bill in his oval office address.

But while most of the attention during this larger energy and climate debate has focused mainly on a so-called cap-and-trade system for greenhouse gases, a small but critical piece of energy policy has been mostly invisible to the public: creating a system for collecting royalties on the potentially huge number of wind and solar facilities to be constructed on public lands in the coming years. Given the new emphasis on renewable energy, there is immense potential for development of wind and solar projects on public land, and royalties from these facilities could and should become an important revenue stream, in this time of exploding deficits.

Background:

The Obama Administration is beginning to process an enormous backlog of renewable energy applications the Bush Administration largely ignored because of its singular focus on fossil fuels. As a result, the Department of Interior is only now developing the policies that will govern where and how vast tracts of public lands are used. It is important at the outset of this process for the Obama Administration and Congress to send the correct price signals to private industry for use of public lands for new generation and transmission facilities to ensure responsible development as well as a fair return to taxpayers.

The Bureau of Land Management (BLM) has identified 31 renewable energy projects (14 solar, 7 wind, 3 geothermal, and 7 energy transmission) as likely to successfully complete full environmental analysis and public review by December, and put them on a ‘fast track’. These projects will have the cumulative potential to deliver 5,000 megawatts of renewable power, and BLM has committed to permitting a total of 9,000 megawatts of renewable power by the end of 2011, putting the agency on track to meet a Congressional target of 10,000 megawatts of new renewable power from public lands by 2015.

The Federal Land Policy and Management Act requires BLM to collect an annual rental payment for ROW authorizations on public lands. Right-of-way authorizations, however, are traditionally used by BLM to locate power lines, pipelines, and communications towers and lines on federal land. Unlike communication facilities, the federal land to be used for wind and solar power generation provides critical resource inputs that have additional value far in excess of basic rental fees charged for occupying the land.

Current law ties the agency’s hands in efforts to account for these critical resource inputs. The rental fee schedule announced last week for solar energy is a strong affirmation of the principle of fair return and a much-needed clarification of the terms for developing federal solar resources. Nevertheless, while the rental fee schedules in place for wind and solar attempt to account for critical resource inputs, they are unable to charge per unit of power produced, the most efficient method of capturing a fair return for taxpayers.

On June 16, BLM issued an Instruction Memorandum (IM) establishing fees for solar development on public lands, which includes a rental fee as well as an additional fee based on a percentage of generating capacity. BLM issued an IM in December 2008 that set fees for wind generation on public lands, which also includes a rental fee based on installed generation capacity. While these are good interim measures, Congress needs to give BLM the authority to create a permanent system for leasing public lands for renewable energy development and collecting royalties based on percentage of gross proceeds from the sale of electricity produced–at a rate that ensures a fair return to the public.

The more appropriate legal framework for conveying authorizations for commercial development of wind and solar power generation on public land is a system that competitively leases these inputs similar to the one used for oil and gas extraction. Congress must establish a competitive leasing system to replace the ROW authorizations currently used because competitive leasing can harness market forces to determine the value of the inputs found on the land. Congress also needs to give the BLM the authority to charge royalties for wind and solar development that ensures just compensation per unit of commodity produced.

As the percentage of renewable energy in our portfolio begins to grow rapidly, Congress needs to make sure the best systems are in place to avoid previous mistakes. Experience has shown how taxpayers can lose billions in foregone revenue from energy projects when government fails to ensure we receive a fair return for commercial development of public lands.

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Royalty System Examples and Legislative Activity

Oil and Gas. Oil and gas companies that drill offshore or on public lands are required to pay for both the occupancy of the land or water in rent, and for oil and gas they remove in the form of royalties. However, because of out-dated energy policy and mismanagement of royalty collection, oil and gas companies often pay little to no royalties to the owners of the resources—U.S. taxpayers. All publically owned leases are currently subject to royalty fees of 12.5 percent for onshore leases and 18.75 percent for all water depths, except for instances where royalty suspension, or “relief,” applies.

Oil and gas companies have accumulated a number of significant areas of royalty relief through acts of Congress over the last few years. The Energy Policy Act of 2005 extended royalty relief to all offshore oil drilling in shallow waters (less than 400 meters) with deep wells (more than 15,000 meters) as well as all wells 400 meters or deeper. As a result, the Interior Secretary does not have the authority to charge royalties for any of these leases that cover millions of acres of public land.

The 1995 Deep Water Royalty Relief Act (DWRRA) similarly provided royalty “relief,” up to certain production volumes, for leases sold from 1996-2000 in water 200 meters or deeper in the Gulf of Mexico. At the time the law was passed, oil and gas prices were only $18/barrel and royalty “relief” might have seemed like a small incentive for drilling. With current oil prices hovering near $80/barrel, DWRRA has become one of the biggest subsidies the oil and gas industries receive, potentially costing taxpayers in excess of $50 billion over the next 25 years.

Mining. The General Mining Law of 1872 is one of the worst examples of undervaluing public lands. Under the law, which is still in effect, billions of dollars of gold, uranium, silver, and copper are taken – royalty-free – from public lands each year.  Oil, gas and coal industries pay more than a 12 percent royalty, and they and the hardrock mining companies may pay even more when mining on private, state or tribal lands.  But under the 1872 law, federal lands are sold for no more than $5 an acre.  Not only have mining companies been able to gain title to land valued at tens of millions of dollars for as little as tens of thousands of dollars, but the land can be developed for other purposes, including commercial enterprises, such as condominiums, ski resorts and casinos.  The 1872 law also saddles taxpayers with the hefty clean-up costs of the toxic aftermath of mining operations.  Not only do American taxpayers underwrite the profits, but they are also forced to pay for the damages left behind – estimated to cost upwards of $50 billion.

Hydropower.Hydropower is an example of a location-based energy source that has been around long enough to provide some insight into establishing fair market value for the public land where these projects are sited. In 2003, the GAO reviewed the fees being collected by FERC, which is required by the Federal Power Act to issue licenses to private hydropower companies and administer and collect fees for the use of federal lands, similar to the process BLM is engaged in now with wind and solar. The GAO found that FERC was using ROW grants to convey land to private industry and charging companies a fixed rate per acre each year for use of the land. Although FERC agreed that energy companies should be charged the fair market value for use of the land, it had decided to use the fixed rate as means to avoid lawsuits from the industry.

In order to determine the fair market value of the land, GAO used a “net benefits analysis,” which estimates the difference between the value of the power produced and the cost to produce it. GAO estimated that FERC was undervaluing the land being used by private hydropower companies and was subsequently receiving less than 2 percent of the true fair market value in annual user fees, costing taxpayers hundreds of millions of dollars a year.

Grazing Fees.Efforts to protect the sustainability of western plains grazing lands date back to the Taylor Grazing Act of 1934, which sought to prevent overgrazing and the associated soil and watershed deterioration. More recently, the Federal Land Policy and Management Act (FLPMA) directed BLM to collect fair market value for public lands used for livestock grazing in order to prevent economic disruption and harm to the western livestock industry.

Under FLPMA, the primary purpose of the BLM grazing fee formula was to mirror the fees charged by private ranchers. The formula also included periodic adjustments to the grazing fees to reflect the costs of the ranching business by incorporating fluctuations in the beef cattle price and producer prices indexes. When the GAO studied the grazing fees in 2005, however, it found that the base price used in the grazing fee formula initially represented fair market value for most public grazing lands, but that the adjustments over time did not keep up with private fees. While the fee charged by BLM decreased by about 40 percent from $2.36 per animal unit month (AUM) in 1980 to $1.43 per AUM in 2004, private ranching fees increased by 78 percent over the same period, from $7.53 per AUM to $13.40 per AUM, according to GAO. Not surprisingly, BLM (and the Forest Service) spent $132.5 million to manage their grazing programs in FY2004 and collected only $17.5 million in receipts, effectively costing taxpayers $115 million in subsidies to cattle ranchers.

Using a formula to calculate user fees or royalty payments, like the grazing fee formula, can be an effective way to set a fair price for both the taxpayer and energy companies, provided it is regularly updated to reflect real market conditions.

Geothermal. Geothermal power is produced by capturing the energy from “hydrothermal convection” systems where water seeps into Earth’s crust, is heated up, and then rises and turns electric generators. Like wind and solar power, geothermal relies on a resource input from the land where the generator is located. The Energy Policy Act of 2005 (Sec. 224 (a) (1)) established a two-tiered system for collecting geothermal royalties from new leases on public land. The royalties are calculated on a percentage of gross proceeds from the sale of electricity, between 1 percent and 2.5 percent for the first 10 years of production and between 2 percent and 5 percent for every year after that. The goal of the tiered system was to keep initial royalty costs for new entrants relatively low in order to encourage private investment. Wind and solar systems similarly face high up-front costs, so phasing in royalty payments based on a fair market value of the land may be appropriate for these projects as well.

Current Legislative Activity

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A number of bills have also been introduced in the 111th Congress that would affect the leasing, inspection, enforcement or revenue collection for energy projects sited on public lands, including the following:

  • The Consolidated Land, Energy, and Aquatic Resources Act of 2009 would create a new office within the DOI, the Office of Federal Energy and Minerals Leasing (OFEML) that would be responsible for all leasing, inspection, enforcement and revenue collection for all energy activities, including oil, gas, and renewable, previously done by BLM, the U.S. Forest Service (USFS), and the Minerals and Management Service (MMS). This new office would be responsible for, among other things, establishing the fair market value for onshore lease sales for renewable energy projects. Sponsor: Rep. Nick J. Rahall (introduced 9/8/2009)
     
  • American Clean Energy Leadership Act of 2009 would create a pilot program that would identify 2 wind sites and 2 solar sites with high potential to test the level of industry interest in a competitive leasing program to replace the existing system of ROW grants used by BLM. Based on the results of the pilot program, the Secretary of Interior is then authorized to establish a leasing program for wind and solar power if it is considered in the public interest and provides an effective means of developing wind or solar energy on covered land. The bill would also prioritize development of Brownfield sites for renewable energy facilities and commission a study by National Academy of Sciences, in partnership with DOI and DOA, to study whether existing laws and regulations governing development of wind and solar energy projects on public land ensure a fair return to the tax payer, among other things. Sponsor: Sen. Jeff Bingaman (reported by committee 7/16/2009)
     
  • California Desert Protection Act of 2010 directs the Secretary of Interior to enter into a memorandum of understanding with the Secretary of Agriculture, the Chief of Engineers, and the Secretary of Defense to address processes for improving renewable energy project review; sets aggressive, perhaps unrealistic, timelines for environmental review of renewable energy projects under existing ROW system; clarifies basis for ROW rental fees and dedicates a portion of revenues to natural resource conservation programs including a new wildlife mitigation banking system; and processes for facilitating siting and permitting of renewable energy projects consistent with Federal and State climate and renewable energy goals. It would establish a single multiagency, joint process under which renewable energy projects would be reviewed and approved, including the establishment of schedules for projects and coordination with state governments. Sponsor: Sen. Dianne Feinstein (introduced 12/21/2009)

Going Forward

It is critical we do not create the same structure of incentives for the renewable energy industry as we have for oil, gas and mining companies. We need to learn from our mistakes and put in place a system that encourages responsible and sustainable development of our public land resources in ways that help us reduce our overall greenhouse gas emissions. Over the course of the coming months, TCS will be producing a series of studies and policy papers to inform the public and decision makers about the process of renewable energy development on public lands.

For more information, please contact Autumn Hanna at (202) 546-8500 x112 or autumn [at] taxpayer.net.

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