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on May 3, 1967, by the distinguished chairman of this subcommittee, Mr. Edmondson. My bill, H.R. 5778, similarly does not contain the provision which has been dubbed "grandfather clause." Undoubtedly, there are cogent arguments, both pro and con, with respect to the inclusion of a provision which permits prior holders of mineral leases or permits and of mining locations to convert them into geothermal leases. The Department of the Interior views this provision as a condonation of any attempt to acquire rights for geothermal steam under the guise of other leases or permits. However, I think much could be said in support of the provision which would permit those who were working geothermal deposits under other types of leases or claims before September 7, 1965, to convert their holdings to the new geothermal leases. It would seem that these people have acquired a certain equity, and that their investment of time and money in developing or in taking preliminary steps to develop geothermal resources ought to be protected. However, I do not wish to make it my purpose in appearing before this subcommittee to argue the relative merits of the grandfather clause and of the other provisions, the inclusion or exclusion of which may be the subject of a difference of opinion in the drafting of an acceptable bill. I am sure that the chairman and members of this subcommittee will give their most serious consideration to these areas of refinement in the proposed legislation.

My primary concern is to urge the early reporting of a bill which would provide for the development of geothermal steam as an additional source of power for this Nation.

This new source of power has already been successfully commercialized in Italy, Japan, New Zealand, Mexico, Russia, Iceland, and elsewhere.

In our own country, most of the Western States, including Hawaii, and Alaska, show potential for geothermal development. Up to the present time, however, our only significant use of geothermal steam is in the Salton Sea and the Geysers area of California. The Salton Sea field was accidentally discovered in 1962 in an area where only meager surface indications were present. At the Geysers, the steam is being used to power two turbines which produce 27,500 kilowatts of electricity.

The development of geothermal steam as a source of energy is not only sophisticated, but it also has a very practical basis as well. This Nation's future requirements for electric power staggers the imagination. The record of the past has shown that the use of electric power in this country doubles about every 10 years. There is every reason to believe that this demand for electric power is going to continue.

In 1964, the Federal Power Commission, using 1960 as the base year, predicted that the total electric energy requirements of the United States would double by 1970, would increase 166 percent by 1975, and that the increase would rise to 330 percent by 1980.

It is significant that in the Western States, where the country's greatest known geothermal potential exists, power needs by 1980 will be 45 percent greater than those of the remaining areas of the United States.

Geothermal, which literally means "earth heat," is not something new. As far back as the first century A.D. the fumaroles of Larderello,

Italy, were described in a poem by Lucretius Carus. But it was not until 1818 that man put the Larderello geothermal steam to use. He first used it to concentrate the boric acid which was found in the boiling solution. In 1904, the steam was first used for electric power. Prince Conti of Larderello used it to drive a dynamo which lighted five electric lamps. Today, the area has eight power stations with a combined production of more than 300,000 kilowatts. As a bonus, sulfur, boric acid, borax, carbon dioxide, boron carbide, and other minerals are extracted as byproducts of geothermal steam and brine.

It is also noteworthy that in Iceland, the Soviet Union, and elsewhere, geothermal energy has been used for community heating.

Perhaps the most ambitious project to tap subterranean heat as a new power source has been undertaken by Japan. Late in 1965, after 10 years of research and an investment of more than $5,600,000, Japan launched its first geothermal power station at Matsuo Village, in the mountainous northeastern region of that country. Japan, the world's third largest power consumer, uses 140 billion kilowatt-hours annually. By harnessing the earth's "natural boiler" the Japanese hope to cut power costs considerably.

There are several advantages in using geothermal resources:

1. It requires no fuel to generate the steam.

2. The source of power is not subject to sharp fluctuation. In hydroelectric operations, droughts and floods are often a problem. 3. Valuable byproducts can sometimes be recovered from the minerals in geothermal steam or brine.

4. The productive life of a steam well is fairly long. The estimated average is 10 to 20 years. Some wells in Italy have been producing for more than 30 years.

5. The amount of untapped heat energy in the earth is tremendous. The natural heat flow from five of the known U.S. hot spring areas totals about 70 trillion British thermal units a year. Mr. Chairman and members of the subcommittee, we ought not to let minor differences further delay action on this important aspect of natural resource utilization in the United States. The legislation presented in the various bills would enable the Federal Government, under clearly specified conditions, to lease geothermal steam resources for commercial development. In the event that additional safeguards are deemed necessary, then I would be the first to urge that such safeguards be adopted and the necessary legislation be speedily enacted in order that commercial geothermal development may proceed as rapidly as possible.

Thank you very much.

Mr. EDMONSON. Thank you for a very fine statement and particularly an explanation of the potential of geothermal steam.

Are there any questions?

Mr. BARING. We are very happy to have Mr. Matsunaga before this committee. I have never been in Hawaii but I know you have volcanoes and so forth. I wondered just what the potential was in Hawaii for geothermal steam?

Mr. MATSUNAGA. As the gentleman probably knows, about the only island which could afford some development in this area is the big island of Hawaii, which is 4,021 square miles in area and it has a national park there owned by the Federal Government with an area of 344 square miles. The various areas, depending on the volcanic ac

tivity, affording a possibility of development are within this national park area, mostly. The Federal area amounts to 201,000 acres and the non-Federal area amounts to 19,300 acres. But we did have some experiments conducted there. Four wells were dug. The last one appeared to be presenting some possibility and I was informed by Mr. Gillett this morning that the Geothermal Resources, Inc.-is that correct?

Mr. GILLETT. That is correct.

Mr. MATSUNAGA. That they except to go back to Hawaii to conduct further experiments. I am particularly interested in this because today Hawaii_pays the highest, or one of the highest, prices for electric power. For example, we pay $8.82 per 250 kilowatt-hours as compared to the national average of $7.43 and as compared to only $4.81 in Tennessee and the State of Washington. So we pay just about double what the people pay for power in the State of Washington and in the State of Tennessee. This is one of the reasons why we are anxious to see that some development is made possible through the adoption of this legislation.

Mr. EDMONDSON. Any further questions?

Mr. BARING. No. I am probably the only Congressman who has never gone to Hawaii, but some day I will.

Mr. MATSUNAGA. You are certainly most welcome to come to Hawaii and I think you will agree with me--I may be prejudiced-that it is the most beautiful place on earth.

Mr. EDMONDSON. Any further questions?

Mr. HOSMER. No questions, but I want to welcome Mr. Matsunaga and quarrel with him only in that I think he is an expert on this matter from the contents of his very excellent statement.

Mr. MATSUNAGA. Thank you very much.

Mr. EDMONDSON. Any other questions?

Thank you very much, Congressman Matsunaga.

We have here this morning Mr. Phillip S. Hughes, Deputy Director of the Bureau of the Budget, who was unable to complete his answers to questions the other day and several members indicated they had further questions. Mr. Hughes, we appreciate your coming back. I have no further questions myself. Does the gentleman from California, Mr. Johnson, have further questions of Mr. Hughes?

Mr. JOHNSON. Yes, I have, when the members of the subcommittee are through.

STATEMENT OF PHILLIP S. HUGHES, DEPUTY DIRECTOR, BUREAU OF THE BUDGET-Resumed

Mr. HOSMER. Mr. Hughes, I just wanted to cover two subjects with you briefly based on some of the material from which you testified. One is respecting the allegation in those materials that there was a "misuse" of the oil and gas and mining lease laws by these people who went in the steam areas and on advice of counsel sought either oil and gas or mineral leases of some kind. We went through this whole business last year and the upshot of it was that the Government lawyers, even, admitted this was a perfectly legal thing to do and pointed out that some companies did so on the advice of their counsel and other companies did not do so on the advice of their counsel, not from the standpoint it might be illegal but it might be futile. In that context

I want to ask you if you feel there is actually a misuse of these laws or whether the use was a legal use?

Mr. HUGHES. Mr. Hosmer, I would like to avoid, if I can, any allegations with respect to the persons who either did or did not enter Federal lands for mineral leasing or for purposes of applying for leases, as the case might be. It seems to me the question that confronts us at this point, as I see it, is not a legal or moral question as to the propriety of what was done. I think the Interior lawyers familiar with land laws can dicuss the question of the trespassing, or whatever it might be, much better than I can.

The question I have is not one of the legality of those actions at this time. The question is whether special rights should accrue to them as a consequence of the actions which they took, and on this point I feel, and the administration has expressed its view, that rights should not accrue, that whatever advantage was to be gained from the actions of these persons should be limited to the experience, the knowledge, the know-how, the technical competence which they achieved by virtue of their initiative. Therefore, their use of the mineral laws on the claims side or on the leasing side to achieve objectives in the geothermal area should not entitle them to special statutory rights.

Mr. HOSMER. The other question I have has to do with the grandfather provision in H.R. 715, which provides for competitive bidding but the grandfather holder would be able to meet the top bid and take the property on that basis. Of course we know that in this mineral and oil and gas leasing there are really two types of lessees. One type is the producer that really wants to go ahead and develop. The other type is the lease speculator. The allegation in the papers from which you testified was that allowing this preemption by the grandfather developer would involve the deterioration of the competitive bidding process. I wonder if you can give us any reasoning for that? Mr. HUGHES. I will try, Mr. Hosmer. I guess I should say at the outset the same question arose on the Senate side in hearings conducted by Senator Bible. He had suggested, I think, essentially the same thing, that the grandfather holder should have the right to meet the highest competitive bid, and he asked if that would be satisfactory as the administration saw it.

Certainly there is some improvement reflected in that over a straight grandfather right, as we see it, but, regretfully, we concluded that that kind of an arrangement would not adequately permit the normal competitive forces to operate. I think the two primary considerations that led us to this conclusion are, first, that the number of potential competitors is relatively few in these circumstances, and it is, therefore, important that so far as possible full competitive forces can apply. And second, and perhaps even more important, is the consideration that in these circumstances the incentives to the nongrandfather holders to bid in a truly competitive fashion are certainly reduced. The degree of reduction depends on the particulars of the circumstances, but if the nongrandfather holders know that no matter how they bid the grandfather holder will have a right, in effect, to outbid them, this is obviously discouraging from the standpoint of getting the best possible bidding to gain the Government its maximum return for the property.

It was these considerations that led us to this conclusion.

Mr. HOSMER. What do you conceive the bidding to be, on both a bonus and a royalty rate?

Mr. HUGHES. As I understand it-again, I am no expert on this but as I understand it the bidding would be the same as in other bid situations and would involve a royalty and a bonus in addition to the royalty. The succcessful bidder would be determined by the high bonus bid, as I understand it.

Mr. HOSMER. I attempted to get the Library of Congress to look into the psychology of competitive bidding where there is a preemptive opportunity, and in that vast compendium of knowledge, there seems to be no knowledge on this point. Therefore, I would like to ask you, in your allegation that the number of competitive bidders would be few, that is true with respect to actual competitive bidders that really want to produce, but what do we know about the speculators? This is a romantic area and the speculator may well be able to come in and overbid so that we might have quite a spirited competition despite the preemptive provision.

Mr. HUGHES. It is certainly conceivable, Mr. Hosmer. It would seem to me the speculator, particularly if he is a speculator without any know-how in the area, would be very much a gambler in this kind of a situation and I frankly don't know what incentives would be operative in these circumstanes. It seems to me that in the area where the unknowns are as significant as they are in this area, that the most earnest bidders, those most likely to bid most knowledgeably and productively, would be those with some knowledge in the field, and there are relatively few of these.

Mr. HOSMER. But the speculator is with us, he is a part of the American scene, and he is quite likely to be in this area. Would you grant that—and would you also grant that his bid may be an overbid, one that would not be the kind of a bid that the producer would want to bring up because it would be uneconomical to do so?

Mr. HUGHES. It certainly could be. I do not know whether as a matter of public policy he is the individual to encourage or not in this situation, but certainly it is possible that the speculative bidding could expand somewhat the scope of those who might bid.

Mr. HOSMER. And, of course, with a straightforward grandfather clause we would exclude the speculator?

Mr. HUGHES. That is right.

Mr. HOSMER. It would be limited to the highest bidder.

Mr. HUGHES. It would be limited to one person.

Mr. HOSMER. Could we say that the effect of a preemptive provision on the competitive bidding is itself a matter of speculation, judgment, and opinion, and we certainly could not at this point certify as to what the effect would be?

Mr. HUGHES. Well, with respect to the number of potential bidders, I think any conclusions I would be able to reach at this point would be speculative. It seems to me that, regardless of the number of bidders, the fact that the grandfather holder could ultimately outbid the other bidders could not but have a depressing effect on the bidders, no matter how many bidders there were.

Mr. HOSMER. Would you grant that there is any slight possibility at all that your estimate, as a practical matter, would turn out to be incorrect?

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