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MINUTE ITEM

This Calendar Item No.-1.1-was a!)proved as Minu\e Item No. -12- by the S~~t~ Lands

17 1 3/22/81.i. P~.C !.~596 p~_c 4597 Small/ Herring/ '.!illa re

ComiJ!ission by a !/te J.fL ...3 -to v at its /~ 8L meeting.

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APPROVP.L OF SETTLE~IC~lT AC:-'F.E'.'E'l'f A~O ~OYALTY ACC0U~Tl~G p~ncfrn'~ES

STATE LANDS co~~ISS[O~

3ACKGR0l:~'l):

The State has previously is~ued two ~eocherma! leases to llni.on 0i 1 C0mpany, Thermal Power Com;n1'1y and :-la~r.a Geysers, Inc. The leases provide that the lessees shall pay the Scace a ro1alcy of ten percent (10~) of the grob& revenues received from thhe leases proviae that the lessees shall pay the State a royalty of ten percent (10~) of the gross ravenues received from the sale of steam.

A steam s~les co1tact was encere~ into between Paciflc Gus Anci £1ectric Company an~ th.e lessees. Th~se contracts were previously approved by che Commlssion. Pursuant to paragraph 10 of the steam sales contracts, the lessees 3re paid for steam on ~he basis of net kilowa:t hours proauced by ':he electr:i cal 3enerati1 .. : plants. The steam sales contracts provide ~hat the lessees are obligated to dispose of effluent produced from steam condensation and provides add5tional conside~acion of a 0.5 mill oer net kilowatt hour of electrical production as tong as the lessees are d5sposin3 cf the effluent.

In 1S79, Public Resources Code Sec~ion 6921 was amenaea co al.low t;he State to share in any profits which are reaU.zed frv.11 ~f fluent re-injection ope rat'! ons.

-1-A ., ,~

s 4 , .. /S:-c-cN..SNOAR PAO£ ---S-S O

Ml~JT~ PAGI!

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CALE~DAR ITE~ NO •

Th.::! auciit staff completed an aucU t wrir.:ti Jndicatea that rhe ~essees coulC: owe Lhe State for r.1oney received pursuan:: :o ':lte 0. 5 mi 1_ i_ payment. T1'e 1..e sse•.:s \1ere bi!. :ec and a c:~pute aro~e rezardin~ the ~nterprer~tion oi t~e s~les con~ract an~ PRC S9c~ion 6921.

In order to avoid costly and time-consuming l~~i?ation concerning complex legal issues, staff comreenced settlement ne~otiacions with t~e lessees and have reache~ a oropose~ set:lement which will avojd the need for expens;v~ !itigation.

The sectlement essentially provides as follows:

2.

The lessees will pay the Sta~e ~560,000.

For years commencing January 1, 1q7q, the parties have develooed what ls essentia\ly a net profi~s ac~ountln~ agreement (see Exhibit 11 ~ 11 ). Revenue anG excenses for effluent disposal operations shall be deter~ine~ in accordance with these procedures.

Pursuant to the Commission's ~ele~ation of au:horicv anci the Seate CEQA Guicieli nes ( 14·- Cal. Acm. Col~e 15061), the staff h~s <leterffiined rhat this activ~ty is ~xernpt from :he reouLremencs of the CalLfornia 2nv:ronc~ntal QuaJ.U:v .\ct ·ccEOA) because the act!vitv is not a "oroiect" as def"Lned by CEQA and the State CEC'~A Gu;de:ines. . .

Authority: PRC 21065 ana 14 Cal. Acim. 15373.

E'<!-!t13lTS: A. Area "ap.

13. Settlement A,r:r~ement anci Accoun~i.ng Procec.ures.

THE STAFF BELIEVES THAT THIS SETTLE'.'-!C:\~T AGRE~'tE::T rs I~~ THE BEST I>!TEP.E'.STS OF THE STf.TE AND REC\''!\lE~7DS Tl-!AT T~lS cn~i'!ISSIO~~:

1. FH!D Tl-lAT THC ACTI"ITY IS EXEi-1PT Fi.C1:1 TP~ R.EC'-'lRE~!E:!TS OF THE CA LIF')R~lIA E!rnIRm~~·;E~!T.A.L ClJAl :.TY .-\CT (CE0A) PU?.SUA~-!T TO ll; CAL. AIYI. CODE 1SO'Jl, ~ECACSE 'PF .. \CTIVITY rs ~!OT A PROJECT AS DEFrNED ~y P' .. C 21065 AYD 1.::. CAL. Ami. CODE 15378.

2. APP?<WF. T'-iE PROPOSCD St.TTLE'.'.P~'f AG~CE'.·IE"T A:·D .!.(C')IJ:,!TE\G PiWCEf'URES ATTACHED AS :::XHIPiIT "'V', AND A''T'..l•li:'.I?E EXEC1!Tl0'!

OF Tl-IE AGr:EE! !£~lT .

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EXHIBIT "B"

SETTLF:!MENT AND ACCOUNTING AGREEMENT

FOR CONSIDERATION ON REVENUE

RECEIVED FOR EFFLUENT DISPOSAL OPERATIONS

This Agreement is entered into thi.;; day of

March, 1984 by and betwet:n the California State Lands

Commission (hereinafter referred to as "Lessor") and Union Oil

Company of California, Magma Geysers, Inc. and Thermal Power

Company, (hereinafter referred to jointly as "Less~es");

W I T N E S S E T H

WHEREAS, pursuant to the provisions of Division 6 of

the California Public Resources Code, Lessor and Lessees

entered into, effective May :?7, 1971, two geothermal leases

known as PRC 4596 and 4597 ,hereinafter: referred to as "the

leases"); and

WHEREAS, Lessees each have individual steam sales

contracts ~hereinafter referred to as "Sales Contracts") with

Pacific Gas and Electric Company (hereinafter referred to as

II PG&E") covering the geothermal re~ources developed and

produced from the aforesaid leases, said Sales Contracts

being, in pertinent ?art, identical ~s to the terms and

conditions relevant to this agreement; ~nd

78 l -----· _..._ss ....... "y ..

...

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WHEREAS, California Public Resources Code Section

6'21, as ame~ded, was enacted effective January i: 1979,

empowering the Commission tc charge a considera~ion fcx

effluent disposal operations conducted by Lessees on State

1 eases on the cond it io;1 that the Lessees reali ZP. a profit on

said d;s?os~l operations and that said consideration could not

excee<~ thii! net profits or royal': ies payable under the lease;

and

WHEREAS, the leases provide a royalty of ten percent

(10%) on "gross reve11ues" rP.ceived from t:-ie "sale" of steam

produced fcom the leases; anJ

WHEREAS, the Sales Contracts impose an ob] igation

upon Lassees to jispnse of effluent resulting from steam con-

densation and provides additiona1 consideration on the

condition that said effluent disposal obligation be com9lied

with by Lesse~s; and

WHEREAS, the additional consideration received by

Lessees for P.tfluent disposal is treated separately from the

steam salE's price, though both are calculated on the basis of

net kilowatt hours; and

Ir-------,:;-, 9 f C<\li;.l!OAn PAuE:

ff.l>PJT'.! PAQI! 5 5 9 ) L.---------=-1

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WHEREAS, Lessees ~ave developed and continue to

develop a f ield-1:1ide integated effluent d~sposal system

designed to efficiently re inject effluent in a ;nanne r that

both properly disposes of effluent waste, possibly stimulating to said

the geothermal resevoir(s) and avoids damage

resevoir(s); and

WHEREAS, a dispute has arisen between Lessor and

Lessees as to the proper operation and application of CPRC

Sect ion 6921, the Sa.les Contracts, and a mutually acceptable

accounting procedure to determine whether a profit is actually

being realized by Lessees for effluent disposal; and

WHEREAS, the Lessor and Lessees acknowledge that the

dispute concernii19 the above-noted issues are of substantial

complexity, and unless resolved, would result in costly and

time-consuming 1 it iga ti on which Lessor and Lessees desire to

avoid;

NOW THEREFORE? in consideration of the facts stated

above, and the ~utual covenants contained hereinbelow, the

Les?or and Lessees hereby agree to resolve the above-stated

dispute as follows:

\.: ~U!.J'.)AR IW",E

!>li.'IUn' PAO!

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1. Lessor agrees that consideration received by

Lessees for effluent disposal shall not be

considered or treated as income subject to the

royalty provisions of the leases.

2. In addition, as consideration for the covenants

contained herein, Lessees shall, within fifteen (15)

days of execution of this agreement by all parties

and approval by the State Lands Commission, pay

Lessor a one-time-only lump sum of Five Hundred and

Forty Thousand dollars and No Cents ($540,000) .

3. For calendar years commencing January 1, 1979,

the Lessor and Lessees further agree i.1 order to

determine future consideration to be paid to Lessor,

that costs associated with effluent disposal shall

be determined in accordance with an Accounting Pro-

cedure, attached hereto and incorporated by

reference as though fully set out herein.

4. The Accounting Procedure accounts for costs and

revenues from all electrical generating plants

incorpora tea in the Lessees' ef fluent disposal

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system. Said :,ccounting Procedure fer expenses and

t evenue relating to effluent disposal is not

intended by the Lessor or Lessees to be inconsist~nt

with, nor shall be construed to be inconsistent

with, the prov is ions of Puhlic Resources Code

Section 6921. Because of the integrated effluent

disposal system, revenue and expenses associated

with effluent disposal operations not on the leases

shall be considered revenue and expenses for the

purpose of calculating proceeds attributable to

effluent disposal operations on the leas1:s to which

the percentage factor. set out in Exhibit A shall

apply.

5. The covenants and payments made pursuant to this

Agreement are ~onditioned upon the agre~ment by the

Parties hereto that all disputes concerning proper

calculation of consideratio11 to be paid by Lessee

for efflulent rUsposal income are herein resolved,

and that no additional consideration, amount, levy,

percentage, or royalty shall be applied, either

1~ ... 'tl!..~(.).\:'1 ~~'··~ ! j·\1l~U~1! .=AO!! t-.~~~~~~~~~~..J

82 562

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Date:

Date:

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retroactively or prospectively, concerning effluent

disposal income received by Lessees pursuant to said

Sales Contracts, except as herein provided.

Date of Commission Authorization

Executive Officer State Lands Commission

Union Oil Company of California

Date: ___ _ Thermal Power Company

Magma Geysers, Inc.

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Accounting Procedure attached to and

made a par.t of the SettlernP,nt and Accounting

Agreement for Royalty Payments,

State Geothermal Leases PRC's 4596 and 4597

Accounting Procedures

Effluent Disposal Operations

State Leases PRC's 4596.2 and 4597.2

General Provisons

A. Definitions:

"Leases" or "State Leases" shall mean the geothermal

leases issued by the State Lands Commission, and

known as PRC 4596 and PRC 4597.

"Commission" shall mean the California State Lands

Commission.

11 Lessees" shall menn the lessees of the Lease and

their respective heirs, successors, and assigns .

ICAL!ill.'C.tfl f'I\~ 1~~~1CPAG!

84 I

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"Effluent" shall mean the condensable water and other

chemicals contained therein resulting from the condensation of steam.

"Noneffluent" shall mean freshwater, runnoff water, or

other fluids not resulting from the condensation of

steam.

"Sta~e steam" shall mean steam produced from the Leases.

"State Effluent Disposal Account" shall mean the account

•• used to account for revenue received pur.suant to

i?aragraph 10 {c) of the P. G. Ft E. ~team sales contract

and to which capital costs, special we.U repairs, direct

expenses, indirect expenses and applicable overhead are

debited as provided in these accounting procedures.

"Effluent Disposal Operations" shall mean those operations necessary for the disposal of effluent.

"Effluent Disposal Facilit:i~s" include injection wells,

pumps, effluent pipes and lines, and pumps.

"First Level Supervisors" shall mean those employees

whos~ primary function is the direct £Upervisi~n of other

employees and/or contract labor directly employed in

Effluent Disposal Operations.

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"Technical Employees" shall mean those employees having

special and sp~cific engineering, geological or other

professional skills, and whose primary function is the

handling of specific operating conditions and p~oblems

for the benefi' of Effluent Disposal Operations.

"Personal Expenses" shall mean travel and other

reasonable reimbursable e~penses of Lessee's employees

necessary for Effluent Dis!?osal Operations attributable

to steam produced from the leases.

"Material" shall mean personal prop~rty, equipment or

supplies acquired 'or held for use for Effluent Disposal

Operations.

"Controllable Material" shall mean Mate rial which a' the

time is so classified in a list agreed upon by the

Lessees and State.

B. Purpose and Creation of Accounts

Lessees shall establish a special internal account

concerning Effluent Disposal Operations called the "State

Lease Effluent Disposal Account", (hereinafter sometimes

referred to in these procedures as the "Account").

I CAl,~'OhR fJ1\GF, .::; 6 l :~~:!_ __ s_6_s __ ---~

II.

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Ml\NAGEMEN'T \'>F ACCOUNTS

A. Allowabl~ costs as provided in these procedures

below, shall be ...:ebi ted to th~ State Effluent Disposal

Account.

B. All revenue received by lessees from P.G.&E.

pursu . .mt to paragraph 10 (c) of the sales contract shall

o<.: credited to the Account regardless of the location of

the electrical generating plant from which such revenu:,

was received .

c. After posting items ~ and B above, the credit

balance if any, of the Account shall be determined. The

credit balance remaining in the State Effluent Disposal

Account will represent the net prof its resulting from

Effluent Disposal Operations. The debit balance in the

State Effluent Disposal Account reflects an ahsen•::e of

profit (loss condition) in the conduct of Effluent

Disposal Operations and shall be carried over to the

following year. The State share shall be computed at the

end of each year and th3.t is the amount that will be

carried foreward.

o. The credit balance to be allocated to the State

leases shall be determined by dividing the total kilowatt

o7 56.t._

!C,\LENOl>A Pl\0€

IM•NUTI! PAGI! • ~~~~~~~---l

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hours of the electrical genera ting plan ts ser•1 ing as the

basis of revenue pursuant to II B. above, into the total

kilowatt hours ~ttributable to State steam delivered from

the leases. The amount owing as additional royalty to

the State shall be the royalty i:.ate percentage provided

in the leases multiplied by the allocated credit balance

in the State Effluent Disposal Account.

E. The amount owing as additional royalty to the State

shall be paid once a year by March 20th of the following

calendar year and shall b~ based on costs paid and

revenue r~~ceived as of December 31st for the pl'evious

year for wt1ich paym.ent is to !:le made.

F. Interest and Penalty

1. Any payment which is not paid when due shall

bear interest from its due date unti.l paid at the

rate of one and one-half percent (1 1/2%) per month

of the unpaid balance.

2. Any payment which is not paid when due shall be

subject to a penalty of five percent (5%) of the

past-due a:nount .

3. Past-due payments include, but are not limited

to, amounts which ware not paid bFause of less¥!~' I C:.t.£.'IOAA ?/,GE v vg MINUTI! PhGf! ~· 8

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unreasonable use of inn1.:curate information,

unreasonable errors in the computations themselves,

and improper or unreasonable allocation of costs to

effluent disposal operations.

III. ADJUSTMENTS

Submission of bills, cost recordu, and other .'icr.ount i.ng

information related to effluent disposal operations ~:hall not

prejudice the right of the State to protest Qr quest.ion the

correctness thei:-eof; provided, however, all bills, stateiner.ts,

~nd ot:hi:r accounting records submitted to the St~te by I.essee

durins1 any calendar yec1r shall conclusively be presumed ::o be

true and correct after twenty-four (24) months fol.lowing the

end of. any such calendar year, unless within the twenty-fouc

{24) month period the State takes written exception thereto

and makes claim on Lessee for adjustment or the State is

auditing the period in qu,estion. No adjustment favorable to

Lessea shall be made unlesa it is mad~ within the same

prescribed period. The provisic.ns of this paragraph shall :'lot

prevent adjustments resulting trom a physical inventory of

Controllable Material as provide: for in Section VII or fraud.

IV . AUDIT

Lessees shall maintaL. all records for the Commission to

audit for a period cif six (6) The r::;tate shal~.v9° C..'.LENo.r.r: PAGf C

l~'IUUTEPAG~~ --~~-h-Q-.=== years.

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Lessees thirty (30) days' notice of a proposed audit. Audits

shall occur no m~re frequently than once a year.

V. ALf )WABLE CHARGES

costs are allowable only for Effluent Disposal Operations

as follows:

A. Direct expense~:

Lessees shall debit the Sta'.e E.ffluent Disposal Account

with the items specified in Paragraph 1~9 bele>w and

~llocated in accordance with Section c, below .

l. Labor.

2 •

a. Salaries and wages of Lessees' [ield

employees directly employed in the conduct of

Effluent Disposal Operations.

b. Salaries of First Level Supervisors ir. th,<?

field.

c. Salaries and wagt)s of Technical Employees,

te11porarily assigned to and <Erectly employed

in the conduct of Effluent Disposal Operations.

Lessees' cost of holiday, vncation, sickness

lcALEHO..\!:: PAGE

h.m.;t.111! PAGI! :

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ana dis.:ibili ty and other customary allowances paid

to employees whose salaries and wages are ~hargeable

to the Effluent Disposal Account under Paragrap': A

of this Section v. Such costs under this P~ragraph

2 may be charged on a "when and as f)aid basis" or by

"percentaqe assessment" on the amount of salaries

and wages chargeable to the Effluent Disposal

Operations under Paragraph l of this Section V. If

percentage assessment is used, the ra~e shall be

based on the Lesse~s' cost experience.

3. Expenditures or contr.:.butions made pursuant to

assessments imposed by governmental a11':hori ty ·,.;11j ::i

are applicable to Lessees 1 costs chargE:able to the

Effluent Disposal Account under Paragraphs 1 and 2

of this Section.

4. Personal Expenses specifically incur:ed by

those employees who.se snla r ies and wages ar:e

chargeable to the Effluent Disposal Account under

Paragraph l of this Section V and for which expenses

the employees are reimbursed under Lessees' usual

practice.

5. Employee Benefits:

Lessees' curren~ costs of established plans for

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employees' group life insurance, hospitalization,

pen::: ion, retirement, stock purcn~ ,e, thrift, bonu•.;,

and other benefit plans of a li~c nature, applicable

to Les.~~es' labor cost chargeable to Effluent

Disposal Operations under Para0raphs l and 2 of this

Section v. Costs und~r this paragraph may be

charged by "percentage assessment" on the amount of

salari~s and wages chargeable to the Account and

shall be based upon operators cost experience.

6. Material:

MaLerial purchased o: furnished by Lessees for use

iP Effluent Disposal Operations.

!>1a terial shall be purchased for or trans ft:r red co

the Effluent Disposal Operations as may be required

and is reasonably practical and consistent with

efficient and economical operations. •rhe

accumulation of surplus stocks shall be avoided.

7. Transportation:

Transport.ation or employees and Matedal necessary

J:or Effluent Disposal Operations but subject to the

following limitationu:

a. If Material is moved for the benefit Gf

Efflue:nt Disposal Operation$ from the Lessee's

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warehouse or other propert;ies, no chargG shall

b~ made to th.:: Account for a distance greater

tban the distance from the nearest reli -:.ble

supply store, recognized ~arge terminal, or

rai.Lway receiving point wh-ere like material is

normally available, unless agreed to by the

Partie5.

b. If surplus Material is move~ to Lessees'

warehouse or other storage point, no charge

shall be made to the Account for a dis tClnce

• greater than the distance to lhe nearest

celi;ole supply store, recognized barge

terminal, or railway receiving point un_ 0s

agreed to by the Parties. ~:o cbarge shall b1::

made to the Account for moving Material to

other properties belonging to r.essees, unless

agr~ed to by the Parties.

c. In the application of subpa.ographs a and b

above, there shall :ie no equali.?ation of actual

gross trucking cost of $200 or less excluding

accessorial charges.

• Ser:•1 ices:

The cost of c.:>ntract services, equipment and

MINUTI! PAGf 573

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utilities provided by outside sourcesr except

services otherwise excludtd by this paragraph or

Section VI. The cost of ?rof ession&l consultant

services and car.tract sc.rvices of technical

personnel dHectly engaged in E -,, r 1ent Disposal

Of~rations if such charges are excluded from the

Overhead rates. The cos: of professional consultant

services or contract services of technical personnel

not: directly engaged in Effluent Disposal Operations

shall not be charged to the Account unless

previously agreed to by the State and Lessees .

9. Other Expenditures:

Any other e>1.penditure not covered or ciealt with in

the f,:.. ~going provisions of this Section V.A., and

wh:ch is incurred by the lessees in the necessary

and proper conduct of the Effluent Disposal

Operations.

B. Indirect Expense

District Office:

The portion of the costs necessary in maintaining and

operati~g the district off ice, including the salaries ~nd

expenses of distr il.!t manager, production and drU.lrng

superintendents, off ice clerk~·, and other employees

loca t- ~a in ':he district, performing district functions r-·----...,_ __ /c~~1 NCA: S· 4 .\.llNUic rAG~ 5 z~_ '----·~-------------.!t-=::J

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for the benef: it of State Ef .nuent Disposal Operations.

Such portion of costs is to be determined ~asen upon time

spent to the benefit of the Effluent Disposal Operations

as shown on indivdual employee time allocation rep0rts.

c. ~~~: l. Overhead-Drilling and Producing Operations

a. A charge shall be made to cover any port ion

of salaries and wages, applicable payroll

burden and expenses of any management,

supervi.sory, administrative, accounting,

purchasing, ta:-c, insurance, stores, technical,

cl~rical and other employees and officers

indirectl~ serving Effluent Disposal Operations

whose salaries, wages and expenses a re not a

chargeable cost under Section V A. and B.:

also, any portion of the expense of ~3intaining

and operating al\ offices and facilities and

other similar facili t-.ies not required

exclusivel~ Eor Effluent Disposal Operations

with the exception of the portion of the

District Octic.~ costs and r_ • rical costs which

vill be charged directly under Section V,

paragraph B above, and shall be the sum of a

percentage of development and operating charges

as determined in paragraph 2 of this Section D.

\~~!.Et~;,.\~ PAC€

\;.11NUT~ ?,l.G! ,~:__--------------'

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b. The salaries, wages and Personal Expenses oE

Technical employees temporarily assigned to and

e:mployees a i rectly employed on or in the

concuct of Effluent Disposal Operations and/or

the cost of professi~nal consultant services

and contract services of technical personnel

directly employed in tl.!1 cc lduct of Effluent

Disposal Operations ~hall not be covered by the

Overhead rates.

2. Overhead-Percentage Basis

a. Not withstanding that the actual overhead

may be greater or less, Lessee shall charge

Effluent Disposal Operations at the following

rates:

(1) Development:.

Four percent (4%) of the capitalized cost of

development of the Effluent Disposal

Facililies shall be debited to the State

Effluent Disposal Account. This i:-ate shall

also be applicable to special well repairs

under paragraph E. 4. of these procedures .

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(2) Operating

Ten Percent (10%) of tl.,e cost of conducting

Effluent Disposal Opecations exclusive of

costs provided under Section V a., all

salvage credits and all taxes and

assessments which are levied, assessed and

paid upon Effluent Disposal Facilities.

(3) Ecological and Environmental

Ten Percent (10%) of tile costs incurred with

respect to requirements, whether statutory

or other~ise, relating to the ec0lo9y of t~e

environment in the project area and incurred

in the conduct of Effluent Disposal

Ope rn t ions.

b. Application of Overhead - P.:n.1::.-:ta.ge Ba,sis

shall be as follows:

For the purpose of determining charges under

paragraph 2 of this Section V.D., and if such

costs are allowed by section E. 1 of these

procedures development shall include all costs

in connection with the drilling, redrilling,

~eepening or any remedial operations on any or

all wells involving the use vi: drilling crew

and equ ipr.1ent; also, prelim inar -~Pf:~ndi tu res 97 5/7

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nece ssct ry in preparation for drilling and

expenditures incurred in a~=~~Jning when the

well is not completecl and original cost of

c:onstruct ion or install.a ti on of f bed assets,

the expansion of f ixe6 assets and any other

project clearly dis0ernible as a fixed asset.

All other costs shall be considered

Operating.

E. Capital Investment:

Lessees shall debit tnc Account with the items specified

in Section 1 and 2 .

1. Injection Wells:

a. The full costs are chargeable to the

Account for exploratory or development wells

which are dry, and converted to injection wells

within five (5) years of comFletion, and wells

in it iall~ 1 cir illY.!d only for inject ion service.

Such co:;ts shall be charged in t~c ye 1r of

conversion.

b. Only the conversion costs are charge~ble to

the Aci::ount for production wells which c?.re

convertt•d to inject ion wells, and explora t.ory

or development wells co~verted later than Eive

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{5) year ar~e: suspen~1on oc !bandonment.

2. Other Investments:

?.l. Invest1'1ents made to construct pipelines,

i?Urchc-se and/or install pum?s, construct

effluent disposal facilities, and o=her charges

necessary for the maintenance of such

facililie~, shall be charged to th~ Account.

3. ~pecial Well repair costs:

Well repair costs for injection wells are t6 be

charged to the Account as incurred.

4. Property 1axes:

Property taxes attributable to the improve~~nts

represented by waste water disposal operations shall

be allowable and debited to the account. However.,

any inerease in prop~rty taxes created by any

purchase, sale, oc other acquisition of an interest

in the leases are not chargeable

VI. NONCHARGEABLE COSTS

Thr following costs shall not be c~arged as Direct or Indirect

expenses or Capital investments:

A.

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Direct and Indirect expenses and ~api~el investments

incurred for the disposal of non-efflu~nt shall iot

be ~harged to the Account.

B. Undocumeiited expenses or ,.api tal investmei.ts, or

documented expenses or ca~1i tal '"'Vestn:ents which do

no\ benefit Effluent Disposal rations are not chargeable.

c. Interest on investment, or capital recovery.

D. The following legal exp~nses:

l. The costs of litigation against th.e State of

California.

2. Fines er penalties levied by any goverr.men tal

agency exc0pt when the actions subject tc-, fine or

penalty are performed at the crder of the Executive

Officer.

3. Settlement of claims or other litiration

re'3ulting from violation of regulatory requirements

or gross •.1egl igence or will full misconduct; an,:i

4. The costs of the Lessees' legal staft or

expense of outsiJe attorneys.

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E. The Lessees' o~n cost of administering employee

F.

benefit plans.

,Research and development costs, except that this

type of cost shall not be construed to cover the

resolution of specific i:.echnical problems

confronting Effluent Disp0sal Operations, specific

engineering design problems related to equipment or

facilities required for Effluent Disposal

Operations, or services requited to comply wi~~

federal, stat~ and local laws or regulations.

VII. INVENTORIES

The Lessees shall maintain detc:iiled records of

Controllable Material.

l. Perio6f~ Inventories, Notice and Reoresentation:

At reasonable intervals, Inventories shall be taken

by Lessees of the Controllable Material attributable

to effluent disposal operations. Writ ten not ice of

intention to tak~ inventory shall be given the State

cy Lessees at least thirty (30) days before any

i~ventory is to begin so that the State may be

represented when any inventory is taken. Failure of

r~~tPA~ f'<!l'!IJ?;: P.~Of!

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the Stai-e to !:le represented at an inventory shall

bind the State to accept the inventvry taken by

Lessees.

2. Reconciliation and Adju.~tment of Inventorier..:

Reconciliation of a physical inventory shall be

made, and a list of overages and shortages s~all be

furnished to the State within six months following

the taking of any inventory. Inventory adjustments

shall be made by Lessees with the Account for

overages .:ind shortages, but Lessees shall be held

accountable only for shortages due to lack of

reasonable diligence.

3. Special Inventories:

Special Inventories may be taken whenever there is

any sale or change of interest in the L~ases. In

such cases, both the seller and the purchaser shall

be governed by such inventory.

4. Expense of Conducting Periodic Inventories:

The expense of conducting periodic Inventories shall

not be charged to the State Effluent Disposal

Account unless agreed to by tne Parties.

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