United States Court of Appeals,
Fifth Circuit.
No. 93-1377.
PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellant,
v.
Gary JOHNSON, Area Manager, Dallas Area Compliance Office,
Minerals Management Service, et al., Defendants-Appellees.
ATLANTIC RICHFIELD COMPANY, Plaintiff-Appellant,
v.
Bruce BABBITT, Secretary of Department of Interior, et al.,
Defendants-Appellees.
PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellant,
v.
Gary JOHNSON, Area Manager, Dallas Area Compliance Office,
Minerals Management Service, et al., Defendants-Appellees.
PHILLIPS PETROLEUM COMPANY, Plaintiff-Appellant,
v.
Gary JOHNSON, Area Manager, Dallas Area Compliance Office,
Minerals Management Service, et al., Defendants-Appellees.
June 10, 1994.
Appeals from the United States District Court for the Northern
District of Texas.
Before SMITH and BARKSDALE, Circuit Judges, WALTER,* District
Judge.
JERRY E. SMITH, Circuit Judge:
In this consolidated appeal, plaintiffs Phillips Petroleum
Company ("Phillips") and Atlantic Richfield Company ("Arco") appeal
*
District Judge of the Western District of Louisiana,
sitting by designation.
1
a summary judgment. Phillips and Arco contend that (1) the
six-year limitations period of 28 U.S.C. § 2415(a) barred the
administrative order issued by Minerals Management Service ("MMS")
of the Department of Interior ("DOI") requiring the recalculation
and payment of additional oil and gas royalties based upon an
unpublished MMS royalty-valuation procedure (the "Procedure
Paper"); (2) defendants failed properly to initiate an audit
pursuant to the Federal Oil and Gas Royalty Management Act
("FOGRMA"), 30 U.S.C. §§ 1701-1757; and (3) MMS promulgated the
Procedure Paper without notice and comment required under the
Administrative Procedure Act of 1982 ("APA"), 5 U.S.C. §§ 552, 553.
Phillips further asserts that defendants failed to comply with the
Paperwork Reduction Act, 44 U.S.C. §§ 3501-3520. Concluding that
MMS promulgated a substantive rule without notice and comment, we
reverse.
I.
A.
DOI is responsible for issuing and administering oil and gas
leases for federal lands. 30 U.S.C. §§ 181, 223-237. FOGRMA
directs the Secretary of Interior (the "Secretary") to establish "a
comprehensive inspection, collection and fiscal and production
accounting and auditing system to provide the capability to
accurately determine oil and gas royalties, interest, fines,
penalties, fees, deposits, and other payments owed, and to collect
and account for such amounts in a timely manner." 30 U.S.C. §
1711(a). FOGRMA further provides that the Secretary "shall audit
2
and reconcile, to the extent practicable, all current and past
lease accounts for leases of oil or gas and take appropriate
actions to make additional collections or refunds as warranted, ...
[and] may also audit accounts and records of selected lessees and
operators." Id. § 1711(c)(1). MMS is the agency within the DOI
that is responsible for auditing royalty payments on federal and
Indian oil and gas leases.
Phillips and Arco hold numerous leases on federal and offshore
lands. As lessees, they pay royalties to the government based upon
the value of the production saved, removed, or sold from the leased
premises. Up until March 1, 1988, DOI considered several factors
in determining the value of federal offshore production for royalty
purposes:
The value of production shall never be less than fair market
value. The value used in the computation of royalty shall be
determined by the Director. In establishing the value, the
Director shall consider: (a) The highest price paid for a
part or for a majority of like-quality products produced from
the field or area; (b) the price received by the lessee; (c)
posted prices; (d) regulated prices; and (e) other relevant
matters. Under no circumstances shall the value of production
be less than the gross proceeds accruing to the lessee from
the disposition of the produced substances or less than the
value computed on the reasonable unit value established by the
Secretary.
30 C.F.R. § 206.150 (1987).
On December 14, 1984, MMS developed new criteria for valuing
natural gas liquid products ("NGLP's"),1 as set forth in an
1
When natural gas is produced that contains a high volume of
liquefiable hydrocarbons (commonly known as "wet" gas), the gas
is sometimes processed to separate the liquids from the dry
methane, or "residue," gas. The liquids are then fractionated to
separate the NGLP's, such as ethane, propane, butane, and natural
gasoline.
3
unpublished internal agency paper referred to as the "Procedure
Paper." Instead of considering the range of the various types of
prices prescribed in the governing regulation, the Procedure Paper
focused entirely upon one type of price, the spot market price:
MMS will take the highest and lowest published price for the
month from the appropriate [spot market price] bulletin. If
the reported price [by the lessee] falls within this range,
the [lessee's] value will normally be accepted by MMS for
royalty determination purposes....
....
If the prices used to calculate royalties fall below this
range, a minimum value that is acceptable to MMS can be
determined by developing an average value from the lowest and
highest prices in the range.
In a September 6, 1989, order, MMS advised Arco that it had
audited royalty payments under five of Arco's federal offshore
leases for the month of September 1983. MMS directed Arco to
recalculate its royalties under the five leases, using the
Procedure Paper, for the period 1983-1989. In a September 7, 1989,
order, MMS required Arco to recalculate and pay additional
royalties for all federal offshore leases from 1983 to 1989. MMS
sent Arco another order on September 29, 1989, requiring Arco to
recalculate its royalties using the Procedure Paper for all federal
offshore leases for a period from October 1980 to February 1988.
MMS sent similar orders to Phillips in September 1989, requiring
Phillips to recalculate and pay additional royalties, using the
Procedure Paper, on all offshore leases between January 1977 and
February 1988.
B.
Phillips filed three separate suits for declaratory and
4
injunctive relief, disputing the validity of the MMS orders; at
about the same time, Arco filed a similar action in the same court.
The four cases were consolidated, and the parties filed
cross-motions for summary judgment. The district court allowed the
government to file a counterclaim seeking judicial enforcement of
the orders, concluding that the statute of limitations provision of
28 U.S.C. § 2415(a) did not apply to the contested orders, and
granted summary judgment on the government's counterclaim.
II.
The Procedure Paper is a "rule," and its promulgation
constituted "rulemaking" within the meaning of the APA.2 Section
553 of the APA provides that an agency must provide notice of a
proposed rule in the Federal Register and afford an opportunity for
interested persons to present their views. 5 U.S.C. § 553(b), (c).
The required publication must be made not less than thirty days
before the effective date of the proposed rule. Id. § 553(d). In
promulgating the Procedure Paper, MMS did not attempt to comport
with these requirements, as it argues that the requirements of §
553 do not apply to the APA.
The APA exempts "interpretative rules, general statements of
2
Title 5 U.S.C. § 551(4) defines a "rule" as "an agency
statement of general or particular applicability and future
effect designed to implement, interpret, or prescribe law or
policy or describing the organization, procedure, or practice
requirements of an agency and includes [various substantive
agency functions] or practices bearing on any of the foregoing."
Section 551(5) defines "rulemaking" as "agency process for
formulating, amending, or repealing a rule." Indeed, MMS does
not argue that its action was not rulemaking but only that the
Procedure Paper was exempt from the APA's notice and comment
provisions.
5
policy, [and] rules of agency organization, procedure, or practice"
from the notice and comment requirements. Id. § 553(b)(A). In the
Procedure Paper itself, MMS attempted to avoid the notice and
comment requirements of the APA by characterizing the rule as a
"yardstick." The Interior Board of Land Appeals called the rule
"essentially a policy guideline." Conoco & ARCO Oil & Gas Co., 110
IBLA 232, 242-43 (1989). This court, however, must determine the
category into which the rule falls: "[T]he label that the
particular agency puts upon its given exercise of administrative
power is not, for our purposes, conclusive; rather it is what the
agency does in fact." Brown Express, Inc. v. United States, 607
F.2d 695, 700 (5th Cir.1979) (quoting Lewis-Mota v. Secretary of
Labor, 469 F.2d 478, 481 (2d Cir.1972)). We review this legal
issue de novo. See Munn v. Algee, 924 F.2d 568, 575 (5th Cir.),
cert. denied, --- U.S. ----, 112 S.Ct. 277, 116 L.Ed.2d 229 (1991).
A.
MMS argues that the Procedure Paper merely interprets the
existing royalty valuation regulation in the context of NGLP's used
internally and not sold. It is therefore a clarification or
explanation of existing laws and regulations rather than a
substantive modification of existing regulations or adoption of new
ones. See Continental Oil Co. v. Burns, 317 F.Supp. 194, 197
(D.Del.1970). Consequently, MMS concludes, the Procedure Paper is
exempt from the notice and comment requirements as an
"interpretative rule."
"Interpretative rules" have been defined by this court in
6
Brown Express: "Generally speaking, it seems to be established
that "regulations,' "substantive rules,' or "legislative rules' are
those which create law, usually implementary to an existing law;
whereas interpretative rules are statements as to what the
administrative officer thinks the statute or regulation means."
Brown Express, 607 F.2d at 700 (quoting Gibson Wine Co. v. Snyder,
194 F.2d 329, 331 (D.C.Cir.1952)). The Procedure Paper is not an
interpretative rule, as it does not purport to interpret a statute
or regulation. Notwithstanding MMS's assertion that the Procedure
Paper merely announced the approach MMS would take in interpreting
and applying 30 C.F.R. § 206.150, the Procedure Paper is not a mere
clarification. It defines no ambiguous term. It gives no
officer's opinion about the meaning of the statute or regulations.
Rather, it effects a change in the method used by MMS in valuing
NGLPs.3 As such, it is a new rule and cannot be interpretative.
Brown Express, 607 F.2d at 700.
B.
MMS also contends that the Procedure Paper may be
characterized as a "general statement of MMS policy." A general
statement of policy is a statement by an administrative agency
announcing motivating factors the agency will consider, or
3
MMS claims that the Procedure Paper effects no change
because MMS could have used spot market prices to value NGLP's
not sold. Under 30 C.F.R. § 206.150, "posted prices" are but one
factor to be used in valuing NGLP royalties. And rules are
viewed as substantive when they "constrict the discretion of
agency officials by largely determining the issue addressed."
Batterton v. Marshall, 648 F.2d 694, 702 (D.C.Cir.1980) (footnote
omitted).
7
tentative goals toward which it will aim, in determining the
resolution of a substantive question of regulation. Id. at 701.
A general statement of policy ... is merely an announcement to
the public of the policy which the agency hopes to implement
in future rulemakings or adjudications. A general statement
of policy, like a press release, presages an upcoming
rulemaking or announces the course which the agency intends to
follow in future adjudications.
Id. (quoting Pacific Gas & Elec. Co. v. FPC, 506 F.2d 33, 38
(D.C.Cir.1974)). The Procedure Paper, however, does none of these
things. It does not set a goal that future proceedings may
achieve, for the change has already been made. Immediately upon
its effective date, the five-factor valuation technique of 30
C.F.R. § 206.150 was no longer to be followed. An announcement
stating a change in the method by which an agency will value NGLP's
is not a "general statement of policy." Thus, the Procedure Paper
is not exempt from APA requirements as a "general statement of
policy."
C.
Section 553(b)(A) also exempts "rules of agency organization,
procedure, or practice." Although the Procedure Paper would appear
to fall squarely within this exemption, for the change effected by
the Procedure Paper plainly relates to the internal practices of
MMS, the mere fact that it may guide MMS procedures does not mean
that the Procedure Paper is a "procedural" rule for purposes of the
APA.
The Supreme Court has stated that the notice and comment
provisions "were designed to assure fairness and mature
consideration of rules of general application." NLRB v. Wyman-
8
Gordon Co., 394 U.S. 759, 764, 89 S.Ct. 1426, 1429, 22 L.Ed.2d 709
(1969). These provisions afford an opportunity for "the agency
promulgating the rule to educate itself before establishing rules
and procedures which have a substantial impact on those regulated."
Texaco, Inc. v. Federal Power Comm'n, 412 F.2d 740, 744 (3d
Cir.1969). Congress realized that an agency's judgment would be
only as good as the information upon which it drew. It prescribed
these procedures to ensure that the broadest base of information
would be provided to the agency by those most interested and
perhaps best informed on the subject of the rulemaking at hand.
See Shell Oil Co. v. Federal Energy Admin., 574 F.2d 512, 516
(Temp.Emer.Ct.App.1978).
The proper test to be applied in considering a rule that may
arguably fall under the exemptions for "procedural rules" is as
stated by Brown Express: "[W]hen a proposed regulation of general
applicability has a substantial impact on the regulated industry,
or an important class of the members or the products of that
industry, notice and opportunity for comment should first be
provided." Brown Express, 607 F.2d at 702 (citation omitted). The
exemption of § 553(b)(A) from the duty to provide notice by
publication does not extend to those procedural rules that depart
from existing practice and have a substantial impact on those
regulated. Our inquiry, therefore, is not whether the rule is
"substantive" or "procedural," but rather whether the rule will
have a "substantial impact" on those regulated.
We conclude that the Procedure Paper does have a substantial
9
impact on those regulated in the industry. The rule narrowly
restricts the discretion of MMS officials in determining the value
of NGLP's. It forecloses other valuation methods by prescribing
binding valuation criteria. Although the regulation allows the use
of posted prices in determining the value of NGLP's, the Procedure
Paper mandates the use of spot prices.4 Thus, the Procedure Paper
does not even comport with the regulation in using posted prices.
Moreover, the Procedure Paper eliminates the other four factors in
determining the value of NGLP's.
This change in valuation technique dramatically affects the
royalty values of all oil and gas leases. Thus, the Procedure
Paper should have been published in the Federal Register and
offered for notice and comment. A party may not be adversely
affected by a rule promulgated in violation of these requirements.
5 U.S.C. § 552(a)(1).
III.
We conclude that the Procedure Paper is a substantive rule,
and § 553 of the APA controlled its promulgation. We therefore
REVERSE the summary judgment and REMAND for such further
proceedings as may be necessary.
4
A posted price is a publicly announced price at which a
purchaser is willing to buy a certain type and amount of
petroleum products. Spot prices, on the other hand, reflect
actual transactions on a short-term or one-time basis.
10
Phillips Petroleum Co. v. Johnson
Combined Opinion