Shell Offshore Inc. v. Babbitt

              IN THE UNITED STATES COURT OF APPEALS
                      FOR THE FIFTH CIRCUIT



                            No. 99-30532



     SHELL OFFSHORE INC.;
     SHELL DEEPWATER PRODUCTION INC.,

                          Plaintiffs-Appellants-Cross-Appellees,

          versus

     BRUCE BABBITT, SECRETARY OF THE DEPARTMENT
     OF INTERIOR; BOB ARMSTRONG, ASSISTANT
     SECRETARY, LAND & MINERALS MANAGEMENT,
     DEPARTMENT OF THE INTERIOR;
     WALT ROSENBUSCH, DIRECTOR, MINERALS
     MANAGEMENT SERVICE, DEPARTMENT OF THE INTERIOR,

                          Defendants-Appellees-Cross-Appellants.



          Appeals from the United States District Court
              for the Western District of Louisiana

                          January 12, 2001

Before GARWOOD, HIGGINBOTHAM, and STEWART, Circuit Judges.

GARWOOD, Circuit Judge:

     Plaintiff-appellant Shell Offshore, Inc., (Shell) sued the

Department of the Interior (Interior) under the citizen suit

provisions of the Outer Continental Shelf Lands Act, 43 U.S.C. §§

1331 et seq. (§ 1349(b)) (OCSLA), the Administrative Procedure Act,

5 U.S.C. § 551 et seq. (§ 704) (APA), and the Declaratory Judgment

Act, 28 U.S.C. §§ 2201, 2202, challenging Interior’s denial of

Shell’s request to use its Federal Energy Regulatory Commission
(FERC) tariff rate as the cost of transporting crude oil produced

from certain of Shell’s offshore oil and gas leases for purposes of

calculating Shell’s royalty payments due Interior.                     The district

court granted Shell’s summary judgment motion in part, holding that

Interior’s     decision     denying       the    use   of    the   tariff    rate    was

arbitrary and capricious, and was a new substantive rule that

required notice and comment under the APA, 5 U.S.C. § 553.                            We

agree with the district court that Interior’s decision was in

essence the application of a new substantive rule that required

notice and comment before implementation.                    We hold that Shell was

entitled to use the FERC tariff rate to calculate transportation

costs for all of the oil at issue in this case which it transported

through the Auger pipeline, and was therefore entitled to have its

motion for summary judgment granted in full.                        Accordingly, we

affirm    in   part,      reverse     in    part,      and   remand   for    entry    of

appropriate judgment consistent herewith.

                          Facts and Proceedings Below

     Shell     is   the    lessee    in    numerous     federal     leases    for    the

production of crude oil and gas located offshore Louisiana within

the Auger Unit on the Outer Continental Shelf (OCS).1                  These leases

were issued by Interior through its sub-agency, the Minerals

Management Service (MMS),            under the authority of the OCSLA, 43

U.S.C. §§ 1331 et seq.              This dispute involves Shell’s royalty


     1
         A “unit” is an area containing leases located on the OCS.

                                           -2-
payments on crude oil produced from offshore leases comprising

Shell’s Auger Unit.         Under the OCSLA and the terms of the leases,

Shell is required to pay royalties as a specified percentage of the

“value of the production saved, removed, or sold” from the lease.

43   U.S.C.    §    1337(a)(1)(A).              Interior   is   responsible      for

administering      leases    on   the   OCS,      and   promulgates   regulations

governing     royalty   collection        and      establishing    the   value    of

production on which lessees pay royalties.

     Under the regulations in effect at the time, Interior allowed

lessees to deduct transportation costs from the value on which they

calculated    royalty   payments.          Those     regulations   distinguished

between     transportation        costs         incurred   under    “arms-length”

agreements      with        common      carriers        and     “non-arms-length”

transportation costs, such as when a lessee transports the oil

itself or via a pipeline owned by an affiliate of the lessee. See

30 C.F.R. § 206.105(a)-(b).

     Shell began producing from the Auger Unit in April 1994.                    The

Auger pipeline transports crude oil from the Auger Unit to a series

of other pipelines that begins on the OCS, crosses onshore into

Louisiana, and eventually reaches other states. The district court

found, and Interior does not dispute, that some portion——apparently

a substantial majority——of the oil produced in the Auger Unit

travels in a continuous stream to Illinois for refining.                  The oil

that reaches Illinois travels first through the Auger pipeline and



                                          -3-
then, via several pipeline systems, to St. James, Louisiana, and

from there through the Capline/Capwood pipeline system to the Wood

River refinery in Illinois. The Auger pipeline is owned by a Shell

affiliate.    The parties agree that the transport of Shell’s oil

through the Auger pipeline was a non-arms-length transaction, and

that therefore the calculation of Auger pipeline transport costs

Shell could permissibly deduct from its royalty payments was

governed by 30 C.F.R. § 206.105(b).          Under section 206.105(b)(2),

lessees must demonstrate their actual costs of transport for

deduction    from    their   royalty   payments   due   Interior,   and     the

regulation provides detailed instructions for such calculations.

Under    section    206.105(b)(5),     however,   lessees   are   granted   an

exception from the requirement of showing actual costs of transport

if the lessee has “a tariff for the transportation system approved

by the [FERC].” Id.      Under this exception, the lessee can use the

FERC tariff rate to calculate their transportation cost deductions

from royalty payments if that tariff has been “approved by the

[FERC].”    Id.2


     2
        30 C.F.R. § 206.105(b)(5) (1999) provided:

     “(5) A lessee may apply to the MMS for an exception from the
     requirement that it compute actual costs in accordance with
     paragraphs (b)(1) through (b)(4) of this section. The MMS
     will grant the exception only if the lessee has a tariff for
     the transportation system approved by the Federal Energy
     Regulatory Commission (FERC) (for both Federal and Indian
     leases) or a State regulatory agency (for Federal leases).
     The MMS shall deny the exception request if it determines
     that the tariff is excessive as compared to arm’s length

                                       -4-
       Interior points to several recent FERC opinions, commencing in

1992, that, it argues, cast FERC jurisdiction over pipelines on the

OCS    into       some    doubt.3      It   is    and   was   FERC’s   practice    to

automatically accept all filed tariffs unless a timely protest is

filed.       Prior to 1993, MMS (the sub-agency of Interior responsible

for administering the OCS leases) accepted tariffs that were filed

with       FERC   in     determining   whether     a    lessee   qualified   for   an


       transportation charges by pipelines, owned by the lessee or
       others, providing similar transportation services in that
       area. If there are no arm’s length transportation charges,
       MMS shall deny the exception request if: (i) No FERC or State
       regulatory agency cost analysis exists and the FERC or State
       regulatory agency, as applicable, has declined to investigate
       pursuant to MMS timely objections upon filing; and (ii) the
       tariff significantly exceeds the lessee’s actual costs for
       transportation as determined under this section.”

     It is undisputed that in this case neither of the conditions stated
in clauses (i) and (ii) of the last sentence of § 206.105(b)(5) is
applicable and also that MMS never made the determination referred to
in the next to last sentence of § 206.105(b)(5).

     The relevant regulations have now been formally changed (effective
June 1, 2000), in part to address the exact issues that are in dispute
in this case. See 62 Fed. Reg. 3742, 3746 (Jan. 24, 1997). Under the
current regulations, lessees may still deduct non-arms-length
transportation costs, but they cannot rely on FERC tariff rates as a
substitute for demonstrating the actual costs of transport. Compare 30
C.F.R. § 206.105(1999) with 30 C.F.R. § 206.111 (as amended March 15,
2000, effective June 1, 2000; 65 Fed. Reg. 14022, 14031, 14088 et seq.,
March 15, 2000). References to Interior’s regulations in this opinion
refer to the rules in effect at the time of suit unless otherwise noted.

       This case does not involve oil produced on or after June 1, 2000.

       3
       The decisions were Oxy Pipeline, Inc., 61 FERC 61,051
(1992), and Bonito Pipeline Co., 61 FERC 61,050 (1992). Later in
the adjudicative process, Interior also relied on Ultramar, Inc.,
v. Gaviota Terminal Co., 80 FERC 61,201 (1997).

                                            -5-
exception under 30 C.F.R. § 206.105(b)(5).              From 1988 until some

point in 1993 or 1994,4 MMS accepted as “approved by FERC” most

tariffs that were simply filed with FERC, and did not require

producers to petition FERC for a determination of jurisdiction. By

1994, however, Interior was disallowing use of the tariff exception

for OCS lessees that it felt might no longer be within FERC

jurisdiction.

      Shell filed a tariff with FERC on March 2, 1994, which was

unprotested, and was accepted and published by FERC on April 1,

1994.     In a letter dated July 7, 1994, Shell requested that the MMS

confirm that, in valuing Shell’s Auger Unit crude oil production

for     royalty   purposes,    Shell         was   entitled   to    deduct   as

transportation costs the tariff rate accepted by FERC for the Auger

pipeline.     In an order dated November 10, 1994, the MMS denied

Shell’s     request,   and    Shell    appealed      the   order.      Several

administrative appeals followed, but in its final decision on

August 13, 1998, Interior stated that Shell’s request was being

denied because Shell had failed to petition FERC and receive from

FERC a determination affirmatively stating that FERC possessed


      4
       On November 10, 1994, MMS denied Shell’s request to use the
FERC tariff on the grounds that because of the FERC’s decision in
Oxy Pipeline, Inc., 61 FERC 61,051 (1992), FERC had no jurisdiction
over OCS pipelines and therefore could not “approve” Shell’s
tariff. Interior’s “Dear Payor” letter of December 18, 1998, sent
generally to OCS lessee oil royalty payors (including Shell), states
that “[b]eginning with production in January, 1993,” MMS “began to deny
requests for approving FERC tariffs in lieu of actual costs for non-
arm’s-length OCS oil transportation allowances.”

                                       -6-
jurisdiction over the Auger pipeline.

       Shell    then   filed   the   instant    lawsuit.     Thereafter,     on

December 18, 1998, MMS sent a “Dear Payor” letter to Shell stating

that   due     to   uncertainty    concerning   FERC’s     jurisdiction    over

pipelines on the OCS, lessees must “petition FERC” and receive from

FERC    “a     determination      affirmatively    stating     that   it   has

jurisdiction” before MMS will allow the lessee to use the FERC

tariff to calculate transportation costs for the purposes of

royalty calculations.          Similar letters were sent to other OCS

lessees.

       In the district court, Shell claimed that its FERC tariff

established the rate Shell could permissibly deduct from its

royalty payments for transporting oil through the Auger pipeline.

Interior argued that FERC’s jurisdiction had not been clearly

established and that if FERC did not have jurisdiction, then FERC

could not establish the appropriate rate and “approve” the tariff

within the meaning of § 206.105(b)(5).

       Both Shell and Interior moved for summary judgment in the

district court.        The district court denied Interior’s motion and

partially granted Shell’s motion.            The district court found that

there was no rational connection between the FERC’s decisions in

Ultramar and Oxy and Interior’s decision to wholly deny Shell’s

request. See Shell Offshore, Inc., v. Babbit, 61 F.Supp.2d 520, 528

(W.D. La. 1999).         The court held that Interior had failed to


                                       -7-
adequately consider the evidence of interstate transportation of

the oil submitted by Shell, and that Interior’s decision was

therefore arbitrary and capricious. Id.

     The district court also held that the notice and comment

provisions of the APA were applicable to Interior’s change in

policy.   The district court applied the test set out by this Court

in Phillips Petroleum Co. v. Johnson, 22 F.3d 616 (5 th Cir. 1994)

that dictates when exemption from APA notice and comment is proper

for rules that govern “rules of agency organization, procedure, or

practice.”   Id. at 616.    See also 5 U.S.C. § 553(b)(A).    Despite

its holding that Interior’s new policy required notice and comment

under the APA, the district court only partially granted Shell’s

summary judgment motion.    The court reasoned that   “[t]ransporting

the crude [oil] to a refinery in Louisiana is not interstate and

the holding in Ultramar is applicable to crude transported from the

OCS to Louisiana,” and held that Shell’s tariff was not applicable

to the portion of the Auger crude oil that did not leave Louisiana

unrefined. Shell Offshore, 61 F.Supp.2d at 529.       Both Shell and

Interior timely appealed.

                             Discussion

     This case involves two basic issues.      The first is whether

Interior’s policy change–requiring OCS lessees to petition FERC for

an affirmation of jurisdiction–is a new “rule” that triggers the

notice and comment provisions of the APA.     If Interior had, from


                                  -8-
the   beginning,   interpreted   their   regulation   as   requiring   an

affirmation of FERC jurisdiction, their interpretation of their own

regulation would be entitled to substantial deference.          However,

Interior changed their policy–they began to require lessees (and

required Shell in this case) to petition FERC for an affirmation of

jurisdiction whereas from 1988 to 1993 their established procedure

was to treat tariffs that were simply filed with the FERC as

“approved” under § 206.105(b)(5).        A party may not lawfully be

adversely affected by a rule promulgated in violation of the

requirements of the APA.   See 5 U.S.C. § 552(a)(1).       Interior’s new

policy was never submitted for notice and comment.         If Interior’s

change in policy is a new substantive rule for APA purposes the

rule is invalid.

      The second issue need be reached only if Interior’s policy

change was not a new rule for APA purposes.     If the change was not

such a rule, then Interior’s decision must still satisfy the APA

standard of not being arbitrary and capricious.        See Acadian Gas

Pipeline Sys. v. FERC, 878 F.2d 865 (5th Cir. 1989).5       If Interior’s

new policy was a “rule” for APA purposes, we need not reach the

arbitrary and capricious issue.


      5
       In that case, we stated: “Where an agency has acted
arbitrarily or capriciously, a reviewing court is bound to set
aside the agency action. Where an agency fails to distinguish past
practice, its actions may indicate that lack of reasoned
articulation and responsibility that vitiates the deference the
reviewing court would otherwise show.” Acadian, 878 F.2d at 868
(citations omitted).

                                   -9-
     This Court reviews the district court’s grant of summary

judgment de novo.     Hernandez v. Reno, 91 F.3d 776, 779 (5th Cir.

1996).    Summary judgment is appropriate if the record shows “that

there is no genuine issue as to any material fact and the moving

party is entitled to judgment as a matter of law.” FED.R.CIV.P.

56(c). In reviewing the underlying agency decision denying Shell’s

request, the general standard under the APA is whether the agency’s

final decision was “arbitrary, capricious, an abuse of discretion,

or otherwise not in accordance with law.”            5 U.S.C. §706(2)(A);

Avoyelles Sportsmen’s League, Inc., v. Marsh, 715 F.2d 897, 904 (5th

Cir. 1983).     Determining whether Interior’s policy change was a

“rule” for APA purposes is purely a matter of construction of the

APA and we review this issue de novo. Phillips, 22 F.3d at 619

(“‘[T]he label that the particular agency puts on upon its given

exercise   of   administrative   power   is   not,    for   our   purposes,

conclusive; rather, it is what the agency does in fact.’[] We

review this legal issue de novo.”) (citations omitted) (quoting

Brown Express, Inc., v. United States, 607 F.2d 695, 700 (5th Cir.

1979)).    Interior is not charged with administering the APA; its

conclusions of law regarding whether its policy change is a “rule”

for APA purposes are not given deference and are also reviewed de

novo.    See Institute for Technology Development v. Brown, 63 F.3d

445, 450 (5th Cir. 1995).

                The Rulemaking Requirements of the APA


                                  -10-
     Interior argues that the district court erred when it ruled

that Interior’s new policy was a legislative rule subject to the

notice and comment requirements of the APA.                  Interior claims,

initially, that the decision in this case was an “adjudication” and

was therefore exempt from the rulemaking requirements of 5 U.S.C.

§ 553.   In the alternative, Interior argues that even if the new

policy is a “rule” it is an interpretive rule rather than a

substantive one, and is thus exempt from the APA’s notice and

comment requirements under 5 U.S.C. § 553(d)(2).

     The APA 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 ... practices bearing on any of the foregoing.” 5 U.S.C.

§ 551(4).     Rulemaking is the “agency process for formulating,

amending, or repealing a rule.” Id. at § 551(5).             In contrast, the

APA defines     an    “adjudication”     as   “an   agency   process   for   the

formulation of an order,” and defines “order” as “the whole or part

of a final disposition ... of an agency in a matter other than rule

making but including licencing.” Id. at § 551(6), (7).            There is no

notice and comment requirement for an agency adjudication. Id. at

§ 554. Similarly exempted from the notice and comment requirements

are “interpretive rules.”        Id. at § 553(d)(2).

     Interior        argues   that     this   case     merely   involves      an


                                       -11-
“adjudication” exempt from the rulemaking requirements of the APA,

and,    in    the    alternative,       that      the   new    rule    is   merely

“interpretive.”       Shell’s response to the first part of Interior’s

argument is that the decision in the adjudication in this case was

wholly predicated upon a new requirement that is, in effect, a new

“substantive” rule.          We conclude that Shell’s argument is the more

persuasive.        It is clear from Interior’s internal memoranda and

correspondence with Shell that Interior’s denial of Shell’s request

was the result of a departure from Interior’s previous practice of

treating as approved all filed FERC tariffs. It is similarly clear

that Interior’s new policy was the basis for the adjudication

rather than the facts of the particular adjudication causing

Interior to modify or re-interpret its rule.                   Interior did not

apply a general regulation to the specific facts of Shell’s case.

Rather, it established a new policy and then applied that new

policy to several OCS producers, including Shell.                     If Shell had

submitted its tariff early in 1992 instead of 1994, Interior would

have accepted Shell’s tariff as “approved by FERC” and Shell would

not have been required to petition FERC--there would have been no

adjudication prior to 1994.             The adjudication resulted because

Interior changed its policy, and the district court did not err in

reaching     the    policy    change    that     controlled    the    adjudicative

process.

       Interior     also     argues    that     their   new   policy    should   be



                                         -12-
considered an “interpretive” rule, and should therefore be exempt

from the notice and comment requirements of the APA.                    In Brown

Express Inc. v. United States, 607 F.2d 695 (5th Cir. 1979), we

repeated    with   approval      the   District       of    Columbia    Circuit’s

distinction between interpretive and substantive rules: “‘Generally

speaking,    it    seems    to   be    established         that   ‘regulations,’

‘substantive rules,’ or ‘legislative rules’ are those which create

law; whereas interpretive rules are statements as to what the

administrative officer thinks the statute or regulation means.’”

Id. at 700. (quoting Gibson Wine Co. v. Snyder, 194 F.2d 329, 331

(D.C. Cir. 1952)).         Legislative or substantive rules are those

which “affect individual rights and obligations.” See Chrysler

Corp. v. Brown, 99 S.Ct. 1705, 1718 (1979) (citations omitted).                  We

now review some of our prior cases on this topic.

     In Phillips Petroleum Co. v. Babbit, 22 F.3d 616 (5th Cir.

1994), MMS issued an unpublished internal agency paper that changed

the procedure for determining oil and gas royalties.                The original

regulation directed MMS to consider a variety of factors in valuing

offshore    production,     including         the   highest    prices   for    such

production in the area, the price paid by the lessee, posted

prices, regulated prices, and other factors.                  Id. at 618.     MMS’s

new policy under the agency paper was to focus only on the “spot

price” instead of the enumerated factors in the regulation. Unlike

the present case, MMS admitted in Phillips that the procedure paper


                                       -13-
was a new “rule.”            Just as Interior asserts now, however, in

Phillips     MMS    asserted   that    the     paper    merely    interpreted    the

existing regulation and was therefore a clarification of existing

regulations rather than a substantive modification.                  We held that

the procedure paper was not an “interpretive rule” and was subject

to the notice and comment requirements of the APA.                   Phillips, 22

F.3d at 621.         However, unlike the present case, in Phillips the

procedure paper directly contradicted the text of the regulation at

issue.

       In Davidson v. Glickman, 196 F.3d 996 (5th Cir. 1999), we held

that a provision of a Farm Services Agency (FSA) handbook was a

substantive rule that required notice and comment under the APA.

The    provision     prohibited      revision      of   acreage   reports   if   the

producer would benefit from the revision.                     The regulation in

question did not mention this condition on revision of acreage

reports.     We held that the provision was indeed a legislative (or

substantive) rule that required notice and comment under the APA,

and invalidated the application of the handbook provision.                   Id. at

999.

       In   the    present   case,    the    new    “rule”   that   Shell   asserts

violates the APA is not a change from a written policy statement or

regulation.        Rather, it is an alteration of an existing practice.

From 1988 through 1993, Interior treated all filed tariffs as

approved by the FERC; now it requires lessees in Shell’s position


                                        -14-
to (as stated in the “Dear Payor” letter, see note 4 supra)

“petition      FERC”       and       receive       from    FERC      “a    determination

affirmatively stating that it has jurisdiction over the pipelines

in question”.       This case is somewhat different from Glickman and

Phillips in that the new interpretation of “approved by FERC” does

not    directly     and    expressly       contradict       the     regulation       itself.

Instead, it contradicts Interior’s prior consistent interpretation

of    the   regulation.          A   further       complication      is   that       each    of

Interior’s        interpretations           of       §      206.105(b)(5)——the              new

interpretation as well as the old——may perhaps, independently,

qualify as an “interpretive rule” that is exempt from notice and

comment     under    the    APA,      in   that     each    interprets         an   arguably

ambiguous     regulation.6             Assuming          that   each      of    Interior’s

interpretations of their regulation are valid interpretive rules,

a    significant     issue       remains:      can       Interior    switch         from    one

consistently long followed permissible interpretation to a new one

without providing an opportunity for notice and comment?

       In a line of recent cases, the D.C. Circuit has addressed this

very issue.       In Alaska Professional Hunters Ass’n v. FAA, 177 F.3d

1030 (D.C. Cir. 1999), a regional office of the FAA had for many


       6
      Agencies need not provide notice and comment for every meaningful
policy decision. Interpretations of ambiguous or unclear regulations
by agencies may be exempt from the APA’s notice and comment
requirements. See 5 U.S.C. § 553(b)(A), Phillips, 22 F.3d at 619, Brown
Express v. United States, 607 F.2d 695, 700 (5th Cir. 1979). We express
no opinion as to whether either of Interior’s interpretations of §
206.105(b)(5) are valid interpretive rules.

                                            -15-
years been advising Alaskan hunting and fishing guides that they

were exempt from FAA regulations governing commercial pilots.7              At

some point in the early 1990's, the FAA discovered that their

regional office had been telling the Alaskan guide pilots that they

were exempt, and in 1998 the FAA published a “Notice to Operators”

which announced that Alaskan guides who transport customers by

aircraft were no longer considered exempt from the FAA’s safety

regulations.      63 Fed. Reg. 4 (1998).        The court ruled that the

FAA’s    action   required   notice    and   comment,   and   that   the   new

interpretation of their regulation was invalid without it. Alaska,

177 F.3d at 1036.      The court, relying on Paralyzed Veterans of

America v. D.C. Arena, 117 F.3d 579 (D.C. Cir. 1997), stated: “When

an agency has given its regulation a definitive interpretation, and

later significantly revises that interpretation, the agency has in

effect amended its rule, something it may not accomplish without

notice and comment.”     Alaska, 177 F.3d at 1034.       We agree with the

reasoning of the D.C. Circuit; the APA requires an agency to

provide an opportunity for notice and comment before substantially

altering a well established regulatory interpretation. We turn now

to Interior’s new     interpretation of § 206.105(b)(5).


     7
       The regulations in question were 14 C.F.R. §§ 121.1(a)(5), (d),
and 135.1(a)(2) (1965), which applied to “commercial operator[s],” who
were defined as persons operating aircraft “for compensation or hire”.
Id. At the time of the Alaska case, those regulations continued to apply
to “commercial operator[s],” who were still defined as persons who, “for
compensation or hire,” carry people or property by aircraft. See 14
C.F.R. §§ 1.1, 119.1(a)(1), 121.1(a), 135.1(a)(1) (1999).

                                      -16-
     In 1988, Interior utilized a regulatory practice based on §

206.105(b)(5) that it apparently felt adequately governed OCS

lessees’ non-arms-length transportation deductions from royalty

payments: it accepted as “approved” all tariffs filed with FERC.

When FERC declined jurisdiction over some OCS pipelines under

certain conditions, Interior adapted their regulatory practices to

include    an   additional   procedural        step–OCS   lessees    in   Shell’s

position    were   denied    use   of    their    FERC    tariff    for   royalty

calculations unless they petitioned FERC and received from FERC a

determination affirmatively stating that FERC had jurisdiction.

Even though Interior never set forth its interpretation of section

206.105(b)(5)’s “approved by FERC” in a written statement, it was

undeniably its long established and consistently followed practice

to accept tariffs filed with FERC as “approved” for purposes of

section 206.105(b)(5).8      An agency that, as a practical matter, has



     8
       Interior accepted the FERC tariffs for at least five years, from
1988 until 1993, when, according to its December 1998 “Dear Payor”
letter, Interior “began to deny requests for approving FERC tariffs in
lieu of actual costs for non-arm’s-length transportation allowances.”
(emphasis added). Interior argues that since this letter is not part
of the administrative record, it should not have been considered by the
district court.     As Interior correctly points out, it is well
established that reviewing courts generally should, in evaluating agency
action, avoid considering evidence that was not before the agency when
it issued its final decision. See Louisiana v. Verity, 853 F.2d 311,
327 n.8 (5th Cir. 1988), Camp v. Pitts, 93 S.Ct. 1241, 1244 (1973).
Agency actions should generally be reviewed in light of the evidence
before the agency at the time, and not with the benefit of hindsight.
But the “Dear Payor” letter is not evidence that could or should have
been used by the agency to formulate policy. Instead, it is evidence
of agency policy. The district court did not err in considering it.

                                        -17-
enacted a new substantive rule cannot evade the notice and comment

requirements of the APA by avoiding written statements or other

“official” interpretations of a given regulation.              If a new agency

policy represents a significant departure from long established and

consistent       practice   that   substantially     affects    the    regulated

industry, the new policy is a new substantive rule and the agency

is obliged, under the APA, to submit the change for notice and

comment.     If Interior wishes to change its established practices

and procedures in a manner that so significantly affects OCS

lessees, it must give them notice and an opportunity to comment on

the proposed change.9       Interior’s new practice may be a reasonable

change in its oversight practices and procedures, but it places a

new   and   substantial     requirement      on   many   OCS   lessees,   was   a

significant departure from long established and consistent past

practice, and should have been submitted for notice and comment

before adoption.       Interior’s new interpretation of “approved by

[FERC]”     in    section    206.105(b)(5)          accordingly       meets   the

requirements for a new legislative rule under the APA.

      Under the APA, “a person may not in any manner be required to

resort to, or be adversely affected by, a matter required to be


      9
       As we observed above (see note 2, supra), effective June 1,
2000, Interior has formally changed the regulations governing
royalty calculations. Under the new regulations, no lessee can use
an FERC tariff to calculate its transportation costs. Instead,
lessees using affiliated pipelines must now show their actual
transportation costs. See 30 C.F.R. § 206.111 (as amended March 15,
2000, effective June 1, 2000).

                                      -18-
published in the Federal Register and not so published”.   5 U.S.C.

§ 552(a)(1).   Since Shell cannot lawfully be affected by this new

requirement, until Interior properly promulgates a new regulation

it cannot require more of Shell than filing their tariff with FERC.

Shell was thus entitled to use their FERC filed tariff to calculate

transport costs for all oil produced in the Auger Unit and sent

through the Auger pipeline. The district court should have granted

Shell’s summary judgment motion in full.    Because Interior’s new

policy was a “rule” that required notice and comment under the APA,

we need not reach the issue of whether Interior’s action in this

case was arbitrary and capricious.

                            Conclusion

     Interior’s new policy is a substantive rule for purposes of

the APA, and Interior was required to submit their new rule for

notice and comment.   The district court’s holding that Interior’s

new rule is invalid under the the APA is affirmed.         Prior to

Interior’s policy change, Shell’s FERC tariff would have been

routinely accepted by Interior for all oil flowing through the

Auger pipeline.   Since no party can be adversely affected by an

agency rule that should have been but was not submitted for notice

and comment, Shell is entitled to use their FERC tariff in lieu of

showing actual costs for all of the oil at issue in this case which

they transported through the Auger pipeline, not just the oil that

eventually crossed unrefined into another state.      The district



                                -19-
court should have granted Shell’s motion for summary judgment in

full.   Accordingly, the judgment of the district court is

                        AFFIRMED in part,

                         REVERSED in part,

                           and REMANDED.




                                -20-