UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________________
No. 95-60326
_____________________________
WRT ENERGY CORPORATION,
Petitioner,
versus
FEDERAL ENERGY REGULATORY COMMISSION,
Respondent.
_________________________________________________________________
Petition for Review of Order of
Federal Energy Regulatory Commission
_________________________________________________________________
February 28, 1997
Before HIGGINBOTHAM, BARKSDALE and EMILIO M. GARZA, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
The principal issue at hand is whether natural gas wells,
which previously produced from a gas cap and were subsequently
fitted with new technology for removing gas from the brine in the
aquifer, qualify as producing “high-cost natural gas” pursuant to
the Natural Gas Policy Act, 15 U.S.C. § 3301 et seq.(repealed
1989). Reversing determinations by the Louisiana Department of
Natural Resources, Office of Conservation, the Federal Energy
Regulatory Commission ruled that the gas did not qualify. We
AFFIRM.
I.
WRT Energy Corporation has five wells in Louisiana which
extract brine from an aquifer and then use recently-developed
vortoil hydrocyclones to separate natural gas from the brine.
Prior to installation of this new technology, each well had
produced natural gas by tapping a “cap” of gas which had broken
free from the brine and migrated to the top of the aquifer.
As the gas cap was depleted, however, the pressure in the well
decreased. This pressure reduction allowed gas which had been
dissolved in the brine to resolve out of it; but, it also allowed
the brine which occupied the underlying aquifer to move upward,
replacing all or part of the area previously occupied by the gas
cap. This resulted in fewer well perforations exposed to free gas,
and the well began to produce more and more brine with the gas,
until the well “watered out”. As a result, the wells were going to
be plugged.
WRT’s new process reaches more gas by allowing the production
of gas which never broke free of the brine, but it is more costly
than the usual extraction of natural gas; and, as with any new
application of technology, there is an amount of risk involved.
Accordingly, WRT applied for special treatment of these five wells
under the Natural Gas Policy Act (NGPA).
The purpose of this special treatment is to encourage the
production of natural gas sources, such as geopressured brine,
which would not otherwise be economical to exploit. 1978
U.S.C.C.A.N. 8800, 9003. WRT sought relief under § 107 of the
NGPA, 15 U.S.C. § 3317, which provided an incentive to produce
“high-cost natural gas”. For qualifying gas, the producer could
elect either a pricing benefit under the NGPA, or a tax benefit.
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15 U.S.C. § 3317(d); 26 U.S.C. § 29(c). One way to qualify -- the
route taken by WRT -- is if the gas is “produced from geopressured
brine”. 15 U.S.C. § 3317(c)(2). Because the NGPA was repealed
effective 1 January 1993, the pricing benefits are no longer of
use. Natural Gas Wellhead Decontrol Act of 1989, Pub. L. 101-60,
103 Stat. 157 (1989). But, remaining is the potential tax benefit,
which is not directly at issue in this proceeding, as discussed
infra. 26 U.S.C. § 29(c).
As defined by the FERC, “geopressured brine” is subsurface
fluid that has at least 10,000 parts of dissolved solids for every
million parts water, and has an initial reservoir geopressure
gradient over .465 pounds of pressure per square inch for each
vertical foot of depth. 18 C.F.R. § 272.103. By FERC regulation,
in order for gas to qualify as being “produced from geopressured
brine”, the gas must be “dissolved [in the brine] before initial
production”. 18 C.F.R. § 272.103(c).
Gas exists in brine in two states: (1) in solution--when the
gas is dissolved in the brine; and (2) in free but immobile form--
when the gas has fallen out of solution (or resolved) but remains
trapped in the brine, without migrating to the top to form or join
a gas cap. The NGPA and its regulations make no mention of the
treatment of gas which is not dissolved in the brine, but exists
instead in free immobile form in the brine without rising to form
or join a gas cap. On the other hand, the FERC has expressly
rejected the possibility that gas cap gas could qualify as gas
“produced from geopressured brine”; early on, it required that, in
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order to qualify, the gas had to be dissolved in the brine.
Interim Rules Defining and Deregulating Certain High-cost Natural
Gas, FERC Regulations Preambles 1977-81, 44 Fed. Reg. 61,950 (29
October 1979); Final Rules Defining and Deregulating Certain High-
cost Natural Gas, FERC Regulations Preambles 1977-81, 45 Fed. Reg.
28,092 (28 April 1980).
WRT faced two hurdles in order for the gas to be classified as
being “produced from geopressured brine”: (1) the wells had
previously successfully produced gas cap gas, before “watering
out”; and (2) the brine now being extracted carried natural gas in
two different states: dissolved gas which met the FERC’s definition
as having come from brine, and free immobile gas. Exacerbating
matters is the fact that it is not known with certainty how much of
each type of gas is produced and no one seems to be able to measure
how much of the free immobile gas resolved as a result of the prior
gas cap production.
There is a two-step process for deciding whether natural gas
qualifies as “high-cost”. 15 U.S.C. § 3317(c). First, the
appropriate state or federal agency makes a determination; next,
the FERC makes the conclusive determination, reviewing the earlier
determination for substantial evidence. 15 U.S.C. § 3413(b)(1)(A).
The FERC’s determination is reviewable in a United States Court of
Appeals. 15 U.S.C. § 3413(b)(4)(B).
Consistent with this process, after WRT installed a vortoil
hydrocycone at one of its wells as a test subject, it received a
determination from the Louisiana Office of Conservation (LOC) that
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the well qualified as producing high-cost natural gas. The vortoil
units were then installed at the other four wells; the LOC also
certified them as producing high-cost gas. It found that, although
all the wells had previously produced gas cap gas, the gas now
produced is not from caps, but is either dissolved, or is in free
immobile form, in the brine.
These positive determinations were transmitted to the FERC in
April and May 1994. That August, it issued an adverse notice of
preliminary finding, after requesting and receiving more
information from the LOC and WRT about the wells. This preliminary
finding provided: (1) that the wells would not qualify because
they had previously produced gas cap gas; and (2) that the gas
which was not dissolved in the brine, but instead was in free
immobile form, was not produced “from” the brine.
After the FERC’s preliminary finding, the LOC addressed some
of the FERC’s concerns about the technical and other aspects of the
wells’ production. The FERC held an informal technical conference
and accepted additional post-conference comments.
The FERC’s final order was issued in April 1995. Unlike the
preliminary finding, it reversed the LOC determinations on the sole
ground that the FERC “did not intend to allow any gas in an aquifer
associated with a gas cap to qualify as geopressured brine gas if
gas from the gas cap was produced before significant amounts of
brine [were] produced”. (Emphasis added.) As a result, the FERC
did not reach whether free immobile gas (broken free of the brine
but not part of a gas cap) would qualify as high-cost.
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II.
In order to determine whether the gas qualifies as high-cost,
we must first consider the prior gas cap production issue. But,
the second issue, whether the free immobile gas qualifies as high-
cost, bears on this first issue. In any event, before reaching the
merits, we will confirm our jurisdiction.
A.
Concerning, inter alia, a high-cost determination,
[a]ny person aggrieved or adversely affected
by a final finding of the [FERC] ... may ...
file a petition for review of such finding....
The reviewing court shall reverse any such
finding of the [FERC] if the State or Federal
agency determination involved is supported by
substantial evidence.
15 U.S.C. § 3413(b)(4)(B). The FERC urged in an earlier motion to
dismiss that, because the NGPA pricing had been repealed, and
therefore the FERC does not control the price at which WRT may sell
its natural gas, any determination by the FERC regarding the status
of the wells has no effect on WRT. And, FERC contended that the
mere possibility that, for tax credit purposes, the IRS will defer
to the FERC in determining whether the gas is produced from
geopressured brine is too conjectural to give standing to WRT.
The motion was denied by another panel of our court. Although
the FERC did not formally raise this issue again, it was noted in
its brief on the merits, citing an opinion rendered after the
motion was denied; and, at oral argument, it urged lack of
standing. In any event, because the issue concerns jurisdiction,
we will, of course, address it.
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The new case cited by FERC, Marathon Oil Co. v. Federal Energy
Regulatory Commission, 68 F.3d 1376 (D.C. Cir. 1995), is
inapposite. There, the FERC refused to rule on a state agency
determination in that the wells in question were reentered after 1
January 1993, the cutoff date for petitions that the FERC would
review. Id. at 1378. The court held that plaintiffs lacked
standing to challenge the FERC’s refusal to accept (or reject) the
state agency’s determinations. Id. at 1379. No action by the FERC
was exactly that; plaintiffs were not aggrieved, because the FERC
had neither reversed the determination nor remanded the case to the
state agency.
Needless to say, the case at hand presents a far different
scenario; the FERC has made a final determination detrimental to
WRT’s efforts at obtaining a tax benefit. Therefore, we agree with
the earlier panel ruling. In short, the FERC ruled against WRT;
pursuant to 15 U.S.C. § 3413(b)(4)(B), WRT is “aggrieved or
adversely affected”. The FERC ruling is part of this record and
will doubtless play a part in any IRS proceeding. True, it is not
dispositive; the IRS will determine for itself whether the wells
are producing gas from geopressured brine, and it is not bound to
follow the FERC’s ruling. IRS Private Ruling 9035034 (1 June
1990)(FERC determinations “not dispositive” about Section 107
qualification). But, as stated, the FERC ruling will be in play;
WRT will have to counter it. It has standing.
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B.
As discussed, under the NGPA, the FERC reviews state or
federal agency determinations whether gas qualifies as high-cost
for “substantial evidence in the record upon which such
determination was made”. 15 U.S.C. §§ 3413(a)(1)(D), (b)(1)(A).
The standard for judicial review of FERC final findings is also for
substantial evidence. Id. § 3413(b)(4)(B). Regardless of this
non-deferential standard of review of factual finding, in
promulgating and interpreting its regulations, the FERC has acted,
with Congress’ authorization, to administer and interpret the NGPA.
Id. § 3411. The FERC is due deference in this legal area.
In reviewing an agency’s interpretation of its statute, “if
the intent of Congress is clear, that is the end of the matter ...
[otherwise we ask] whether the agency’s answer is based on a
permissible construction of the statute.” Chevron U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837, 843-44
(1984)(emphasis added); see also Pacific Gas Transmission Co. v.
Federal Energy Regulatory Commission, 998 F.2d 1303, 1308 (5th Cir.
1993). Likewise, in reviewing an agency’s interpretation of its
regulations, unless a regulation’s plain language is to the
contrary, we defer to the interpretation of that regulation by the
agency which promulgated it. E.g., Thomas Jefferson University v.
Shalala, 512 U.S. 504 (1994). As discussed infra, such deference
is due the final finding in issue.
As noted, this case concerns two questions: (1) whether wells
which first produced gas cap gas can later qualify as producing
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high-cost gas; and (2) if so, how to factor in the gas coming out
of the brine that is not dissolved and instead is trapped (free
immobile). As explained, although the LOC ruled that neither of
these circumstances were disqualifiers, the FERC reversed, ruling
that, pursuant to the NGPA and its regulations, prior gas cap
production precluded qualification, and that, accordingly, it was
unnecessary to reach “WRT’s request that we clarify whether the
‘immobile’ free gas being produced through the [new technology] is
not gas that has broken free from the brine”. (Such “broken free”
gas arguably would not qualify as high-cost.)
This much is certain: the NGPA is a complex statute, one that
was designed to control natural gas pricing and yet allow
sufficient flexibility so that prices would encourage the
production of gas that is more difficult to produce. See, e.g.,
Preamble to Final Rules, FERC 1977-81, 45 Fed. Reg. 28,093. The
Act concerned, among other things, pricing for new and high-cost
natural gas. 15 U.S.C. §§ 3312, 3317. There are numerous
corresponding terms, definitions and contingencies. E.g., id. §§
3301 (“Definitions”), 3316 (“Ceiling price for sales under rollover
contracts”).
To this end, the FERC is given quite a bit of discretion. For
example, for the first sale of high-cost natural gas, the FERC
could set a price above “the otherwise applicable maximum lawful
price to the extent that such special price is necessary to provide
reasonable incentives for the production of such ... gas.” Id. §
3317(b). Furthermore, the FERC is expressly authorized to perform
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“any and all acts” and to “issue, amend and rescind” any rules
necessary for the enforcement of the NGPA. Id. § 3411(a). This
expressly includes the authority to define any technical and trade
terms used in the NGPA. Id. § 3411(b).
Obviously pertinent to whether wells which previously produced
gas cap gas can qualify as high-cost is the fact that the NGPA
enumerated four methods for producing gas that might qualify as
high-cost:
(1) produced from any well the surface
drilling of which began on or after February
19, 1977, if such production is from a
completion location which is located at a
depth of more than 15,000 feet;
(2) produced from geopressured brine;
(3) occluded natural gas produced from coal seams;
(4) produced from Devonian shale....
15 U.S.C. § 3317(c)(1)-(4). Each of these types involves higher
cost to produce than usual gas production. Moreover, this section
contains a fifth “catch-all” category; the FERC could determine
that a well presented “extraordinary risks or costs”. Id. §
3317(c)(5).
And, this section on high-cost gas contained another
qualifier: “the term ‘high-cost natural gas’ means natural gas
determined in accordance with section 3413" which was produced
under one of the five above described methods. Id. § 3317(c)
(emphasis added). Section 3413, as previously discussed, provides
for the initial state or federal agency finding, followed by FERC,
and possible judicial, review. This is yet another instance of
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discretion being placed with the FERC for interpreting this
section.
Certainly, § 107 of the NGPA, 15 U.S.C. § 3317, does not
provide expressly that gas can qualify as high-cost only if it is
produced, unlike here, by a “new well”. And, the NGPA deals
extensively with production from a “new well”, defined as one for
which
(A) The surface drilling ... began on or
after February 19, 1977; or
(B) the depth ... was increased, by means of
drilling on or after February 19, 1977, to a
completion location which is located at least
1,000 feet below the depth of the deepest
completion location of such well attained
before February 19, 1977.
15 U.S.C. § 3301(3). In fact, one of the four listed methods for
possibly qualifying as high-cost is through a certain type of new
well -- one for which “surface drilling began on or after February
19, 1977, if such production is from a completion location which is
located at a depth of more than 15,000 feet”. This type of “new
well” has a different, probably more costly, production depth than
for other “new wells”. Therefore, it can be maintained quite
persuasively that, because 15 U.S.C. § 3317 does not mention a “new
well” in conjunction with gas “produced from geopressed brine”,
such gas need not be from a “new well” in order to qualify.
But, this section, 15 U.S.C. § 3317, cannot be read in
isolation; it must be read in the light of the NGPA as a whole.
See, e.g., Medtronic, Inc. v. Lohr, ___ U.S. ___, 116 S. Ct. 2240
(1996). When read as a whole, the complexity of the NGPA, as well
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as the earlier discussed discretion vested with the FERC by 15
U.S.C. § 3317, precludes reading § 3317 as providing the complete
answer to the post-gas cap production question at hand.
Accordingly, we must look to the FERC’s interpretation of the
section.
The apparent intent of Congress, as discussed by the FERC for
its final finding, was to reward producers who incurred, “the high-
costs of brine disposal from the start”, and to grant the FERC a
great deal of authority over the way in which the incentives are
implemented. In fact, as discussed infra, the FERC noted in its
final finding that the NGPA and its regulations have never been
read to intend to reward a producer for a well, all or part of the
cost of which had been recouped by producing from a gas cap, and
which later produces, as an added bonus, the gas both dissolved and
trapped (free immobile) in the brine.
As noted, the regulations define “produced from geopressured
brine” as
natural gas which is dissolved before initial
production of the natural gas in subsurface
brine aquifers with at least 10,000 parts of
dissolved solids per million parts of water
and with an initial reservoir geopressure
gradient in excess of .465 pounds per square
inch for each vertical foot of depth.
18 C.F.R. § 272.103(c) (emphasis added). Furthermore, the question
at hand was touched on by the FERC in the preamble to its interim
regulations:
Gas not dissolved in brine, such as gas caps,
may be economically produced through less
expensive conventional production techniques
and is not a high-cost gas. Therefore, if the
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gas has broken free from the brine before
initial production (before any fluids are
withdrawn from the reservoir), it will not
qualify under this definition.
44 Fed. Reg. 61,950 (emphasis added). In the preamble to the final
regulations, the FERC did not alter this position, stating in
relevant part that “qualification under this category of gas
relates only to whether the gas is dissolved gas produced from
geopressured brine”; and that
[i]n the interim regulations the Commission
considered the possibility of qualifying “free
gas” caps found in association with brine.
For the same reasons elucidated therein, the
Commission will not include such free gas in
its definition of “natural gas produced from
geopressured brine.”
FERC 1977-1981, 45 Fed. Reg. 28,093.
As noted, portions of the gas in issue are dissolved in the
brine, but other portions are free, yet immobile. This finding is
not challenged by WRT, and is supported by substantial evidence.
Restated, it is undisputed that all of the gas is not dissolved in
the brine. The above quoted interim rules’ preamble merely lists
gas cap gas as one example of gas (“such as gas caps”) which can be
produced in association with brine, but which is not dissolved in
it.
The regulation provides that “‘natural gas produced from
geopressured brine’ is natural gas which is dissolved before
initial production”. 18 C.F.R. § 272.103(c). In conjunction with
this, the interim rules’ preamble’s definition of “initial
production” is of assistance: “before any fluids are withdrawn from
the reservoir”. This seems to preclude post-gas cap production,
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because fluids (brine) would probably, if not certainly, be
withdrawn during gas cap production, as the brine moved upward
because of the resulting pressure reduction caused by removal of
gas from the gas cap. But, there may be ambiguity in the interim
rules’ preamble’s statement that, if the gas has “broken free”, it
will not qualify. There is no definition for when the gas has
“broken free”: when it resolves out of the brine and becomes free
immobile gas, or when it actually escapes the brine and forms or
joins a gas cap. In the light of such questions, we defer to the
promulgating agency. For example, as quoted earlier from the
preamble to the final rules, and consistent with the regulation,
“qualification under this category of gas relates only to whether
the gas is dissolved gas produced from geopressured brine”.
Based on the NGPA, the FERC’s arguments here, and its
admission that the new technology was not available and therefore
not considered during its rule making, there is reason to believe
that it had not fully considered the question of free immobile gas.
But, in the face of the clear statement in the regulation that, in
order to qualify as high-cost, the gas must be “dissolved before
initial production”, we must apply it as written. Therefore, we
rely on this plain language that the gas must be dissolved in the
brine in order to qualify as coming “from” the brine.
In conjunction with this, the FERC contends that once some of
the gas produced has been shown not to be “from geopressured
brine”, all of the gas must be disqualified, regardless of how much
was in fact dissolved in the brine. This maintains the NGPA’s
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basic approach of regulating wells, not gas molecules. See e.g.,
15 U.S.C. 3317(a)(regulating gas “produced from any well”)(emphasis
added). Moreover, this requirement finds substantial support in the
record. It avoids the impossible task, as stated in the FERC’s
final order, of “trying to distinguish free gas molecules from
dissolved gas molecules”. This task would be made even more
difficult under the circumstances presented here, because, as
noted, the regulation provides that the gas must be dissolved at
the time of initial production. 18 C.F.R. § 272.103(c). As also
discussed, “initial production” is defined in the interim rules’
preamble as “before any fluids are withdrawn from the reservoir”.
Therefore, where there has been, as here, production from the gas
cap, then that is the “initial production”.
Along this line, the private study of the wells at issue
placed the percentage of dissolved gas being produced at 1.4%
volumetrically, but placed the production of free immobile gas at
between 1 and 7% of volume of brine production. This disparity
between dissolved gas and free immobile gas indicates that the
ruling which WRT seeks would not have the profound effect on its
gas production which it claims is needed in order to make the
production cost-effective. In other words, there is little evidence
that a favorable ruling in this instance as to the dissolved gas
would affect the well costs significantly.
Another, earlier noted, factor in the record which provides
compelling support for the FERC’s ruling is that, according to the
FERC, the LOC determination in issue is the first finding that
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post-gas cap production qualifies as high-cost. In its final
order, the FERC stated that,
[w]hile the preambles to the Interim and Final
Rules did not specifically so state, the
[FERC] intended, and it is the [FERC’s]
understanding the jurisdictional agencies and
producers in general interpreted the
regulations to mean, that if gas was produced
from a gas cap before the onset of fluids
production from the underlying aquifer, none
of the gas subsequently produced from the gas
cap and/other underlying aquifer could qualify
under the [FERC’s] regulations. Thus, under
this interpretation, gas produced through
secondary recovery operations was precluded
from qualifying as geopressured brine gas.
As a result, according to the FERC, “[it] received no affirmative
geopressured brine gas determinations between 1979, when [its]
Interim Rule was adopted, and 1994, when Louisiana’s affirmative
determinations for WRT’s wells were received.” Therefore, as
quoted supra, the FERC “affirm[ed] that it did not intend to allow
any gas in an aquifer to qualify as geopressured brine gas if gas
cap gas was produced before significant amounts of brine [were]
produced.” (Emphasis added.)
This reading by the FERC takes into consideration a number of
factors bearing on the production of natural gas, including hydro-
geological and other pertinent data about aquifers, economic
efficiency, and wellhead technology. Needless to say, the FERC is
far better able than we to evaluate such factors; this is one of
the reasons why it is entitled to deference under the NGPA. In
sum, we defer to its conclusion that
Congress deregulated gas produced from
geopressured brine to provide an incentive for
drilling wells into previously unproduced
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geopressured aquifers to tap gas dissolved in
brine, not for producing gas from partially
depleted or nearly depleted gas reservoirs.
In the light of this conclusion, which is consistent with both the
NGPA and its regulations, and is within the discretion of the FERC,
we affirm its ruling that the wells in issue, which previously
produced gas cap gas, do not qualify as high-cost natural gas
producers.
WRT contends that the FERC’s final finding, if upheld, is
impermissibly retroactive. We recognize that this is the first
time the FERC has squarely addressed these issues, and it comes
years after the NGPA was repealed. But, WRT does not challenge the
FERC’s making a final finding. Although the NGPA was repealed in
pertinent part by the Wellhead Decontrol Act, the FERC continued to
make determinations regarding high-cost status through the date of
its rule rescinding Part 275 of its NGPA regulations, 28 July 1994.
The FERC received the LOC’s determinations in this case in April
and May 1994, before the effective date of the rescission. 59 Fed.
Reg. 40,240 (28 July 1994).
Concerning this retroactive-rule-making contention, we note
that WRT apparently relied, perhaps imprudently, on the affirmative
LOC determination as to the first well when it subsequently
installed the new technology on its other four wells, prior to
receiving a final determination from the FERC as to that first
well. In any event, the fact that the final determination followed
repeal of the NGPA and installation of the new technology does not
render it retroactive. Moreover, as noted, long before the new
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technology was installed and production resumed, the FERC had
spoken -- certainly in part -- to the issues at hand. 18 C.F.R. §
272.103(c); 44 Fed. Reg. 61,950. The application of the language
from the regulations and preambles, and indeed from the statute
itself, to this record cannot be said to be retroactive.
III.
For the foregoing reasons, the final finding of the Federal
Energy Regulatory Commission is
AFFIRMED.
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