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.
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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
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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).
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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.”
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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
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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
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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).
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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
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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
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“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
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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
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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
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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.
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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).
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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.
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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).
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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
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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.
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