Independent Petroleum Association of America v. Bruce Babbitt

to the off-limits the matter places That sale that very aspects of the consider the FERC. agency specifi- by an assessed have been . authority Congress with cally vested for re- petition grant PGT’s We therefore subject. over the the Commis- challenges as view insofar of what in terms 1(c) NGA, is couched Although ANR authority under sion’s consider, a required to is 717(c). the Commission dis- also Accordingly, .§ we U.S.C. Congress when logical implication by the CPUC petition filed moot miss as a matter jurisdiction over explicitly reserves (without agency has resolving whether no here, has states, the Commission deny peti- complain) and we standing to n a “induc[e] how to considering Expansion business by Altamont and tion filed respect to that policy” with state] change [of Shippers. event, offers the Commission In matter. So ordered. authority. contrary no that it has Instead, insists Commission rates jurisdictional

merely PGT’s lowered authority intruding upon the

without The, rings hollow indeed. claim This CPUC. equity return PGT’s lowered

Commission change to “indue[e] to a

specifically jurisdictional purview,” beyond [its] policy regulate PG&E i.e., the CPUC to pressure PETROLEUM INDEPENDENT could desired but as the Commission AMERICA, OF ASSOCIATION circumstances, the require. Under itself al., Appellants, et attempting to do indeed was Commission directly, that not do indirectly could what .it Congress

is, that the a matter intercede in al., Appellees. BABBITT, et Bruce Cen State. See Northwest reserved 95-5210, 95-5245. Nos. Comm’n, Corp. Pipeline v. State tral . 493, 512, 109 S.Ct. U.S Appeals, Court States United (“The (1989) designed NGA was L.Ed.2d 509 Circuit. District Columbia produce power and supplement state regulation of comprehensive April harmonious 1996. Argued reg nor industry. Neither state federal Aug. Decided juris upon the ulatory body to encroach other”). diction III. Conclusion a Hin conceding that PG&E expressly de pipeline, the Commission

shaw company’s pipeline

clined-to look behind and to treat PG&E

corporate structure uphold that company. single We

PGT as hold therefore

step as reasonable must exempt rates

that PG&E’s California Al jurisdiction of the Commission. ordinarily has the

though. the Commission beyond its

authority consider a matter jurisdictional matter affects

jurisdiction if the abe there would otherwise least

sales' —at if gap there is no such

regulatory gap-—here congression

but, contrary, express body. jurisdiction to another

al reservation of Lazarus, Depart- B. United States

William Justice, appel- argued the cause ment of Acting lees, Coppelman, Peter D. with whom General, L. Attorney and Robert Assistant DC, were on Washington, Klarquist, brief. DC, McBride, Washington,

Lawrence G. curiae Interstate for amicus was on the brief al., et Association America Natural Gas appellants. support of LA, Whitrock, Rouge, Baton Frederick C. curiae State was on the brief amicus support appellees. Louisiana Attorney Unna, Gen- Special Assistant Jan eral, curiae State on the brief for amicus was Mexico. of New DC, Grant, an Washington, entered E. Jill curiae Jicarilla appearance amicus Apache Tribe. BUCKLEY, and SENTELLE

Before: ROGERS, Judges. Circuit court filed Circuit Opinion for the Judge SENTELLE. dissenting opinion filed Circuit

Separate Judge ROGERS.

SENTELLE, Judge: Circuit gas producer and and Appellants, oil association, industry chal- petroleum trade arbitrary capricious and incon- lenge as Department of applicable law a sistent with (“DOI”) royal- decision to collect the Interior gas pro- charges from the ties interest appellant on ducer of a well on made to a lessee natural exchange com- allotted Indian lands prospective accrued and take-or- promise of outstanding contract. under an pay liabilities appellant claims gas producer also royalties to collect if the DOI decision even valid, by a government is barred collecting from of limitations statute specific take-or-pay set- on the and interest this case. The issue in tlement summary judgment granted District Court government on both issues. Because for the impermissibly depart- that DOI for we argued the conclude Leggette, L. Poe causes Bruce, attempt- whom, practices its established ed from E. appellants, with Edward DC, ing collect Washington, was on the briefs. (1991) (“AGA II)). Previously, District Court and we reverse the natural

payment, merchants, gas pipelines appellant pur cannot acted gas producer hold that the wellhead, it, chasing gas at transporting any royalties on the set- required be reselling it compa to local distribution accordingly find it payment. We tlement (“LDCs”) large nies end users. In the unnecessary the statute of limita- to consider 1980s, concluding system after that this re tions issue. sulted various market distortions and inef ficiencies, Energy Regulatory Federal Background: Indus- I. The Natural Gas (“FERC”) began Commission lengthy Royalties “Take-or-Pay” try and process transforming pipelines from Payments and Settlements gas. Along merchants to common carriers of DOI, Management through its Minerals way, Congress completed deregula (“MMS”), and administers issues Service gas prices through tion of wellhead the Natu gas production leases for offshore oil and (“De ral Gas Wellhead Decontrol Act of 1989 Lands Act under the Continental Shelf Outer Act”), 101-60, control Pub.L. No. 103 Stat. (“OCSLA”), § seq., 43 1331 et for U.S.C. regulated pricing, 157. Under wellhead production on federal lands under onshore pipelines, policy, consistent with FERC had (“MLA”), Leasing Act 30 U.S.C. the Mineral long-term, price entered into fixed wellhead Leasing seq., § and the Mineral Act 181 et purchase price contracts. After wellhead de Lands, seq., § Acquired 30 351 et for U.S.C. regulation price gas dipped the market production on Indian tribal and allot- and for long-term prices well below the contract 396, 396a-396g. §§ ted lands under 25 U.S.C. I, pipelines pay. were committed to AGD royalty provisions leases include Certain DOI 824 F.2d 995-96. percentage calculate as a which Unfortunately pipelines, for the the well saved, production “amount or value of the usually take-or-pay head contracts contained See, removed, e.g., or sold” the lessee. provisions, required pipeline which (C) (G); OCSLA, 1337(a)(1)(A), § 43 U.S.C. & seventy-five percent for as much as 226(b) k(l)(2); MLA, § see also 30 U.S.C. & if it eontraeted-for even did not take the (1995) (tribal leases); § 25 25 211.13 C.F.R. (Often, gas. pipeline Id. at 996. could (1995) (Indian § 212.16 allotted land C.F.R. payments “make-up gas,” credit these toward leases). dispute over This case involves gas taken at a later date. See Diamond lump-sum payments by gas made whether Hodel, Exploration Shamrock Co. v. 853 large “take-or- pipelines to lessees to settle (5th Cir.1988) (“Diamond 1159, F.2d 1164 long-term gas pay” liabilities accrued under Shamrock”)). pipelines Because the could purchase properly contracts are long-term rely corresponding sales royalties. (FERC customers had contracts their controversy from a fundamen This arises abrogate allowed those customers to such industry change natural over tal pipelines, contracts with see Wisconsin Gas generally past years. several See United (D.C.Cir.1985), FERC, 1144, v. 770 F.2d Co. FERC, Distribution Cos. v. 88 F.3d 1105 denied, 1114, rt. 106 S.Ct. U.S. ce 1968, curiam) (D.C.Cir.1996) (discussing (per (1986)),they 90 L.Ed.2d 653 soon found beginning line of cases with Associated Gas themselves headed for financial ruin as their (D.C.Cir.1987), FERC, F.2d 981 Distributors v. supply cheaper customers switched to denied, 1006, rt. 485 U.S. 108 S.Ct. experimented with several sources. FERC ce 1468, (“AGD (1988) F), 99 L.Ed.2d 698 mechanisms, relief see United Distribution FERC, including Ass’n v. 888 Cos., 1124-27; American Gas 88 F.3d at Baltimore Gas & (D.C.Cir.1989), FERC, denied sub F.2d 136 cert. Elec. v. 26 F.3d 1132-33 Co. Comm’n, (D.C.Cir.1994); major nom. FERC v. Public Util. resolution of 373, 112 through U.S. 111 S.Ct. L.Ed.2d 335 liabilities occurred (1990) (“AGA7”), pipelines sup and American Gas Ass’n v. and their settlements between (D.C.Cir.1990), FERC, II, cert. at 1508-09 pliers. 912 F.2d 1496 AGA See FERC, private City (upholding decision to allow denied sub nom. Willcox FERC’s negotiations, structured 112 L.Ed.2d under incentives 498 U.S. S.Ct. OCSLA, See, industry’s e.g., U.S.C. Commission, remedy the lessee. 226(b); 1337(a)(1)(A); MLA, 30 U.S.C. pipelines could The take-or-pay problems). (1995) (tribal § 211.13 see also 25 C.F.R. some of the costs pass on at least then (1995) (Indian leases); § 212.16 25 C.F.R. See to their customers. settlements these leases). general rule on MMS’ Passthrough allotted land Mechanism Order No. “gross proceeds royalties, as the Buyout Buy- known Take-or-Pay Pipeline ¶ rule,” 61,163 (1990), provides that “under no circumstances Costs, order 53 FERC down ¶ denied, royalty pur- 61,095, reh’g 55 shall the value reh’g, 54 FERC ¶ accru- (1991). gross proceeds 61,372 poses be less than the FERC production.” 30 ing to the lessee for lease were of two take-or-pay settlements 206.152(h) (1995) (emphasis add- C.F.R. In “buyouts.” types “buydowns” — (1995) ed).1 § 206.151 defines lump pays a cash sum buydown, pipeline “the total monies and “gross proceeds” as exchange for contract producer to the accruing to oil and other consideration contract) (or providing a new amendments [gas].” disposition of gas lessee for the of the contracted-for for continued sale underlying leading present case issue buyout, pipeline prices. In a at reduced gas contract settlement is whether lump exchange for re sum pays cash “gross proceeds.” a ser- are included gas purchase pipeline from the lease of the decisions, deter- ies of administrative MMS producer is then free to sell contract. The royalties due on both mined that are take-or- contract gas to someone else. Some payments payments gas contract pay and buydowns partial both settlements included decisions reached settlements. Before these cases, the buyouts. In some partial and review, judicial stage DOI issued rules of thereof) (or portions payments settlement January adopting a broad definition gas pur recouped through future could be “gross proceeds”: be cred payments in which the would chases (for royalty payment See, proceeds” “Gross purchase gas. price toward the ited Co., Ltd., purposes) means the total monies MMS- e.g., Blackwood & Nichols accruing other consideration to an oil 20, 1989), (Apr. 10 Gower Fed. 88-0008-O&G ... disposition lessee for Serv., Royalty Management Valuation and gas.... proceeds, applied as to (“Blackwood Co.’’) Gross (construing at 2 & Nichols gas, also includes but is not limited to: containing agreement both a settlement Payments Take-or-pay payments_ nonrecoupable payment). recoupable and a exploration or or credits for advanced types of contracts also often include Both development prepaid costs or reserve liability existing previously settlement of recoup- payments that are take-or-pay obligation. incurred through against pur- ment credits among producers were As DOI lessees price through prices or reduced chase agreements, be- entering settlement MMS later sales and which are made before royalty implications of gan to address production part become commences take-or-pay payments and contract settle- gross proceeds time of first as of the As we payments on lessees’ liabilities. ment production. earlier, governing the noted the statutes royalty Royalty Regula- require they contain a Revision of Gas Valuation leases Fed.Reg. royalties paid Topics, and Related contemplating to be on tions clause 1988) (January (promulgating 30 percentage or value of 1275 a set of the “amount (1988)). saved, removed, C.F.R. 206.151 production or sold” proceeds accruing gross gross the lessee from the proceeds rule in effect 1. The version of the 1, 1987, making (1987). the date of the on December the litigation, sale thereof." 30 C.F.R. 206.103 at the source of this wording gross proceeds rule was current of the substantive man- did not differ Royalty adopted in 1988. See Revision of Gas provided "[u]nder no ner. That version Topics, Regulations Valuation and Related production of shall the value of circumstances 15, 1988) Fed.Reg. (January (promul- purposes any of said substances for the of com- (1988)). gating 30 C.F.R. 206.151 puting royalty than the be deemed to be less successfully payment ties on a settlement August In some lessees because the rulings requiring challenged pre-1988 payment “subject recoupment was not immediately paid on take-or- through against to be purchase price credits and the payments. sales”). the lease Because through prices reduced in later contemplated royalty controlling statutes 3,1993, May step On MMS took another “production” the value of the payments on clarifying pay- its treatment of settlement royal- Fifth concluded that gas, the Circuit Shaw, ments. a letter from James W. take-or-pay payments at ties were not due on Royalty Management, Associate Director for payments made. Dia- the time those are MMS announced that “some or all of a settle- (emphasis mond payment royalty or will is become bear- added). court reasoned that the statute ing specific money if to which is actually pro- contemplates attributable occurs.” Letter from James W. taken, take-or-pay payments duced Shaw, Royalty Associate Director for Man- “payment pipeline-purchaser’s for the MMS, agement, “Payor” (May addressed to (take) gas,” payment purchase failure 1993) letter”). (“May 1993 An enclosed “[rjoyalty gas. Accordingly, Id. at 1167. description royalty policy of the MMS only are due on the value of miner- payments explicit: is more i.e., actually produced, physically als severed Shamrock], Consistent with [Diamond ground. No is due on take- [Royalty Management Program is, until or-pay payments [that unless and (“RMP”)] interpretation policy actually make-up gas] produced and tak- portion pay- that a or a of a en.” Id. at 1168. royalty bearing ment is if the mineral seeking Rather than review Dia pro- which the is attributable is applying decision or mond Shamrock original duced and sold either to the geographic to leases within the domain purchaser purchaser, or a substitute Circuit, gross pro Fifth MMS amended its part “gross proceeds” received for comport the decision. It ceeds rule to disposition ap- of that under phrase “[t]ake-or-pay payments” deleted the plicable regulations. “gross proceeds” and from the definition only would accrue letter, determined May 1993 Enclosure at Under take-or-pay payments pipeline when a on interpretation, royalties this on become due make-up gas. takes Revision of Gross Pro payments regardless of whether and Gas Valuation ceeds Definition Oil payments “recoupable” those or not —the 45,082, 45,084, 45, Regulations, Fed.Reg. only question relevant is whether or not the (Nov. 1988). 8, applied also the MMS gas originally spoken which was for in the contemporane rule of Diamond Shamrock in eventually settled contracts is sold to some- proceed subsequent ous and administrative one. Co., ings. Energy Fe MMS-85- See Santa by Dispute: Challenges II. The Instant (Oct. 14, 1988), 5 Gower Fed. 0046-OCS IPAA and Samedan Serv., Royalty Management Valuation and (citing holding and at Diamond Shamrock Proceedings A. Administrative take-or-pay payments and 1993, Independent In Asso- Petroleum “only if settlements become due and when (“IPAA”) ciation of America filed suit pipeline”); make-up gas is taken U.S. District Court for the Northern District (holding at 2 Blackwood & Nichols Co. Virginia challenging May of West agreement containing for a settlement both a June 1993 letter and Assistant recoupable nonreeoupable payment, and a gas requesting order information on contract only recoupable payment would become settlements. After transfer of the case royalty bearing, “to the extent cred Court, the D.C. District IPAA dismissed its against production”); ited future Wolverine Co., challenge (May to the June 1993 order. Soon Exploration MMS-88-0052-IND thereafter, 2, Serv., 1990), DOI issued its final decision Royalty 10 Gower Fed. Valu royal- payment royalties in a case in- Management (denying at 4 ation and 3,May 1993 letter policy outlined its Corpora- producer Oil volving gas Samedan $100,000 $10,294 (“Samedan”). ease was to and concluded Samedan’s tion compensation for al- pay- represented for the settlement test case become and that ready take-or-pay liabilities accrued royalty question. $89,706 buyout payment represented a under of Indian lands is a lessee Samedan obligations. Id. remaining purchase for the form, typical provides, lease which a 1979 appeal, but made an administrative Samedan value of twenty percent Indian Affairs Ada E. Assistant to be “shall not be-deemed production which order. Samedan Oil upheld Deer the MMS accruing proceeds gross less than 16, (September Corp., MMS-94-0003-IND thereof.” In the sale Lessee from Serv., 1994), Royalty Valua- 16 Gower Fed. take-or-pay ten-year into a entered Samedan Management. tion Natural agreement with Southern gas sales first addressed Deer (“Southern”). Assistant take-or- Company Gas $89,706 buyout considering sit- payment, required pay clause Southern pur- pipeline continues to uations where the gas percent of the contracted-for eighty-five gas after the settlement situations chase gas. A that it did not take the in the event purchas- sold to a substitute where the is allowed to credit make-up clause Southern er: against “excess” gas (gas buyout arrangement taken over and above the make-up parties to a the five requirements) subsequent production taken over contract ... know that will By following payments. April years prices and that the lessee- be sold at lower price dropped had price the market not obtain the same producer will price, lump-sum the contract A original one-fourth of contract. about under the stopped taking gas from Samedan. buy obligation to take Southern out $51,468 refused to make required higher prices Southern there- volumes take-or-pay payments billed Samedan. in some de- compensates fore the lessee and South- price December Samedan the lessee will gree On for the reduced complete buyout, terminating agreed produced to a ern when the and de- receive exchange for a “nonre- the 1981 contract livered. $100,000 pay- and nonrefundable” coverable purchaser, The fact that a substitute full and final settle-

ment “in resolution and original purchaser, in- instead of the obligations and liabilities ment of and all buyout does not volved in the situation may or have under the that Southern has change The result from the the result. Agreement and Re- Contract.” Settlement perspective, and the benefit to the lessee’s 1987). (December 1, the same at 2 On lease production, is the same lessee gas for- day, contracted to sell the Samedan identity party regardless of the tak- merly to Hadson Gas allocated to Southern delivery. bought If out ing volumes (“Hadson”) price. at the market Systems, produced to the substitute and delivered Subsequently, sold some of the Samedan also agreement, purchaser under a successor 1989, By had sold gas to Transok. Samedan paid by original purchaser the amount would have been sold to all the which obligation to take the to be relieved of its contract, the 1981 but South- Southern under part which the lessee gas is of the benefit of it. purchased ern none production. pay- derives from that attributable to those vol- ment therefore is years and after an audit of Several later part of the total amount umes and becomes royalty obligations, ordered MMS Samedan’s production. for that paid to the lessee $20,000 royalties, which Samedan $100,000 twenty Id. at 16-17. Assistant Deer represented percent that payment found irrelevant the fact from Southern. MMS 206.152(b)(l)(ii) (1993), regula- Be- one Order re Contract Settlement Service governing oversight of Corporation and South- tions MMS’ tween Samedan Oil payments, refers to “the total consideration Company Natural Dated December ern Gas 1993). (December actually directly or indi- applied transferred either MMS Babbitt, dent Ass’n America v. buyer to the seller for the Petroleum rectly from the added). (D.D.C. 1995) is no rea- (emphasis “[T]here 1995 WL 431305 June gas” (“IPAA”). buyer’ in the cited why term ‘the son buyers both under

regulation cannot mean IPAA, the District Court considered to which the of the sales contracts both (1) May three issues: whether the 1993 letter subject involved under the circumstances was rulemaking subject awas to APA notice-and- Corp., Oil MMS-94-0003- here.” Samedan (2) appro- comment what the requirements, IND at 18. priate reviewing standard is for the Assistant rejected Secretary also Assistant 16, 1994, September decision of May argument that the 1993 let- Samedan’s (3) whether that decision should survive prior with numerous ter was inconsistent IPAA, appropriate level of review. positions. Id. at 18-23. agency decisions and WL 431305 at *3. The court held that the rejected the claim that under the She also letter did not constitute a rule for APA no- (“APA”) Act Administrative Procedure purposes. “Nothing tice-and-comment validly issued without letter could not be procedures authority in DOI’s vests the As- rulemaking, concluding notice-and-comment MMS, or Di- sociate Director of even the within ... the letter “falls well rector, proclamations binding to issue exception to the APA’s notice-and-comment agency.... May The court finds that the rules, requirements ‘interpretive general statement,’- ‘agency letter is not an it has no policy, agency orga- statements of or rules effect,’ binding ‘prescribe ‘future and cannot nization, practice.’” Id. at procedure, and ” policy.’ law or Id. at *4. The court also 553(b)(3)(A)). (quoting 23-24 5 U.S.C. She if determined even the letter were a $10,294 payment concluded that the further rule, exempt'from it was notice-and-comment take-or-pay to settle accrued liabilities was rulemaking clearly interpre- because “it was reasoning royalties, that such also *6; tative not substantive.” Id. see also payment possible future a makes 553(b)(A) (“[T]his APA, 5 U.S.C. subsec- delivery prices. compro- at lower “The apply interpretative tion does not ... payment properly regarded mise therefore rules, general policy, statements of or rules anticipation price as a lower agency organization, procedure, prac- if and to the to be received the lessee tice.”). produces extent the lessee later take-or-pay payment volumes to which The District Court next concluded applied.”

would have Id. at 27. Same- been protestations, despite plaintiffs’ agree- dan also claimed that the settlement apply would to Assistant Deer’s comparable legal judgment, to a U.S.A., Inc. production, which not a decision the deferential Chevron Council, Inc., imposition royalties was inconsis- v. Natural Resources that the Defense 2778, 2781-82, 843, 104 previous and with tent with MMS decision 467 U.S. S.Ct. (1984), prior FERC statements about the nature of and Enron L.Ed.2d 694 Oil Gas Cir.1992), (5th payments. The As- Lujan, v. 978 F.2d 215 Co. Secretary rejected arguments denied, 813, 114 sistant these 510 rt. U.S. S.Ct. ce (1993), at as well. Id. 30-36. 126 L.Ed.2d 29 standards for review interpretation agency’s of an administrative Proceedings B. District Court governing of its statute and its own rules. Chevron, at *8. a court first asks Id. Under judicial sought review of Assis- Samedan Congress directly spoken to “whether has ruling; tant Deer’s the District Chevron, precise question at issue.” 467 the challenge Court consolidated Samedan’s with so, at 104 at 2781. If letter; U.S. S.Ct. challenge May IPAA’s to the 1993 give Congress’ intent. court must effect policy. and DOI counterclaimed to enforce its But if court concludes that the statute is granted summary judgment The court ambiguous respect spe “silent or with government separate all in two issues issue,” Deer, step of the cific it moves to the second opinions. Corp. v. Samedan Oil (D.D.C. 843, 104 14,1995); at 2781-82. In Indepen- inquiry. Id. at S.Ct. WL 431307 June agency considering sever- agency’s final action. After step, it defers to the the second ambiguities in of the statute as “if it is reason- al the terms interpretation of statute case, pur- in the court concluded that applied consistent with the statute’s this able and (2) (1) contract, Serv. is a pose.” Nuclear Resource the Samedan lease Information (D.C.Cir.1992) NRC, government’s neither the MMS order nor (internal quotation money damages marks and citation omit- as “pursued counterclaim ted). judicial applied A limita- similar standard in the statute of that term is utilized” agency’s interpretation Samedan, *5-*6, of its of an review tions. 1995 WL interpretation regulations. Such an own The court also noted several other rea- *6. reasonable, only only be and not the “need why limitations does not sons the statute of the court would interpretation or the one government’s effort to collect apply to the initially if it were faced with have reached $20,000 royalties. Id. at *6-*ll. Ac- (cita- Enron, question.” F.2d at 215 government’s coun- cordingly, it held that the omitted). tion The District Court held appeals is not barred. Samedan terclaim ‘gross proceeds’ is Deer’s “construction of decision on the statute District Court’s permissible, reasonable and not inconsistent limitations issue. governing regulations, nor with the with DOI IPAA, 1995 WL 431305 at *12. statutes.” Analysis Challenges Appellants’ III. court concluded that Deer’s decision was May Letter and the Assis- with the Fifth Circuit’s hold- not inconsistent tant Decision May ing in Diamond Shamrock: “The May APA A. The 1993 Letter and No- ground lump-sum letter covers new settle- — Rulemaking tice-and-Comment upon by Diamond ments —not touched The APA defines an administrative Only one issue was common to Shamrock. part agency whole or a of an situations; rule “the and treatment of that issue both general particular applicabili statement of or totally Royalties consistent. on take-or- implement, ty designed future effect provi- if make-up revenues are due interpret prescribe policy.” law or sions are exercised.” Id. at *10. The court 551(4). § further re U.S.C. The statute without on settle- also noted quires imple such rule must be “producers an payments, ment would have through mented the notice-and-comment negotiate large pipelines incentive to procedures give which “interested exchange non-recoupable DOI, persons opportunity participate an drastically gas prices. reduced future 553(c). making.” IPAA and rule 5 U.S.C. acting on behalf of federal and Indian les- argue sors, Samedan that the letter constituted unjust should not condone enrichment requirements. agency rule to these producers through self-serving, opportun- arrangements.” at *12. istic settlement Id. itself, By the letter did not constitute appeal IPAA and Samedan the District rulemaking requiring APA notice-and-com- decision. Court’s procedures. As the District Court found, separate opinion, “[njothing procedures Dis- vests its Samedan DOI’s argument authority in Director of trict Court considered Samedan’s the Associate MMS author], Director, government’s claim for letter’s or even the [the against proclamations binding agency. Samedan is barred the statute of issue 2415(a), pro- court can not and will not invent such limitations 28 U.S.C. which IPAA, brought by authority.” 431305 at *4. vides that all actions the United 1995 WL money damages Quite simply, May 1993 letter is not an States for based on contract brought years “agency claims be within six after statement” with “future effect” since must or, later, year agency any way.2 if the claim arose within one it did not bind the general agency policy Court if statements of are ex- The District held even the letter rule, empt requirements. 5 constituted an APA notice-and-comment from notice-and-comment 553(b)(A). required holding rulemaking § was not because the letter U.S.C. Because of our all, IPAA, qualify interpretative an the letter does not constitute a rule at we find would as rule. unnecessary qual- Interpretative it 1995 WL 431305 at *4-*6. rules it to consider whether would saved, removed, production” constituted a rule or sold that the letter Arguing OCSLA, require- subject APA notice-and-comment lessee. See 43 U.S.C. MLA, 1337(a)(1); 226; ments, § we set forth appellants stress the test 30 U.S.C. (tribal Congress leases); Mining v. Mine 211.13 in American C.F.R. Safe- Admin., (Indian leases). 1112 § ty and Health 212.16 allotted land (D.C.Cir.1993), distinguishing between regulation gross proceeds relevant is the interpretative rules. rules and substantive rule. “effectively if a there that rule

We held Appellants argue that normal admin rule,” legislative a rule prior it is amends a istrative, apply law standards do not in this subject “legal to notice-and-eom- effect” claim, They they case. as did in the District requirements. Appellants contend that Court, that Assistant Deer’s deci past practice of ex- the letter altered DOI’s actually interpret sion does not statutes cluding take-or-pay settlement rules, agency interprets but instead the Fifth However, ap- if proceeds. even gross from Circuit’s decision in Diamond claim that pellants are correct their which, contend, they already has addressed system in royalty computation the letter de- controversy They at issue this case. substantially prior legislative from a parted argue “reinterpretation” that DOI’s of Dia rule, not itself constitute a the letter would problematic mond is Shamrock because DOI re- to notice-and-comment “rule” already regulations has amended its to com agency an quirements. Id. The letter is not ply supra with Diamond Shamrock. See all, interpretative, be- legislative rule at (citing Revision Gross Proceeds Defi to, capable it purport it nor is cause does Regulations, nition in Oil and Gas Valuation However, of, binding agency. appellants’ (Nov. 45,082, 45,083 45,084, Fed.Reg. past practice with arguments about DOI’s 1988)). Thus, claim, they agency is rele- regard to settlements are acquies its own hand —it is own bound its the Assistant vant to our evaluation of Secre- cence Diamond Shamrock that bars it case, and tary’s decision in the Samedah we “reinterpreting” from that decision. Because appel- as we now turn to will consider them court, agency, and not administrative challenges to that decision. lants’ proper place construing past judi is the decisions, appellants cial contend that we Secretary’s Decision B. The Assistant interpretations. should not defer to DOI’s Review 1. Standard of By implication, we would also not afford the actions of administrative We review Assistant decision benefit arbitrary capricious agencies under the standard, arbitrary capricious the APA’s 706(2)(A). APA, standard of the U.S.C. already Diamond has deter as Shamrock earlier, in we noted our review defer As we analysis. APA mined the outcome of the agency’s interpretation of a to an reasonable Appellants support cite in of their claim long so statute it is entrusted administer interpreta that we not defer to DOI’s should unambigu it not inconsistent with the the United tion of Diamond Shamrock ously expressed congressional intent. Chev Supreme Court’s statement States U.S.A., Inc. v. Natural Resources De ron we have determined a statute’s clear “[o]nee Council, Inc., 837, 842-13, 104 467 U.S. fense meaning, we adhere to that determination (1984). 2778, 2781-82, L.Ed.2d 694 S.Ct. decisis, “[djeference the doctrine of stare and we under noted, As the Court District agency’s interpretation later judge an clearly agency in order when an even more against prior our determination of the statute interprets regula its own administrative Industries, meaning.” Maislin IPAA, statute’s (citing 1995 WL 431305 at *6 tions.” Inc., U.S., Steel, Tollman, Primary 497 U.S. Inc. v. 380 U.S. S.Ct. Udall (1965)). 116, 131, 2759, 2768, 111 L.Ed.2d 94 792, 801, 110 S.Ct. 13 L.Ed.2d 616 rele (1990). is not stare royal But Diamond Shamrock provide case vant statutes this in this case. Diamond Shamrock is “amount or value of decisis ties shall be based on the exception ify interpretative if were a rule. rule

1258 interpretation that respect a of a sister termination DOFs deserving of as decision authority circuit, binding gross proceeds on us. rule is unreasonable under but it is not is, case, in if in- language from Maislin is therefore That this DOI’s The cited Chevron. proceeds point. terpretation gross rule is not on unreasonable, it is unreasonable because the say agency’s This is not to that the application interpretation of that in the case Fifth decision is acquiescence in the Circuit’s take-or-pay payments of consti- Chevron, unimportant. Under irrelevant or unexplained departure tutes an from the gross proceeds interpretation of DOI’s agency’s adoption of Diamond Shamrock. only to a standard of reasonable rule is held Broadcasters, See National Association of ness, interpretation must be reason but the F.2d at 1201. 740 adoption Diamond ligkt able in DOI’s Apache ar 706(2)(A) review, Amicus the Jicarilla Tribe also §APA Shamrock. Under gues a different from standard review Secretary’s decision must satis the Assistant law standards we normal the administrative arbitrary fy capricious and standard inso Tribe, ly apply. According we are payments far it treats contract settlement Secretary’s not review the Assistant decision differently way take-or-pay it treats standard, arbitrary capricious An under the and payments under Diamond Shamrock. rigorous in but under the standard of a fiducia agency must treat similar cases a similar legitimate ry duty it Indian who provide manner unless can owed DOI to tribes failing leasing Among to do so. See National are Indian lands. other reason FCC, v. things, Association Broadcasters the Tribe relies on a Tenth Circuit (D.C.Cir.1984) 1190, (stating fiduciary duty 1201 that opinion which states that this agency depart from its conclusion requires could to Indian oil and lessors that explana prior in a decision without reasoned merely DOI’s “actions must not meet tion). law, requirements minimal of administrative pass scrutiny but must also under the more past, in As we have noted “Chev stringent of a standards demanded fiducia arbitrary capricious and and re ron review ry.” Apache Supron v. Jicarilla Tribe Ener overlap margins.” view Arent v. (10th Cir.1984) 1555, gy Corp., 728 F.2d 1563 Shalala, (D.C.Cir.1995); 615 F.3d J., (Seymour, concurring part in and dissent Regulatory National Ass’n Util. Comm’rs ing part), majority adopted as en banc (D.C.Cir.1994). ICC, F.3d (10th Cir.), opinion, 782 F.2d cert. overlap. The instant case falls within that denied, U.S. S.Ct. A that has acted incon determination DOI (1986). unnecessary L.Ed.2d 416 find it We sistently adoption of Diamond its fiduciary duty argu to consider the Tribe’s phrased Shamrock could be as a conclusion ment. Even if the Assistant de agency’s interpretation that is unrea standard, cision should be this light adoption of its of the Fifth sonable pass arbitrary must also the APA’s and ca agency decision or that had Circuit’s pricious test. Because we conclude below arbitrarily treating take-or-pay acted set arbitrary that the decision fails to meet the payments differently tlement from take-or- test, capricious and we need not reach the pay payments, governed by which are fiduciary duty issue. agency’s adoption of Diamond Shamrock. proceed We now to examine the Assistant analytic two frameworks this case Secretary’s decision under the APA’s arbi- produce ques the same result. Because the trary capricious standard of review. analysis tion at the root of the is whether types payments DOI has treated the two Analysis differently, arbitrary capricious ana However, must decide whether it was arbi lytic apt. framework is the most ? trary capricious DOI to conclude we stress within the boundaries of this case, take-or-pay payments royalty determination the Assistant Sec (follow bearing light retary’s arbitrary capricious of its determination decision is Shamrock) light adoption ing of DOI’s of Diamond Diamond functionally equivalent bearing Shamrock is de- themselves are not only take-or-pay payments on and are due on specifically allocat- payments are until those [i.e., gas actually produced from the and taken physically severed so- gas that is ed “make-up” gas].’” that DOI has failed conclude called Revision of Gross ground. We nonarbitrary for reason a sufficient Definition in give Proceeds Oil Gas Valuation payments (No- different- types 45,082, 45,082 treating Fed.Reg. the two Regulations, 53 1988). ly- vember DOI thus demonstrated that it understood Diamond Shamrock to be analysis an examination begin our We saying royalties only that would be due on holding in Diamond basis for the take-or-pay type payments pay- when those placed heavy Fifth Circuit Shamrock. recouped. ments were Two sentences later roy- necessary link between emphasis on order, quoted in its revision DOI from the gas, finding it production of and actual alties court’s conclusion with the bracketed inser- statutes, regula- from the relevant “obvious” royalty take-or-pay pay- is due on tion: “No royalties provisions that “are and lease tions gas [namely, make-up and until ments unless even ‘market value’ on ‘value’ or due gas] actually produced and taken.” Id. at is abstract, produc- value of but on the 45,083. emphasizes that This insertion DOI saved, from the leased removed or sold tion in 1988 as read Diamond Shamrock we read Shamrock, 853 F.2d at property.” Diamond because, today. important it This fact is as Similarly, determined that the court subsection, previous we noted is the “only applies gross gross proceeds rule agency’s adoption application of Dia- the lessee from the proceeds that accrue to that is the mond Shamrock relevant consid- substances, produced disposition or sale of another Fifth eration. DOI cites Circuit is, actually and delivered to removed Co., case, Frey Production v. Amoco pipeline.” Id. (5th Cir.1991), vacated review F.2d 578 for required argues that the connection DOI Court, Supreme F.2d Part Louisiana royalties physical severance between (5th reinstated, Cir.1992), IIA 976 F.2d 242 is, royalties on temporal only; that must be attempt in an to demonstrate that even the produced, re- payments accrue when is Fifth Circuit reads Diamond Shamrock more payments those came gardless of whether narrowly Frey, In Fifth appellants. than gas. But this purchaser of the from the royalties are owed on con- Circuit held reading account for Diamond does not However, payments. Frey tract settlement emphasis the link between Shamrock’s decision, inapposite. In that the Fifth is royalties physical severance. Under Di- distinguished Diamond Shamrock Circuit at the time of amond any not on the basis of functional difference pro- take-or-pay payment, no payment or a take-or-pay payments and settle- between occurred; royalties no has therefore duction payments, grounds ment but taken, make-up gas accrue. But when language Frey involved different lease to be take-or-pay payment is credit- portion of the law under construed not under federal make-up gas. It is payment ed as Frey, 943 F.2d at 581. Louisiana law. royalties to collect therefore reasonable funds, just been trans- which have these Diamond Shamrock’s construction Under payments gas produced. formed into requiring a link statute royalty upon payments and the Fifth Circuit relied between That is what the gas, is no mean- physical severance of there in Diamond decision—the exis- its Shamrock pay- a settlement upon ingful distinction between of a direct link between the funds tence take-or-pay payment physical recoupable and a imposed and the which actually produced either gas. is how DOI read that no severance of This roy- recoupable But unlike the when it revised its case. Diamond Shamrock pay- payment, nonrecoupable settlement alty describing regulations in 1988. holding, quoted never credited as DOI ment is Diamond Shamrock ease, ground. gas actually When severed from the court’s introduction actually sold to a substi- gas is severed and inserting bracketed material: “the court does purchaser, are not due tute that ‘... ruled (or pay- take-or-pay payments link gas. for the The payment as not serve ments) pay recouped, those funds do which are are funds on between (of payments gas. of is But when the production actual severed and the claimed nonrecoupable, variety) are the funds either missing. gas.4 severed There- are never linked to course, that DOI argue, of possible It is fore, payments. royalties accrue on those no holding in Diamond merely adopted the reasoning opin- of but not Shamrock analysis, we find As- preceding Under scenario, DOI could collect ion. Under this Secretary Deer’s decision Samedan sistant payments because royalties on settlement Corp. arbitrary capricious light of and Oil not address settle- did Diamond Shamrock adoption of the Diamond Shamrock DOI’s with this line problem The payments. ment holding. take-or-pay payments nor Neither already we have reasoning is as of payments royalty take-or-pay settlement are Diamond Shamrock has read explained, DOI they bearing unless and until are credited royalty-bearing requiring a link between purchase make-up gas. toward the regulated gas and has payments severed and agency cannot meet the ar- accordingly. An IV. Conclusion by treating type A test bitrary capricious and similarly type differently from situated cases Secretary Having reviewed Assistant type B a court once decided cases because Corp. and Deer’s decision Samedan Oil agency where the ratio- against A case arbitrary capricious in found it to be and applies to both. of the court decision nale acquiescence in light of DOI’s the Fifth Cir- B, of cases A and where The treatment Shamrock, cuit’s decision in Diamond we functionally indistinguishable, two are cases granting reverse the District Court’s of sum- very That mean- consistent. is the must be mary judgment against appellants and hold arbitrary capricious and standard.3 ing of the precluded collecting royal- from that DOI is $100,000 ties on the Take-or-pay payments and contract settle- by Because we made Southern Samedan. functionally payments are indistin- any royal- conclude that DOI cannot collect the calculation of guishable respect with payment, ties on the settlement it is unneces- satisfy royalties. types payments Both sary appellant for us to consider Samedan’s outstanding take-or-pay obligations, and both of limitations claim. statute nonrecoupable. types reeoupable or can be payments only difference is whether the The negotiations parties over

follow between the ROGERS, Judge, dissenting: Circuit obligations. the cancellation of contractual Secretary court that the way no in which the occurrence of The concludes We see adopted impermissible changes functional na- the Interior inter- negotiations these regulations royalty purposes. pretation of his when he deter- ture of the cases, buy-out payments question in both under mined that contract The relevant Shamrock, of accrued liabilities is whether or not the settlements Diamond actually “gross proceeds” making up among received funds gas production. any gas ground. When a lessee for The court relies severed reasoning dispute poses arbitrarily capriciously reject it for 3. We do not this dis- others. power proposition agencies have the sent's single nonacquiescence in decisions of a cir- colleague’s rejection 4. We do not understand our p. cuit. Dissent at 1261 & n. 3 & n. 4. That proposition that Diamond Shamrock de- proposition simply inapplicable here. The is pends recoupability. portion on of the Dia- acquiesce Secretary did not refuse to Diamond opinion quoted by colleague our mond Shamrock applicable amended the but instead p. expressly reflects that "no is due explanations regulations accompanying with take-or-pay payments unless and until adopting interpreting Diamond Shamrock. [namely, make-up gas] actually produced and acquiescence, While free to refuse p. taken.” Dissent at 1264. It is not clear to us free, text, taking make-up gas for the reasons set forth in the how the pur- recoupability. adopt for some could ever occur absent the Diamond Shamrock rule interpretations Exploration accord the rationale Shamrock largely on Diamond (5th Cir.1988), Hodel, change of Diamond This subtle Shamrock. v.Co. Secretary’s acquiescence approach the Dia- misconceives the nature of the and the holding, Revision Gross acquiescence Shamrock in Diamond Sham- mond and Gas Valua- in Oil Proceeds rock. Definition (1988) 45,082 Fed.Reg. Regulations, tion accept was not bound to Revision). (Gross contrary, To the Proceeds holding at in of Diamond least responding in to Secretary made clear the cases reviewable in courts outside the Fifth regulations that the Diamond Shamrock disagreed has Circuit. Even after one circuit requiring the of changed to extent were position, agency with its is entitled to of from the earth that actual severance independent maintain its assessment of the any on are due must occur before regulations dictates the statutes and is challenged interpreta- the revenue. Because charged administering, hope in the that royal- assess in consolidated cases tions these circuits, Court, Supreme other or Con occurs, there is only after such severance ties gress ultimately uphold agency’s pos will inconsistency Secretary’s po- between the no Mendoza, ition.3 See United States v. 464 acquiescence in Diamond and his sition 154, 160, 568, 572, U.S. 104 78 L.Ed.2d S.Ct. Accordingly, respectfully I dis- Shamrock. (1984); 379 see also American Tel. & Tel. Co. sent. FCC, (D.C.Cir.1992) 727, v. 978 F.2d 737 I. (referring agency’s “right to to refuse to courts), critical, acquiesce” in in these decisions of circuit cert. preliminary, A issue denied, 913, 3020, of review. Or 509 U.S. 113 S.Ct. 125 proper is the standard cases (1993). courts, in to consider L.Ed.2d 709 While some dinarily, the is entitled one, cluding agencies this criticized interpreting in both the stat have deference able 1 here, apply v. refuse to the settled law of the circuit Chevron U.S.A. Inc. utes at issue Council, Inc., agency’s that will review the action in a Natural Resources Defense 837, 842-43, 2778, ease, particular nonacquiescence intercircuit 104 S.Ct. 2781- 467 U.S. (1984), 82, regulat permissible, especially when the law is 694 and the 81 L.Ed.2d statutes, can doubt that implement unsettled.4 Nor there be adopted ions2 to Tallman, 1, 16, in 85 the law involved Diamond Shamrock is v. 380 U.S. S.Ct. Udall (1965). unsettled; 792, 801, theory, and commentators are L.Ed.2d 616 courts 13 questions sharply over a host of in recognizes that the such deference divided the court volving Op. application leases take- appropriate the instant cases. settlements, however, or-pay payments court effec and even practice, 1258. In general regarding how to from whether the the most issues tively changes the issue interpret to divide interpretations of statutes clauses continue Secretary’s generally permissible the authorities.5 See John S. regulations are to whether J., MacKinnon, Act, J.); (Wright, Leasing con- 25 U.S.C. id. at 384-85 1. Indian Mineral Act, J., 396, (1994); (Bork, concurring). Leasing curring); §§ Mineral 30 id. at 385 396d (1994); § 226 Outer Continental Shelf U.S.C. Act, 1337(a) (1994). Lands 43 U.S.C. Corp. Hughey, 5.Compare v. 630 Tara Petroleum 1269, (Okla.1981) with Texas Oil & P.2d 1272-74 (1995). §§ 2. 206.150-.159 866, Vela, (Tex. Corp. 871 Gas v. 429 S.W.2d 1968). on whether Commentators are divided pointed various ben- 3. Commentators have out should be due nonacquiescence. See Samu- efits of intercircuit Brown, Note, payments. Compare Patricia A. Revesz, Nonacquies- and Richard L. el Estreicher Royalties Equitable Right v. Klein Jones: Agencies, by Federal Administrative 98 Yale cence 749, Settlements, Take-or-Pay 784- 47 Ark. L.Rev. 679, (1989). 736-37 LJ. Comment, (1994) Bily, Royalty on 86 and Kirk J. Take-or-Pay Payments and Related Consideration Retirement Johnson v. United States R.R. Cf. 105, Producers, Bd., (D.C.Cir.1992), Accruing 133— 27 Hous. L.Rev. rt. 1090-93 ce Barrett, Note, (1990) denied, Beverly (yes) with M. 113 S.Ct. 507 U.S. J., (1993); Roye Realty Royalties all (Buckley, Are Owedon id. at Watson: L.Ed.2d 467 1097-98 Oklahoma?, NLRB, Take-or-Pay part); dissenting Taxi Co. v. Settlements Yellow Okla. (1993) (D.C.Cir. 1983) Angela Jeanne (opinion 762-64 & F.2d n. 39 L.Rev. Secretary’s treat- Lowe, Obligation, Op. at 1260. The Defining Royalty 49 ments. inconsistent, however, (1996). Thus, because he Secretary ment is not SMU L.Rev. types royalties on obligation to adhere to the assesses both under no produces gas to which holding, let alone its the lessee when Diamond Shamrock dicta, court should not and the is attributable. rationale compliance with the actions for review his types At issue here are two opinion. language of payments as were described court concludes that 3,1993, Payor” May from “Dear letter of light interpretation “must be reasonable (MMS) Management the Minerals Service Op. adoption of Diamond Shamrock.” DOI’s Applying principle “les- its lessees. understood, Correctly the Secre- at 1258. required payors and other are sees tary’s interpretation must be reasonable payments to royalties on contract settlement adopted regulations he after light min- attributable to the extent Faced Diamond Shamrock was decided. lease,” produced from the the MMS erals circuit, from one the with an adverse decision types four common of settlement examined Secretary to how to re- had discretion as payments. pricing disputes” “Past relate to spond. regulations Because the were produced for minerals or the amount owed response to Diamond amended settlement, sold before the contract and such authority persuasive will be as to ease royalty amounts are when the regulations’ meaning. But what binds the buydown” A payment is made.7 “contract Secretary regulations is the amended payment price involves a made to reduce the themselves, pre- not the court decision (after gas of to be taken the future cipitated the amendment. settlement) by original purchaser is—“it Secretary great The is entitled to the def- payment of some amount now in return for usually agency’s in- erence we accord to an pay- paying price a lower later” —and such terpretation regulations,6 of its own S.G. royalty-bearing produc- are as future ments Reich, Sons, & Inc. v. 70 F.3d Loewendick types of two of tion occurs. Neither these (D.C.Cir.1995), interpreta- for his 1294 is involved the instant case. Fifth tion is not constrained what the Rather, agreement the Samedan-Southern say. Secretary had to must also Circuit ($89,- buyout” payment contains a “contract for when have a coherent rationale 706) and a made settlement of assessed, to ensure that his decision is are unpaid take-or-pay accrued but liabilities arbitrary capricious. nor 5 U.S.C. neither ($10,294). “buyout” payment extinguish- 706(2)(A). § purchaser’s obligation any gas es the to take future, royalty-bearing and is because II. “compensates prices it the lessee for lower pur- production foregone by The court faults the for his the future for the portedly royalty original purchaser.” an attribution inconsistent treatment Under formula, take-or-pay payments “functionally buyout payment indis- amount pay- up unit tinguishable” attributable to each freed Crowder, Comment, Taker-or-PayPayments tary prescribe regulations governing mineral Share?, (allotted lands, Settlements—Does the Landowner 49 La. § 25 U.S.C. Indian leases. 396 (1989) (no). 935- 37 Samedan); (trib- applicable §id. see also 396d L.Rev. lands); 1334(a) (offshore § al leases); 43 U.S.C. Indian Appellants 6. contend that no deference should (onshore leases); § 30 U.S.C. see agency's interpretation be due to an of its own Udall, Co. v. California regulation when it will affect contracts to which (D.C.Cir.1961) (deferring Secretary's reason- agency party, relying is a dictum in a § construction of 30 U.S.C. able because previous opinion. See Transohio Sav. Bank v. statute). duty administering the Director, has Supervision, F.2d Office of Thrift (D.C.Cir.1992) (leaving open whether to interpretation accord deference to Chevron paid Appellants have conceded that amounts agreements a statute that affected to which the disputes past price produc- to resolve over the party). agency was a This contention is incor- royalty bearing. tion are Congress authorized the Secre- rect because has gas.9 in connection with Before original take-or- remaining term of the regulations specified that the “value” must be proceeds re- to the is added pay contract “gross proceeds accruing at least the to the purchaser, and substitute ceived gas, but did not royalty-bearing as lessee from the sale of” proceeds are gross these “gross proceeds.” 30 Finally, payments in set- further define C.F.R. production occurs. (1987). 206.103, §§ The 1988 over- take-or-pay liabilities are 206.150 tlement of accrued regulations haul of continued the same production, as royalty-bearing, at the time of up approach, prescribing basic that “under no unit of attributed to each make-up production circumstances shall the value of would have been volume of what gross make-up purposes be less than the remaining term of the gas, for the proceeds accruing to the for lease original contract. lessee period under the 206.152(h) (1988) production,” § regulatory scheme An examination 205.153(h) (unprocessed gas); (unpro- § id. Secretary’s extraction-plus- why the reveals gas),10 explicitly the new cessed rules principle permissible. Con- attribution “gross proceeds” defined to mean “the total authority delegated to the Secre- gress broad accruing monies and other consideration paid on the tary to ensure disposition an oil and lessee for or sold removed full “value of unprocessed gas, gas, gas plant residue 226(b)(1)(A); 30 U.S.C. from the lease.” products.” 206.151. As MMS ex- Id. (for 1337(a)(1)(A) Outer see also U.S.C. gross plained, “purposefully drafted the leases, pro- “value of the Shelf Continental proceeds expansive definition to be and thus sold”).8 saved, removed, The Sec- or duction types flowing all of consideration include turn, a market-based retary, adopted has buyer Royalty to the seller.” Gas of determining the value each approach Revision, Fed.Reg. expan- at 1241. This 53 market gas produced. unit of necessary sive definition was because other- individuals “and its reliance on self-motivated Secretary’s acceptance general wise the of which are to their engage transactions arm’s-length val- contracts as evidence of the therefore, interest, is a cornerstone own best gas might total of ue of overlook the value Royal- regulations.” Revision Gas of the of gas to the lessee: Topics, Regulation and Related ty Valuation [Tjhere gener- (1988) (Gas exceptions must be 1230, Royalty Fed.Reg. 53 1233 arm’s-length al rule that the lessee’s Revision). production is The value of price accepted with- contract should be by indi- generally prices set “determined question out as the value opposing economic interests trans- viduals of where purposes. Once such situation is acting Id. business between themselves.” contract does not reflect all time, Secretary recog- At has the same directly or flowing either consideration produc- benefits conferred on nized that the buyer indirectly from the to the seller. may natural-gas market not all be ers of At when the economies regu- Id. at 1247. a time in the same fashion. The denominated changing and gas production rapidly were imposed royalties on a have therefore lations beginning ap- innovations were by lessees contractual range of received broad calculation statutory authority charge royalties tax reimbursements in the severance 8. 813, broader, denied, ”), ‘gross proceeds’ as are not U.S. Indian lands is even required cert. 510 of "production.” 59, (1993); 25 U.S.C. Oper to be tied to L.Ed.2d 29 Mesa 114 S.Ct. 126 (tribal lands). (allotted lands), §§ However, 396d 396 Partnership Department ating rior, Inte Ltd. U.S. of Secretary adopted has the formula 318, (5th 1991) (upholding F.2d 324 Cir. 931 produced and saved from the land "value ... Secretary's on reim assessment of on Indian lands. 25 C.F.R. leased” for leases §§ lands). denied, costs), 502 treatment cert. bursed lands), (allotted 211.13(a) (tribal 212.16 934, 106 S.Ct. 117 L.Ed.2d U.S. 112 Indian lease is on allotted Samedan's (1992). lands, regulation § is the so 25 C.F.R. 212.16 applicable to Samedan’s lease. gas, produces unprocessed so 30 10.Samedan (1995) 206.152(h) reg- applicable See, § Lujan, C.F.R. e.g., Co. v. 978 Enron Oil & Gas (5th Cir.1992) (upholding Sec- ulation. F.2d 215-17 including "long-standing state retary’s method of 1264 Revision, 45,- Fed.Reg. therefore, Secretary 53 made it clear Gross Proceeds

pear, Shamrock, dealings pro- (quoting Diamond that he would examine 082-083 1168). carefully purchasers Although to ensure the court is not F.2d at ducers by producers value received Secretary’s that all of the reviewing the merits of the read (cid:127) royalties. subjected Shamrock, In the definition was ing of Diamond his view many exam- “gross proceeds,” he included reasonable; has twice the Fifth Circuit itself subject to ples payments that would -be distinguished charac Diamond Shamrock royalties; among examples were take- those terizing depending decidendi as its ratio payments to or-pay payments and advance Frey “production.” the definition of v. Amo development costs. 30 exploration cover or Co., 578, 581-82, n. co Prod. 943 F.2d 584 & 5 (1988). C.F.R. 206.151 (5th Cir.1991) I), (Frey part, vacated in (5th adjunct Cir.1992), reinstated, necessary to his reliance on As a F.2d arm’s-length (5th contracts as indicators of Cir.1992); Operating F.2d 242 Mesa value, Secretary required producers to be Partnership Department Inte Ltd. v. U.S. reasonably diligent enforcing con their (5th Cir.1991) rior, (Brown, against purchasers. rights tractual On J.), denied, 1058,112 cert. S.Ct. U.S. generated considerable comment issue (1992). important 117 L.Ed.2d 106 More rulemaking, Royalty during the Gas Revi light reading of the court’s sion, 1240-41, Fed.Reg. at reading reported no of Diamond concluded: “Monies and other consideration reasoning has described that case’s decision contractually ... to which a lessee is depending recoupability at all on the legally but which it does not seek to entitled take-or-pay payments. through collect reasonable efforts are also major regulatory Out of the revisions part gross proceeds.” 206.151 adopted year following lengthy earlier that (1988); Thus, 206.152(j). pro see also id. rulemaking, identified the rights ducers who failed to enforce their provisions incompatible two under lucrative contracts were were they royal that newly accepted “production,” on notice could be liable for the definition price. ties on the contract provisions and he excised those from the Revision, regulations. Gross Proceeds Shortly regulations the after revised were 45,083. Fed.Reg. Nothing at else was promulgated, Fifth the Circuit decided Dia- Emphasizing touched. the limited nature of Secretary’s mond Shamrock The reaction amendments, Secretary the in noted quite to that case was brief and clear. Dia- final rule itself that the amendments were Shamrock, Secretary, mond said the inter- by” minimum “the necessitated Diamond preted phrase production” “value of Shamrock, and reasserted his intention that require gas that actual severance of “product regulations premised value will be any royalty earth must occur before could be concept royalty that value cannot be decision, crux due. The to which the gross proceeds accruing less than the acquiescence, announced his was 45,084. lessee.” Id. at There was no men- that nonrecoupable take-or-pay payments tion of adopted legal [t]he Court as the defini- take-or-pay payments or of in —not “production,” tion of the word as used surprisingly, because Diamond Shamrock calculating royalty pay- the context of subjects. Although was silent on these ments, physical actual severance places great interpretative weight court minerals from the formation. Accord- Secretary’s bracketed inclusion of the ingly, “royalty that the Court concluded “make-up gas,” Op. words at the Secre- only payments are due on the value of tary “make-up gas” referred to in the context i.e., actually produced, physical- minerals holding: of the Diamond Shamrock for re- ly royalty ground. severed from the No take-or-pay coupable payments, the time of take-or-pay payments is due on unless [namely, purchaser extraction gas make-up gas] and until is is when the takes make- actually produced up gas. and taken.” therefore, claims, reading, enforceable

Contrary court’s after to this pertain which claims has extract- those been Shamrock nor Gross neither Diamond ground. ed from the adopted requirement Proceeds Revision royalty recouped payments be before Rather, it Op. at 1259. be assessed. could III. only change in the that the was clear regulations minimum necessitated”— —“the The court reads the references previously that all revenues that had was make-up gas royal- his discussion of the longer be sub- royalty-bearing would no been ty recoupable take-or-pay pay- treatment of royalty until actual jected to a assessment Revision, ments Gross Proceeds 53 Fed. It follows extraction of occurred. 45,082-83, Reg. indicating that the Sec- Secretary’s decision the instant cases retary believed that could be as- post-Dia- the text of the is consistent with take-or-pay payments only sessed on because amendment, all because mond Shamrock recouped by later were triggered by actual royalty were assessments original purchaser. Op. at 1259-60. With extraction. however, respect take-or-pay payment, ato things happen make-up gas two when is tak- Secretary’s challenged actions are also extracted; en: is and the the rationale of the amended consistent with Thus, noting recouped. regulations as a whole. The definition take-or-pay payments roy- would not be such to which a “gross proceeds” includes revenue taken, alty-bearing make-up gas until contractually but does not entitled lessee could have identified as a sine through reasonable efforts. seek to collect qua recoupment. non either extraction or (1995). regulations, § 206.151 that the Gross Proceeds Revision does Given and after Diamond both before all, recoupability at and that the not mention that the most possibility for the also account make-up gas references to occur the con- way to collect contractual entitle- reasonable explaining defi- text of Diamond Shamrock’s through ‘Walue may be settlement. ments “extraction,” “production” mean nition of highest price prudent be based on the shall reading the most natural is that it was ex- through legally enforce- can receive lessee traction, recoupment, that the and not Secre- its contract.” 30 C.F.R. able claims under tary triggering viewed as obli- (1995). 206.152(j) Given the unforeseen gation. the contract so un- circumstances that made Southern, for Samedan’s decision economical recoupa- without The court contends prudent a course at a discount was settle bility, no link between the there is “direct MMS, acting in accordance with of action. imposed and upon funds which 206.152®, by logic recognized this the of gas.” Op. at 1259. physical severance of the royalty prudent charging however, a on the by the Secre- provided, That link is value, full face value of rather than on the case of a tary’s principle. attribution the By waiting Secretary until extraction buyout payment, the contract. the determines occurred, settling the gas MMS also adhered to Secre- of for which the the amount take-or-pay obligation and tary’s acceptance purchaser of Diamond Shamrock’s had a buyout pay- challenged proceeds from the “production.” The the definition of attributes would not straightforward gas than a ment to the the lessee actions are no more the settle- regulations: assessing a have been able to sell without application of the “freed-up gas.”11 For the settle- legally royalty of ment —the payment on the settlement By limiting deliverability year. the attri- technological each only and some- of Not are there take-or-pay lia- legal for accrued on increas- bution times contractual or constraints make-up period, original the Secre- production, take-or-pay the but bilities to es in the volume of problem demanding tary percentage avoids the typically a certain contracts set aside original purchaser would have been deliverability. when the In Southern’s take- of the lessee's Samedan, make-up rights. For example, take its entire or-pay unable to contract with for example, were able to percent Hadson and TransOk promised to take or Southern by pipelines that take-or-pay lia- that would have been made payments for accrued contracts, bilities, Secretary fully performed determines the amount under the for the the (at settling purchaser’s accrued gas simply replacements under the a settlements are make-up rights proceeds discount) and attributes the forgone take-or-pay payments portion from that of the settlement high prices. contract Just as the lessor gas that sells additional the lessee production would have received at the time of take-or-pay obligation orig- beyond the the price royalty a on the full contract of make- make-up inal contract —the “would-have-been paid by an up gas, which would have been case, gas.” In each the waits take-or-pay payment, it should receive earlier royalties until the time of extrac- assess the royalty price a full contract of would- the pro- link between the tion establishes make-up gas, less a reasonable have-been and the ceeds from discount, part by paid which is for in gas produced. Secretary’s ap- contract settlement. proach only permissible eminently not royalty system recog- Any sensible must sensible. does, nize, Secretary’s system gas as the production go take-or-pay will on after the By recognizing the estimates of value crisis, has been resolved. Before the crisis agreement the settlement between Southern routinely contracts were when Samedan, adhered to his reasonably it negotiated, was assumed general approach allowing the market to pipelines eventually all of would take production. determine the value of When they make-up volumes to which were enti- arm’s-length take-or-pay contract was Thus, ongoing take-or-pay tled. con- into, represented first entered it the mar- tract, Diamond Shamrock rule affects contemplated ket’s estimation of the value of royalty timing payment, not production. price future Even after the royalty Although the amount of due. declined, spot on the market charge royalty lessor could when the higher to the contract had a value for take-or-pay payment, received the lessee Samedan because of the existence of the eventually lessor received take-or-pay contract with Southern. de- proceeds full received the lessee when the market, however, cline of the did reduce the make-up gas was taken. When an extreme market value of contract under the drop spot prices coupled market the time of settlement below the face sales, deregulation of wellhead the elimi- contract, value of the because introduced pipelines’ minimum nation of bills and the uncertainty ability as to Southern’s to contin- implementation open-access transporta- performing. ue Southern and Samedan however, tion, pipelines were threatened with freely negotiated pay- therefore a settlement bankruptcy they if continued to meet their ment that reflected their estimation of how take-or-pay obligations. See United Distri- far the value of Samedan’s future FERC, Companies bution 88 F.3d 1105 had fallen. Consistent with his view that (D.C.Cir.1996). circumstances, Under those “[vjalue by prices ... is determined set producers accept it made sense for to con- opposing individuals of economic interests buyouts keep pipeline tract needed their themselves,” on, transacting business between solvent. But customers went Revision, 1233, Royalty Fed.Reg. prices. Gas logical at much reduced There is no Secretary accepted the take-or-pay reason to treat the settlements Southern’s and Sam- any differently take-or-pay payments from edan’s estimate.12 up give producer make the entire amount of Southern’s ac- ties would the an incentive to take-or-pay crued greater appropri- liabilities in less than three settle such contracts at a than discount, months. ate to the detriment of lessor who is a unrepresented negotiations. in the settlement Moreover, produc- contrary royalty This distortion would occur because the a rule would willing accept distort the market incentives for the er would be a below-market efficient take-or-pay ability exchange settlement of uneconomical con- discount in return for the Exempting buy-out payments royal- royalty-bearing original rights tracts. from under the contract by regulations only authorized the that by the not adopted contrary arguments Diamond Century adopted in the wake of Sham- he in In re court district Offshore rock, (E.D.Ky. applied con- B.R. but also well-reasoned Corp., 185 Mgmt. (6th types 1995), pending, sistently No. 95-6320 across-the-board to all of appeal Cir.), buyout payment, for involving take-or-pay pay- take-or-pay a case settlement flawed, Secretary’s position why the ments. First, concern that the court’s

unpersuasive. royalty payments for two would be there IV. the gas misapprehends Secre each sale determining the rule for tary’s attribution appel- that Previous administrative actions Second, the for each sale. “gross proceeds” Secretary’s conflict the ac- lants claim with the mini purpose that the claim court’s present in fact no tions in the instant case protect the requirements was to mum-take Secretary’s position. Op. See obstacle lessor) (and against the risks not lessee Co., Energy Fe MMS-85- at 1253. Santa that anoth the fact development overlooks (Ass’t Sec’y Land Minerals & 0046-OCS (which paramount has become purpose er 14, 1988), roy- Mgmt. decided Oct. settlement) protect both was to the time of take-or-pay payments reeoupable alties against risk that lessee and lessor take-or-pay accrued lia- and settlements of Third, drop. the court’s would price market make-up gas until were not due bilities might barred from be claim that lessees decision, shortly Diamond after taken. The overpayments, see seeking refunds holding of that simply put the under because is mistaken 43 U.S.C. effect, entirely and is consistent case into Secretary’s extraction-and-attribution position. current Santa only at the royalties are assessed principle question, which was speak to the Fe did not Finally, court’s claim production. time of proceeding, whether a presented in that not part payments are that settlement third-party purchase could substitute Roy production, Gas value of fair market cf. on Hunt make-up gas. reliance Samedan’s Revision, ignores Fed.Reg. at alty Co., (Dep. Ass’t Oil MMS-87-0324-OCS settlement, sale of like the fact that the Mgmt. Sec’y Minerals Jan. Land & an arm’s- subsequent purchase, is gas to the 1989), pro- persuasive. In that is no more pro “value of length market measure charge ceeding, permitted was not MMS lessee, why only unclear duction.” It is pay- of advance royalties on the time value lessor, from that should benefit and not production development and ments for the value. (that is, imputed interest payments were made until advance time the Accordingly, I conclude Secre- though royal- production), even time of principle is tary’s extraction-and-attribution perverse that would other- incentives royalty-free payment. This is avoids for a wise obtain. duty toward the with the lessee’s inconsistent price. highest possible to obtain the lessor apply if the effect would A similar distortive Co., 206.152(j); Frey v. Amoco Prod. C.F.R. cf. take-or-pay liabilities were of accrued 1992) II); (La. (Frey So.2d 173-75 recog- royalty-free. As the Assistant Oil Gas Eugene Kuntz, the Law of Treatise nized, original purchaser retains whether the (“[T]he 60.3, (1991) is re- lessee at 137-38 make-up rights settlement is on its diligence degree quired ... the to exercise willing how much it is function of prudent op- ordinarily by an would be exercised analysis urged under the settlement. Even having regard for the interests of both erator court, recoupa- accepted by appellants a and lessee.”). Eighth Circuit As the and the lessor observed, royalty-bear- take-or-pay be settlement would ble relinquished a action has “The lessee's Treating gas non- ing make-up was taken. when right to receive differently and the lessor is entitled would distort recoupable valuable settlements Jones, decision-making F.2d it something lead producer’s return.” Klein in Cir.1992). (8th uneconomically large on a Secretary's posi- discount accept an nonrecoupable royalty-bearing settlement. buy-out payments are tion that due, production, at take-or-pay provi- ties were the time ued to take under the Deputy Secretary sions. The Assistant ruled principal payments. value of the advance Hunt, royalty-bearing was not Whatever the merits the Secre- against it not fu- because could be credited tary’s actions are consistent with that deci- purchases. ture The result in Wolverine sion because he does not assess Secretary’s does not conflict with the assess- (that the time value of contract settlements payments ment of on Southern’s in is, imputed interest from the time the settlement of accrued liabilities were made until the because, Secretary as the Assistant in Same- production). time of noted, dan the record does not show that the appellants The two other decisions that purchaser took Wolverine additional cite, Co., Blackwood obligation. By & Nichols MMS-88- above its minimum-take con- (Dir. trast, 20, 1989), Apr. Samedan concedes that its 0008-0&G MMS sales Co., Hadson exceeded the minimum-take amount Exploration Wolverine MMS-88-0052- Southern, original in its contract with so that (Dep. Sec’y (Opera- IND Ass’t Indian Affairs Secretary’s policy roy- under the attribution tions) 2,May 1990), by were both issued alties were assessed on that “would-have- authority officials who did not have the make-up gas” only. been department-wide policy, make or even to agency subject judicial take final action 243.3, (1995); §§

review. See C.F.R. 290.7 Y. 4.21(c) (1995). Although both subject decisions were to further administra- The court argu- does not reach Samedan’s appeal, they Secretary’s tive appealed. were not counterclaim to When partially enforce his order is time-barred be- Samedan reached the Assistant cause it finds the order cannot be en- disagree she was therefore free to with any Op. forced case. at 1260. I Because prior decisions of lower-level officials. In disagree holding with the court’s on the va- event, though, neither decision conflicts lidity Secretary’s order, of the I address the Secretary’s with the actions the instant statute limitations issue and conclude Nichols, case. quite Blackwood & while as with the by appel- other issues raised cryptic, held that nonrecoupable a certain lants,13 position Samedan’s is not meritorious. buyout payment was not royalty-bearing, but is no there indication in the record that the Samedan contends that the at- buyout payment volumes to which the tempt partly to assess by barred by attributable par- were ever taken a third six-year period by limitations created Thus, ty. the decision does not address the 2415(a).14 U.S.C. A brief review of the issue of the of “would-have-been” chronology is in order. settling After make-up volumes. Wolverine involved a Southern in began December Samedan nonrecoupable settlement of accrued take-or- producing to which the buyout liabilities. There was no later payment. attributed the settlement contract, original purchaser and the contin- began February Production roy- join 2415(a) (1994) opinion 13. I provides: Part II.A of the Section 1256-57, Op. holding at that the "Dear court. Subject provisions of section 2416 of this 3, 1993, Payor" May letter of does not constitute title, except provided by as otherwise Con- rulemaking requiring APAnotice-and-comment gress, every money damages brought action for addition, procedures. because for reasons agency the United States or officer or my noted above in Part II of dissent the letter did upon any thereof which is founded contract "effectively prior legislative amend[] rule" fact, express implied in law or shall be assessments, governing royalty Mining American complaint barred unless the is filed within six Admin., Congress Safety v. Mine & Health years right after the of action accrues or within (D.C.Cir.1993), (if F.2d the letter year one after final decisions have been ren- all) “interpretative- were a rule would be an applicable proceedings dered in administrative proce- law, rule” not required by notice-and-comment contract or whichever is 553(b)(A). dures. 5 U.S.C. later.... any pro engaged in administrative having portion of the buyout the due on alties were actually proceedings that he ceedings, so the until occurred production “required by ... law” and not provided were 1989, total sales when in November sometime filing period the suit. thus did not extend Royalties $89,706buyout value. the reached required was undisputed that Samedan It is the settlement portion of were due appeal to the pursue its administrative to liabilities as accrued Secretary before it could file level Assistant until May 1988 sometime from occurred 243.3; 43 C.F.R. judicial suit. would- 1988, during which period July the proceed the administrative 4.21. Because taken, until make-up gas was have-been could “required” before ings were Samedan $10,294 the reached sales those additional sue, one-year period Secretary also had a the the settlement. portion of for that value he could following their conclusion which if the settlement dispute that is no There Operating in court. See Mesa file his claim all, royalties became due royalty-bearing at Department Inte Partnership v. U.S. Ltd. following pro- day month of the on the last (10th Cir.1994); rior, 1288, 1291-92 royalties on the duction, which means Corp., 709 v. Care United States California accrue began to Cir.1983).15 (9th 1241, 1247 F.2d 2, 1993—almost December March 1988. On await the Permitting government to the royalties began to accrue—(cid:127) years after six proceedings re of administrative conclusion pay a 20% to ordered Samedan MMS adversary purposes the quired of its serves in- The order the entire on settlement. of limitations while simulta of the statute right to an adminis- of its Samedan formed proper be neously preserving the balance exercised appeal. Samedan trative judicial pro tween administrative and the Secretary affirmed right, and the Assistant otherwise, the cesses. Were 16, On September 1994. order on the MMS to “protective” suit have had to file would enjoin 3, 1994, sued Samedan October order even as the MMS order enforce the Secretary’s or- of the Assistant enforcement review. Such administrative was under der, Secretary filed a counterclaim the formality” hav would be a “sheer suit either 1, 1994, the order. to enforce November of the during pendency the ing no substance counterclaim, than more On the date review, in a result or would administrative ac- passed since had years had six process. administrative “short-circuit” through Septem- produced on volumes crued Inc., Elec., v. General States United therefore contends ber 1988. Samedan (D.N.J.1983) (quoting F.Supp. time-barred Secretary’s counterclaim is States, 386 v. Front Co. United Crown Coat volumes. respect those 1177, 1184, 18 L.Ed.2d 87 S.Ct. U.S. (1967)); International United States however, timely, be- The counterclaim F.Supp. Firefighters, 716 Ass’n of 2415(a) government permits cause (D.D.C.1989). in the absence of At least years accru- complaint within six file a delay by the Sec unreasonable allegation of year “or within one right of action al of proceedings, retary the administrative been final have rendered after decisions those Secretary into before forcing court re- proceedings applicable administrative completed would not have been proceedings law, by whichever is by quired contract limita purposes statute serve the filed less than was The counterclaim later.” Transferring dispute tions. initial order year MMS one after both court process into district administrative ap- accuracy order of fact-find improve and the Assistant would not repose parties Samedan’s ing, provide that the contends peal. Samedan sleep- government for position, penalize judicial complaint without could have filed a "required Berkau, Inc., not relief was cess for administrative v. Cocoa United States because, things, private among other (Fed.Cir.1993), law" Same- cited 615-16 F.2d dan, There, required and exhaust party to invoke contrary. Federal is not informal, bringing process suit. discretionary pro- before held that Circuit ing rights, equalize positions Aceordingly, on its I dissent and would affirm adversaries, government private judgment its of the district court. S.Rep. goals § which are the 2415. No. 2, 12, Cong., reprinted 89th 2d Sess. 2502, 2503, 2513; 1966 U.S.C.C.A.N. see Gen- Elec., F.Supp.

eral at 805.16 contract; rejected ages The district court the statute of on a and the counterclaim was limitations defense for a 2415(f), number of other reasons timely provides § under which "money as well: damages” counterclaim was not for 2415(a) prevent government shall not from meaning within the of 2415 because asserting a counterclaim "that arises sought performance agreement of the lease same transaction or occurrence that sub- breach; monetary compensation than rather for a ject opposing party's matter of the claim." Be- proceedings the administrative themselves did year cause the counterclaim was filed within one not constitute "action” within pro- of the final decision the administrative concluded, proceedings gov- once those were ceedings, unnecessary it is to reach these alterna- judicial had a ernment claim to enforce the ad- grounds. tive order, money ministrative rather than for dam-

Case Details

Case Name: Independent Petroleum Association of America v. Bruce Babbitt

Court Name: Court of Appeals for the D.C. Circuit

Date Published: Nov 21, 1996

Citation: 92 F.3d 1248

Docket Number: 95-5210, 95-5245

Court Abbreviation: D.C. Cir.