Honeywell International, Inc. v. Nuclear Regulatory Commission

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 16, 2010 Decided December 21, 2010

No. 10-1022

HONEYWELL INTERNATIONAL, INC.,

PETITIONER

v.

NUCLEAR REGULATORY COMMISSION AND UNITED STATES OF

AMERICA,

RESPONDENTS

On Petition for Review of an Order

of the Nuclear Regulatory Commission

Tyson R. Smith argued the cause for petitioner. With him

on the briefs was David A. Repka.

Robert M. Rader, Senior Attorney, U.S. Nuclear Regulatory

Commission, argued the cause for respondent. With him on the

brief were Robert Dreher, Acting Assistant Attorney General,

U.S. Department of Justice, John E. Arbab, Attorney, Stephen

G. Burns, General Counsel, U.S. Nuclear Regulatory

Commission, and John F. Cordes Jr., Solicitor.

Before: ROGERS, BROWN and GRIFFITH, Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

2

Rogers, Circuit Judge: In 2007 and 2008, the Nuclear

Regulatory Commission granted the requests of Honeywell

International, Inc. for exemptions from the regulatory

requirement that licensees have a tangible net worth at least 10

times the current decommissioning cost estimate of its licensed

facility. In each instance, the Commission justified the

exemption by considering the value of Honeywell’s goodwill, an

intangible asset.1 Yet the Commission denied a third exemption

request in 2009 without considering the value of goodwill.

Honeywell contends that the Commission’s action was arbitrary

and capricious for lack of a reasoned explanation. For the

following reasons we grant the petition.

I.

The Commission’s regulations provide that licensees that

operate facilities requiring the receipt, possession, use, transfer,

or delivery of uranium source and byproduct materials must

provide financial assurance for the decommissioning of such

facilities. See 10 C.F.R. § 40.36(e). Where as here the licensee

is a commercial company that issues bonds, it may, in lieu of

other methods such as obtaining a surety, see id. § 40.36(e)(2),

“provide reasonable assurance of the availability of funds for

decommissioning based on furnishing its own guarantee that

funds will be available for decommissioning costs and on a

demonstration that the company passes the financial test of

Section II.” Id. pt. 30, app. C., § I. Section II in turn requires,

as relevant, that a company have: (1) “[t]angible net worth at

least 10 times the total current decommissioning cost estimate

for the total of all facilities . . . for all decommissioning

activities for which the company is responsible as self-

1

“Goodwill” refers generally to “the expectancy of continued

patronage.” Newark Morning Ledger Co. v. United States, 507 U.S.

546, 555-56 (1993) (citation and quotation marks omitted).

3

guaranteeing licensee”; (2) “assets located in the United States

amounting to at least 90 percent of total assets or at least 10

times the total current decommissioning cost estimate”; and (3)

“[a] current rating for its most recent bond issuance of AAA,

AA, or A as issued by Standard and Poor[’]s . . . or . . .

Moody[’]s.” Id. pt. 30, app. C., § II.A. The regulations also

include a provision for exemptions:

The Commission may, upon application of any

interested person or upon its own initiative, grant such

exemptions from the requirements of the regulation in

this part as it determines are authorized by law and will

not endanger life or property or the common defense

and security and are otherwise in the public interest.

Id. § 40.14.

Honeywell owns and operates Honeywell Metropolis

Works, a facility in Illinois that chemically converts uranium ore

concentrates, commonly known as “yellowcake,” into uranium

hexaflouride (UF6), a material used in nuclear power reactors.

It is required to obtain a source materials license from the

Commission, see id. § 40.3, and, pursuant to 10 C.F.R

§ 40.36(e), to provide financial assurance that it has resources to

decommission its facility. Honeywell last applied in 2005 to

renew Source Materials License SUB-526 for ten years, noting

that the financial assurance for decommissioning costs had

previously been provided by a corporate self-guarantee.

In November 2006, Honeywell, at the Commission’s behest,

reviewed its compliance with 10 C.F.R. § 40.36(e) and, upon

finding certain periods of noncompliance, informed the

Commission that it would seek an exemption from the 10:1

tangible net worth to decommissioning cost requirement. On

December 1, 2006, Honeywell formally requested a section

4

40.14 exemption from the 10:1 ratio requirement, seeking

permission to include the value of its goodwill, an intangible

asset, in the tangible net worth calculation. Honeywell

represented that as of December 31, 2006 it had an “A” bond

rating from Standard & Poor’s, tangible net worth of

$70,000,000, and goodwill valued at $8,403,000,000, a number

well in excess of 10 times the $156,440,898 estimated

decommissioning cost. Letter from David J. Anderson, Senior

Vice President & Chief Fin. Officer, Honeywell, to Dir., Office

of Nuclear Material Safety & Safeguards, NRC (Mar. 30, 2007).

The Commission, by letter of May 11, 2007, granted

Honeywell’s ten-year license renewal application. See Letter

from Gary S. Janosko, Deputy Dir., Fuel Facility Licensing

Directorate, Div. of Fuel Cycle Safety & Safeguards, Office of

Nuclear Material Safety & Safeguards, NRC, to David Edwards,

Plant Manager, Honeywell Metropolis Works, Honeywell (May

11, 2007). See generally 10 C.F.R. § 1.42. It also granted

Honeywell a one-year exemption, commencing May 11, 2007,

allowing the use of goodwill in satisfying the 10:1 tangible net

worth to decommissioning liability requirement. License

Condition 26 required Honeywell to verify its eligibility for the

self-guarantee by submitting for Commission approval the

results of the financial test and supporting documentation within

120 days of the close of each fiscal year. The time-limited

exemption was set forth in License Condition 27.

The accompanying technical evaluation report explained

that the exemption request was justified on two related grounds.

First, a licensee’s ability to pay “under normal circumstances is

regularly rated by the bond rating agencies,” with “[a] rating of

‘A’ or higher indicat[ing] a very low probability of default on a

company’s bonds.” Technical Evaluation Report for the

Renewal of Source Materials License SUB-526 for Honeywell

Metropolis Works UF6 Conversion Plant, Metropolis, Illinois,

5

Docket 40-3392, at 53 (May 11, 2007) (“2007 Report”). Even

in times of “financial distress,” the Commission explained, “a

transition from the ‘A’ rating to a default has not occurred

within a one year time span during the period 1983 to 2005 for

bonds rated by either Moody’s or Standard and Poor’s.” Id.

Noting, however, that “[t]he default rate rises as the time span

for default extends greater than one year,” the Commission

stated that “the financial test to qualify for using the self

guarantee must be repeated annually, to assure that the risk of

default remains low for the next year.” Id. Second, the

Commission explained that a “licensee’s ability to pay under

conditions of financial distress relates to the ratio of assets to

decommissioning liability” and recognized that “if goodwill

assets are included in net worth, Honeywell’s ratio exceeds 35

to 1.” Id. The Commission concluded that “[i]n view of the ‘A’

bond rating and the high ratio of net worth (including goodwill)

to decommissioning obligation, the likelihood that assets will be

available for decommissioning in the event of financial distress

in the next year is adequate.” Id. The Commission noted,

however, that the ongoing evaluation of the self-guarantee

regulations might cause reconsideration of the adequacy of using

goodwill.2 See id. at 54.

2

On January 22, 2008, the Commission published for

comment a proposed rule allowing the use of intangible assets in the

net worth calculation, provided the licensee has tangible assets of $19

million. Nuclear Regulatory Commission Rules for Decommissioning

Planning, 73 Fed. Reg. 3812, 3825, 3831 (Jan. 22, 2008). The

Commission has made available to the public on its website a

“proposed final rule” increasing the tangible assets prerequisite to $21

million. See Rulemaking Issue Affirmation from R.W. Borchardt,

Exec. Dir. for Operations, NRC, to the Comm’rs, NRC (Mar. 13,

2009).

6

Honeywell applied for a second exemption on April 11,

2008, to continue until the earlier of either May 11, 2009 or the

effective date of a final rule amending 10 C.F.R. Part 30,

Appendix C consistent with the proposed rule published January

22, 2008. When Honeywell’s net worth was calculated using

goodwill, it met the 10:1 ratio; however, without goodwill its

tangible net worth was insufficient to meet the self-guarantee

requirement and in fact declined to a negative amount during

this period. Honeywell passed the annual self-guarantee

financial test for fiscal year 2006 under License Condition 26,

in view of License Condition 27, given Honeywell’s

$9,175,000,000 in goodwill assets at the close of its fiscal year.

Letter from Michael D. Tschiltz, Deputy Dir., Div. of Fuel

Cycle Safety & Safeguards, Office of Nuclear Material Safety

& Safeguards, NRC, to David J. Anderson, Senior Vice

President & Chief Fin. Officer, Honeywell (Aug. 22, 2008).

By letter of August 22, 2008, the Commission granted

Honeywell’s request to extend the exemption for another year,

allowing the use of goodwill in satisfying the 10:1 ratio

requirement. See Letter from Daniel H. Dorman, Dir., Div. of

Fuel Cycle Safety & Safeguards, Office of Nuclear Material

Safety & Safeguards, NRC, to Mitch Tillman, Plant Manager,

Honeywell Metropolis Works, Honeywell (Aug. 22, 2008). The

new exemption was approved as Amendment 2 to License

Condition 27 of Honeywell’s Source Materials License. The

Commission found that Honeywell had increased its net income,

current assets, and earnings per share, pointing to Honeywell’s

letter of May 15, 2008, which represented that it maintains $21.9

billion in total assets in the United States. See Extension of

One-Year Exemption from the Requirements of 10 CFR 30,

Appendix C, Regarding Decommissioning Financial Assurance

at 2 (“2008 Report”). The Commission also found that after

covering an additional $225 million in decommissioning

liabilities to other federal and state agencies through guarantees

7

for an aggregate decommissioning liability of $382 million, the

ratio of Honeywell’s net worth, with inclusion of goodwill, to

decommissioning costs was approximately 21:1 as of March 31,

2008. The Commission noted that Honeywell continued to

maintain a long-term credit rating of “A” as assigned by

Standard & Poor’s. “Because the basis for granting the original

exemption still applie[d], the [Commission] consider[ed] that it

[wa]s acceptable to allow an extension” as requested. Id. at 2-3.

Honeywell applied for a third exemption on April 1, 2009,

referencing its March 23, 2009 letter, sent pursuant to License

Condition 26, verifying its eligibility for the self-guarantee and

noting that its net worth including goodwill continued to exceed

its decommissioning costs by a 10:1 ratio. Honeywell estimated

that as of December 31, 2008 its decommissioning costs

remained $156,440,898 while its net worth decreased to

$4,920,000,000 (comprised of negative $5,265,000,000 in

tangible net worth and $10,185,000,000 in goodwill).

Honeywell passed the annual self-guarantee financial test for

fiscal year 2008 under License Condition 26, in view of License

Condition 27, given its goodwill assets. Letter from Marissa G.

Bailey, Deputy Dir., Special Projects & Technical Support

Directorate, Div. of Fuel Cycle Safety & Safeguards, Office of

Nuclear Material Safety & Safeguards, NRC, to David J.

Anderson, Senior Vice President & Chief Fin. Officer,

Honeywell at 2 (Aug. 3, 2009). As of December 31, 2008,

Honeywell had assets in the United States of at least 10 times

the current decommissioning cost estimate, at least one class of

equity securities registered under the Securities and Exchange

Act of 1934, 15 U.S.C. § 78a et seq., a current rating for its most

recent unsecured bond issuance of “A” as issued by Standard &

Poor’s, and a tangible net worth at least 10 times the current

decommissioning cost estimate. See id.

8

At the Commission’s request, on October 13, 2009

Honeywell submitted supplemental information to support the

exemption’s extension. This information addressed

Honeywell’s:

(1) maintenance of an “A” bond rating from Standard &

Poor’s and an A2 rating from Moody’s for the past 17 years,

noting the default rate was “still less than 0.244%” for A2

Moody’s rated bonds at only 3 defaults in the last 25 years,

Supplemental Information at 3 (Oct. 13, 2009);

(2) strong financial condition as evidenced by the fact that

“[t]o the extent that the recent economic turmoil has led to a

historically anomalous number of defaults, the majority . . . were

in the banking, finance, insurance, and real estate finance

sectors,” id., and additionally that “Honeywell is in a stronger

financial condition than many of the third parties that it would

turn to in the event that it became necessary to obtain a letter of

credit,” id. at 3-4;

(3) “significant annual free cash flow that is available for

decommissioning [Honeywell’s facility],” noting it had

generated $3.1 billion in free cash flow in 2007 and in 2008, and

expected in 2009 to generate a minimum of $2.2 billion, id. at 4;

(4) more than $22.5 billion in assets in the United States at

the end of 2008, more than in 2006 or 2007, id.;

(5) explanation of why the tangible net worth test does not

accurately reflect the financial stability or low risk of default of

a diversified technology and manufacturing company like

Honeywell, see id. at 4-5; and

(6) view that the third exemption request was consistent

with the pending proposed rule, see id. at 6-7.

The Commission, by letter of December 11, 2009, denied

the third exemption request, stating that “Honeywell’s tangible

net worth has continued to decline . . . [from] $1.929 billion . .

. as of December 31, 2005; $70 million . . . as of December 31,

2006; minus $1.451 billion . . . as of December 31, 2007; and

9

minus $5.265 billion . . . as of December 31, 2008.” Letter from

Daniel H. Dorman, Dir., Div. of Fuel Cycle Safety &

Safeguards, Office of Nuclear Material Safety & Safeguards,

NRC, to Dave Cope, Plant Manager, Honeywell Metropolis

Works, Honeywell at 2 (Dec. 11, 2009) (“2009 Letter”). The

Commission also rejected Honeywell’s position that the

exemption request was consistent with the proposed rule, see

supra note 2, stating that the originally proposed rule required

a tangible net worth of $19 million before intangible assets such

as goodwill may be used to calculate the 10:1 tangible net worth

to decommissioning cost ratio, and that the amount had been

increased to $21 million to account for inflation. See 2009

Letter at 2-3. The Commission directed Honeywell to provide

one or more alternate forms of financial security within 120

days; Honeywell’s self-guarantee would remain in force until

the Commission approved an alternate security. Id. at 3.

Honeywell petitions for review.

II.

We first address two threshold issues regarding this court’s

jurisdiction.

A.

The Administrative Orders Review Act, known as the

Hobbs Act, 28 U.S.C. § 2342(4), provides as relevant that the

court of appeals “has exclusive jurisdiction to enjoin, set aside,

suspend (in whole or in part), or to determine the validity of . . .

all final orders of the Atomic Energy Commission,” now the

Nuclear Regulatory Commission, “made reviewable by section

2239 of title 42.” Section 2239, in turn, makes reviewable

“[a]ny final order entered in any proceeding of the kind

specified in subsection (a) of this section,” 42 U.S.C. § 2239(b),

which includes proceedings “for the granting, suspending,

revoking, or amending of any license,” id. § 2239(a)(1)(A).

10

In Florida Power & Light Co. v. Lorion, 470 U.S. 729

(1985), the Supreme Court clarified a “vexing semantic

conjunction” due to subsection 2239(a)’s reference both to the

scope of Commission licensing proceedings and to the hearing

requirement for such proceedings, holding that “Congress

intended to provide for initial court of appeals review of all final

orders in licensing proceedings whether or not a hearing before

the Commission occurred or could have occurred.” Id. at 736-

37. The Court explained that “[a]bsent a firm indication that

Congress intended to locate initial [Administrative Procedure

Act (“APA”)] review of agency action in the district courts, we

will not presume that Congress intended to depart from the

sound policy of placing initial APA review in the courts of

appeals.” Id. at 745.

Until recently courts of appeals found jurisdiction to review

the Commission’s exemption decisions under the Hobbs Act, as

interpreted in Lorian. See, e.g., Shoreham-Wading River Cent.

Sch. Dist. v. NRC, 931 F.2d 102 (D.C. Cir. 1991); Massachusetts

v. NRC, 878 F.2d 1516 (1st Cir. 1989). The Second Circuit in

Brodsky v. NRC, 578 F.3d 175, 182 (2d Cir. 2009), distinguished

Lorian, however, holding that it lacked jurisdiction under the

Hobbs Act to consider the Commission’s fire safety regulation

exemption at a nuclear power plant. Observing that its

jurisdiction was limited to an appeal of an order “issued in a

proceeding . . . for the granting, suspending, revoking, or

amending of any license,” id. at 180 (ellipsis in original)

(citations and internal quotation marks omitted), the court

focused on the fact that the Commission had not treated the

exemption as an amendment to the license of the nuclear power

plant, see id. at 182-83. Deferring to the Commission’s

characterization of its exemption, the court concluded its Hobbs

Act jurisdiction did not reach that far.

11

Lorian controls here. The Commission has treated

Honeywell’s exemptions from the 10:1 tangible net worth to

decommissioning cost requirement under 10 C.F.R. § 40.36(e)

and 10 C.F.R. Part 30, Appendix C, Section II, as an amendment

to its Source Materials License, bringing Honeywell’s petition

for review within the ambit of the Hobbs Act, 28 U.S.C.

§ 2342(4) (cross-referencing 42 U.S.C. § 2239). The first

exemption was granted as part of a license renewal proceeding

and memorialized as License Condition 27 to Honeywell’s

Source Materials License; the second exemption was granted as

an amendment to License Condition 27. Therefore, because the

Commission’s letter of December 11, 2009 denying

Honeywell’s exemption request is a “final order” marking the

consummation of the decision-making process that determines

rights and obligations, see Natural Res. Def. Council, Inc. v.

NRC, 680 F.2d 810, 815 (D.C. Cir. 1982), this court has

jurisdiction over Honeywell’s petition challenging the denial of

an extension of the exemption memorialized in License

Condition 27 to its Source Materials License.

B.

“[A] case is moot when the issues presented are no longer

‘live’ or the parties lack a legally cognizable interest in the

outcome.” County of Los Angeles v. Davis, 440 U.S. 625, 631

(1979) (citation and quotation marks omitted). “[I]f an event

occurs while a case is pending on appeal that makes it

impossible for the court to grant ‘any effectual relief whatever’

to a prevailing party, the appeal must be dismissed.” Church of

Scientology of Cal. v. United States, 506 U.S. 9, 12 (1992)

(citation omitted). The court has held in numerous instances

that a case is moot because a period or deadline has passed. See,

e.g., S. Co. Servs., Inc. v. FERC, 416 F.3d 39, 43 (D.C. Cir.

2005); McBryde v. Comm. to Review Circuit Council Conduct

& Disability Orders of Judicial Conference, 264 F.3d 52, 55

(D.C. Cir. 2001). The initial “heavy burden” of establishing

12

mootness lies with the party asserting a case is moot, see Motor

& Equip. Mfrs. Ass’n v. Nichols, 142 F.3d 449, 459 (D.C. Cir.

1998), but the opposing party bears the burden of showing an

exception applies, see S. Co. Servs., 416 F.3d at 43.

Contrary to the Commission’s contention, this case is not

moot. The Commission maintains that the court can grant no

relief that would affect the parties’ rights with regard to

Honeywell’s exemption request for the May 2009-May 2010

period. Responding, Honeywell persuasively maintains that its

challenge falls within the exception to mootness for issues that

are “capable of repetition, yet evading review.” S. Pac.

Terminal Co. v. ICC, 219 U.S. 498, 515 (1911); see Newdow v.

Roberts, 603 F.3d 1002, 1008 (D.C. Cir. 2010); Christian

Knights of the Ku Klux Klan Invisible Empire, Inc. v. District of

Columbia, 972 F.2d 365, 369 (D.C. Cir. 1992).

The “capable of repetition, yet evading review” exception

to mootness has two requirements: (1) the challenged action

must be too short to be fully litigated prior to cessation or

expiration; and (2) there must be a “reasonable expectation that

the same complaining party [will] be subject to the same action

again.” S. Co. Servs., 416 F.3d at 43 (alteration in original)

(citation and quotation marks omitted); see Christian Knights,

972 F.2d at 369-71. It is undisputed that Honeywell meets the

first requirement, for a presumption applies that “orders of less

than two years’ duration ordinarily evade review.” S. Co.

Servs., 416 F.3d at 43 (citation and quotation marks omitted).

The license amendment formulated by the Commission requires

Honeywell to reapply for the exemption on an annual basis.

Moreover, as Honeywell points out, the Commission denied

Honeywell’s exemption for the May 2009-May 2010 period on

December 11, 2009, eight months after Honeywell’s application

and only five months before the exemption would have expired

had it been granted.

13

Honeywell also meets the second requirement. It holds a

license from the Commission that does not expire until 2015. It

has sought a license amendment allowing goodwill, an

intangible asset, to be considered in satisfying the 10:1 tangible

net worth to decommissioning cost requirement on three

occasions since its license was renewed, and it timely petitioned

for review of the Commission decision denying the 2009

exemption request. It also advised the Commission that the

alternative to serving as a self-guaranteeing licensee is costly: it

estimated the cost of a letter of credit covering the

decommissioning costs would be between $550,000 to $750,000

annually in 2007 (and up to $7 million over a 10-year license

term), and $1.5 to $2 million annually in 2009 (and up to $20

million over a 10-year license term). In its brief to this court

Honeywell states that as a result of the Commission’s action it

has executed a costly surety bond to meet the requirements of 40

C.F.R. § 40.36(e). See Pet’r’s Br. 15. Honeywell’s historical

preference for the self-guarantee method and its three exemption

requests to use goodwill in satisfying the tangible net worth

requirement are consistent with the Commission’s stated

purpose in establishing this method: “to ‘reduce the licensee’s

cost burden’ in annual fees for letters of credit, surety bonds,

and other forms of third-party financial assurance, but ‘without

causing adverse effects on public health and safety.’” Resp’t’s

Br. 10 (quoting Self-Guarantee as an Additional Financial

Assurance Mechanism, 58 Fed. Reg. 68,726, 68,727 (Dec. 29,

1993)). Under the circumstances we conclude that there is a

reasonable expectation that Honeywell, as a regulated party

subject to the Commission’s licensing requirements, will in the

future seek Commission approval to act as a self-guaranteeing

licensee by means of an exemption from the 10:1 tangible net

worth to decommissioning cost requirement. See Washington v.

Harper, 494 U.S. 210, 219 (1990).

14

The Commission points to the fact that Honeywell did not

apply for an exemption for the May 2010-May 2011 period in

maintaining that there are no “future relations” to be affected by

judicial resolution of this appeal. In the Commission’s view,

Honeywell has “chose[n] to abandon the undertakings that gave

rise to the controversy.” Entergy Servs., Inc. v. FERC, 391 F.3d

1240, 1246 (D.C. Cir. 2004). But the test is not whether there is

in fact a “future relation” that will be affected, but rather

whether “resolution of an otherwise moot case . . . h[as] a

reasonable chance of affecting the parties’ future relations.”

Newdow, 603 F.3d at 1008 (emphasis added) (citation and

internal quotation marks omitted). As Honeywell responds, the

record indicates that another exemption request would be

pointless until the Commission adequately explains the reasons

for rejecting Honeywell’s third request. Although the

Commission’s determination whether to grant an exemption will

turn on specific facts regarding Honeywell’s financial net worth

at the relevant time, the likelihood that Honeywell will again

seek to use the value of goodwill intangible assets in satisfying

the 10:1 tangible net worth to decommissioning cost

requirement do not cause the court “to imagine a sequence of

coincidences too long to credit.” People for the Ethical

Treatment of Animals, Inc. v. Gittens, 396 F.3d 416, 424 (D.C.

Cir. 2005); see also Pharmachemie B.V. v. Barr Labs., Inc., 276

F.3d 627, 633-34 (D.C. Cir. 2002). Unlike in Entergy, where

the petitioners abandoned their judicial challenge altogether, see

391 F.3d at 1245-46, Honeywell continues to challenge the

Commission’s denial of its exemption request and its choice not

to file a subsequent exemption request neither forecloses such

action in the future nor evidences an intention to abandon its

challenge.

Likewise the Commission’s reliance on cases holding the

second requirement is not met when the application of a

regulatory requirement varies from one period to the next and

15

the factual record changes is misplaced. For example, in

National Association of Home Builders v. U.S. Army Corps of

Engineers, 264 F. App’x 10, 13 (D.C. Cir. 2008) (per curiam),

cited by the Commission, the court concluded the agency’s

issuance of time-limited permits was not “capable of repetition”

because the permit regulations had changed. Here, by contrast,

the Commission’s proposed rulemaking has been pending for a

number of years. See supra note 2. It would be imprudent to

dismiss Honeywell’s petition as moot when the challenged

denial was based on regulations that continue in effect and the

content and timing of the Commission’s final rule are uncertain.

Finally, the Commission’s suggestion that Honeywell can

“easily neutralize any future, adverse decision” by Commission

staff by seeking a hearing before the Atomic Safety and

Licensing Board and subsequent review before the Commission,

Resp’t’s Br. 32 (citing 10 C.F.R. §§ 2.340(a), 2.341), does not

address whether there is a reasonable likelihood that Honeywell

will in the future apply for an exemption allowing consideration

of the value of goodwill in satisfying the 10:1 tangible net worth

to decommissioning cost requirement.

III.

Honeywell contends that in denying its 2009 request for an

exemption under 10 C.F.R. § 40.14 the Commission was

arbitrary and capricious because it failed to provide a reasoned

decision for changing its policy of considering the value of

goodwill, an intangible asset, as it had in granting prior

exemptions. Specifically, Honeywell contends that the

Commission’s December 11, 2009 decision, without

explanation, changed the criteria it applies in interpreting section

40.14, applied the new criteria inconsistently, and ignored

information in the record that is contrary to its conclusions. As

for the Commission’s statement about the continuing decline in

16

Honeywell’s tangible net worth, Honeywell maintains that “this

does not explain why the [Commission] drastically departed

from its prior decision to allow intangible assets to be used for

determining capital adequacy, nor . . . how the relationship

between tangible and intangible assets affects a licensee’s ability

to use self-guarantee to provide decommissioning financial

assurance.” Pet’r’s Br. 26.

The scope of our review under the APA is narrow, see

Reytblatt v. NRC, 105 F.3d 715, 722 (D.C. Cir. 1997), and the

court generally accords the Commission’s licensing decisions

“the highest judicial deference” in view of Congress’ delegation

of broad authority to the Commission under the Atomic Energy

Act, Massachusetts v. NRC, 924 F.2d 311, 324 (D.C. Cir. 1991).

We have no occasion to doubt such deference is similarly due

where, in denying an exemption under a license condition, the

Commission is enforcing regulations pertaining to ensuring

licensees provide a financial guarantee for the decommissioning

of their facilities, see 10 C.F.R. § 40.36, a statutory mandate, see

42 U.S.C. §§ 2201(i)(4) and (x), 2243(d)(2). Honeywell’s

petition is thus distinguishable from cases in which deference is

withheld because the agency is interpreting a statute “outside

[its] particular expertise and special charge to administer.”

Prof’l Reactor Operator Soc. v. NRC, 939 F.2d 1047, 1051

(D.C. Cir. 1991). Moreover, the court has declined “to

micromanage the [Commission’s] licensure proceeding, or to

second-guess its acceptance of reasonable cost estimates.”

Nuclear Info. & Res. Serv. v. NRC, 509 F.3d 562, 570 (D.C. Cir.

2007).

Honeywell’s challenge to the Commission’s denial of its

exemption request is based on the legal constraint that an agency

“may change its policy only if it provides ‘a reasoned analysis

indicating that prior policies and standards are deliberately

changed, not casually ignored.” Mich. Pub. Power Agency v.

17

FERC, 405 F.3d 8, 12 (D.C. Cir. 2005) (quoting Greater Boston

Television Corp. v. FCC, 444 F.3d 841, 852 (D.C. Cir. 1970)).

“As a general matter,” the court explained in Hatch v. FERC,

654 F.2d 825, 834 (D.C. Cir. 1981), “an agency is free to alter

its past rulings and practices even in an adjudicatory setting . . . .

However, it is equally settled that an agency must provide a

reasoned explanation for any failure to adhere to its own

precedents.”

It is true, as the Commission points out, that Honeywell

falls short of showing that the Commission’s 2009 denial of its

exemption request runs afoul of Alaska Professional Hunters

Ass’n, Inc. v. FAA, 177 F.3d 1030 (D.C. Cir. 1999). In that case,

the court set aside an agency announcement changing a policy

to which it had adhered for more than 30 years exempting

Alaskan guide pilots from its regulations on commercial pilots.

The court held that “[w]hen 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.”

Id. at 1034.

In granting the 2007 and 2008 exemption requests, the

Commission did not give the exemption provision, 10 C.F.R.

§ 40.14, a “definitive,” Alaska Prof’l Hunters, 177 F.3d at 1034,

or “express, direct, and uniform interpretation,” Ass’n of Am.

Railroads v. Dep’t of Transp., 198 F.3d 944, 949 (D.C. Cir.

1999). The court has repeatedly held that “conditional or

qualified statements, including statements that something ‘may

be’ permitted, do not establish definitive and authoritative

interpretations.” MetWest Inc. v. Sec’y of Labor, 560 F.3d 506,

509-10 (D.C. Cir. 2009) (citations omitted). In the technical

evaluation report accompanying its 2007 letter, the Commission

stated that the exemption “must be time limited to allow

reconsideration of the basis for the exemption in the future”

18

given the ongoing re-examination of the self-guarantee

regulations. 2007 Report at 54. Likewise in 2008, the

Commission granted the exemption for only one year or until the

proposed rule was promulgated as a final rule, whichever came

first. These statements qualify the Commission’s action, rather

than establish a definitive policy that could be changed only by

notice and comment rulemaking. See Ass’n of Am. Railroads,

198 F.3d at 949.

Moreover, “[a] fundamental rationale of Alaska

Professional Hunters was the affected parties’ substantial and

justifiable reliance on a well-established agency interpretation.”

MetWest, 560 F.3d at 511. “People in the lower 48 states had

pulled up stakes and moved to Alaska,” id., and “Alaskan guide

pilots and lodge operators relied on the advice FAA officials

imparted to them — they opened lodges and built up businesses

dependent on aircraft, believing their flights were subject to

[general instructions regarding aircraft operation] only,” Alaska

Prof’l Hunters, 177 F.3d at 1035. Even if the Commission’s

approval letters in 2007 and 2008 had provided a definitive

regulatory interpretation, Honeywell could not reasonably have

based its long-term conversion contracts in part on the annual

extension of the exemption. The Commission’s approvals, and

the accompanying reports, gave fair warning that the

appropriateness of the time-limited exemption would be

reevaluated each year. Indeed, in granting the original one-year

exemption resulting in License Condition 27, the Commission

advised Honeywell that the exemption “will expire” and that

Honeywell’s options upon expiration would be to re-apply for

an exemption, comply with the self-guarantee financial test

without including the value of its goodwill, or have an

alternative surety in place. See 2007 Report at 54.

Instead, the problem arises for the Commission because its

2009 decision is inconsistent with its 2007 and 2008 decisions

19

granting Honeywell’s exemption requests. The Commission’s

2007 grant of the initial exemption following relicensing was

based on (1) Honeywell’s “A” bond rating, which served as a

“reliable indicator” that Honeywell had the ability to pay its

decommissioning costs under normal circumstances and further

indicated that Honeywell was unlikely to face default or

financial distress within a year, and (2) the fact that Honeywell’s

net worth to decommissioning cost ratio exceeded 35:1 when

goodwill was considered. Thus, the Commission found that

“[i]n view of the ‘A’ bond rating and the high ratio of net worth

(including goodwill) to decommissioning obligation, the

likelihood that assets will be available for decommissioning in

the event of financial distress in the next year is adequate.” Id.

at 53. The Commission relied on this same rationale in granting

the exemption in 2008: “Honeywell’s net worth to

decommissioning liability is approximately 21 to 1 [if goodwill

is included]. . . . Additionally, Honeywell has continued to

maintain a long-term credit rating of ‘A’ . . . . Because the basis

for granting the original exemption still applies, the

[Commission] considers that it is acceptable to allow an

extension of this exemption . . . .” 2008 Report at 2-3.

Although in 2009 Honeywell continued to maintain an “A” bond

rating and its net worth to decommissioning liability ratio

continued to exceed 10:1, the Commission denied the exemption

request because Honeywell’s tangible net worth had declined

over a four-year period.

The Commission’s decision is inconsistent with its

precedent addressing Honeywell’s exemption requests and its

explanation for its denial in the December 11, 2009 letter is

inadequate. If the Commission in 2009 had applied the same

criteria identified in 2007 and 2008 in granting the exemption,

then, Honeywell maintains, it should have granted the

exemption again because Honeywell maintained an “A” bond

rating and reported a net worth, inclusive of goodwill, that

20

exceeded its decommissioning liability by more than a 10:1

ratio. Contrary to the Commission’s suggestion, this is not a

case in which the court should “permit agency action to stand

without elaborate explanation where distinctions between the

case under review and the asserted precedent are so plain that no

inconsistency appears.” Jicarilla Apache Nation v. U.S. Dep’t

of Interior, 613 F.3d 1112, 1120 (D.C. Cir. 2010) (citation and

quotation marks omitted). The Commission’s December 11,

2009 letter did not address the substance of supplemental

information Honeywell submitted on October 13, 2009 at the

Commission’s request regarding Honeywell’s financial health

and stability and data of default rates by credit sources during

“recent economic turmoil that has led to a historically

anomalous number of defaults,” Supplemental Information at 3.

Nor did the Commission’s mere recital of its 2007 and 2008

rulings in the December 11, 2009 letter demonstrate that the

Commission was “by inference clearly reevaluating what it has

previously looked at” in granting Honeywell’s exemption

requests, as Commission counsel suggested at oral argument.

Oral Arg. 15:42-16:11. While the Commission might

reasonably have concluded that a decline in tangible net worth

over a given period is not rectified by a high goodwill value, or

by other potential indicators of a company’s financial health and

stability, the Commission’s decision leaves too much to

inference. See Hatch, 654 F.2d at 834. Most notably, how far

must the tangible net worth decline and over what period before

goodwill will not be considered adequate? How does a decline

in tangible net worth affect the reliability of the “A” bond rating

and other assets previously considered, and the high ratio of net

worth to decommissioning liability when goodwill is included?

Without the Commission’s explanation, “we are left with no

guideposts for determining the consistency of administrative

action in similar cases, or for accurately predicting future action

by the Commission.” Id. at 834-35.

21

On the record before the court, the fact that Honeywell’s

tangible net worth declined does not necessarily provide a

reasonable basis to distinguish the 2009 decision because, as the

Commission charts in its denial letter, Honeywell’s tangible net

worth was declining when it granted the 2007 and 2008

exemptions. Nor can the fact that Honeywell had a negative

tangible net worth in 2009 serve as the apparent basis for the

denial because its 2008 tangible net worth was also negative.

Nor can the fact that the proposed rule would require a licensee

to have $19 million in tangible net worth before allowing

consideration of goodwill; the proposed rule was published

before the Commission granted Honeywell’s second exemption

in 2008, see supra note 2, and the governing regulations have

remained unchanged since Honeywell received its exemption in

2007 upon renewal of its Source Materials License. The

Commission’s attempt through post hoc arguments of counsel

to explain its decision in its response brief comes too late. See

Motor Vehicle Mfrs. Ass’n of the U.S. v. State Farm Mut. Auto.

Ins. Co., 463 U.S. 29, 50 (1983).

Accordingly, we grant the petition, vacate the

Commission’s December 11, 2009 denial, and remand

Honeywell’s April 11, 2009 exemption request to the

Commission for further proceedings.